|
6.1.C. - Page 22
<br />based on a Discount Rate that reflects the value of those Benefits payments to the beneficiaries
<br />(that is, the amount an investor would pay today in exchange for the right to receive that future
<br />cash flow). Noting that obligations to pay Benefits in the future are similar to obligations to
<br />make future payments on municipal bonds, they argue that yield rates on municipal bonds having
<br />a duration and risk of non-payment similar to pension Benefits obligations are the best yardstick
<br />for establishing the value of those Benefit obligations and, accordingly, the Discount Rate. 21 This
<br />approach is sometimes referred to as the "bond -based approach" or "market-based method. ,22
<br />However, other experts, particularly actuarial professionals, argue that this bond or market-based
<br />approach does not provide useful information to the Agency sponsoring a pension plan about the
<br />cost to that Agency of funding future benefit obligations. They point out that, for purposes of
<br />calculating contribution rates, the expected costs of meeting future Benefit obligations are the
<br />only relevant consideration and that such costs are best calculated based on "assumed rates of
<br />return. ,23 Yet other experts believe that a variation on the assumed rate of return method in
<br />which the risk that future additional amortization payments will be necessary is factored into the
<br />Discount Rate offers the most useful information.24
<br />This debate has important implications because Ca1PERS' assumed Return on Investment (7.5
<br />percent per year from 2012 to the present) is significantly greater than municipal bond yield
<br />rates. 25 Since Ca1PERS' projected Return on Investment exceeds that of municipal bonds yields,
<br />the result is greater Discount Rates and smaller present values of Benefit payment obligations
<br />and Unfunded Liabilities.
<br />Other experts do not engage in the debate between proponents of the assumed return approach
<br />and the bond or market-based approach but focus instead on concerns that Ca1PERS' new
<br />projection of a 7.0 percent annual Return on Investment — approved in December 2016 but not
<br />content/unloads/files/pension discount rates best_ Dractices.Ddf>. Biggs and Smetters, Understanding the Argument
<br />for Market Valuation, pp. 2-5. American Academy of Actuaries. Measuring Pension Obligations: Discount Rates
<br />Serve Various Purposes. American Academy of Actuaries Issue Brief, November 2013,
<br /><htt-o://www.actuary.or&files/IB Measurine-Pension-Oblieations Nov-21-2013.pdf>.
<br />21 Bui and Randazzo, Why Discount Rates Should Reflect Liabilities, p. 2. U.S. Government Accountability Office,
<br />p. 2. Biggs and Smetters, Understanding the Argument for Market Valuation, p. 5. American Academy of Actuaries,
<br />p. 2.
<br />22 Mixon, Estimating Future Costs at Public Pension Plans, p. 2. U.S. Government Accountability Office, p. 2.
<br />23 American Academy of Actuaries, p. 2. Angelo, Understanding the Valuation of Public Pension Liabilities, pp. 9,
<br />11-12. Mixon, Estimating Future Costs at Public Pension Plans, p. 2. See also, Nation, Pension Math 2011, p. 12,
<br />for a chart outlining the arguments for and against public pension systems using high Discount Rates.
<br />24 Turner, Determining Discount Rates, p. 3.
<br />25 Boyd, Donald, Kiernan, Peter, Strengthening the Security of Public Sector Defined Benefit Plans, The Blinken
<br />Report, The Nelson A. Rockefeller Institute of Government. January 2014, pp. 38-39, footnote 12,
<br /><www.rockinst.org/pdf/eovernment finance/2014-01-Blinken Report One.pdf>. Angelo, Understanding the
<br />Valuation of Public Pension Liabilities, p. 10. U.S. Government Accountability Office, pp. 2-3.
<br />2017-2018 San Mateo County Civil Grand Jury 8
<br />
|