Monday, October 6, 2014

why Providence choses 8.25%

Ri shrugs
the unvarnished truth ,. An effort to bring the analysis of Municipal and State pension liabilities, and opeb into   compliance with  GOVERNMENT Accounting STANDARDS

We use  GASB 68 projections and  moody,s methodology  to make apples to apples comparisons of pension liabilities and funding policies.

A discussion about Pension Discount rates and why Providence choses 8.25%

Providence Rhode Island Mayor Angel Taveras  is in his final few months of office and to hear his losing message as candidate for Governor , he "saved the city from bankruptcy" and a category 5 hurricane  left  by the previous mayor and current Congressman David Cicilline  who characterized Providence economy  as in “ excellent  condition”. This excellent condition was repeated by ad nauseum by Projo , WPRI and WJAR.  Later, when Taveras became the next mayor and called it a “category 5” hurricane, they cheered the New Democratic Mayors heroic efforts to “save the city” and then dutifully both the seemingly  blindsided  Mayor Taveras and the Providence Journal endorsed the proven Liar , David Cicilline. for Congress. Projo followed on, by then endorsing Taveras for R hode Island Governor ,if not tacitly, certainly  through the ink of partisan journalist K. Gregg..
There is a dirty little secret about municipal finance, politics and the municipality's choice of actuary or favorite reporter. You see Government accounting allows for wide disagreement over expected returns on assets and then allows use of that return expectation to discount liabilities regardless of funding ratio and the riskiness of either the assets or liabilities. The honor system is the only restraint.  Mayors and treasurers quickly learn that the higher the "discount rate" the lower the present value of liabilities and less pressure on the budget. They can effectively lower their contributions to funding pensions by simply changing the discount rate. Politicians know this and Actuaries know this. Like chocolate and peanut butter they naturally combine to produce sweet outcomes for both politicians and governments who want to spend and since the costs of properly  funding a pension plan  disappear there is no pain of increase taxes or angry taxpayers either.  Could a politician have it any better than this? So many politicians jumped on it and passed the cost of funding pensions to future generations in full view of the public workers who simply negotiated more wages and benefits certain that they were guaranteed a retirement regardless of whether the politicians properly funded it or not. Feigned ignorance is bliss. The Public workers gained both ways through increased government spending and future promises that were unaccounted for. The union leadership clearly understood this "money tree" as did the politicians. Its arguable whether the average public employee knew this as well. So the magic money producer was the discount rate, the higher the better, cities and towns shopped for the most lenient actuary. Not so strangely, the worst funded plans display the highest discount rates. The tongue in cheek explanation by  the actuary typically goes like this “ our choice of financial managers and asset allocation will be superior to other plans, therefor 8.25% is appropriate even though Warren Buffet uses 6% for his estimate. We are just that good.”
Let’s talk Providence
       Of course this line of thinking defied all logic but GASB and logic parted ways when government plans were excluded from ERISA many years ago. Providence choice of 8.25% is laughable. Never mind that Taveras has inappropriately already overstated assets by calling next years  pension contributions as an asset this year. (why wouldn’t every plan do that? :answer because its illegal)  In 2012 Taveras reported Assets in the pension Plan were $421 million dollars compared to the real  market value of $247 million.  GASB is so fed up with accounting abuses like this that they are working in a very bureaucratic and political way to end abuse. Actuarial asset smoothing as used by Taveras is gone and an attempt to rein in wild return assumptions is underway. The accounting profession has been attempting to bring reality to government accounting through GASB 67 &68 and has notified Providence of the coming changes as far back as the Cicilline administration. Providence officials have made no effort to clarify GASB effects on purpose, because Providence Rhode Island for some time has been among the worst funded pension systems in America, even when using phony numbers.
 Some Mayors, administrators and actuaries like Providence’s have misled the public for years now.  Other municipal leaders across the nation had a moral compass and did not abuse the public. As far as misleading bond holders and the Public goes , Providence reigns supreme.  These violations are an SEC focus and the last few years in Providence the deception has been even worse  under the direction of Finance Director Mancini and Chair of the investment Commission Angel Taveras. The first transgression was the use of an outrageously high discount rate of 8.25%, which not so coincidently reduced the “stated “Unfunded Accumulated Actuarial liability (UAAL ) by  roughly $800 million from  Taveras Claim of $900 million to Moody’s $1.7 billion . In reality todays Funded Ratios are closer to 11% to 16% when proper accounting for Assets and liabilities are used and calculated according to Moodys , Riley/Stanford model or GASB 68.That table appears below :

Point of view                   Assets        AAL ( Actuarial Accrued Liabilities)      UAAL (unfunded Liability)             FUNDED Ratio %
Taveras 2012(post reform) 8.25%
$421 million
Moody’s 6%
$ 327 million
Riley /Stanford
$ 270 million
Gasb 68 (2014)
Blended rate 5%

$ 270 million
2002 Cianci
$340 million

Providence has clearly misled everyone and individual violators should be prosecuted by the SEC. Bondholders, taxpayers (both state and providence and pension beneficiaries are entitled to the unvarnished truth.

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