Wednesday, August 2, 2017

Sierra Madre's "Actuarial Liability" Versus "Market Pension Debt" CalPERS Numbers Hopefully Explained

On Monday I posted an article called "City Hall Report: Sierra Madre's Employee Pension Obligation Numbers Are Impressively Large." Which they most certainly are.

The big question is exactly how much money Sierra Madre actually is in the hole to CalPERS. The two numbers being tossed around are either $10 million dollars or $40 million dollars. Quite a discrepancy no matter how you happen to round them off. Apparently there are two distinctly different ways of calculating Sierra Madre's quite troubling pension debt. And even then there is a very good possibility that neither of them is going to be all that accurate. Just to make this real easy for you.

What follows just below are the figures supplied to us by the Stanford Institute for Economic Policy Research, which supplies us with both the "Actuarial Liability" and "Market Pension Debt" calculation varieties. This is how they display Sierra Madre's pension woes (link):


There you go. You have your "Actuarial Pension Debt," which is $10,678,446. And you also have your "Market Pension Debt" at $40,428,900." So how much does Sierra Madre really owe CalPERS? $10 million big ones? $40 million long? Somewhere in between? Your guess is as good as mine. I don't know. And neither, apparently, does anybody else.

When I discover that I don't know something, I go ask people questions. Over the years I have managed to find a few people who really do know a lot about things such as this, and on the CalPERS pension debt tip some do have this down cold. First I went to the knowledgeable Gabe Engeland, Sierra Madre's new City Manager.

As a disclosure, I have never gotten along very well with City Managers in the past, but Gabe so far has come off as being a fairly reasonable guy. That said, in his July report on Sierra Madre's CalPERS exposure Gabe did cite the far lower "Actuarial Pension Debt" number, which I thought might have been a little too convenient.

Here is how our e-mail exchange went:

Gabe: This from today's Tattler post:

"While the "Actuarial Liability" numbers being supplied by both City Hall and this Stanford based outfit are the same at $10,678,00, there is another number. The Stanford Institute for Economic Policy Research also talks about something called "Market Pension Debt." At right around $40 million, that figure is approximately four times Sierra Madre's reported actuarial pension debt, or right around $8,500 per unhappy household.

Sierra Madre's report does not discuss "Market Pension Debt."

What is the difference between "actuarial pension debt" and "market pension debt?"

Here is Gabe's reply:

I love the Market Liability vs. Actuarial Liability debate! In its simplest terms here is the difference:

The Market Liability is what assets and liabilities are actually worth today, according to the market.  To determine market liability you would take actual pension fund assets and subtract from them from actual obligations and you are left with your “unfunded” pension obligation. 

The Actuarial Liability is the expected value of assets and liabilities over a given period of time.  To calculate actuarial liability you have to make assumptions about your liabilities (total value of payouts, length of time it is to be paid, etc.) as well as your assets (rate of return). 

The actuarial liability can get you in trouble if your assumptions are wrong (Hello, CalPERS!). 

The market liability has shortcomings as well, but mostly it ignores long-term market or economic trends and can greatly overstate or greatly understate the total liability, especially for pensions, where liabilities are difficult to calculate.

I think both numbers are helpful when looking at your total obligation picture.

Thanks, Gabe

I repliedSuch a wide discrepancy between the two! Is it possible to say we really don't know for certain where this will all go? The two approaches being just bookends with everything in-between a possibility?

Gabe answeredYes, it will end up somewhere in-between. The better the assumptions made, the closer it will be to actuarial, the worse the assumptions made, the closer it will be to market. CalPERS has a long time to provide more realistic scenarios, the key is they need to do it.

Next I turned to my panel of pension experts. Robert Fellner, of Transparent California acclaim, praised Engeland's open approach and assured me that he was not cherry picking his numbers as I so coldly suggested, but just going with the information CalPERS had supplied. Which is proper for what he does and the best that can be expected under the circumstances.

