[Continued from yesterday’s Part 2 and the preceding Part 1.]
By: David A. Smith
‘You are a difficult case.’
By now our exploration of yet another piece of the doublethink canon – the role of actuaries in understating future pension-fund obligations (and overstating expected future contributions by new participants) has revealed that the takeover, like many a takeover, acted with slow steady clandestine purpose and execute the coup before anyone noticed it had happened.
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)
Having done so, they wished their takeover to remain hidden until enough time had past to make it almost irreversible.
Other commentators have focused on the opacity of actuaries’ calculations and reports to the boards of trustees that govern public pension plans.
Doublethink requires fog.
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“I foresee no problems”
Trustees need clear and honest projections and do not receive them, wrote a former pension trustee from Kentucky, Christopher Tobe, author of Kentucky Fried Pensions.
Tobe for Treasurer, or not tobe? That is the question
He recalled seeing an assumption for future investment returns jump with no explanation from 4.5% to 7.75%.
Mr. Tobe also wrote this:
Based on my experience as a trustee I think there need to be tougher standards for rationalizing assumptions to protect honest actuaries from political pressure, and punish those dishonest ones who cut deals.
Chop off their tables!
While for the last 8 years Kentucky Government has shrunk in size, and is expected to not grow, the actuarial assumption of a 4.5% growth in payroll has been kept at KRS and related pensions.
It’s clear that the actuaries who testified see the pension funds’ actuaries as sustaining fraud against common sense, for instance in Detroit’s pension-fund doublethink,
Aside from issues of yield rates and inflation rates, any insurance or retirement plan also depends on two demographic streams:
1. Spenders to workers. The ratio of (R) Retired workers receiving benefits over (W) the number of current Workers paying in to the system.
2. Spendspan-to-earnspan. The ratio of (L) Lifespan of benefits to the average retiree over (E) the Earnings career of the average current worker.
When the workers outnumber the spenders, then the burden of paying current benefits to retirees is distributed among more earners. When Social Security was enacted, there were roughly 40 workers per 1 retiree; today the figure is under 3-to-1.
At some point the numbers don’t work any longer
When the years you spend a pension are short compared to the years you worked to earn it, the same favorable multiple-inputs-per-output dynamic works. Again, when Social Security was created a man would work 40+ years, then retire and expect to live 13 more; today people retire after 25 or 30 years’ work [Not you! – Ed.], then live 10-15-20 or more years – a 3-to-1 ratio has become less than 2-to-1.
Actuaries putting together estimates of plan viability have to make forecasts of R, W, L, and E, and central to these projections has always been that America will keep growing, America’s cities will keep growing, and its public-employee workforce will grow at least as fast as the rate of population growth.
Kentucky’s willingness to believe in continued new fools being hired by the state government, paying in to the system to enable the old sorts to retire with their defined-benefit pensions.
This has led to an overstating of funding probably in the hundreds of millions.
In other words, says Mr. Tobe, the pension fund is woefully underfunded and this is being doublethink concealed.
Kentucky (within the KRS system) has now what I think is approaching a 14% funded (worst-in-nation) pension KERS, which has had its investments commingled with the 60% funded CERS pension.
KERS 14% is mostly explained by receiving 50% ARC payments. However by law Cities and Counties pay every year 100% of the ARC payment and the actuary cannot (or will not due to political pressure) explain why the CERS plan is only 60% funded.
His testimony all but accuses of fraud the KRS actuary and several others who are unnamed but clearly enough described to be identified.
The change [boosting expected return from 4.5% to 7.75%] lowered the state’s pension obligations by more than a billion dollars, which in turn meant smaller contributions.
Couple that with the assumption of imaginary new employees making payments and it’s no wonder the KRS pension fund over-promised and over-promised to the point where it’s the nation’s worst-funded.
Well, that’s unfair as you’re comparing us with people who do better than we do
Another commentator, Mark Glennon, told the board that actuaries were churning out reports that no one but other actuaries could understand, providing cover for elected officials who were letting problems spin out of control.
The more I encounter these and other comments, the clearer it becomes that there’s a movement afoot: a movement by technocrats to take government back from those who, whether out of innumeracy, optimism, or venality, were willing to pile ever more debt and future obligations onto cities and states.
An actuary could have looked only briefly at some of its pension reports from years ago and seen the calamity to come. Reporters, political leadership and most pension trustees could not.”
Most reporters, and most political leaders, can be given a pass for not knowing these issues. Pension trustees cannot.
Failure to understand the implications of the financial projections on which a pension fund was making binding multi-decade commitments is every bit as reckless as a climbing into the cockpit of an airplane with blacked-out windows
“Those who could understand were able to remain silent.”
Silence is essential to the code of doublethink.
Important sources relevant to public-employee pension funds
California’s self-tying knots (February 27, 2012; 5 parts)
[San Bernardino] Innumeracy precedes insolvency; December 4, 2012; 4 parts)
[Detroit] The fall of the Roamin’ Empire (September 25, 2013; 5 parts)
Stock-taking (October 15, 2014; 2 parts)
[Detroit] A fleeting miracle? (December 31, 2014; 2 parts)
[Detroit] Doublethink pension funding (January 5, 2015; 10 parts)
In re City of Stockton (pdf, also available in text here), issued February 5, 2015
[Stockton revitalization] Folly or catalyst? (May 13, 2015; 3 parts)
[Stockton: The curse of the gray PERL (June 9, 2015; 9 parts)
Until the rise of social media and the web, expert whistleblower voices were easy to marginalize, because the means of communication were monopolized by those who excluded technocracy in favor of headline. Now they are not, and those with deep technical expertise can at least get their message out – and that allows them to connect with others of similar or complementary technical expertise.
Now they are enabled to come forward:
“Chicago represents the most glaring example,” wrote Mr. Glennon, the founder of an online news service, WirePoints, which covers the fiscal morass in Illinois.
Broadcasting live from the morass
A quick glance at Mr. Glennon’s site reveals a handful of articles absolutely worth reading, with great teasers like this: “A particularly fine editorial on why the attempt to override Rauner’s veto of the labor arbitration bill may indeed be the “worst piece of legislation ever passed by the General Assembly.”
In La Grange, Mr. Palermo, who was elected in 2007, thought the pension funds were being shortchanged. More and more police officers and firefighters were retiring, and they were not dying according to the mortality table used by the actuary.
Where’s black lung disease when you need it?
Between them, the two pension funds had less than half the money they should. If this continued, he said, the money would eventually run short, and people would get hurt.
And not just in La Grange. The actuary, Timothy W. Sharpe, had the biggest market share of police and fire pension business in Illinois.
As we saw in California, if you want to loot a pension fund without causing a fuss, hire your pet actuary.
You’re protecting me, aren’t you watch dog?
In fact, Mr. Sharpe is many Illinois cities’ favorite actuary, as reported a year ago in the Forest Park Review (September 9, 2014; buff blue font):
Sharpe earns about $3,500 per valuation. He has a niche market and has prepared actuarial valuations for around 160 Illinois public safety plans – or more than 70 percent of Illinois towns that used a private actuary.
As Mr. Sharpe’s company employs a staff of “approximately 1 to 4”, he will be making a tidy living, and he’s also been doing it for many years.
He is, in short, a captive of his clients.
Yes, mighty Jabba, two and two does equal five
“I think it’s a moral hazard,” Mr. Palermo said.
Of course it is.
[Continued tomorrow in Part 4.]