PRB Actuary Problems

During the June 2010 meeting of the PRB, Mr. Jody Carreiro, the PRB Actuary, stated, “As far as I know, I’m still Jody Carreiro and the actuary for this Board for the last twenty years” (00.17.21 into the June PRB audio).  Later in that meeting of the PRB, Mr. Lee Harrod asked (02.34.01 into the June PRB audio), if the Board could answer the question, in the next PRB meeting, of why it does not bid out the actuarial contract?  Mr. Lundy, the chairman of the PRB, said he could answer that question now and stated the Board did bid out the contract when they first changed to Mr. Carreiro because he was local and cheaper and just approved contract extensions every since.  When asked by Mr. Harrod how long ago that had been, Mr. Lundy said around twenty (20) years ago.

These comments peaked my curiosity so I asked Mr. David Clark, Executive Director of the PRB, to show me a copy of Mr. Jody Carreiro’s contract with the PRB a few days after that PRB meeting.  What I received from Mr. Clark was the most recent renewal of that contract by the PRB, which did not state the original terms of the contract but merely provided the fee increases requested by Mr. Carreiro for another extension of his contract for actuarial services.  Upon telling Mr. Clark that what I was requesting was a copy of the original contract, Mr. Clark stated that would predate his employment with the PRB and he wasn’t even sure it was available.  Not wishing to further inconvenience Mr. Clark, who had been extremely helpful in supplying my numerous requests for information, I just dropped the matter and took the information he had provided.

A short time later, I preformed a preliminary search of the Arkansas Code and found a few interesting statutes that I believe concern this matter in Title 19 of Arkansas Code on Public Finance.  Now, please bear in mind that I am NOT an attorney, have not preformed any in depth analysis of these code sections, and only provide these sections of Arkansas Code for informational purposes.  The first section of Code that I found interesting is at A.C.A. § 19-11-238, Multiyear contracts, that states at subsection (a):

. . . Unless otherwise provided by law, a contract for commodities or services may be entered into for periods of not more than seven (7) years . . . [Emphasis added]

If this section of the law were applicable to the PRB, it would seem that the PRB is violating the terms of that subsection of law and, for that reason, should comply with its provisions.

The second section of Code that I found interesting is at A.C.A. § 19-11-1010 found in Subchapter 10 “Professional and Consultant Services Contracts” under Chapter 10 which states at subsection (c):

Under regulations promulgated by the State Procurement Director, all state agencies, boards, commissions, and institutions of higher education shall use performance-based standards in professional and consultant service contracts. [Emphasis added]

Because I have not seen Mr. Carreiro’s contract and it may contain “performance-based standards,” I cannot say with any degree of certainty that it does not; however, because this section of law was only passed by the legislature in 2003 and Mr. Carreiro’s contract has to date back some seventeen (17) years earlier, I find it difficult to believe that the PRB had the foresight to anticipate this requirement of the legislature at that time.

The third section I found interesting is contained at A.C.A. § 19-11-1009 that states:

Service contracts filed with a state agency under § 19-4-1109 [Procurement contracts] shall be available for public inspection and auditing purposes.  [Emphasis added]

For the reasons contained in the above subsections of Arkansas law, I would recommend that, if the contract of Mr. Carreiro is not available from the PRB and the other provisions of law mentioned above must be followed by the PRB, that the PRB remedy these matters because the provisions found in A.C.A. § 19-4-103, Penalty, states:

With respect to all matters for which penalties have not otherwise been provided in this act, any person who shall knowingly violate any of the provisions of this act shall be guilty of a violation and upon conviction shall be fined in any amount not to exceed one thousand dollars ($1,000).

It is also interesting to note that the term “knowingly” used in the above section of Arkansas law is defined at § 19-1-603(4):

“Knowingly” means that a person is aware or should have been aware that his or her conduct will violate the fiscal responsibility and management laws[.] [Emphasis added]

After discovering the above sections of Arkansas Code, I called an old friend of mine who serves on the Arkansas Public Employees Retirement System (APERS) Board.  APERS is the main state pension authority for state pension plans.  I related to him that the PRB has not bid out their actuary contract in twenty years and he said that neither had APERS but they discovered they had too by law approximately three years ago and changed their procedures accordingly.  He claimed that, after bidding the service out to several different firms, APERS hired the same actuarial service company that LOPFI uses.  His statements led me to the question, if APRES had to bid out their contract for actuarial services under the law, why does the PRB not have to do the same?

