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  1. 1. PUBLIC FINANCEMichel Rochette, MBA, FSA Society of Actuaries Annual Meeting New York, NY October 18, 2010
  2. 2. 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 Enterprise Risk Advisory, LLC
  3. 3. 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 Enterprise Risk Advisory, LLC
  4. 4. Size of GovernmentsSource: Dye Understanding Public Policy Enterprise Risk Advisory, LLC
  5. 5. Number of US Governments Enterprise Risk Advisory, LLC
  6. 6. Federal vs Local Governments. Enterprise Risk Advisory, LLC
  7. 7. US Federal Budget
  8. 8. 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?Source: SOA/CAS Actuarial Principles Enterprise Risk Advisory, LLC
  9. 9. 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 consequencesSource: SOA/CAS Actuarial Principles Enterprise Risk Advisory, LLC
  10. 10. 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 AdditionSource: SOA/CAS Actuarial Principles Enterprise Risk Advisory, LLC
  11. 11. Actuarial RolesTrowbridge, FSA: Fundamental Concepts of Actuarial Science, 1989 Enterprise Risk Advisory, LLC
  12. 12. 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 Enterprise Risk Advisory, LLC
  13. 13. 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! Enterprise Risk Advisory, LLC
  14. 14. 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 realitynterprise Risk Advisory, LLC E
  15. 15. CONTACT MICHEL ROCHETTE, MBA, FSA ENTERPRISE RISK ADVISORY, LLC 954-607-6969 Enterprise Risk Advisory, LLC