Tuesday, September 21, 2010

Are Illinois Pension Funding Disclosures Fraudulent?

In my last post, "Illinois is #1 in Underfunded Pensions", I ended with the newly enacted two tier pension system which will apply to future hires starting in 2011 and indicated there are actuarial and accounting questions with respect to how the long term savings from the adoption of a two tiered system were applied.  This has come as a surprise and I know of only one Illinois newspaper (Champaign-Urbana) which has mentioned the New York Times article entitled, "The Illusion of Pension Savings".  We have previously commented in detail on the failure of Illinois mainstream media to discuss Illinois pension systems risky investment policies.

While we have been a public proponent of a two tiered pension system as economically necessary, however distasteful or unfair, given the growing underfunded liabilities of the Illinois pension systems, Illinois officials have apparently taken a concept designed to create future cost savings and used grey areas of actuarial language and governmental accounting standards to purposefully calculate the savings by including all current employees (not just future employees to whom the calculation should apply) in the actuarial cost methods calculation and then applied the "future" savings to the current State budget reducing the required pension funding amount.

This does not pay down principal; it does not keep up with interest; and it actually increases debt annually.  It is not a responsible funding method.  It is particularly not responsible and, in fact, very risky for an underfunded pension system to adopt such a cost methods calculation.

When the State of Illinois issued public documents this year, which stated the cost method used did not permit the cost of future benefits to be factored into the current year contributions, it caught the attention of actuaries who questioned the disclosure and the cost methods used as well as discourage Illinois from adopting the deceptive method.  One actuarial consultant to the State recommended they clarify the disclosures and also said the funding method "may not be an appropriate one."

This has caused the Actuarial Standards Board to begin a review of necessary standards revision, particularly since Texas, Rhode Island, Ohio, and Arkansas use similar methods.

Recently, New Jersey signed a SEC consent order acknowledging that New Jersey had engaged in misleading and incomplete disclosures (to improve the perception of their credit risk) to investors with respect to pension system funding.  The investigation had taken three years and no one was charged.  According to the State of Illinois Office of Management and Budget, the SEC has not contacted them and they are confidant the disclosures were complete and accurate.

It appears that the State of Illinois officials were aware of the grey interpretation and purposefully chose to use it as a plug in the current deficit budget.

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