County’s proposed pension plan ignores current economic realities

Tue, 12/09/2008 - 4:24pm
By: Letters to the ...

In a recent letter to a concerned citizen, Mr. Jack Smith, a certified public accountant and chairman of the Fayette County Commission, made this statement: “The pension study committee worked for nine months with information from experts, both paid and unpaid, in thoroughly researching a [defined benefits] plan for Fayette County. This was done in properly advertised open meetings which any one could attend to listen or discuss the issue. Even though few attended the meetings, I have not yet found a pension professional or open-minded citizen who disagrees with implementing the DB plan once they hear all the facts. Unfortunately, there are those alarmists who will believe the worst before they have all the facts.”

So, let’s look at some facts.

The fact is that plans that are put together today will likely miss targets in the future for many reasons. Remember, the pension study was not carried out in the last nine months; it was carried out sometime in early 2007.

Actuarial science is not mathematics because it is not calculated with precision. An actuary is a person who computes premium rates, dividends, risks, etc., according to probabilities based on statistical records.

All of the attributes of actuarial science are steeped in statistical theory, and it has one main flaw.

Unlike mathematics, which draws finite conclusions using numbers, actuarial science requires judgment. And we all know that judgment can be influenced by self-interest. Or as my dear old dad used to say, there are lies, damn lies, and then statistics.

So, let’s see what has happened to some public-funded defined benefit plans recently. These data are dated Nov. 8, 2008, and come from various reports on the under-funding of public defined benefit plans.

1. The California Public Employees Retirement System has lost $67 billion during the last year, and had a total portfolio value of $192.7 billion two weeks ago, down from $260.4 billion.

2. The Illinois Municipal Retirement Fund is down about 21 percent and taxpayers might be called upon to pay for a bailout.

3. In New York, where state and local governments are struggling with large projected deficits, the state pension plan has dropped 20 percent since April.

4. Colorado on Oct. 24 announced, “the market value of assets as of Oct. 15, 2008, was $31 billion, down from $41 billion at the beginning of 2008.”

5. There are 37 states out of 50 that have significant under-funding of their defined benefit plans.

6. In a recent survey of publicly funded defined benefit plans covering 13 million public workers, results show negative cash flow each year for the last six years.

7. In the same survey the author states that unfunded liability must be amortized over decades to enable plans to pay promised benefits. He states that under-funded plans require revenue to amortize the shortfall between assets and accrued liabilities. Revenue, in this case, is taxes in the form of employee costs and future interest on assets.

8. Finally, the author states: “The critical factor in assessing the current and future health of a pension plan is whether or not funding its liabilities creates fiscal stress for the pension plan sponsor.”

On this last point, I would argue that the taxpayers of Fayette County are already under “fiscal stress” without a county defined benefit plan. If you think the county budget crunch will be any better in the future, you are sadly mistaken.

To make things even worse, state, municipal and corporate pensions lost hundreds of billions on derivative swaps in recent weeks; these are not included in the data above. This is just another unforeseen event by the actuaries and certainly not in their historical data.

Unfortunately, the fact is a defined benefit plan puts the taxpayer on the hook for any shortfalls in participant pay-out funding. Taxpayers are the guarantors of the plan and it doesn’t stop with just today’s plan; once there’s a plan, it can be “improved.”

In fact, Commissioner Smith asked about this in one of the public meetings on this subject when questioning the actuary on the future risk associated with a defined benefit plan. The actuary confirmed to Mr. Smith that changing the plan benefit by future commissions was the biggest single risk in adopting a defined plan.

Finally, one last fact on the oldest politically run defined benefit plan in the United States, the safety net of all safety nets. Yes, that would be Social Security.

Social Security is currently $6.6 trillion under-funded and still sinking under its own weight.

Medicare, an add-on program to the basic Social Security program, is now $34 trillion under-funded and growing.