Hey John,

No, he’s definitely not cherry picking. Honestly, pretty cool to see him addressing this at all, normally they just hide it.

The difference between market and actuarial reflects pension accounting practices used by all U.S. public pension plans, and the rest of the world.

U.S. public pension plans discount their debt by assumed investment returns = actuarial debt.

The rest of the world (including private US pension plans and even the US federal govt plan) understand that a guaranteed promise can not be discounted by an assumed investment return (which isn’t guaranteed) and instead can only be discounted by something with the same degree of certainty as the guaranteed promised benefits. That number is typically U.S. government bonds, which are also guaranteed.

The market value is the correct measure of the true cost of pension debt. I'm not defending the use of the inflated actuarial numbers used by CalPERS by pretending an assumed investment return is guaranteed, but I don’t think you can expect the Sierra Madre city manager to reject the numbers provided to him by CalPERS.

So while the actuarial numbers are bogus, Gabe is not the culprit. If anything he should be commended for being transparent and addressing this issue head on. The actuarial versus market discussion is much bigger than him and outside of his authority to change. CalPERS dictates these decisions, and he can only go on the numbers they provide him.

Sincerely, Robert Fellner
Research Director, Transparent California

Fair enough, and very good to know. My next e-mail went off to Jack Dean, gatekeeper of the excellent Pension Tsunami website (link). An incredible news resource that I read most every day. He offered me the following insights.

http://www.pensiontracker.org/agencySummary.php?agency_name=City+of+Sierra+Madre&id=512&search=Search (link)

On this data page, if you place your pointer over the little blue dot with an "i" in it, you'll see a pop-up with a definition for each term.

He's using the number that government officials use -- the actuarial liability: "Present Value of future benefits for current members, using discount rates reported by most systems, typically 7.5%." Using this number, Sierra Madre's funded ratio is 74.2%.

The larger number is provided on Pension Tracker to show the more realistic market valuation. This is the definition: "Present Value of future benefits for current members, discounted at a market rate of return, ranging from 2.82% to 4.82% between 2011 and 2013." Using this number, Sierra Madre's funded ratio is 41.3%.

It's the same debt but calculated differently (more conservatively) -- using a lower, more realistic discount rate. - Jack

Here are the definitions Jack Dean is referring to:


Jack Dean suggested I drop a line to Joe Nation, the noted Stanford University economics professor who runs the rather remarkable Stanford Institute for Economic Policy Research website. Which is where this conversation all began. Joe got back to me in about 15 minutes.

John - I would just use the verbiage on Pension Tracker to highlight the actuarial and market value differences. Actuarial values, while used by CalPERS and most municipal finance managers, are not what is generally accepted by financial economists. The biggest difference is that actuarial values assume CalPERS (and others) will earn their discount rate forever, even as CalPERS acknowledges this remains too high. The market value uses a 20-year Treasury yield instead, providing a better assessment of the financial status for any municipal government plan and for CalPERS overall.  From the site: "The use of this discount rate is intended, as most financial economists agree, to more closely represent market realities and system liabilities.”  - Joe

So that is where we are at. I hope this clears things up at least a little bit. It did for me.

However, I will leave you with this rather melancholy thought. Sierra Madre's CalPERS debt exposure is hard to accurately calculate. It could be $10 million if you believe the overly optimistic CalPERS' numbers, or it could be as high as $40 million if you use the kinds of accounting standards privately run concerns do when calculating their pensions costs.

But apparently nobody can really say for certain what the final numbers are going to be in the next few years. Only time will tell. Back in the day City Hall placed Sierra Madre's financial fate into the hands of a failed pension bureaucracy called CalPERS. In the end everything, including the fate of this town, depends on them.

Which is probably the scariest prospect of them all.

sierramadretattler.blogspot.com

43 comments:

  1. I'm still confused but thanks for laying it out on the table for all to look and decide for our selves.

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    1. The City of Sierra Madre owes somewhere between $10,000,000 and $40,000,000 to CalPERS. There are two ways of calculating it, neither, 100% dependable. The real number probably lies somewhere between the two, though right now nobody knows what that is. Split it down the middle and each household here will be expected to cough up somewhere around $4,000.

