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  #1  
Old 01-02-2011, 11:26 AM
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Mary Pat Campbell
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Default Public Plan Watch III: The reckoning

First thread started in 2008 here: http://www.actuarialoutpost.com/actu...d.php?t=146801

Second thread from 2010 here: http://www.actuarialoutpost.com/actu...d.php?t=183680

And now, we are in 2011. Let's ring in the new year!


I want to open up with something from John Bury:
http://burypensions.wordpress.com/20...es-whos-first/

Quote:
On the local level it’s already happened in Passaic County, NJ but those retirees are still being paid by current taxpayers. That’s not the case in Prichard, Alabma. There may be others but, without any oversight mechanism of public plans, they might be buried in budgetese.

....
The situation is direr than the numbers reveal. Consider New Jersey:

1. Having a funded ratio of 50% means that there should be twice as much money in the plan right now to cover promises accrued to-date. Future taxpayers in the state can’t afford to pay for current accruals, much less make additional contributions amounting to EVERYTHING that all prior taxpayers have put in.

2. About $30 million of those assets are from the employees’ own contributions with interest that will need to be returned upon plan termination.

3. If you’re refusing to pay even an actuarially minimized contribution amount while applying benefit ‘reforms’ only to new-hires where the impact might start being felt around 2035 then you’re part of the problem.

That is why I predict New Jersey as being the first major public pension plan to go bust.
Nah, Illinois is going to be in a real bind first, I think -- because they can barely keep up with their short-term cashflows. NJ I think can paper over pension problems for a little while with current taxes [I definitely can be wrong about that], but I don't have much hope for Illinois.

I know Bury is looking at percentages of the funds as standalone entities, but if you look at it as percentages of the annual budget, that can give an idea how long they can keep the farce going. That's why that even though legislators' plans tend to look awful in percentages, they can be kept going for a while by just being covered in the regular operating budget.

Alas.

One of the benefits of the new year is a bunch of new governors/mayors coming in, with the old pols having fun warning about the ruin that's coming... and btw, it's not their fault. Ah, the blame-avoiding exercise.

http://jammiewearingfool.blogspot.co...c-pension.html

Quote:
Today is New York Governor David Paterson's last day in office, and coincidentally he just had a most disturbing epiphany: America's public pension funds are at risk of insolvency.

Zoiks!

It's just so convenient too bad that Paterson won't be around to help clean up the mess. If only he had realized the urgency of the situation earlier in his term, he would have had time to do something about it.

Why are you laughing?
Then there's the perennial "good timing" award:
http://www.rrstar.com/businessrockfo...inois-pensions

Quote:
When it comes to pensions in Illinois, a day can mean all the difference in the world.

Thanks to the eight-month span between Gov. Pat Quinn’s approval of a pension reform bill last spring and its implementation, any public worker hired in Illinois as late as Friday has been enrolled in a far more lucrative pension plan than those hired on or after Saturday.

A Rockford Register Star analysis of pension data has identified nearly 19,000 public workers at all levels of Illinois government hired in that span, from bus drivers to university presidents. More than 300 now work for Rock River Valley public bodies.

The employees’ 2010 hire date gives them a toehold in the richer — and more expensive, to the taxpayer — pension plan.

Some state pundits say taking longer than the length of a Major League Baseball season is waiting too long to make the change, while others say some adjustment time to implement a new pension plan is reasonable.
And someone mentioned Ponzi in the dying posts of the last thread:
http://www.startribune.com/business/...:_vqnH_nchO7DU

Quote:
Pension costs are not threatening to bankrupt any Minnesota cities because most public employees are enrolled in one of three state-run plans. But that's a far cry from saying all is well. The three major state plans are an estimated $12.3 billion short of the cost of benefits that will have to be paid out over the next 30 years. Add another $3 billion to account for unfunded liabilities of independent plans, including the St. Paul Teacher's Retirement Fund. Tack on another $2.5 billion to $3 billion for other benefits that some Minnesota cities and many school districts offer retirees, such as health care.

Pretty soon you're talking about a shortfall of almost $20 billion, and it could get worse if the stock market does as badly in the next 10 years as it has in the most recent decade.

The issue plaguing pensions is the same one facing Social Security: Fewer people are paying into the fund even as the benefit, and number of people relying on it, grows. In 1985 there were four workers for every person drawing a pension from one of Minnesota's three big plans and the average benefit was $5,053. By 2009 there were fewer than two workers for every beneficiary collecting an average of $18,472.
You know, this wouldn't be a big deal if the appropriate contributions were made for the benefit these people would get.

But math is hard. And scary.

Quote:
First, elected officials from both parties often chose to hide the cost of these agreements from voters, often for decades. That's how a $32 million liability in Duluth in 1998 became more than $300 million by 2009, raising the spectre of a potential bankruptcy filing.
So, the public unions are ready to play ball, right?

Quote:
Union leaders, meanwhile, owe it to their members to help craft a solution that is sustainable and responsible. But don't fault them for being alarmed and resistant. Imagine how charitable the rest of us would feel if the topic wasn't pensions but Social Security and Medicare, benefits we're counting on and helping pay for.
Have fun with the game of chicken, y'all.

