Accentuate the actuarial
Yesterday the grand total on our City of Portland long-term debt clock (in our left sidebar) officially broke $5 billion. The city finally revealed that it has a liability of around $90 million attributable to the subsidies it provides to its retirees for health insurance. That, along with more than $2 billion in police and fire pension and disability obligations and $2.9 billion of bonds and other long-term I.O.U.'s outstanding, adds up to more than $5 billion.
This morning, we want to add an asterisk on that pension number. It's probably too low. The way the actuaries compute the present value of such obligations tends to underestimate it.
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.What we find most alarming about the new stories trickling in from other cities on this issue is that even if its numbers are accurate, Portland is in far worse shape than the other municipalities are. In Fort Worth, for example, the city is suing its actuaries for underestimating its pension liabilities and thus creating "a crushing $410 million deficit." In Portland, the police and fire pension is completely unfunded -- pay as you go -- to the tune of $2 billion.
"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.
With a "b."
And city commissioners babble on every year about how to spend their budget "surplus."
Even more startling is the debate in other cities about the discount rate to use in estimating the present value of the government's future payout obligation. As a recent article from the United Kingdom explains:
Financial theory requires one to discount pension fund liabilities at the market return on investments with the closest characteristics to those liabilities. This is why AC1 16 requires the use of interest rates on low risk bonds to discount post-retirement benefit obligations. Actuaries, on the other hand, argue that pension fund obligations should be discounted at the return expected from the assets in the fund.No such debate can take place regarding Portland police and fire pension, because there are no assets in any fund to pay them!
In any event, put an asterisk next to that $5 billion on the debt clock. The real number could be higher.
UPDATE, 11:42 a.m.: An alert reader points out that the city changed actuaries recently. A new actuary will make the call as of June 30 of this year.