About 200 local agencies in California have
increased pension benefits this year, as noted in pensiontsunami.com.
How these benefits are eventually paid is a concern to California voters.
As an actuary who has worked on pension formulas for forty years, I know that
actuaries are the key figures in making that decision.
The pension plan advisors and actuaries should be
held to a higher standard than in the past. Responsible public
disclosure from actuaries should indicate (in advance) the financial consequences
on public pension plans for decisions made on benefit changes. Lack of such
transparency has put our current pension system in jeopardy.
Here are three ideas for change:
should be held to a standard that promises (benefits) must be paid for (funded)
during the period that employees provide services.
failure to do so is an unfunded promise that must be disclosed. If an
action creates debt, the people who pay for it should have a say.
increase should be funded now, not over 30 years.
When dealing with the public sector, the ultimate
payers of the debt are the taxpayers and the employees who must pay higher
Decision makers must be held to an open disclosure
standard. If an action causes liability, it must be measured fairly and timely.
This applies whether it comes from a benefit formula amendment or from an
unexpected change in participant compensation.
If the benefit cannot be funded immediately, it should not be granted.
The action to cause future liability to stakeholders
for past services is a form of indebtedness. This should only occur with the
approval of those who will pay for it. If the approval is not given, then the
contract should not be valid.
If public stakeholders are aware of these actions
to cause liability, they can hold the decision makers accountable in the
political arena. Political researchers could look back to see who made
California the problem that it is today.
So a legitimate question arises: How do you address
the fact that we already have benefits granted by legislative deals and
bargaining that did not require disclosure?
In private industry, that is easy because past benefits are protected,
but future benefits can be cut because there is no protection of future
benefits. However, judges are public
employees too, and they don’t want any precedent that could cut their
pensions. So they have a completely
self-serving opinion that public pensions are a cradle-to-grave guarantee. This rises to a constitutional issue of
balance of power between government branches, a political problem that needs a
It falls to actuaries to measure the actions of the decision makers. If
they measure them privately for a principal participant, this can be kept
confidential. But the public statements of the valuation actuary should be
clearly disclosed. Further, those public statements should be subject to public
standards acceptable to the actuarial community first, then the different
publics. These include the investing public, the taxpayer base, the employees
who must pay in, and the media.
If we are to regain the public’s confidence in our public pension
systems, transparency must be the watchword. A lack of transparency has led to
our current dire pension situation.
Robert R Mitchell is an Enrolled Actuary in private pension practice
since 1971. A graduate of Cal State Long
Beach, he has worked with defined benefit plans covering union (Taft-Hartley)
employees, large conglomerates, public employers, school districts, churches
and non-profits, and small business. Bob
is active in community, fraternal and charitable organizations in Southern
California. He and his family reside in