[GJM] Fw: [globalnetnews-summary] Big Problems with State Pension Funds

[mary rose]

Again, FYI.  There are just so many downdraft situations
surfacing all at one time.  It appears that we must prepare
for the worst possible scenario as the worst economic
crisis in the history of the world looms before us.

----- Original Message ----- 
From: "GlobalCirclenet" <webmaster at globalcircle.net>
To: <globalnetnews-summary at lists.riseup.net>
Sent: Wednesday, May 21, 2008 4:44 PM
Subject: [globalnetnews-summary] Big Problems with State Pension Funds



(To change your settings or unsubscribe please go to
http://lists.riseup.net/www/info/globalnetnews-summary)

Big Problems with State Pension Funds
http://www.cnbc.com/id/24757600The New York Times
| 21 May 2008 | 11:43 AM ET

By firing its actuarial consultant last week, the New York State Legislature 
shone a light on one of the public sector's deepest secrets: All across the 
country, states and local governments are promising benefits to public 
workers on the basis of numbers that make little economic sense.

The numbers are off-base for a variety of reasons. Sometimes there is a 
glaring conflict of interest, as there was in Albany, where the consultant 
was being paid by the workers seeking richer benefits. More often, there is 
subtle pressure on the actuary to come up with projections that make the 
pension fund look good.

Most of all, public pension actuaries use old methods that have fallen far 
out of sync with the economic mainstream. That does not necessarily mean 
their figures are wrong, but it does make them vulnerable to distortion, 
misunderstanding and abuse.

"Financial burdens have been hidden" as a result, said Jeremy Gold, a New 
York actuary and economist who was one of the first to call attention to the 
gap between actuarial figures and economic reality. Many economists now 
agree with Mr. Gold, saying they believe actuaries are routinely 
underestimating the cost of providing governmental pensions by as much as a 
third.

The difference "is going to come out of services, and the services are for 
the working poor," Mr. Gold said.

In the private sector, pension funds are highly regulated, and actuarial 
numbers are less of an issue. But in government, actuaries and the 
consulting firms that employ them are starting to draw lawsuits in places 
like Alaska, San Diego, Milwaukee County, Wis., and Evanston, Ill.

In Texas, the attorney general is calling for actuaries to be registered, so 
the state can keep them on a shorter leash. Federal regulators are also 
flexing their muscles, and the actuarial rules-making board is being pushed 
to change.

Two big problems are being laid on actuarial doorsteps: overly aggressive 
investing and overly rich benefits. Benefits can go off the scale because 
widely used actuarial methods tend to make them look inexpensive. And this 
tends to encourage aggressive investing, because the greater the risk in the 
portfolio, the less costly it can seem to provide the benefits.

"Actuarial assumptions based on misinformation are a recipe for disaster," 
said the Texas attorney general, Greg Abbott.

After the Fort Worth pension fund was found to have a crushing $410 million 
deficit, Mr. Abbott sent his staff to dig through more than a decade's worth 
of documents, to find out why. They found that in 1990, an actuary had 
calculated that the city could put less money into the pension fund and 
increase workers' benefits simultaneously - without making a dent in the 
fund - if he assumed that the fund would earn 10.23 percent a year on its 
investments.

This worked on paper but not in the real world. In reality, Fort Worth 
actually lost money on its pension investments that year. And the new 
benefits did, in fact, have a cost. But the city forged ahead, armed with an 
actuarial opinion letter stating that "the numbers are correct." It 
generously sweetened public workers' benefits five times in subsequent 
years.

>From time to time, the actuary issued muted warnings, but he was ignored. He 
also began tweaking other numbers in his calculations, which kept the plan 
looking viable on paper. Meanwhile, the imbalances in the pension fund 
compounded.

"It went bust," said David C. Mattax, the attorney general's chief of 
financial litigation.

Fort Worth is now trying to come up with a reform package to bring the city 
pension fund back into balance. It is struggling, though, because its 
proposals are expensive, and some have been found unconstitutional.

