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Retain an Independent Auditor and Actuary to Review the MBTARF the Partial FTI Report Missed the Mark by Gregory W

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Retain an Independent Auditor and Actuary to Review the MBTARF the Partial FTI Report Missed the Mark by Gregory W Recommendation to the FMCB: Retain an Independent Auditor and Actuary to Review the MBTARF The partial FTI report missed the mark by Gregory W. Sullivan WHITE PAPER No. 163 | January 2017 PIONEER INSTITUTE Pioneer’s Mission Pioneer Institute is an independent, non-partisan, privately funded research organization that seeks to improve the quality of life in Massachusetts through civic discourse and intellectually rigorous, data-driven public policy solutions based on free market principles, individual liberty and responsibility, and the ideal of effective, limited and accountable government. This paper is a publication of Pioneer Public, Pioneer Education seeks to increase the edu- which seeks limited, accountable government cation options available to parents and students, by promoting competitive delivery of public drive system-wide reform, and ensure account- services, elimination of unnecessary regulation, ability in public education. The Center’s work and a focus on core government functions. Cur- builds on Pioneer’s legacy as a recognized leader rent initiatives promote reform of how the state in the charter public school movement, and as builds, manages, repairs and finances its trans- a champion of greater academic rigor in Mas- portation assets as well as public employee benefit sachusetts’ elementary and secondary schools. reform. Current initiatives promote choice and compe- tition, school-based management, and enhanced academic performance in public schools. Pioneer Health seeks to refocus the Massachu- Pioneer Opportunity seeks to keep Massachu- setts conversation about health care costs away setts competitive by promoting a healthy business from government-imposed interventions, toward climate, transparent regulation, small business market-based reforms. Current initiatives include creation in urban areas and sound environmen- driving public discourse on Medicaid; present- tal and development policy. Current initiatives ing a strong consumer perspective as the state promote market reforms to increase the supply of considers a dramatic overhaul of the health care affordable housing, reduce the cost of doing busi- payment process; and supporting thoughtful tort ness, and revitalize urban areas. reforms. Pioneer Institute is a tax-exempt 501(c)3 organization funded through the donations of individuals, foundations and businesses committed to the principles Pioneer espouses. To ensure its independence, Pioneer does not accept government grants. RECOMMENDATION TO THE FMCB: RETAIN AN INDEPENDENT AUDITOR AND ACTUARY TO REVIEW THE MBTARF Table of Contents Introduction ____________________________________________ 4 Analysis _________________________________________________ 4 The First of Five Red Flags Raised by Markopolos-Williams: Weakness of MBTARF Board Oversight _________________________ 5 Second of Five Red Flags Raised by Markopolos-Williams: Lack of Reporting ________________________ 7 Third of Five Red Flags Raised by Markopolos-Williams: Use of Outdated Mortality Tables ___________ 8 Fourth of Five Red Flags Raised by Markopolos-Williams: Increasing Assumed Rate of Return on Investments _______________ 9 Fifth Red Flag Raised by Markopolos-Williams: Changes to Asset Smoothing Methods _________________________ 9 Conclusion ______________________________________________ 9 Endnotes _______________________________________________ 10 3 RECOMMENDATION TO THE FMCB: RETAIN AN INDEPENDENT AUDITOR AND ACTUARY TO REVIEW THE MBTARF Introduction In December, Pioneer Institute released “Fixing the MBTA by the MBTARF's third-party actuary, Buck.” Retirement Fund: Reforming a Pension Fund in Crisis,” which “Alternative Investments are valued based on estimates made the case that the MBTARF Board’s mishandling of the provided by the investment manager and supported by fund’s assets had reached a critical level, and that the Fiscal audited financial statements. The value of each Alter- and Management Control Board needed to consider moving native Investment is provided by the respective fund MBTA workers out of Social Security, instituting a new pen- administrator for each of the Alternative Investments in sion benefit structure for all MBTARF members, and transfer the form of a capital account statement. As an indepen- investment management to the Pension Reserves Investment dent check on the value of each of its Alternative Invest- management (PRIM). ments, the Staff compares the capital account statement In that report, Pioneer Institute also argued that the problems to the audited financial statements of the Alternative were far beyond anything identified in the FTI