It is not enough to say that there will be savings next year without acknowledging the long-term financial risks to the taxpayer through over-promising and under-funding.

There is a threat to the citizens’ pocketbook when elected officials pursue short-term gains without regard to or responsibility for potential long-term costs. Clearly, a defined benefit plan will remain in place long after the current board is but a vague memory.

Over the long haul, based on facts like those above, you will have a county defined benefit plan that the taxpayer will be obligated to fund so it can pay its participants, and there will be a lot of unhappy county employees in the future when they find out taxpayers can’t or won’t do it.

I find it hard to believe that the commission or the actuary that studied a defined pension plan for nine months in early 2007 had any idea that the current financial crash would happen, which happens to prove the point that no one can see into the future, not even actuarial scientists.

Now to the other assertion that Mr. Smith made: “This was done in properly advertised open meetings which any one could attend ... and discuss.”

Well, I would say that this is only partially true, and it certainly doesn’t make the dialog between government and its citizens adequate.

The fact that commission minutes were changed to minimize the content and scope of what was being discussed, and the fact that a document concerning what was being discussed concerning the study was never released to the public as an attachment to the meeting minutes online, is not what I would term an “open meeting” or a well communicated meeting.

The fact is that during the mentioned meetings most folks were simply out working so they could make a living and pay their taxes.

To achieve open government, elected officials should publicly commit to exposing as many citizens to the political process as possible. They should act on those commitments by improving the tools of communication. There should be a 24/7 opportunity for all citizens of this county to easily find information on what the commission is doing, to hear and see what they are planning.

In fact, if you look on the county’s new revamped website, it is challenging to find the archives of past meetings and one would suspect that they aren’t even there.

Why can’t an archive link easily be found on the header page of the county commission section of the site?

Citizens should have the opportunity to debate the positions of the commission with the commissioners. The assertion that citizens could “listen or discuss the issue” in open meetings does not square with the realities of how the commission takes public comment.

Perhaps through a dialog a consensus on issues can be reached between the commission and the citizens they represent.

During the early days of the republic, they called these citizen exchanges town hall meetings. A lot of things have changed since then but not the right of the citizen to know what is going on in their government or the right of the citizen to question the actions of their elected representatives.

All of Fayette government needs to use technology to bring information to every citizen of this county. They need to open a dialog with their constituents and they need to do it now to avoid misunderstanding and confusion over important issues in the future.

So, Mr. Smith, if you believe that any “open minded” citizen would change their mind about a defined benefit plan when they hear the facts, we would welcome your dialog.

You should explain, given the facts above, how going from what is essentially a 401(k) program to a guaranteed pension program will somehow put the citizens at less financial risk.

Not next year, but over the long haul. We would welcome our government’s commitment to open its doors to the citizens to discuss this issue.

You should explain to the employees of the county how they would no longer be able to direct their own investments and that an administrator would direct these investments for them. It is clear, based on what we see all around us, that there is no guarantee for anything in life, not even defined benefit plans.

In fact, it could put the employees at greater risk through under-funding and collapse of their plan in the future, empty handed without any direct investments and with a less than expected cash pay-out when the plan is terminated.

What will make the proposed Fayette plan outcome any different than the plans mentioned above? When it comes to open government, there should be an open mind on the part of elected officials as well.

Isn’t it reasonable to believe the “worst” we simply look around at what is happening with other public defined benefit plans without the benefit of well communicated facts from the commission?

In light of the realities of what is going on in the financial markets, job market, and the condition of current public defined benefit plans, people should be alarmed at another long-term taxpayer-guaranteed program.

Please contact me at the address below, if you would like to sign a public petition against this proposed plan; we’ll be glad to put you on our expanding list.

James Wingo

Co-Chairman, Fayette Citizens for Open Government

[Editor’s note: The county’s defined benefits plan is on the agenda this Thursday night at the Fayette County Commission, which meets in the county government complex on Stonewall Avenue in Fayetteville.]

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