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    2. Either way the residents are screwed. In Sierra Madre faces change in City Hall and City Councils...but the problems never change. They just get more expensive.

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  2. Mod, What's the worst case scenario with the CalPERS...That is if the City can't pony up the funds?

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    1. According to this article pensioners lose much of their benefits. That and I imagine CalPERS sues the defaulting city in order to get their money. After all, they did sign a contract. Loyalton, population 750, was the first town ever to do so.

      Tiny town can’t pay its pension debt
      http://digital.olivesoftware.com/Olive/ODN/SacBee/shared/ShowArticle.aspx

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    2. Loyalton's pension default is a wake up call
      http://www.sandiegouniontribune.com/opinion/commentary/sd-utbg-pension-default-loyalton-20161207-story.html

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    3. If calPERS sues a defaulting city in order to get their money, and the city can't pay off the incurred debt, then what happens?

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    4. Jerry Brown sends in the National Guard, our leading citizens are arrested and put in stocks, all government services are suspended and marshal law declared.

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    5. Jerry Brown? Our leading citizens arrested? Never happen, their protected.

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    6. Locusts?, You have to have something green for them to eat. Everything here is dry or dead. They will just fly onto greener pastures.

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    7. They're coming for everyone's 6 pot plants. Can't you hear the buzzing?

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    8. If they devour everyone's 6 inch plants, they won't be buzzing. They'll be stoned.

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    9. Then they'd move to the Canyon.

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    10. Would that be Stone(d) Canyon Road in BelAir, woops wrong Canyon?

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  3. Regardless of the exact number, Sierra Madre is in trouble. It's interesting to note that the recipients of these pensions are not in trouble or affected in any way. It falls back on the taxpayers to backstop this whole mess. To be clear, the end result is that the taxpayers have to work harder and retire later so that our "public servants" can "retire" as young as 50 with a lifetime pensions, cost of living increases and Cadillac medical benefits. "Retire" is in quotes because even they recognize they are too young to retire so they get another job to supplement their retirement income. So long as taxpayers keep electing politicians who are beholden to the unions this will contribute. Possible solutions: don't allow the public employees to unionize, raise the retirement age to 65, and switch their pensions to defined contribution pensions rather than defined benefit pensions. That means City Councils can no longer make extravagant promises in which the pernicious consequences don't manifest themselves until they are long out of office. Instead the City Council has to budget for that promise whine they are still in office. Does any member of our City Council have the guts to promote real reform? No. They just want to fulfill their tenure in office with the least amount of problems so the can keeps getting kicked further down the road and the Calpers problem only gets bigger and more intractable.

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  4. One wonders if we might eventually have to sell the Library land anyway so as to pay back calPERS.

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    1. If the city wasn't up to its ears in bond and pension debt, and paying out millions of dollars to keep up with it, then there would be money to build wheelchair ramps at the library. So yes, the library property will have to be sold because there is no other choice. Trust me, it isn't because we need to build a community room.

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  5. $10 million ... $40 million. Quick, somebody get out the dart board. It's time to do some budgeting.

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  6. every city, municipality and state university is beholden to CALPers, no? and a city can't just pull out of it without having to pay CalPers what they owe up to that point, right?

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    1. I can't answer your question directly but I found this information on the Mod's referral site. Loyalton, City mentioned above, withdrew from CalPERS in 2013 upon its last guaranteed pensioner. It seemed logical to the City Council as they had paid the calPER dues all along. But what they didn't count on was the $1.6 million termination fee demanded by calPERS to cover unfunded liabilities which calPERS has allowed to grow for the past 17 years. It seems there is a termination fee! So it all depends on what you mean by up to that point.

