By: David A. Smith
‘But don’t give up hope.’
The pension-fund doublethink takeover described in earlier parts would have triumphed indefinitely, but for two events: the collapse of asset values in 2008 which dragged financial failure and financial chicanery into the light, and the rise of armchair experts who, by virtue of the Web’s ubiquity and public-sunshine access to information, were able to piece together what was going on, and to send up individual blog flares of outcry.
They’ve been lying to us!
Principal sources used in this post
The Wall Street Journal (2 June 2015; brick red font)
New York Times (July 10, 2015; forest green font)
These could be seen and picked up by others.
Mr. Palermo, who works in financial services, determined Mr. Sharpe [village actuary] was using a table from 1971, which tracked a group of people born from 1914 to 1918, who retired from 1964 to 1968. It is seldom used these days.
Yes, there’s been no medical advances, or changes of diet. How about decline of smoking between 1971 and 2015 (cool gif here)?
In 1970, Americans annually smoked roughly 115 packs of cigarette per adult
By 1990, consumption was down to ~90 packs annually
By 2012, we were down to just over 50 packs a year
Does a 60% drop in smoking suggest perhaps your 1971 table might be obsolete, and that you’d better use an updated one?
How should I know? I’m just the actuary
A table from 2000 is considered more accurate, and in 2014 the Society of Actuaries issued an even newer one.
Reading this story, one perceives the Society of Actuaries struggling against the coils of doublethink.
Mr. Palermo researched mortality rates in the American work force and found no evidence that police and firefighters die younger than other public workers. Finally, he sent a confidential complaint to the Actuarial Board for Counseling and Discipline, which deals with actuaries who stray from the profession’s standards of practice.
Good for him!
You won’t be in the club any more if you do that
A few months later, his complaint was written up in a village manager’s report and distributed at a public meeting. Mr. Palermo had accused Mr. Sharpe of making statements that were “frequently erroneous and incomplete,” it said. He had accused Mr. Sharpe of misleading the village board and persuading it to incorporate the wrong mortality assumptions into the local tax levy.
The news media pounced.
Yes, the media can’t follow abstruse logical argument, but they can read ‘misleading’ and love tearing somebody apart on fragmentary evidence.
I smell … smear campaign!
The village manager’s report strongly suggested that Mr. Palermo was a troublemaker with few allies in the local government. It said he had acted on his own and that most of the village board was on Mr. Sharpe’s side.
As if arithmetic was something to be decided by committee vote.
Oh, I forgot; to a politician, arithmetic is fungible. Polls move; deficits are abstract and future; everything is beyond the political event horizon (the next election). To a policy maker, the purpose of political capital is to make permanent beneficial change; to a politician, it’s to make more political capital.
We are, of course, delighted to hear Mr. Sharpe wasn’t intimidated.
Are you the company you keep?
In a phone interview, Mr. Sharpe said that he had been instructed to use the 1971 mortality table by the Illinois Insurance Department.
Mr. Sharpe chose to offer a double defense: I was told to do it, and It’s better anyway. Either of those by itself would be more credible than the two of them in combination.
You really want me to buy that?
If La Grange projected life spans the way Mr. Palermo wanted, he added, it would “be collecting taxes to pay for pensions to people assumed to live to age 120,” a needless expense.
“In Illinois, our pensions start very early, at age 50 for police and fire,” he said. “There’s a 3% compounded cost-of-living increase that goes on for life. So the pensions at the later ages of life — I’m talking about after 100, for instance — get very, very large. The person who gets a $50,000 pension at age 50 would get a $250,000 pension by age 100.”
Mr. Sharpe is dissembling, for even if the benefits increase at 3% annually, the discount rate back to present value will be greater than 3%.
In a separate interview, Mr. Palermo said he could not discuss his complaint, which has been resolved –
I presume that means a settlement between Mr. Palermo and the town with mutual releases, confidential, and non-disparagement provisions, provisions that do not apply to Mr. Sharpe (who was likely not a party to the settlement), leaving him free to say whatever he wishes, unrebutted.
– but said that by focusing on the oldest years of the mortality tables, Mr. Sharpe was diverting attention from the much more relevant middle years, where the probability of death was much greater in the 1971 table. For 50-year-olds, for example, the risk of death was seen as more than double in 1971 than what is expected in the later table.
“It’s only a role. I am an actress.” – Brooke shields, 1971
Neither man disclosed how the complaint was resolved. But their battle appears to have no clear-cut victor.
Only a person of supreme willful blindness would use mortality tables that overlook the massive decline in American smoking, to say nothing of the impressive rise of life-extending surgery and drugs.
Mr. Sharpe, who now uses the newer mortality table, no longer consults for La Grange’s police and fire pension trustees.
