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.
| Posted at 7:08 AM | Permalink |
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Comments (10)
Portland's police and fire pension and disability unfunded actuarial liability was most recently calculated under these assumptions:
1. The most recent actuarial valuation was performed as of July 1, 2006. Liabilities and costs as of July 1, 2007 were estimated using the July 1, 2006 valuation and the growth in benefit payments and covered payroll since that valuation was performed.
2. The annual required contribution has been computed using the Attained Age Actuarial Cost Method. Under this Method, as applied to the Fund, the actuarial accrued liability is computed using the Projected Unit Credit Funding Method. The present value of future normal costs is computed in the aggregate as the excess of the liability for fully projected benefits over the actuarial accrued liability. The present value of future normal costs is spread over future payroll to produce the normal cost. The unfunded actuarial liability is amortized in level dollar payments over a 30-year period from the date of the valuation.
3. The actuarial value of Fund assets is $750,000.
4. Liabilities and costs are shown using the discount rate of 6.04% set by the City Treasurer.
5. The Consumer Price Index (CPI) is assumed to increase at the rate 3.5% annually.
6. Salaries are assumed to increase at 3.5% per year in response to CPI increases. In addition, members are assumed to receive increases due to productivity and due to longevity and promotion at the rate of 1% annually.
For fire fighters, longevity and promotion increases are assumed to be 8.5% per year for the first five years of service and 0.75% per year thereafter. For police officers, longevity and promotion increases are assumed to be 5.5% annually for the first five years of service, 1% per year for the next 22 years, and 0.0% per year thereafter.
7. Benefits under the Old Plan are assumed to increase with acctive pay levels at 3.5% per year. Benefits under the New Plan are assumed to increase by 2% annually, ill step with the statutory increases under the Oregon Public Employes' Retirement System.
8. All other assumptions are as described in the Actuarial Valuation as of July 1, 2006.
Posted by Jack Bog | June 6, 2008 7:47 AM
$5 Billion is a real fiduciary nightmare and public-oversight embezzlement ... compared to what?
Behind the falsification of US economic data, by Peter Daniels, Global Research, June 5, 2008, from WSWS.org
In recent years, it has become increasingly clear to those who follow US economic statistics that there is something dubious about the numbers released by official government agencies and used to guide many aspects of social and public policy.
Some of the consequences of the falsification of data can be translated into dollars and cents. If the CPI had not been systematically understated, Phillips explains, Social Security checks would be 70 percent greater than they currently are.
How many countless think tank reports and magazine articles, trumpeted by Democratic and Republican politicians and academic figures alike, took as the gospel truth that the “Anglo-American” model of capitalism, compared to its more regulated rivals in France and Germany, meant lower unemployment? This and similar claims were based largely on lies.
American capitalism once prided itself on the accuracy of its economic statistics. ... Where American capitalism once required accurate data, today it requires lies.
(... and LIARS ... paid by advertising ... paid by 'passing along' higher prices to customers. I don't recall exactly when it stopped, but youngish readers perhaps can not sing this jingle -- 'You can trust your car to the man who wears the star, the big, bright, Texaco staarrrrr' -- as there were decades when gas stations bought TV advertising, and the ad cost was merely added to the price of a gallon of gas. Today, pay TV (cable and dish) bankrolls candidates, campaigns, elections, and 'government' ... there is unfathomable detail in the full-out explanation of junk issues / leverages / holding companies / derivatives, but, at the bottom line, everybody's monthly money to the Cable TV company paying for channels we don't even watch, is what buys the (wal)nut-shell facade behind which the public-money pea disappeared and 'actuarialized' treasuries are bankrupted empty. Proprietary advertising is your governing investment-economy. Pay TV is your governing investment-economy on cash accrual.)
Posted by Tenskwatawa | June 6, 2008 9:48 AM
The house next door just sold to folks from California. They're pouring money into the house big time. I wonder if they know the big picture here in Portland? Meanwhile, my house is for sale. Maybe I should advertise in California...
Hmmm. Real estate disclosure laws...I don't think they cover City debt, do they?
Posted by Don | June 6, 2008 10:11 AM
"Maybe I should advertise in California..."
Internet/MLS already pretty much does that.
Posted by Howard | June 6, 2008 11:01 AM
So...aside from Jack, does anybody have any serious ideas or plans as to what's going to happen to Portland if the city's sued for that level of debt? Or is everyone going to impersonate a Borders employee and shove their fingers in their ears and hum really loud while waiting for Santa Claus to save them? (No, I'm not talking about you. Or you. I'm talking about the folks in complete denial about the real consideration that Portland may become the largest city in the country to have to declare bankruptcy in our lifetimes.)
Posted by Sid | June 6, 2008 11:11 AM
You think Mr Tensk is scary - Wait until you see Sam Adams financial acumen in dealing with this debt. The best is yete to come.
Posted by Steve | June 6, 2008 12:09 PM
Jack, are there any write-in positions in local governments that you can run for now?
We need you just on this one issue of understanding public debt. It would be a blessing to have even one voice asking the right questions.
Posted by Lee | June 6, 2008 12:30 PM
This debt does not compare to the really important things Portland has accomplished in the past couple years:
Vision PDX
Restorative Listening Project
Ban on Duct tape for the Rose parade.
Posted by gl | June 6, 2008 6:55 PM
Bankruptcy will be the best thing that ever happened to Portland. It will allow the city to crawl out from under its phony unfunded promises to retired cops and fireman.
Posted by Mr. Ed | June 7, 2008 2:21 AM
Jack,
Adams is taking applications for PDC comissioner during the next couple weeks. You should apply and make Sam reject you.
Or in a rare moment of sanity apppoint you.
Everyone get on board the Jack for PDC train.
Come on,,, it's the perfect steppping stone to clean up the mess.
Posted by Howard | June 7, 2008 8:31 AM