The Bad News in a Good Way
A friend recently sent me a copy of a newsletter that is circulated to retired public employees in Massachusetts. The front page story this month was titled: “State Pension Valuation: Changes Cause for Concern” (The Voice: January 2017).
Over the past 16 years, the unfunded liability of the Massachusetts state pension has skyrocketed, growing from $4.8 billion in 2000 to $33.4 billion at the end of 2015. In 2016, the unfunded liability grew again, ending the year at a whopping $37.9 billion while the funded ratio of the system fell from 59% to 56.7%.
After hearing this news at a monthly meeting held by the Public Employee Retirement Administration Commission (PERAC), Frank Valeri, President of the Massachusetts Retirees Association was concerned. Such a consistent increase in benefit obligations that Massachusetts has yet to pay for can’t possibly be a good thing. Surely, this is a trend taxpayers and retirees should be worried about.
However, according to Massachusetts State Actuary, Jim Lamenzo, what looks bad, is actually good.
In the article, Frank Valeri went on to explain how his initial fears about the pension were calmed…
“After a very succinct and detailed explanation of changes in the report, Lamenzo provided the audience with a sense of relief by showing how the continued drop in funding and increased liabilities was primarily a result of significant actuarial assumption changes and plan changes over the past several years. Lamenzo pointed to the fact in the report, that indicated if the valuation was using the prior actuarial assumptions and if several plan changes hadn’t taken place since 2009, the funding level would be at 63.7% versus the 56.7%.”
The article goes on to detail how significant assumption and plan changes can affect the unfunded liability of a pension system. In 2016, the change that was responsible for most of the increase in unfunded liabilities was a decrease in the expected rate of return on investments. The changing economic environment, coupled with the fact that the fund has fallen significantly short of its own return expectations over the past decade, led the board to lower return expectations for the future.
The fact that the state actuary spun the bad news by essentially saying, “Don’t worry, if the world hadn’t changed, things would look much better,” is comical and in a way, insulting. It’s like telling people who were upset about the Red Sox losing the 1986 World Series, “Don’t be too upset, if the ball hadn’t gone through Bill Buckner’s legs, you probably would have won!”
Unfortunately, the ball did go between Bill Buckner’s legs. The Red Sox did lose the World Series.
Investment return expectations did change. The unfunded liabilities did increase by billions.
There’s a great scene in the movie Robinhood: Men in Tights where the Sherriff of Rottingham is asked by Prince John to soften the blow of bad news by telling it in a “good way” (you can watch that clip here, but given the difficulty I had finding it, I don’t think the link will stay active for long). After the sheriff laughed his way through an explanation of how Robinhood “beat the crap” out of him and his men and would like to see John hanged, a stunned John interrupts:
“WHAT ARE YOU CRAZY? Why are you laughing? This is terrible news!”
Prince John didn’t fall for the lipstick on a pig approach. No matter how it was spun, the fact that Robin of Loxley had returned from the Crusades and was hellbent on removing John from power was BAD NEWS!
Retired public employees in Massachusetts and across the country should be as wise as Prince John. If somebody says not to worry about an $18 billion increase in unfunded liabilities over the past six years, ask them if they are crazy. The jump in unfunded liabilities does matter. It is a problem and one we won’t make progress towards addressing unless we begin to have open and honest conversations about the uncomfortable reality.
At Ariadne, I work closely with families and individuals to organize their finances and utilize their resources to design a life they love. If you are interested in a straightforward, no-gimmick approach to financial planning that focuses on you and your needs, don’t hesitate to get in touch. I’d be happy to have a conversation.