In all fairness to the PRB, I must note here that certain members of the PRB, Mr. Farris Hensley in particular, have argued in the past that they believed the contract with Mr. Carreiro for actuarial services should be bid out; however, they were over ruled by the other members of the PRB who sided with the Chairman of the PRB, Mr. Bill Lundy, who has maintained for the last twenty years that it was not necessary because Mr. Carreiro is the cheapest actuary around.  Apparently, in Mr. Lundy’s alternate universe, things do not change in twenty years.

Please understand that I am not, in this particular argument, claiming that Mr. Carreiro is not the best actuary the PRB could obtain for the money or that he is not the best thing since sliced bread at performing that task; but, I am claiming that, if the subsections of law mentioned above are relevant to the PRB, as I believe they are, the PRB needs to comply with the law just like everyone else must.

However, concerning Mr. Carreiro’s above mentioned “sliced bread” status, I did find what appears to be an error in a report presented to the PRB during their June meeting by Mr. Carreiro entitled Arkansas Fire and Police Pension Premium Tax 2010 Allocation Report. (Click on the bookmarks icon on the left side of the screen for navigation.)  This error is contained under Tab 7 on page #3 of the report and concerns the “Grand Total – Guarantee Fund Distributions” as indicated below:

Projected insolvent Plans – Studies	24,000
Total Guarantee Fund Distributions – Police		301,945
Total Guarantee Fund Distributions – Fire		1,123,215
Grand Total – Guarantee Fund Distributions		1,413,160

While reviewing the report, I had paused on that page to take a sip of coffee and happened to notice that the addition of “0” plus “2” in the above figures was represented as equaling “1” and, while I am not an actuary, this seemed to me to be incorrect so I broke out my little calculator and added the two numbers together and got the result 1,425,160.  Oddly, this figure is correctly represented in the overview of the report provided by Mr. Carreiro on the fourth page after his letter to the PRB at the front of the publication.  Although this error may be what my grand-children refer to as a “boo-boo,” it appears to be a $12,000 “boo-boo” and causes me to question the other results contained in the publication because the figure is obviously produced using a spreadsheet and I have no idea what other figures may access that apparently erroneous figure to calculate a result.

Additionally, Mr. Lee Harrod noticed that in the same report under Tab 7 on page #2, the “Number of Retirees” shown for “Little Rock” is listed as “317” and the “Number of DROPs” is listed as “19.”  However, the actual number of retirees on the Little Rock Police Pension Plan was only 298, as indicated in Little Rock’s Annual Report to the PRB that Mr. Carreiro uses to determine that figure.  What it appears that Mr. Carreiro did was include the number of 19 DROP members into the number of our actual retirees of 298 to get the erroneous number of 317 total retirees and then added the DROP number of members in again to arrive at his erroneous figure of 336 as indicated under Tab 8 on page #8 of his report under the heading “Effective Number of Local Admin Retirees, etc.” for “Little Rock.”  This apparent error raises the question; how many other such numbers are incorrectly listed for other funds?  Those totals are significant because they are used to calculate the total amount of Supplement benefits due to each pension fund across the state.

The two apparent mistakes listed above are also indicative of a serious but unrecognized problem for the Executive Director of the PRB who is required to supervise the actuarial reports under §24-11-205(a)(2), which states, in pertinent part:

The actuarial valuation shall be prepared by an actuary under the supervision of the executive director [of the PRB.]

While this subsection of law clearly places a “check and balance” provision for the Actuary squarely on the shoulders of the Executive Director, this check is unbalanced because the Executive Director of the PRB is not provided with anything from the actuary other than a password protected Acrobat portable document format (pdf) version of the actuary’s report and not the actual spreadsheet used to produce that report.  Therefore, the Executive Director cannot possibly be expected to provide any degree of “supervision” to check anything the actuary may submit.  Because this single report of the Actuary has increased in price by 168% in the last 10 years to it’s existing cost of $29,000, as indicated in the actuary’s contract renewal for 2010 – 2011, one would think the PRB would want to exercise some degree of oversight in accordance with law; however, none is currently possible.