Because the demographics aren't really going to help.
http://www.nytimes.com/2011/01/01/us...2&pagewanted=1

Quote:
This means that the 79 million baby boomers, about 26 percent of this country’s population, will be redefining what it means to be older, and placing greater demands on the social safety net. They are living longer, working longer and, researchers say, nursing some disappointment about how their lives have turned out. The self-aware, or self-absorbed, feel less self-fulfilled, and thus are racked with self-pity.
Self-pity? Oh hear the wails as they find out that not having enough kiddies to pay for the public plan benefits [and Social Security and Medicare] will have a real bite.

Quote:
A study by two sociologists, Julie Phillips of Rutgers University and Ellen Idler of Emory University, indicates that the suicide rate for middle-aged people, notably baby boomers without college degrees, rose from 1999 to 2005.
Well, that's one way to deal with it, but I don't think that's really going to make the numbers better, even with "death panels".

It will be interesting to see how various things shake out this year. Perhaps there will be a few more municipal bankruptcies [due to various federal shenanigans going away, like the Build America Bonds] and we will see more the theory as to the pensions getting paid there under bankruptcy.
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Old 01-02-2011, 11:49 AM
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Quote:
Originally Posted by campbell View Post

And someone mentioned Ponzi in the dying posts of the last thread:
http://www.startribune.com/business/...:_vqnH_nchO7DU
Quote:
Pretty soon you're talking about a shortfall of almost $20 billion, and it could get worse if the stock market does as badly in the next 10 years as it has in the most recent decade.
No way, those assumptions were/are solid.

http://www.nytimes.com/interactive/2...l?ref=business
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Old 01-02-2011, 12:05 PM
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Originally Posted by WellThen View Post
No way, those assumptions were/are solid.

http://www.nytimes.com/interactive/2...l?ref=business
The NYT has been having great infographics the last few years. I've been having lots of fun with it.

Great link.

[of course, it depends on how much one trusts the inflation index.....]
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Old 01-03-2011, 02:59 PM
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This is odd

http://www.philly.com/inquirer/local...ath_error.html

Quote:
PITTSBURGH - The city's actuaries on Thursday found a mathematical problem in the City Council's pension bailout plan, forcing officials to redo the legislation with little more than a day left to forestall a state takeover of the plan.

The council approved the plan Wednesday to dedicate about $414.7 million in parking tax revenues over 31 years to the pension fund, which officials believed would be enough to avert state takeover.

But the actuaries, brought in Thursday morning, thought otherwise, said firefighters union president Joe King, a city pension board member.

Instead of voting to override Mayor Luke Ravenstahl's veto of the plan, King said, the council must redo the plan, submit it to Ravenstahl again, and then override the new expected veto.

Under state law, the pension fund, now 29.3 percent funded, must be 50 percent funded by 12:01 a.m. Saturday to avoid a state takeover.

In passing the plan, King said, the council miscalculated the "net present value" of the future stream of parking tax revenues. If the calculation was not accurate, state officials have said, the 50 percent funding level would be missed and the fund would pass to state takeover.


Okay, so they're saying that there was a problem with the spreadsheet calculation in determining the NPV?

I want to know what was screwed up. The discount rate? They had the timing off?

Any Pittsburgh actuaries reading this, could you PM me and let me know? I really really want to know. I won't post it. I'm just curious.

And if you'd like to share, would it also be appropriate for the European Spreadsheet Risks Interest Group?
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Old 01-03-2011, 03:26 PM
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I like how a piece of paper claiming that $400M of future parking tax revenue over the next 30 years will be directed to the pension fund can immediately raise the funded ratio by 20%. Because the actuaries and city officials have demonstrated that they are so good at projecting future income and costs, and actually adhering to their commitments.
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Old 01-03-2011, 04:01 PM
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Must have been a big mistake if they had to re-do it. I mean, something like accidentally using last year's/month's interest rates is usually a pretty quick fix. Now if you messed it up, and had to re-run cores at multiple sensitivities for many thousands of people, I guess that could take quite a while.

Seems like even if you used last month's rates, it wouldn't make a big impact. Not enough to be worth re-doing in this crunch time. I'd be curious about this too because I don't believe something as big as a benefit coding error would make it through all the checking, but something small like an incorrect interest rate could possibly make it through.

I agree that predicting 30 years out is never really a "safe bet".
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Old 01-03-2011, 04:10 PM
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Sorry, I forgot to hit the refresh button on the pivot tables.
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Old 01-03-2011, 04:46 PM
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It sounds the NPV wasn't in valuing the pension, but in valuing the parking fees/taxes cash flows from 31 years....so supposedly an asset, not liability, valuation.

Yes, the projection is total bullshit, but I really really want to know the screw up. Order of magnitude wrong? I've seen that sort of thing. I've had to point out -- "look at our inforce exposure and the reserves you are calculating. The reserves are greater than the NAR! Is that possible?"

My specialty is catching screw-ups, and I've gotten good at it because I've screwed up so many times.

So come on -- were months mistaken for years [or vice versa]? Was a decimal point moved?
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Old 01-03-2011, 05:07 PM
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When will we get to the Rebirth part? I am a sucker for come back stories. No?
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Old 01-03-2011, 05:46 PM
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Maybe these public plans should switch to a pari-mutuel system.

Hey, it works in horse racing. And racetracks don't seem to go broke.

At least people will get the right proportion of what they put in. If all they get is worthless pieces of paper, tough. It may be harsh but you can't say that it's not fair.
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