The market-based numbers are “close to the truth of the liability,” Professor Sharpe said. But most elected officials want the smaller numbers, and actuaries provide what their clients want. “Somebody just should have stopped this whole charade,” he said. For years, people have been trying to do just that.
In 2003, the Society of Actuaries, a respected professional body, devoted most of its annual meeting to what was called “the Great Controversy” — the notion that the actuarial standards for pensions were fundamentally flawed, causing systemic underfunding and setting up a slow-moving train wreck when baby boomers retired. It drew a standing-room-only crowd.
So what is the biggest difference between the two methodologies?
The problem is, which rate should be used? An economist would say the right rate for Calpers is the one for a risk-free bond, like a Treasury bond, because public pensions in California are guaranteed by the state and therefore risk-free. And that’s what Calpers does when it calculates market values. It used 2.56 percent when it calculated the bill for the pest control district, producing a $447,000 shortfall.
But the rest of the time, Calpers and virtually all other public pension funds use their assumed annual rate of return on assets, now generally around 7.5 percent. Presto: This makes a pension appear to have a much smaller liability — or even a surplus.
Since I have been blogging about this for as long as I have been blogging, I am going resist saying "I told you so."
This is a horrible charade, which can have a devastating effect on people’s lives. Having two sets of books sounds like criminal activity coming straight out of a movie. In the article, is describes how Calpers had an official book and a market value book. Unfortunately, the market value book was found to be $48 million short. The problem becomes when an organization tries to leave and they don’t know the actual market value book numbers. Then they are hit with a huge bill to pay that is so large that it is impossible for a small local government to pay it. With the Citrus Pest Control District No. 2, it was too late because the bill came through the mail four months later showing $48 million due. Also, the problem is actuaries giving pension funds the numbers they want, which is the official book numbers, versus the numbers that they need, which is the market value book numbers. Actuaries should advise their pension fund clients of the two numbers and how they are different as a matter of ethics. To add insult to injury, Calpers took 4 months to create the final bill then tacked on 7.5 interest for late payment. To a local government that is struggling, having to pay such an unexpected high bill could force them to go into bankruptcy.
ReplyDeletehttp://www.nytimes.com/2016/09/18/business/dealbook/a-sour-surprise-for-public-pensions-two-sets-of-books.html?_r=1