NASRA Calls Out ALEC

The American Legislative Exchange Council (ALEC) came out with a report last month based on their review of the latest available actuarial valuations of more than 280 state-administered pension plans and adjusting the discount rate from an average of about 7.37% to a ‘riskless’ rate of of 2.142%. Unfunded liabilities came in at $6 trillion.

Today the National Association of State Retirement Administrators (NASRA) rejected ALECs report, saying its findings contain “serious flaws.”

The ALEC report claimed that US public pension plans are far more underfunded than they report, and that the aggregate unfunded liability of all plans exceeds $6 trillion, with a funding level of approximately 33%. However, NASRA said that using “current, prevailing actuarial methods” for valuing liabilities, public pensions report an aggregate unfunded liability of approximately $1.5 trillion, and a funding ratio of around 70%.

What you have to understand is that by ‘current, prevailing, actuarial methods’ NASRA is referring to valuation assumptions that develop the lowest conceivable contribution amounts and even though…

[i]t added that the rate used by ALEC [2.14%] is lower even than the current yield on 10-year US Treasury bonds, which is just under 2.5%, and that rates used for corporate pension plans are currently around 4.0%.

NASRA saw no need to adjust values from those official government valuation reports to use those assumptions, even though public plans are in far worse funded condition than corporate plans (especially since PBGC has started charging draconian premiums for single employer plans).

NASRA said its main problems with ALEC’s report on 280 state-administered public pension plans is that its conclusions are based on the use of a below-market, risk-free interest rate to calculate the funding condition; it “erroneously states” that using a risk-free rate for funding is endorsed by the Society of Actuaries [SOA]; and it “ignores the variable nature of benefit structures and financing arrangements in many public pension plans,” rather than assign all public pension liabilities and costs to employers and taxpayers.

I don’t believe the SOA has adopted a position on “risk-free rates” for public plans (if it has then please point me to that stance in the comments section) and the “variable nature of benefit structures and financing arrangements”, whatever that might mean, seems to have no bearing on funding shortfalls. If there is anything variable in the nature of financing arrangements it is actuaries, politicians, and financial people coming up with different gimmicks (open amortization, asset smoothing, discount rates valid in the 1990s, applying random fractions to the ARC, Pension Obligation Bonds, and even phony assets) to inflate funded ratios, lower contributions, or both.

15 responses to this post.

  1. I believe the comments on the SOA refers to this project they did (and then seemingly abandoned):

    https://www.soa.org/blueribbonpanel/

    Reply

  2. Posted by Tough Love on January 16, 2018 at 6:52 pm

    If the NASRA were being HONEST, they would show what the the underfunding would be if Public Sector Plans were valued using the (4% quoted) rate required in the valuation of Private Sector Plans.

    But because doing so would show Public Sector Plan underfunding of $4 – $5 Trillion, they clearly won’t show it …. or discuss it.

    Reply

  3. Posted by geo8rge on January 16, 2018 at 7:53 pm

    Off topic but interesting and might come to NJ:

    Cuomo Seeks New York Tax Revisions to Thwart Federal Changes

    Governor plans to replace state income tax with employer levy

    https://www.bloomberg.com/news/articles/2018-01-16/cuomo-says-new-york-to-alter-tax-law-to-thwart-federal-changes

    Reply

    • Posted by NJ2AZ on January 16, 2018 at 10:12 pm

      Interesting in the sense that all these schemes are so horribly doomed that the whole situation is laughable…or at least it is for someone in a state that doesn’t tax its residents into oblivion 😀

      Reply

      • So public employees would no longer pay state and local income taxes. Those would be shifted to state and local government, causing service cuts?

        Public employee pension income is already exempt from state and local income taxes in New York.

        Reply

  4. Posted by MJ on January 17, 2018 at 6:18 am

    Interesting to note too that the schemes become more and more laughable…….but I guess desperation can cloud sound financial planning. It will also be interesting to see where NJ is financially after four years of Phil Murphy.

    Reply

    • Posted by NJ2AZ on January 17, 2018 at 10:05 am

      honestly, Murphy might be good for NJ in the sense that he can hasten the inevitable collapse.

      I don’t see anyway around a day of reckoning for NJ, so maybe its better if it comes sooner rather than later?

      Reply

      • Posted by PS Drone on January 17, 2018 at 2:07 pm

        Absolutely better that the newly elected half-wit hastens the necessary end of New Jersey’s self-created fiscal nightmare. And based on his priorities as witnessed by him immediately setting up an agency to provide legal services to ILLEGAL immigrants, he is moving ahead at flank speed.

        Reply

        • Posted by Tough Love on January 17, 2018 at 4:11 pm

          A failure to extend the 2% Police Salary arbitration cap is going to be a MAJOR problem for Municipalities.

          My guess is that it will eventually be reinstated, so any Municipality that has a Police contract coming up in 2018 should agree to no more than a ONE year contract. At least doing so would minimize any damage from a higher arbitration award.

          Reply

  5. With every asset class in a bubble, the “risk free rate” is probably higher than the actual future investment return on portfolios that include overpriced stocks, bonds, real estate, and private equity.

    https://larrylittlefield.wordpress.com/2013/11/29/pensions-the-nature-of-the-lie/

    Reply

  6. Posted by MJ on January 18, 2018 at 3:49 pm

    I think it is really hard to know…..would be interesting to see what would happen if there is a downturn or minor recession during the next 4 years….best guess, the publics woudln’t miss a beat.

    TL you need to get over that 2% cap thing. You couldn’t have honestly believed that that would stick around…….all that Christie did was to manage the ever rising increases in our real estate taxes. What will be really really interesting to see is what all of the good citizens have to say over the next 4 years when their real estate taxes really go though the roof along with every other tax, toll, fee, etc. and they realize that as teachers, cops and state workers get to retire in their 50s they will literally have to work well into their 70s before even thinking about retirement…..not t mention the crappy health insurance that will eat up more and more of salary take home

    Reply

    • Posted by Tough Love on January 18, 2018 at 6:30 pm

      MJ,

      I certainly don’t disagree that there is a high probably that all sorts of NJ taxes will rise UNLESS the controls that Gov, Christe was able to put in place stay (i.e., the two 2% caps), AND VERY reforms (in the form of very material pension & benefit reductions) are put in place.

      While I’m not “surprised” that the 2% Police Salary arbitration cap has been allowed to expire, one can always hope that (even some Democratic) Legislators with a strong sense of character (and fairness) would realize how just appropriate and NECESSARY that cap is ….. and actively support ity’s extension.

      Reply

  7. Posted by Elliot Young on January 19, 2018 at 12:27 pm

    This report by the SOA’s Blue Ribbon Panel says states, in order to measure risk to their financial position, should calculate liabilities with a risk-free rate. See right-hand side on page 7, https://www.soa.org/brpreport364/

    Reply

  8. […] Bury wrote “NASRA Calls Out ALEC”.  Here are two intelligent, expert parties reviewing the same facts.  How is it possible they […]

    Reply

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