[Continued from yesterday’s Part 1.]
By: David A. Smith
‘It might be a long time,’ said O’Brien.
Yesterday’s post opened yet another chapter in the continuing unraveling of the pension-fund doublethink belief system, by focusing on the role of actuaries in understating the cost of future retirement annuities by overstating the rate at which the beneficiaries were likely to die (and hence to snuff out their annuity obligations).
Principal sources used in this post
The Wall Street Journal (2 June 2015; brick red font)
New York Times (July 10, 2015; forest green font)
They were able to do so because the closed circle of doublethink cabalists controlled the information, and those outside were isolated from one another and unable to put the pieces together. With the Great Recession and the rise of broadband connectivity (web pages, social media), the numerate have gradually awoken, one point of light at a time, to the scale of the fraud that has been perpetrated upon them.
It is only the second time in recent memory that the Actuarial Standards Board has held a public hearing, an indication of the gravity of the nation’s pension woes.
[It’s not the nation’s pension woes, it’s the public-employers’ pension woes. – Ed.]
The ASB took testimony from at least thirteen speakers, and received written comments from 21 advisors, including Mr. Palermo, who stated:
In my role as Village Trustee in La Grange I relied heavily on reports from our actuarial consultant to make decisions on village spending and tax policy. I found those reports lacking contextual detail; frequently they were misunderstood or unread by my colleagues.
As it happened, I was able to locate and download one of Mr. Sharpe’s reports, for the Village of Clarendon Hills, and aside from the ‘usual’ highly generous vesting provisions –
Employees attaining the age of (50) or more with (20) or more years of creditable service are entitled to receive an annual retirement benefit of (2.5%) of final salary for each year of service up to (30) years, to a maximum of (75%) of such salary.
[Work thirty years, paid the whole while and with full medical, then retire with 75% of your salary for the rest of your life: yes, that seems generous – Ed.]
– aside from the vesting provisions, the report provided a whole series of numbers, together with a list of the assumptions that went into them, but omitting (x) any of their calculations or analyses, (y) any sensitivity analysis, or (z) any contextualization of the assumed yield rates or mortality rates or how these compare with market comparables or recent market behavior.
State and local governments have promised several trillion dollars’ worth of benefits to retirees — the exact amount is in dispute.
Whatever number they quote will be too low.
The sky’s the limit!
Now, with large numbers of public workers retiring, the money set aside is turning out to be at least a trillion dollars short.
Tell that to the Greeks, the Spaniards, and the Puerto Ricans.
Taxpayers are in no mood to bail out troubled pension funds.
Some are looking for scapegoats.
‘Scapegoat’ implies that the catastrophe is no one’s fault. That is not so. It is many people’s fault
As Poirot discovered, they were all in on it
“Actuaries make a juicy target,” said Mary Pat Campbell, an actuary who responded to the board’s call for comments.
Certainly stupid or crooked ones do – and I expect that’s what Ms. Campbell meant, given a comment I found in an interview she gave:
“For my research job, my main peeve is talking with reporters who don’t do their homework (or expect me to write their articles with absolutely no credit).”
Peeved by the innumerate and impatient
She expressed concern that elected officials were using actuaries to lend respectability to “questionable behavior” like funding pensions with borrowed money, picking risky investments and “enacting benefit improvements based on lowballed costs.”
They absolutely were, as I demonstrated, at terrifying length, first in my ten-part series on Detroit:
Let us be clear: the system America has used for decades to create and pretend to fund public-employee pensions is nothing short of a massive doublethink fraud that will progressively explode throughout this decade, damaging millions of people involved in it wittingly or unwittingly.
An underfunded plan today – and make no mistake, virtually every public-employee pension fund in America is underfunded, some as much as 60% underfunded – has only three endgames:
1. Insolvency and collapse, with plan dissolution and payouts at percentages of face.
2. Continued underfunding and irresolution.
3. Restoration of solvency through asset replenishment faster than liability accumulation, which can be done either (a) with radical surgery, as through electroshock recapitalization, or (b) over a forced-march of years or short decades of above-equilibrium contributions.
And really, Endgame 2 is no strategy at all, because as we’ve seen, a pension without a strategy becomes progressively more insolvent. So, as Andy Dufresne put it in The Shawshank Redemption, “Either get busy living or get busy dying.”
Even if you have to crawl through a river of shit to come out clean the other side
Today, however, most doublethink pension funds are still busy dyin’.
And then in California, with my nine-part series on CalPERS:
A well-written judicial decision is a work of it not art then fine craftsmanship, and an absorbing treat for those who are of the right disposition and interest and who have or can somehow wangle the time to read it carefully – and one such is In re City of Stockton (pdf, also available in text here), Case 12-32118-C-9, as decided by Christopher M. Klein, chief bankruptcy judge of the eastern District of California, whose ruling in the Stockton bankruptcy I originally thought unfair to a group of bondholders.
A judge who will sleep better knowing that the AHI blog has validated his opinion: Christopher M. Klein
In parsing through the decision, I realized that not only is it fine work for itself – as a ruling in a municipality bankruptcy cast – it does much more. In addition to settling some key questions once and for all (assuming that if appealed it is upheld, which I am confident it will be), it does two other tremendously valuable things, if only we have the wit to see them,
In that post, I went exhaustively into CalPERS’ legislative coup, enacting a law to make itself invulnerable to later political challenge, a stranglehold that the tentacular fund maintains today:
What do the actuarial tables say about your life expectancy?
The Public Employee Retirement Law (PERL) hands over fiscal accountability to unaccountable actuaries
[The law] allowed the PERS board to hire its own actuaries–experts who calculate the contributions needed to keep the fund sound–instead of using those named by the governor, as state law requires.
Translation: We become bulletproof and accountable to no one but the public-employee unions.
File all the legislation you want, see if I care
It was a bloodless coup, and the plotters spent big to make it happen:
Backers of the initiative raised $1.6 million by Sept. 30, Common Cause reported, while there is no organized financial effort in opposition.
Ron Roach of the California Taxpayers Association. said the change would “create a lack of accountability and give public employee pension boards–which often are dominated by public employee unions–control over the amount of taxpayer contributions, which are in fact taxpayer dollars.”
CalPERs controls the actuaries, and the unions control CalPERS.
All is clouded by desire
The result, as Judge Klein methodically laid it out, is a board that is controlled by public employees’ representatives:
Once a municipality agrees to a CalPERS contract, the CalPERS board gets into a position to block changes in the municipality’s pensions by saying a local change would adversely affect the system.
These PERL provisions creating the termination lien and the immunity from Bankruptcy Code contract modification are non-uniform. They selectively protect only CalPERS and CalPERS pensions. They do not apply to any other California municipal pension.
How on earth could the great state of California be so asleep in 1992 as to allow this lock-stock-and-barrel takeover of a chunk of state government by a self-interested body?
We were multitasking
Though back then I asked the question rhetorically, the answer is practical: they were artfully, aggressively, and consciously deceived.
[Continued tomorrow in Part 3.]