public finance issues

PUBLIC FINANCE

Michel Rochette, MBA, FSA

Society of ActuariesAnnual MeetingNew York, NY

October 18, 2010

Enterprise Risk Advisory, LLC

What is Public Finance? « Field of economics concerned with paying

for collective or governmental activities, and with the administration and design of those activities. » (wikipedia)

Essentially, what governments do and how to pay for it.

Public finance is concerned with:− Government expenditures: policy goals− Ressource mobilizations: intergenerational

equity


What is Public Finance? Types of government expenditures:

− Government consumption: yearly− Governement investment: long-term− Transfer payments− Government operations

Sources of funding:− Taxes: income and sales: fiscal policy− Non-tax revenues: government entities− Borrowing: impact on future generation− Other: seigniorage

Size of Governments

Source: Dye Understanding Public Policy Enterprise Risk Advisory, LLC

Number of US Governments


Federal vs Local Governments.


US Federal Budget

Actuarial Principles Statistical Framework:

– Law of large numbers & credibility of models Economic and Behavioral Framework:

– Explain behavior in terms of quantifiable incentives and dis incentives

– Preference varies by stakeholders– Time value of money: now vs later– Money exists: Express economic

preferences in terms of money: ok what about values?

Enterprise Risk Advisory, LLCSource: SOA/CAS Actuarial Principles

Actuarial Principles Facts-based profession:

− « Substitute facts for appearances » SOA Motto

− Fit with the New Public Management: efficiency, effectiveness

Model construction of outcomes & effects− Economic and behavioral framework

Actuarial Risk: Random variables with desirable or non desirable economic consequences


Actuarial Principles Financial Security Systems:

– Risk system where participants transfer one or more undesirable actuarial risks to a second party

– Risk experience: data and facts– Antiselection & moral hazard– Actuarial soundness and degree– Intergenerational equity: MR Addition


Actuarial Roles


Trowbridge, FSA: Fundamental Concepts of Actuarial Science, 1989

Actuarial Roles Policy Evaluations:

− Measuring and modeling impacts – short-term and long-term – of different public policies, not outputs as usually done in governements

− Evaluation ex-ante and ex-post Participate in long-term financing decisions:

− Especially relevant for local governments− Long-term liabilities. Ex. water systems


Actuarial Roles Advise on long-term financial and non financial

costs/benefits of:− Different funding policies: PPP vs debt issue− Assessment of different public policies:

Ex: More police vs more social benefits− Regulation vs direct government involvement

Advise on societal emerging risk issues (Societal Governance). Ex. longevity

Bring independence, credibility and non biaised views and recommendations: Work for the public interest!


Ex. Scottish Policy Evaluation Checklist

Similar to an actuarial appraisal! Identify, quantify and value costs, benefits,

risks and uncertainties of options & objectives Present results:

– Compare immediate and ultimate relationships between outputs and objectives

– Present costs and benefits not valued– Present timing of outputs, timing & discount

rate– Choose alternative states of the world &

compare expected with realityEnterprise Risk Advisory, LLC

CONTACT MICHEL ROCHETTE, MBA, FSA ENTERPRISE RISK ADVISORY, LLC 954-607-6969 [email protected]


SOCIETY OF ACTUARIES2010 Annual Meeting (October 2010)

Session Topic:

Competency: Strategic Insight & Integration Session:

All Sessions 28 OF

Expected Attendance 13,630 33Actual Attendance 10,728 34

Number of responses 5,190 26Return rate (# of resp./actual att.) 48% 76%

Overall 1

Rating Overall rating of this session 3.87 3.83

Provided you with practical technical information 4.01 3.53

Will enable you to make better business decisions 3.90 3.71

Prepared you to impact industry-wide changes 3.72 3.70

Knowledge of Subject 4.22 4.33

Effectiveness of Delivery 3.84 4.05

Number of participants indicating presenter included commercial promotion in presentation 1










3.44 3.38

Did you chose this session based on the Competency addressed during this session? % Yes 52% 35%

Did this session meet your expectations in terms of how it addressed this Competency? % Yes 59% 36%

1 The rating scale used: Excellent (5), Very Good (4), Good (3), Fair (2), Poor (1), and N/A (no value).2 The rating scale used: Strongly Agree (5), Agree (4), Neither Agree nor Disagree (3), Disagree (2), Strongly Disagree (1), and N/A (no value).Speakers are compared to an overall speaker average regardless of the order of presentation.

Evaluation Tips to keep in mind when reviewing the responses:Numerical evaluations tend to give you a pretty good feeling for how well the attendees responded to the session as a whole. Scores in the range of 3 to 5 are considered successful programs. Written comments come from people who may have a strong opinion, therefore they tend to be very good or very bad. Repetitive comments that point to the same theme could be an indication of an area you may want to capitalize on in the future or work on for future presentations.

Pres

ente

r Effe

ctiv

enes

s1

Rate the level of audience interaction for this session 1

Competency

Robert C. North Jr., FSA, EA, FCA, FSPA, MAAA

Michel Rochette, FSA

Public Finance—How Actuaries Should Consider Helping

Jeremy Gold, FSA, CERA, MAAA

Learning Experience 2

Indicate your level of agreement with the following. This session:

Emily K. Kessler, FSA, EA, FCA

3.83

3.53

3.71

3.70

4.33

4.05

1

4.42

4.43

4.21

3.96

0

4.25

3.87

0

3.38

35%

36%

3.87

4.01

3.90

3.72

4.22

3.84

4.22

3.84

4.22

3.84

4.22

3.84

3.44

52%

59%

1

This Session

All Sessions

Perception Solutions, Inc. www.perceptionsolutions.com 12/19/2010

SOCIETY OF ACTUARIES2010 Annual Meeting (October 2010) Session Evaluation (Participants' Comments)

Session Competency Overall Comments Regarding This Session28 OF Strategic Insight &

IntegrationAttended based on personal interest rather than job-related interest. This was fascinating.

28 OF Strategic Insight & Integration

Pie chart slide color-coded only result in problems with tracking on black/white handout - good to use different shaped icons too so the category in the black/white handout can be tracked.


Focus on public pension fund was noted in session description. Outside the pension discussion, there was a shortage of specific usable information.


Moderator shouldn't challenge presenters during session.


I found the set-up interesting - good way to approach a topic like this - have multiple speakers sharing 1 single set of slides.


I would have liked to see more specific ideas of how actuaries could play a role. Some of the questions at the end of the session were way too wordy and should have been cut off.


Appreciate the conversational nature of the session.


Good practical discussion w/out getting into complexities that only those intimately familiar w/ topic understand.


Too much focus was on valuing state and local pensions, which is a less typical public finance topic that some other areas actuaries would like to influence.

Perception Solutions, Inc. www.perceptionsolutions.com 12/19/2010 Comments- 1

public finance issues

Documents

risk system

party risk experience

actuarial appraisal

undesirable actuarial

new public management

public financemichel

government entities

government consumption