Though his conversion to common sense is welcome if absurdly belated, when intensively researching this (five minutes’ Google) I found that Mr. Sharpe really loves him some 1971 tables, and defends them vehemently – here, for instance, is a newspaper story on River Forest, IL from 2008:
What’s to worry about?
“Mr. Parry came in here every year saying, you better save for a rainy day, you better save for a rainy day,” Hoke observed. “They ridiculed him. They cut him off.” Hesitating a moment, Hoke added, “It’s raining,” then went on to accuse the board of routinely borrowing against the pension funds to pay for other budget items.
Sharpe expressed surprise that Tepfer took issue with his use of 1971 mortality tables, noting that the State of Illinois uses the same table. Tepfer, who said he uses updated 2001 mortality tables, responded, “Just because the state uses it doesn’t make it appropriate.”
That was in 2008, before things went so haywire:
Let me know when asset prices stabilize
Ppost-2008, those who pay have become much sharper in their questioning, and they have now the means to find each other and hence to support each other.
2008 is going to be seen as a double watershed era, a point where yet again, everything to do with financial markets (and even public-expenditure governance) changed, because it combined two intersecting phenomena:
1. The real estate asset price crash, which was catastrophe as essential precondition to fundamental reform.
2. The social-media explosion, an output of ubiquitous broadband coupled with the disintegration of the published-as-gatekeeper. Now everyone’s ideas can get instantly into space, so instead of broadcasting (the maximum share of minimally interested) we have narrowcasting (the largest cluster of maximally motivated).
The crash roused from their couches those who until that moment were content to thumb-swipe on kitten pictures and Harlem-Shake videos, with the interim strategic goal of forcing everything into the public electronic realm. The result is earthshaking change like this:
State and local governments will have to add hundreds of billions of dollars in retiree obligations to their books under rules enacted Tuesday that spotlight the growing costs of health insurance and other benefits owed to former municipal employees.
Now it all gets onto the balance sheet
Typically of a certain kind of journalism, this change – which is nothing short of seismic in its implications – earned only half a page worth of dry prose, but as the chart above shows, the effect will be in many cases to double the amount of liabilities towns and states are facing, and treat those liabilities just as if they were bond obligations.
The new rules approved unanimously by the Governmental Accounting Standards Board, which sets accounting rules for states and municipalities, will require governments to carry their unfunded retiree-benefit obligations on their balance sheets—thus making their overall financial position look worse. Currently, governments are required only to disclose the benefit costs in the footnotes to their financial statements.
The result will be instant ‘book insolvency’ for those towns, cities, and states, followed by taxpayer outcry as the voters and property owners face up to the extent that others who have heretofore presented themselves as victims of a cruel local administration are now revealed to have a Rumpelstiltskin claim on the next decades of town revenue. Voter revolts will ensue, as reported in the New York Times (July 10, 2015; forest green font):
We’re against it
The Actuarial Standards Board’s public hearing on Thursday was rare, reflecting mounting concern about the promises made to state and municipal retirees and the risk that actuaries might be blamed for fiscal disasters in places like Detroit, Chicago and New Jersey, where the promises now far exceed the money set aside. Puerto Rico recently reported that its main pension fund has only seven-tenths of a penny for every dollar the commonwealth has promised its public workers.
Those revolts will be accelerated when the Actuarial Standards Board takes the next step and compels greater disclosure of the sneaky and doublethink assumptions that have been used to overstate pension fund assets (absurdly high yield assumptions, counterfactual expectations of rising public employment with new young healthy workers paying into the system) and understate pension fund liabilities (mortality expectations). The Board knows it must grasp the nettle, and is sick at heart having to do so.
“Everything I look at, I have found to be a study in obfuscation,” said Bradley D. Belt, a former pension regulator, who spoke near the end of a four-hour hearing by the Actuarial Standards Board.
“And you can imagine how I feel about obfuscation”
Mr. Belt is yet another one who woke up to the They-Live doublethink operation that had been running for decades – and was appalled at how he had allowed the world to be duped.
The scales fall from my eyes
And I see what’s really going on
From 2004 to 2006, Mr. Belt led the federal government’s pension insurance program, which covers company pensions but not those offered by states or cities.
He acknowledged that he was not an actuary –
Just stop that ‘not an actuary’, okay?
Can we please stop already with the priesthood of actuaries? Actuaries are simply people who use the same sort of compounding and discounting projections that today any normal person with an Excel help function can construct. They are like pre-FIRREA appraisers, certified not by the public but by their own guild, and using the guild to create entry barriers for others.
– but said he had spoken with many of them who often told him they were pressed by politicians into reverse-engineering their calculations to achieve a predetermined result.
There’s the problem with actuaries, as it was for appraisers before FIRREA (the Financial Institutions Reform, Recovery, and Enforcement Act).
[Continued tomorrow in Part 5.]