It’s time for actuaries to stand up and be counted

By   /   January 26, 2011  /   2 Comments

By FRANK KEEGAN – If he could ask state and local officials one question they absolutely had to answer truthfully, David K. Sandberg, president-elect of the American Academy of Actuaries this week said it would be: “Do you understand your risk exposure?”
Frank Todisco, who just started as chief actuary at the Government Accountability Office after serving as a senior pension fellow at AAA, independently gave the same answer: “Pay attention to risk.”

Good luck on that. Public officials don’t have to pay attention because none of the risk is theirs. All risk falls upon the dwindling number of private-sector workers forced to pay for politicians’ public misfeasance and malfeasance.
Politicians don’t lose their homes when they mess up. They seize taxpayers’ homes.
So they don’t have to think about risk, especially long-term.
Actuaries do think about it, precisely. That is their calling, and they are good at it. What they are not good at is forcing politicians to listen and the public to understand.
Sandberg was chairman of the AAA task force that published “Risk Management and Public Retirement Systems” in October after more than three years of hard work. All 56 mind-numbing pages are scarier than a Stephen King novel but not exactly best-seller material.
Too bad, because state and local officials along with the public workers, taxpayers and bond investors they betrayed need to get it. They need to get it fast because time is running out before many fall into a fiscal abyss from which there is no return.
If officials do not take decisive action this year even as tax revenues are rising to pre-recession levels no rate of economic growth, increased taxes and expense cuts will save many states, counties, cities and towns from eternal debt.
The Great Recession did not cause this fiscal catastrophe but merely revealed it.
As the task force clearly says:
The recent economic crisis, spurred by financial institution failures, has heightened public interest in the long-term viability of all financial promises and strengthened the case for more comprehensive risk management in a wide range of financial systems. There have been discussions within the actuarial profession on how to better contribute to the resolution of the financial issues impacting public pension funds, whose stakeholder structures can differ significantly from private pension funds. Our findings regarding public pension systems, however, are independent of the financial crisis and encompass risks unlikely to go away with economic recovery.”   
 
One of those risks is what actuaries refer to as “moral hazard.” That’s when those who benefit immediately from making promises know they won’t have to honor them and can hide the true cost until it is too late.
State and local leaders have done just that for more than a decade on everything from public works projects and self-insurance premiums to social programs, education and, the biggest of all, false retirement promises.
Anybody who doubts the day of reckoning is here should take a look at the latest Census data on state finances. For the first time in history, states paid more for “Insurance Trust Expenditures” than for “Exhibit Salaries and Wages.”
Basically that means citizens are paying more in 2009 $5.4 billion more for those who provide no government services than for those who do. The trend can only get worse as state governments cut jobs to balance operating budgets ravaged by rising debt service and retirement costs.
At the same time, risk-based “Insurance Trust Revenue,” fell $477 billion and “Cash and Security Holdings” value dropped $738 billion, 19.3 percent, from 2008.
Politicians try to blame the recession’s tax revenue impact for this fiscal crisis, but while total revenue fell almost 31 percent, tax revenue fell only 8.5 percent. States are in trouble because leaders failed to understand risk exposure.
Any household or business that suffered such a calamity in one year many have would be bankrupt and unable to keep piling up debt.
But while municipalities can declared bankruptcy, states cannot even when they are bankrupt. So they just keep spending money they do not have, hiding their profligacy and serving their own interests instead of the public interest they are sworn to serve. They plan to have taken the money and run before the bills come due.
Putting a stop to that is one goal of the AAA task force: “Determine ways in which current practices support (or do not support) the public interest and how practices that do not support the public interest can and should be addressed.”
 
One way politicians can start serving the public interest is to listen to the actuaries. While no law or regulation requires politicians to listen, citizens, public workers and bondholders must force them to.
 
Then we must make the politicians do what the actuaries tell them to do.
It is not going to be easy or painless.
 
Todisco said “when actuaries come up with a required contribution,” to keep a pension plan solid, “some state or local governments simply do not make the contribution.”
 
That is one big factor causing a hidden retirement funding shortfall ranging from at least $1 trillion to as much as $5 trillion.
 
Sandberg said that while the true fiscal state of the states “probably is somewhere between Pollyanna and Chicken Little,” politicians definitely face tough, immediate decisions.
 
“What we need most is courage and humility,” he said.
 
Those are qualities of leadership that go way beyond numbers, but listening to the people who know numbers is a good way for politicians to start.
 
Frank Keegan is a national editor for The Franklin Center for Government and Public Integrity, watchdog.org and statehousenewsonline.com . Any disgusted public employee, journalist, activist organization or citizen watchdog who wants help exposing government waste, fraud and abuse may contact him at: frank.keegan@franklincenterhq.org

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  • Tough Love

    Frank, A very good place to start would be to look more at how some paid actuarial consultants bent over backwards to support (i.e., minimize the cost impact of) Pension Plan benefit increases, especially the retroactive increases that have taken place in numerous States (California and NJ come to mind) over the past decade. By this I mean lowering the bar at which a disciplinary hearing should/will take place …. and that it can and will be initiated directly by the Academy where appropriate, rather that only after a referral or complaint.

    A firmer hand and stronger discipline might also be appropriate. It took 2 years for the ABCD to “reprimand” the NY pension actuary (JS), in a galling case. A more swift and immediate suspension might have been more appropriate…. and send a very needed message to the actuarial community.

    It should ALSO be made clear that silence is NOT a defense.

    The few actuarial rabelrousers in the news lately (e.g. the Chief Medicare Actuary) have my utmost respect for their honesty and integrity, for NOT just “finding a way” to support their bosses desired outcome.

  • Keen Observer

    Has it occurred to you that public employees also pay taxes – in effect, a portion of their salaries and benefits? It’s not just workers in the private sector.