Something similar happened in New Jersey. In 1994, the state needed money, 
and it made actuarial changes that allowed it to avoid putting billions of 
dollars into its pension fund. The state then spent the money on other 
things.

Members of the pension oversight board resigned in protest, and employee 
groups sued, but an actuary for the state provided a detailed opinion letter 
saying the new method "will securely fund the present benefits" and even 
produce a modest surplus.

Two years later, a state senate committee called back the actuary, Robert D. 
Baus, for questioning, to make sure all was well. Senator Peter A. Inverso 
noted that a $4 billion deficit had appeared in the pension fund. "That 
frightens me," he said. But Mr. Baus said that while the deficit had grown, 
"it does not change the fact that the system is funded." He said New Jersey 
would have to close the shortfall at some point, but in the meantime, "it 
does not mean that there is not enough money to cover the liabilities right 
now. There is more than enough."

No one asked exactly when the shortfall would have to be closed. Instead, 
legislators kept withholding pension contributions, even as they increased 
benefits again and again. Over the years the imbalances in the fund finally 
snowballed.

Now the fund is so deep in the red that Governor Jon S. Corzine's 
administration cannot find the cash to catch back up. The Securities and 
Exchange Commission is investigating.

Alaska is also struggling with a sick pension fund, and complaining its 
actuary got it into trouble. In Alaska, the state pension fund pays for 
retirees' health care as well as pension benefits. The actuarial firm that 
crunched the numbers for the plan, Mercer, made the assumption that health 
care inflation would fall to 4.5 percent by 2009. Instead, health care costs 
have gone up.

The difference looks small in percentage terms, but multiplied over many 
years, and 80,000 workers and retirees, it is enormous. Alaska has sued 
Mercer for $1.8 billion, arguing that it "failed to take into account 
real-world data," and, therefore, allowed the state to make unreasonably low 
contributions.

Mercer has said that it did nothing wrong, and that Alaska is trying to 
blame it for investment losses and other factors beyond its control.

Mercer is also being sued by Milwaukee County, where the pension fund has 
been draining the budget for years. The county accuses Mercer of 
underestimating the cost of new benefits that were promised in 2001. Mercer 
says the county caused the problems itself, through its mismanagement.

In Evanston, Ill., a former actuary has been accused of using aggressive 
assumptions about such things as investment returns, after a new actuary 
discovered a big shortfall. The former actuary has said his assumptions were 
valid and the plan had weakened because it was highly leveraged.

San Diego's official numbers produced by an outside actuarial firm were 
found to be so misleading that the S.E.C. sanctioned the city for securities 
fraud. The city sued the actuarial firm, which settled.

The New York State Legislature has dropped several proposed pension 
enhancements since lawmakers learned that the actuary, whose opinion was 
that the cost of the benefits would be zero, was being paid by a labor 
group. The actuary said his assumptions were within acceptable ranges. But 
the state's actuarial methods continue to be contentious, showing the 
pension fund is fully funded even when markets turn down.

Actuaries worry their profession cannot withstand too many large lawsuits. 
The board that writes actuarial standards has been working on revisions in 
how to make economic assumptions.

But change is coming at a creep. There are still a large number of actuaries 
for public plans who vigorously defend current methods.

In Washington, the Internal Revenue Service is seeking to intervene. It is 
an active regulator of corporate pension funds, but has seldom been involved 
with public plans until recently. At a recent informational event, I.R.S. 
officials explained that they wanted to help, and would send out an 
anonymous questionnaire.

"The law in this area is complex, and mistakes do happen," said Joyce Kahn 
of the I.R.S.'s Employee Plans Voluntary Compliance division. "They happen 
all the time." She said errors cost much less if they are corrected right at 
the beginning.

Many public fund officials, however, have resisted cooperating with the 
I.R.S., citing states' rights doctrine.