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

[robert searle]

The answer as always is a new financial paradigm, and a new global understanding of capital itself which would BOTH benefit the rich, and the poor.


         http://www.p2pfoundation.net/Transfinancial_Economics



Robert Searle


--- On Thu, 22/5/08, mary rose <maryrose333 at att.net> wrote:

> From: mary rose <maryrose333 at att.net>
> Subject: [GJM] Fw: [globalnetnews-summary] Big Problems with State Pension Funds
> To: FixGov at yahoogroups.com, "Discussion Forum for Global Justice" <discussion at globaljusticemovement.net>
> Date: Thursday, 22 May, 2008, 1:35 AM
> 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 ----- 
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> To: <globalnetnews-summary at lists.riseup.net>
> Sent: Wednesday, May 21, 2008 4:44 PM
> Subject: [globalnetnews-summary] Big Problems with State
> Pension Funds
> 
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> 
> 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.
> 
> 
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