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14 J.L. Econ. & Pol'y 107 (2017)
There Is a Tangled Web of Factors Causing Inappropriate Pension Funding Behavior

handle is hein.journals/jecoplcy14 and id is 111 raw text is: 


2017]


          THERE IS A TANGLED WEB OF FACTORS
      CAUSING INAPPROPRIATE PENSION FUNDING
                               BEHAVIOR

                             Anthony  Randazzo


I.   UNDERFUNDED PUBLIC PENSIONS: THE WEB OF CAUSALITY

     The  Actuary  Civil War  of 2016  that broke out this past summer   be-
tween  the Society of Actuaries and American  Academy of   Actuaries  is em-
blematic  of the challenge  facing public sector pension  funds in America
today.' There  is considerable consensus that public plans are grossly under-
funded.  According   to their own actuarial reports, the largest pension plans
run by  the 50 states had a cumulative overfunded position in 2001  that col-
lapsed  into roughly $1  trillion in unfunded liabilities by 2015.2 There is
profoundly  less consensus on what  factors have caused this underfunding to
emerge   and whether  actuarial valuations are accurately reflecting the true
health (or lack thereof) of American pension plans.3
     Consider  that at the heart of the Actuary Civil War is a disagreement
over  discount rate policy.  Historically, public sector pension funds have
used  their assumed  rate of return on assets to discount accrued liabilities.
This  flies in the face of how financial economics  understands risk, which
would  suggest calculating the value of accrued pension liabilities should be
relative to the risk of liabilities, not the risk of the plan assets.' The debate
is important because  if public plans were to use market based liability val-
ues, total unfunded  liabilities for the biggest state plans combined would
likely be closer to $3 trillion or $5 trillion.'

    1 Press Release, Am. Acad. of Actuaries, Future of the Joint Academy/SOA Pension Finance
Task Force (Aug. 1, 2016).
    2 The author's own review and calculation of the pension plan valuations from all 50 states; plans
considered were any state plan or combination of state plans comprising at least 75% of the collective
liabilities of a state.
    3 See e.g.
    4 Aleksandar Andonov et al., Pension Fund Board Composition and Investment Performance:
Evidence from Private Equity, (Hoover Institution, Working Paper No. 16104, 2016),
https://papers.ssm.com/sol3/papes.cfm?abstractid=2754820; James Naughton et al., Public Pension
Accounting Rules and Economic Outcomes, 59 J. ACCT. & ECON. 2 (2015); JENNIFER STAMAN, CONG.
RESEARCH SERV., R41736, STATE AND LOCAL PENSION PLANS AND FISCAL DISTRESS: A LEGAL
OVERVIEW (2011); Robert Novy-Marx & Joshua Rauh, Public Pension Promises: How Big Are They
and What Are They Worth?, 66 J. FIN. 4 (2011); U.S. CONG. BUDGET OFF., THE UNDERFUNDING OF
STATE AND LOCAL PENSION PLANS (2011).
    5 BOB WILLIAMS ET AL., UNACCOUNTABLE AND UNAFFORDABLE 2016: UNFUNDED PUBLIC
PENSION  LIABILITIES NEAR $5.6  TRILLION, AM.  LEGIS. EXCH.  COUNCIL  (2016),


107

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