By: Mark Glennon*
WirePoints has learned that the Actuarial Board of Counseling and Discipline (the ABCD) recently recommended that Timothy Sharpe, actuary to dozens of troubled Illinois fire and police pension funds, be expelled from membership in the American Academy of Actuaries. If the Academy implements the recommendation, it will be very unusual since only 11 actuaries have been expelled from the Academy since 1975 and only 20 have been otherwise publicly disciplined (http://actuary.org/content/public-discipline).
The recommendation is the result of separate complaints by two actuaries, one by actuary Tia Goss Sawhney. Those complaints followed three prior complaints, two by actuaries and another by Jim Palermo, then trustee of the Village of La Grange, IL. Actuaries and members of the public may file complaints against actuaries who are members of the Academy of Actuaries for violations of the actuarial Code of Professional Conduct and Standards of Practice referenced in Precept 3 of the Code of Professional Conduct. The ABCD recommends expulsion or other public discipline only for the most egregious, systematic, and/or persistent violations of the Code of Professional Conduct and Standards of Practice.
Sharpe’s work was described in July 2015 by the New York Times in “Bad Math and a Coming Public Pension Crisis.” His work has also been discussed here in WirePoints, the Forest Park Review, and the Rockford Register Star. Some feel that some of Sharpe’s work used unrealistic assumptions about future plan experience that lead to lower estimates of fund liability, lower contributions (tax levies) and higher estimates of funded status than more realistic assumptions. Local officials obviously tend to find that attractive.
Surprisingly, Sharpe’s role as the pension actuary of choice for many Illinois fire and police funds may continue, even if he is expelled from the Academy of Actuaries and joins the Academy’s wall of shame. That’s because the Illinois Pension Code only requires that the actuary who calculates the tax levy be an Enrolled Actuary (EA) (40 ILCS 5/3-125, Section 4-118). Sharpe is currently an EA and a Member of the Academy of Actuaries (MAAA). Sharpe’s EA designation is conferred by the Internal Revenue Service (IRS). The IRS has its own processes for designating Enrolled Actuaries in good standing. Losing the MAAA designation will not impact his ability to maintain is EA status.
Maybe ABCD’s recommendation that he should lose his status, however, will impact his credibility in the Illinois fire and police pension community. Every fire and police plan and sponsoring municipality should be taking a hard look at whether its actuary has the skills and fortitude to provide a true picture of the liability taxpayers ultimately face. Most haven’t. Most wouldn’t know what questions to ask anyway. Kudos to the ABCD for lending a hand.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.
Expect no retraction or apology. This what they do.
The state’s existing buyout program for its own pensions is the precedent for Chicago, which should be a warning: Look out for similar exaggerated claims and shoddy analysis.
For the most part, the Actuary uses the presumptions provided by the client. When you set up a system where the client (ultimately the municipality) can skew the results to their benefit, and then later claim the inability to pay due to the fund not performing to the assumptions, you have built a system designed to fail. Only those that are truly dedicated to provide the benefits promised to their employees have taken the high road and funded to the proper levels. Artificially raising the rate of return on investment and artificially lowering the anticipated cost of employees is the… Read more »
As the subject of this article, I am writing to briefly respond since I was never contacted before it was posted. The charges that have been leveled against me are false and unfounded. They were initiated by competitors out to destroy my business and damage my reputation. I am defending myself vigorously, and expect to be vindicated in what are supposed to be confidential proceedings. However, there has been a serious breach of confidentiality. I will be taking prompt legal action to address not only that breach, but also the damage that has been done to my reputation, business, and… Read more »
Mr. Sharpe –
I\’m not aware of any confidentiality obligation breached in connection with this story, nor of any error in what I wrote. I would be more than happy, however, to publish a correction if you can show me where there is any error, or let you publish your own response here.
Long overdue.
The practices of the ALL Actuarial firms employed by Public Sector pensions should be examined with equal scrutiny for acquiescence to the low-balling-cost-desires of Plan management.
There is NO EXCUSE for actuarial valuations not ALSO showing liabilities & costs based on BEST ESTIMATE assumptions…… even if the gov’t entity, statutes, etc. require valuations on some other basis.
Why do these fiduciaries get to hire their own actuaries anyway? They’ll work at the pleasure of whoever is signing their paycheck no?
Many governments don’t want to pay high contributions so they write paychecks to actuaries who use assumptions that make their contributions low.
The pension board fiduciaries SHOULD hire the actuary because it is the fiduciaries who are responsible to the active and inactive pension plan participants to adequately fund the plan. Keep in mind that Illinois Police and Fire plans age governed by statutory boards of two active participants, one retired participants and two municipal appointees; it seems clear that the fiduciaries ought to request the municipality contribute as much as possible to the plan each year. The more interesting question is this: Why would plan fiduciaries hire an actuary who uses a set of assumptions and practices which systematically REDUCE the… Read more »
Sharpe’s work… used unrealistic assumptions about future plan experience that lead to lower estimates of fund liability, lower contributions (tax levies) and higher estimates of funded status than more realistic assumptions. Local officials obviously tend to find that attractive. This happens fairly often in the real world, con men/women use fraudulent inflated income claims while at the same time use fraudulent deflated expenses to give a fraudulent higher return rate of investment, it is called FRAUD and usually results in county jail or prison time depending on the amount defrauded. Bernie Madoff’s “FRAUD” resulted in a 150 years prison term… Read more »
The primary cause is that the actuary is selected and compensation is set by the politicians who have every incentive to whitewash the results. It\’s the same issue with ratings agencies. In the case of pension actuaries, there is sometimes a bit of reason to by sympathetic to the politicians, which is that municipalities face property tax caps so they couldn\’t pay more anyway if the actuarial report indicates that higher contributions are required.
Actuaries (like lawyers and CPAs) know that their clients will shop around for the professional who will provide the answer the client wants. The professional also knows that his income is largely detemined by his fee origination within a professional firm that no longer values its integrity as much as its distributable income. The financial incentives for the individual and the organization are to bend or ignore the rules because the likely competitors are ready and willing to do the same. There ought to be more draconian penalties on the Arthur Andersens of the world (as well as the investment… Read more »