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Old 01-12-2012, 11:01 AM
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Mary Pat Campbell
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
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Start spreading the news....

New York’s chief actuary is recommending that the city’s $115.2 billion pension plans lower their assumed annual rate of return on assets to 7 percent from 8 percent, which would open a funding gap of at least $2 billion next year, according to two people familiar with the proposal.

Robert North, the actuary, is presenting his plan to overseers of funds for police, firefighters, teachers, civilian employees and school administrators, the people said. They spoke on the condition of anonymity because the proposal hasn’t been made public. The New York Post reported on the plan yesterday.

The city has already set aside $1 billion for the fiscal year beginning July 1 to cover an increase in its annual pension contribution.
Higher Cost
Spreading the increased pension costs spurred by lower return assumptions over time, rather than making the full payment all at once, will cost taxpayers more, Brainard said.
“It’s like shorting your mortgage payment,” he said.

“If you take a holiday on your mortgage you’ll have to catch up later on,” Brainard said. “At the same time these plan sponsors and policy makers are weighing competing objectives, which include maintaining some predictability and stability in the budget process.”

Actuaries look at a number of factors in coming up with an assumed return including inflation, historical and projected returns of various asset classes, the pension fund’s historical returns and employee demographics, Brainard said.

Matthew Sweeney, a spokesman for New York City Comptroller John Liu, declined to comment citing the draft nature of the recommendation.
Comment by John Bury:

For that we turn to the New York Post which reports that, in addition to revising the rate of return, North is also recommending a change in key accounting practices which would allow the city to pass some of the costs to Bloomberg’s successors citing sources involved in the pension analysis who said North’s staff was concerned that too big a hit all at once could cause a budget catastrophe at City Hall. “The impact would be too great,” said one analyst involved in the discussions between the actuary and the administration. “You have to look at the [city’s] ability to pay.”

No you don’t!

The actuary should be able to to determine the cost of a promised defined benefit based on his professional judgment. If a government is unable or unwilling to make that payment they have options since there is no authority forcing them to put in that money. The problem with this scenario for a lot of stakeholders in the system is that the government would get the bill for $10.5 billion, put in the $9.5 billion they have, and the deliberate underfunding of the plan would become obvious and might prompt calls to reduce benefits.

However, if they get the actuary to change ‘key accounting practices’* to lower their contribution requirement they can cash in on the good name of the actuarial profession and claim that they met their funding obligations (as determined by their paid flunky).

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