1. PUBLIC FINANCEMichel Rochette, MBA, FSA Society of ActuariesAnnual Meeting New York, NYOctober 18, 2010

2. What is Public Finance?Field of economics concerned with payingfor collective or governmental activities, andwith the administration and design of thoseactivities. (wikipedia)Essentially, what governments do and how topay for it.Public finance is concerned with: Government expenditures: policy goals Ressource mobilizations: intergenerationalequity Enterprise Risk Advisory, LLC 3. What is Public Finance?Types of government expenditures: Government consumption: yearly Governement investment: long-term Transfer payments Government operationsSources 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 GovernmentsSource: Dye Understanding Public Policy Enterprise Risk Advisory, LLC 5. Number of US Governments Enterprise Risk Advisory, LLC 6. Federal vs Local Governments.Enterprise Risk Advisory, LLC 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 quantifiableincentives and dis incentives Preference varies by stakeholders Time value of money: now vs later Money exists: Express economicpreferences in terms of money: ok whatabout values?Source: SOA/CAS Actuarial PrinciplesEnterprise Risk Advisory, LLC 9. Actuarial Principles Facts-based profession: Substitute facts for appearances SOAMotto 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. Actuarial Principles Financial Security Systems: Risk system where participants transfer oneor more undesirable actuarial risks to asecond 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. Actuarial RolesTrowbridge, FSA: Fundamental Concepts of Actuarial Science, 1989 Enterprise Risk Advisory, LLC 12. Actuarial RolesPolicy Evaluations: Measuring and modeling impacts short-term and long-term of different publicpolicies, not outputs as usually done ingovernements Evaluation ex-ante and ex-postParticipate in long-term financing decisions: Especially relevant for local governments Long-term liabilities. Ex. water systems Enterprise Risk Advisory, LLC 13. Actuarial RolesAdvise on long-term financial and non financialcosts/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 involvementAdvise on societal emerging risk issues (SocietalGovernance). Ex. longevityBring independence, credibility and non biaised viewsand recommendations: Work for the public interest!Enterprise Risk Advisory, LLC 14. Ex. Scottish Policy EvaluationChecklistSimilar to an actuarial appraisal!Identify, quantify and value costs, benefits,risks and uncertainties of options & objectivesPresent results: Compare immediate and ultimate relationshipsbetween outputs and objectives Present costs and benefits not valued Present timing of outputs, timing & discountrate Choose alternative states of the world &compare expected with realitynterprise Risk Advisory, LLC E 15. CONTACTMICHEL ROCHETTE, MBA, FSAENTERPRISE RISK ADVISORY, LLC954-607-6969michel.rochette@enterprise-risk-advisory.com Enterprise Risk Advisory, LLC