Archive for the ‘Actuarial Math’ Category

Lottery Enterprise Contribution Act: Politicians Dictating to Actuaries

We have a bill introduced that proposes to move proceeds from the New Jersey lottery for the next 30 years  into the state retirement system. The state is hoping that GASB allows this to be considered an asset of the plan so that the funded ratio looks better even though on page 19 of the law we have:

The contribution shall be computed by actuaries for each system or fund based on an annual valuation of the assets and liabilities of the system or fund pursuant to consistent and generally accepted actuarial standards and shall include the normal contribution and the unfunded accrued liability contribution. Notwithstanding the provisions of any law to the contrary, the assets to be included in the calculation described in is paragraph shall not include the special asset value.

as defined on page 20:

The special asset value shall initially be the value set forth in section 5 of P.L. , c. (C. ) (pending before the Legislature as this bill), and shall be revalued periodically

with section 5 on page 8 reading:

5. (New section) a. For the purposes of this act, P.L.,c.(C.) (pending before the Legislature as this bill), the Lottery Enterprise shall be valued at $13,535,000,000 as that value was determined by the independent valuation service provider engaged by the State.

Meaning that the value of the lottery will not be counted as an asset when the actuaries compute their version of the ‘required’ contribution. The reason for this is that the state wants to take no gambles on losing revenue. However much the lottery brings into the pension will be of no consequence to those who previously got that lottery money as on page 19 we have:
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Open Amortization Paper

Number three on the list of actuarial gimmicks for public pension funding (after allowing negative cash flow and asset smoothing) is a perverse method of amortizing unfunded liabilities that is  accepted within the politician/actuary cabal to understate contributions. Independent observers (or those not being bribed for an opinion) decry open amortization and now we have a scholarly work on the subject.

An analysis of state pension plans from across the country finds that the already troubling state of pension finances may be even worse than it first appears because many pension managers are making their plan’s financial condition look better by perpetually putting off payments.

“Imagine having a 30-year mortgage and each year, instead of making your mortgage payments and having 29 years of payments left, you simply re-amortize the remaining liability over another 30-year period,” says Jeff Diebold, an assistant professor of public policy at North Carolina State University and lead author of a paper on the analysis.

“Using this approach, you can manufacture lower amortization payments for yourself, but you will not eliminate the underlying liability,” Diebold explains. “That’s called open-ended amortization, and despite being an unscrupulous accounting practice, it is widespread among state pension plans.”

State officials can adopt open-ended amortization to reduce the amount the state must contribute to the pension system each year or to improve the appearance, but not the reality, of the state’s current funding effort. Regardless of the reason, open-ended amortization exacerbates funding shortfalls, compounding the risk that the state will have insufficient funds to pay its pension obligations to retired state employees.

“Worse still, we find that officials are most likely to adopt open-ended amortization periods when their plan’s financial condition worsens and would otherwise require higher contributions from the state,” Diebold says.

The paper itself requires a $38 investment for the pdf or $6 to be able to read it for 48 hours. I am not sure about copyright issues with this system but I went with the $6 and here are highlights from my reading:

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U.S. Pension Crisis

I missed this 2013 book when it came out but my Amazon order came yesterday and here are some excerpts starting with a seminal flaw in the valuation of underfunded plans that I also note:

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Pension Black Magic

What you get out of this discussion on Reporters Roundtable this morning about the scheme to move the New Jersey lottery into the pension system is confusion about how this will save any money:


  • black magic
  • counterintuitive
  • found money

Not really. Here’s the deal…..

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Puerto Rico: Pay-As-You-Exit

Actuarial reports, especially for public plans where they are available online, wind up being similar not only as to funding gimmicks but also appearance. When an actuary comes up with an idea that reduces contributions or imbues the presentation of a hopeless situation with a sense of normalcy others pick up on it.

The June 30, 2015 actuarial report for the Puerto Rico Government Employees Retirement System (PRGERS) presented such a challenge for Milliman and here is how they stepped up:

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EA4: Interest Perspective

Much more on the 2017 Enrolled Actuaries meeting in the next week of blogs, including the situation with church plans and cities that tried going from DB to hybrid plans, but first a game-changer for me on interest rates.

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EA3: Pensionmania

406 – Current Events in Public Plan Funding Policy
April 04, 2017 11:00 AM – 12:30 PM

The Conference of Consulting Actuaries’ (CCA’s) Public Plans Community’s white paper “Actuarial Funding Policies and Practices for Public Pension Plans” has been a resource for actuaries for over two years. Many public sector retirement systems have implemented new funding policies based on actuarial principles similar to those in the white paper. Alternatively, an interpretation of financial economics on funding may look much more like private sector plan funding. Speakers discuss these different approaches, as well as how they may or may not align with the objectives of the plan sponsors.

In one corner, from parts unknown, it was Ed Bartholomew of Building Better Pensions espousing the Financial Economics position and his tag-team partner Bob North, former chief actuary for New York City where he pioneered the inclusion of  alternate liability values (MVABO) in NYC actuarial reports and CAFRs.

Opposing them are the Actuarial Realists who are working public plan actuaries: Paul Angelo from California and Sherry Chan, the current New York City chief actuary who took Bob North’s MVABO numbers out of the NYC actuarial reports.

Let’s get ready to rumble:

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