Archive for the ‘Actuarial Math’ Category

Critical Data On Multiemployer Plans

Pensions & Investments covered it but no other media outlet seems to take the institutionalization of theft by government bureaucracy as newsworthy. The sad part is that the participants in the United Furniture Workers Pension Fund A are hardly alone. According to a spreadsheet created from 1,234 Schedule MB filings for 2015 there are 333 other multiemployer (union) plans with larger deficits.

The Pension Benefit Benefit Guaranty Corporation (PBGC) keeps track of troubled multiemployer plans and form 5500 filings have these MB actuarial certifications but you have to know what to look for. Here it is….

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Lottery Asset Lie

Governing calls it creative:

In New Jersey, the state is pledging its lottery — which an outside analysis determined was valued at $13.5 billion — as an asset to state pension funds. The action would reduce the pension system’s $49 billion unfunded liability and improve its funded ratio from 45 percent to about 60 percent, according to State Treasurer Ford Scudder.

It is also a gimmick testing the limits of stakeholder credulity.
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Mercatus Mushrooming Costs

Ranking states by fiscal condition, as the Mercatus Center has done for FY12, FY13, FY14, and now FY15 based on state data reports, gives us a clue as to what an apathetic public might owe for public pensions, retiree health care benefits (OPEBs), and regular debt but since factors for calculating the values of pensions and OPEBs are questionable (and likely understated) while repudiation is probable to varying degrees the public remains mostly in the dark there.

Whereas borrowing by states in the bond market is relatively transparent, benefit costs fall prey to the actuarial/political delusion machine resulting in this trend:

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Public Plans Data Takeaway: Bad Actuarial Assumptions

The numbers collected by the Public Plans Data people have the helpful features of an interactive data browser that goes back to 2001 from which we can compare the worst funded plans in 2001 when the total combined funded ratio was 102.02% for the 161 plans in the survey to the latest data (a combination of 2015 and 2016) for 170 plans with a total funded ratio of 74.33%.

There have been several sham explanations for this drop (market crashes, missed contributions) but this fifteen-year period has also seen extraordinary earnings growth (especially in alternative investments) with several public retirement systems actually cutting benefits and most governments putting in their full required contributions.

The real reason…..

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New Jersey Idiocracy


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Along the same vein, if you obtain an asset that pays you $1 billion* annually but you have to pay out $1 billion annually to ‘own’ that asset then what is the value of that asset to you?

If you answered $13.535 billion you are as smart as a New Jersey legislator, governor, or media member who do not appear to have caught on to this scam.

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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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