Consulting Investment.”3 assessment, which was conducted for the MBTARF Board, Based on our review of FTI’s report and related documents, because FTI’s analysis was narrow in scope. Pioneer Institute recommends that the Fiscal and Manage- The present policy paper follows argues that FMCB must con- ment Control Board (FMCB) retain an independent actuary duct an independent audit and actuarial valuation of the fund, to conduct an actuarial audit on its behalf of MBTARF and because of specific failures and omissions even in the limited retain an independent auditor to audit MBTARF. Such an work that FTI did. In doing so, we find that in opposition to independent review has not been performed for more than a the claims of FTI, the claims of potential malfeasance and decade. poor management by the MBTARF Board, which came from FTI states in its report that “For many public pension plans, noted whistleblower Harry Markopolos and Boston Universi- an actuarial audit is prepared every five to ten years. An actu- ty Professor Mark Williams, were likely accurate. arial audit is intended as a quality control measure to assess the plan’s actuarial valuations. The actuarial audit is prepared Analysis by an actuarial firm independent of the plan actuary and typ- ically entails a full replication of the most recent actuarial val- On June 26 2015, noted whistleblower Harry Markopolos and uation; and in many cases the most recent experience study. Boston University Professor Mark Williams issued an inves- . According to Buck, “the MBTARF has not retained a firm to tigative report entitled “MBTA: A Pension Fund at Risk” prepare an actuarial audit in at least the past eleven years.” 4 We identifying numerous red flags concerning MBTARF’s pen- 1 recommend that a full valuation replication actuarial audit be sion fund reporting. In response, MBTARF retained FTI prepared in the near future.” Consulting (FTI) to assess certain aspects of the assets, lia- bilities and investment returns included in the MBTARF's Omitted from the FTI report “ Actuarial Audits Best Annual Reports for the calendar years 2011, 2012 and 2013. is any mention of the fact that Practices” approved by In its report to MBTARF issued on March 9, 2016,2 FTI con- “Actuarial Audits Best Prac- cluded: tices” approved by the Execu- GFOA's Executive Board tive Board of the Government “We have compared the MBTARF's investment returns in May 2014 provide for Finance Officers Association for 2011, 2012 and 2013 as computed by the Custodian to of the United States and Can- actuarial audits at least the returns reported in the MBTARF’s 2011, 2012 and ada (GFOA) in May 2014 rec- 2013 Annual Reports noting no significant differences.” once every five years. ommend that actuarial audits “Based on our review of the 2011, 2012, 2013 and 2014 be performed at least once every actuarial valuations prepared by the MBTARF 's actu- five years. According to GFOA, “[t]his recommendation is ary, Buck Consultants, LLC (“Buck”), it appears that designed to ensure that more than one actuary has performed the process of setting actuarial assumptions and meth- or replicated the actuarial valuation during any five-year peri- ods conform to Actuarial Standards of Practice and that od.” 5 Buck's recommended assumptions were appropriate- According to GFOA Best Practices, “[a]n actuarial audit ly adopted by the Board. Further, in our opinion, the involves engaging the services of an outside actuary (reviewing mortality rates, projected investment returns and asset actuary) to scrutinize the work of the plan’s consulting actuary. smoothing technique used for the 2011, 2012, 2013 and Actuarial audits are helpful for several reasons: 2014 actuarial valuations were reasonable and appropri- ately applied. It should also be noted that each of these They enhance the credibility of the actuarial valuation actuarial assumptions were proposed and recommended process by providing independent assurance that it was 4 RECOMMENDATION TO THE FMCB: RETAIN AN INDEPENDENT AUDITOR AND ACTUARY TO REVIEW THE MBTARF performed in accordance with actuarial standards of Capital Management.”9 FTI’s response to this assertion was practice; limited: “Nothing came to our attention that suggests the They increase public trust in how the pension plan is being accounting for the Fletcher Investment did not comply with 10 governed; generally accepted accounting principles.” They help plan fiduciaries to assess whether the pension FTI’s issuance of a virtual clean bill of health to MBTARF plan is meeting its funding objectives; in response to Markopolos-Williams’ criticism concerning They can lead to the remediation of errors that might MBTARF’s handling of the Fletcher hedge fund losses is otherwise go undiscovered; and starkly at odds with conclusions reached by other watchdog agencies that reviewed losses experienced by three Louisiana They can provide recommendations for
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