It should also be noted, that Mr. Carreiro has become embroiled in a controversy with the Little Rock Police Pension Board over his calculations of the DROP interest rate to be paid to DROP members of that fund because the Investment Advisors for the Fund, Stephen’s Inc., maintained that their estimate of the interest earnings applicable to DROP members was over five percent (5%) higher than those used by Mr. Carreiro.  Mr. Carreiro was advised by Mr. Farris Hensley, through Mr. David Clark, Executive Director of the PRB, that he had made an error in his calculation of the interest rates by using a “five (5) year smoothing average” rather than the “last years overall annual rate of return” that was approved by the PRB on March 8, 2010, at a PRB meeting that Mr. Carreiro attended.

That error resulted in an increase of just over two and a half percent (2.5%) to the Little Rock Pension Fund DROP members and resulted in a new letter from the PRB being sent to that Fund in order to certify the new interest rate.  While the new certification of the interest rate was received by the Fund on July 9, 2010, and still did not account for the large difference in interest rates in question, Mr. Carrerio admitted that the DROP members of other pension funds had NOT been notified of this mistake as of August 12, 2010, which means other funds across the state were apparently paying the lower, incorrect interest rates to their DROP members based on his faulty calculations, as required in his letter of certification that, while grammatically incorrect, states, “The Pension Review Board in its meeting March 10, 2009 voted to reiterate to plans that the interest rate certified in this letter is the rate to be applied on the DROP accounts for 2009.”  Therefore, it is my opinion that this admitted omission to timely notify other Funds of this error, constitutes a gross misjudgment on the part of Mr. Carrerio.

It was also determined during the August 12, 2010, meeting of the Little Rock Police Pension Board that the cause of most of the discrepancy between Mr. Carrerio’s calculation of interest rates and those of the fund’s financial advisors was due to the inadvertent listing of large amounts of the funds losses in 2008 being placed in the 2009 Annual Report to the PRB.  While this appeared to be an unintentional error of the fund’s accountant due to her lack of familiarity with the requirements of A.C.A. §24-11-207 that outline the requirements of the annual report to the PRB, this fact is nonetheless troublesome for Mr. Carrerio who is well versed in the requirements of that section of Arkansas law and states in his letter of certification that the annual reports “were reviewed for reasonableness and completeness.”  This calls into question the validity of a “review for reasonableness” that could not determine that losses pertaining to 2008 were mistakenly applied in the 2009 report.  In effort to remedy this problem, the Little Rock Police Pension Board has submitted corrected annual reports for the years 2008 and 2009 to the PRB to allow a further review and correction by Mr. Carrerio.  Due to the above-mentioned problems with Mr. Carrerio’s computations, in my opinion, it appears this “sliced bread” has a little mold around the edges.

Finally, for those who did not know, I had always thought that to be an “actuary” one had to obtain a level of education above that of a CPA; however, that is apparently not true.  In fact, if you read the website “BeAnActuary.com,” you will discover that the number one (#1) reason to become an actuary is that “You are self-motivated, goal oriented, and have superior math aptitude and communication skills [well, the last one is debatable]” and the number seven (#7) reason, in the top 10 reasons to become an actuary, is that “You want a professional title, but don’t want to be a doctor, lawyer or accountant.”

Upon a further reading of this website, I learned that one does not even need a college degree to become an actuary.  All that is apparently required is to pass a few actuarial tests, that I am sure are somewhat difficult, as proscribed by the American Academy of Actuaries.  Although I am reasonably certain that Mr. Carreiro has a college degree of some type, no degree in any particular collegiate discipline or a college degree of any type at all is required to become an actuary.  For those reasons, I am even considering becoming an actuary myself and, maybe, even going to work for the PRB where I would be paid a large salary, no one would ever check my work, and I would never have to worry about any competition!  That sounds pretty sweet to me!!!