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    2. i think the figure we would owe was discussed by Elisa Cox at a city council meeting. i think it was close to the $10 million figure. what other options are there? new hires get a defined pension plan?

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  7. And to boot we have our democratic congress in Sacramento trying to circumvent Prop 13 or overturn it.

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  8. Thank you 7:51am. Soooo true. Thanx Jerry Brown and Union Enquires...keep the masses in sheep pens.

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  9. Thank you John for all the research/correspondent.
    Thank you Gabe. Clarity.
    Mr. Engeland reminds me somewhat of Sean Joyce;City Manager from the past...
    The sale of the Library has nothing to do with the expense of CalPERS.
    California cities could band together and tell Sacramento; he// no. Jerry can't shut off the water to all municipalities, can he?
    Sierra Madre could be worse in debth; so many cities are.
    I understand that Mrs. Delmar initiated the "new" way an employee will receive the "JerryBrown" retirements fund. Thank you Mrs. Delmar; second the amendment, Mrs. Arzemendi.
    Sacramento and the leaders we have elected, have given us this mess.

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    1. I'm thinking of a post I read yesterday. It had to do with residents not being informed. Well, here is another informative article from the Tattler. Take note yesterday's poster, the Mod is keeping us informed about our City.

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    2. If Sierra Madre wasn't up to its follicles in pension and bond debt there would be plenty of money to fix the Library. Don't be naive,

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  10. I've learned more about calPERS from the Tattler in the last few days than I ever knew. Thanks John.

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  11. Take pity on us, could someone please donate another can so we can continue kicking it down the road and ignore stark reality of liabilities facing Sierra Madre, California. P.S. please donate some more shoes to keep kicking this can down the road since we on the city staff and city council have worn ours out already. But rest assure we all in Sierra Madre city hall have protected out salaries and retirement pensions. Have a good day and don't for get what we asked for so we can continue protecting our jobs.

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  12. 10:30am. Let me make a wild guess...YOU voted Jerry Brown back into office, cuz he was so great the 1st time around!
    Blame your self!!!
    Attend City Council meetings in Siera Madre; pay attention to what is coming out of Sacramento.

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    1. I vote Peace and Freedom.

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    2. Whiplash 10:30 am - lots of blame to go around but lets get back to kicking the can down the road again? Getting elected to Sierra Madre's city council is nothing more than a social event to go around and hob-knob with the beautiful people who claim to have influence, but that's as far as it goes follow order from the influence people in the shadows and do not cause any problems like changing the status flow! We the shadow people will tell you what to say and how to say it as well as how to vote if we want you too!

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    3. A big part of the responsibility for Sierra Madre's financial crisis is idiots electing idiots. Years of damn fools on the City Council has led to things like rotted water infrastructure and selling the library property to pay down pension debt. Fools all. Every damn one.

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  13. A very stark reality to keep in mind is that if, going forward, new employees can only go into a defined contribution plan, that much less money goes into the current plan. The guaranteed benefits of the current plan remain the same, so the gap will widen more dramatically as current employees retire. And as each year goes by, that gap will continue to grow exponentially.

    The obligation is still there and, under the public pension plan laws, it is the employer (state, county, city) that is responsible to fill that gap. Which really means that it is us taxpayers who will have to fill the gap. And the ex-post facto prohibition in the Constitution protects benefits already earned.

    This is a really prime example of being between a rock and a hard place.

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  14. Randy Newman out on Friday everyone.

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    1. Please explain.

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    2. Randy Newman has a new album coming out Friday. Called Dark Matter. Getting some very good notices.

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  15. 11:29am. By the time the pensions are due, the majoriety of us will have moved into as nother state. Let "wealthy" pay for the mistakes; that is, all the retirees of the CalPER system!

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  16. What's Newman's Short People album got to do with CalPers and city employees?

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    1. Both have no reason.

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  17. Who is Randy Newman. He dislikes midgets?

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    1. You'd think judging by that song. Midgiphobia is not a laughing matter.

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