This document discusses public finance and the role of actuaries. It defines public finance as the economics of paying for governmental activities and administering those activities. It describes types of government expenditures and sources of funding. Charts show the size of governments and number of governments in the US. The document outlines actuarial principles of statistical frameworks, economic behavior, facts-based analysis, and risk transfer. It proposes actuarial roles in policy evaluation, long-term financing decisions, and advising on costs and benefits of policies, funding, and emerging societal risks.

1. PUBLIC FINANCE
Michel Rochette, MBA, FSA
Society of Actuaries
Annual Meeting
New York, NY
October 18, 2010

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
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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. Size of Governments
Source: Dye Understanding Public Policy Enterprise Risk Advisory, LLC

5. Number of US Governments
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6. Federal vs Local Governments.
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7. US Federal Budget

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. 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
Source: SOA/CAS Actuarial Principles Enterprise Risk Advisory, LLC

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 Addition
Source: SOA/CAS Actuarial Principles Enterprise Risk Advisory, LLC

11. Actuarial Roles
Trowbridge, FSA: Fundamental Concepts of Actuarial Science, 1989
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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
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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!
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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. CONTACT

MICHEL ROCHETTE, MBA, FSA

ENTERPRISE RISK ADVISORY, LLC

954-607-6969

michel.rochette@enterprise-risk-advisory.com
Enterprise Risk Advisory, LLC