Maybe it will enter the lexicon to mean paying for errors that you committed when performing calculations whose methodology is intrinsically flawed.
That’s what happened yesterday when Buck Consultants was sued by the city of Providence, RI for multiplying some number by 9 instead of 10. In a plan that is 31.85% funded due primarily to a set of funding rules designed specifically to understate contributions Buck accidentally understated them too much by making a math error that even politicians could grasp.
Coincidentally, Buck Consultants will release their 6/30/12 valuation reports on the New Jersey pension system next week and, combined with the TPAF plan that Milliman does, they will report the plans having about $82 billion in assets though there have been about $70 billion in the trust for years. The $82 billion is a phony number derived using a dodgy concept called ‘asset smoothing’. It’s a ‘generally accepted actuarial principle’ so you can’t sue them over using it and it artificially reduces contributions (or it wouldn’t be used) so politicians are loath to discourage its use.
But make a math error (if it can be made obvious to a jury) within a flawed calculation process (opaque to that jury) and you find yourself before that jury. That’s bucked.
PS: Actuaries don’t have a reputation for eloquence or lawyer-like circumspection under fire but these excerpts from a news report might define a new low:
“When first confronted with the material errors, Buck admitted its mistakes and acknowledged responsibility for its carelessness,” the lawsuit states. “Thereafter, in a feeble attempt to explain the error away, Buck offered that it actually had committed numerous other undisclosed calculation errors that accounted for the lost savings, some of which had persisted for up to two decades.”
and in thinking on your feet:
In a descriptive section of the complaint, lawyers write that when confronted with the error by the city’s director of administration, Michael D’Amico, Buck employee Philip Bonanno struggled to explain the error.
“Sweat poured down Bonanno’s face, and he asked those present to turn down the heat in the room,” the lawsuit states. “He struggled to speak and stated that he felt that he might ‘pass out.’”
More excerpts from the lawsuit:
4. When first confronted, Buck admitted its error. Thereafter, Buck offered a different explanation and contended that it had made a different calculation error: for up to two decades, Buck had failed to account for COLA payments to the spouses of deceased retirees. Having been presented with new material errors so persistently over the past weeks, the City now has reason to doubt that those are the only errors that Buck has made in its century-long employment as its actuary. A minimum-funding ratio commonly used to mark relative stability for a government pension plan is in the range of 70%-80%. According to Buck's valuation report dated June 30. 2011 (the "2011 Valuation Report"), the Pension System had a funding ratio of approximately 32%. The City's total pension liability was more than $1.3 billion and the total unfunded portion of that liability was over $900 million. Absent the reforms adopted in April 2012, over the next twenty-seven years, the City's ARC to the Pension System would increase each year until the unfunded liability was fully amortized. Based on Buck's projections, the City's total ARC would rise from approximately $55.8 million in fiscal year 2012 to over $207 million in fiscal year 2039. 24. Based upon its calculations, Buck represented to the City that freezing the COLAS for ten years would reduce the Pension System's unfunded accrued liability by approximately $165 million, reduce the City's ARC by approximately $10.4 million for the fiscal year ending June 30. 2013, and increase the Pension System's funded percentage. Buck also represented that the ten-year suspension would allow the Pension System to attain a funded percentage of 70% in the fiscal year ending June 30, 2035. E. The City discovers Buck's mistake -- and Buck admits it 39. Apparently aware the gravity of Buck's mistakes, Zmich noted that he was hoping to have had a chance to speak with D'Amico before he saw the badly botched calculations. Zmich went on to claim that the Inactive Mortality and Data Adjustment variance of $10.8 million was attributable to fewer deaths than expected, and/or because of changes to the reasons for the retirement of certain pension recipients. 43. Like Zmich, Bonanno tried to excuse Buck's error by stating that Buck was under the false impression that COLA payments were made in July, rather than January. When pressed, however, Bonarmo admitted that the timing of the COLA payment could not be a basis for missing a year. 44. Grasping at straws, Bonanno desperately offered the excuse that perhaps Buck did not understand when the COLA suspension was supposed to begin. D'Amico presented Bonanno the e--mail Zmich sent on September 27, 2012 that explicitly stated that the COLA suspension started on January 1, 2013. S_e? Exh. 5. Upon being presented with this damning evidence, Bonanno did not even attempt to explain why Buck had listed the correct date for the COLA suspension in the e-mail but had used a different date when actually performing its calculations. 45. This was not the end of Buck's embarrassment, however. Bonanno admitted that Buck's inexplicable oversight meant that the savings for the City's 2014 ARC -- the very savings on which the City had relied during its negotiations -- had been overstated by $700,000. Bonanno further admitted that since the ARC is programmed to grow by 3.5% each year, the lost savings would also grow by the same percentage. Finally, Bonanno also admitted that the $10.8 million Inactive Mortality and Data Adjustment variance in the 2012 Valuation Report was actually the net present value of the annual shortfall created by the $700,000 in lost savings in today's dollars. 46. Ultimately, Bonanno had no choice but to acknowledge that during the entirety of the City's negotiations with the retirees and unions, Buck had provided the City with the wrong numbers. 47. The remainder of the meeting played out in cinematic fashion. Faced with the gravity of Buck's admitted and inexcusable mistake, Bonanno could barely speak and choked out his words as he asked for a glass of water. Sweat poured down Bonanno's face, and he asked those present to turn down the heat in the room. He struggled to speak and stated that he felt that he might "pass out." After drinking two large glasses of water and taking several minutes to compose himself, Bonanno, in a classic instance of "too little, too late," assured D'Amico that he would review all of Buck's calculations. F. Passing the Buck 49. In an apparent attempt to save face, Buck sent more actuaries to meet with D'Amico in the City's offices in Providence on January 22, 2013. Clearly incapable of handling the situation alone, Bonanno brought his superiors from Buck: David Driscoll a Principal Consulting Actuary and the National Public Sector Consulting Leader, and Anthony Abazia ("Abazia"), a Principal Consulting Actuary and the New York Retirement Practice Leader. 50. Driscoll and Abazia admitted that Buck did understate the City's savings, but now claimed that the errors were not due to overlooking a COLA during the negotiations. Rather, they claimed that their calculations during the negotiations had been correct, despite the fact that the person who performed the calculations (Bonanno) admitted they were wrong. Now they claimed the variances between the two valuation reports were due to other mistakes that Buck had made in its calculations, which Buck had discovered after another review in preparation for the meeting. This purported explanation was hardly reassuring, nor did it change the fact that the City's liability had been underestimated by $10 million because of Buck's error. 51. Driscoll and Abazia offered new "mistakes" in an effort to explain why the City's pension liability increased by $10 million. To help explain, Driscoll and Abazia brought a one- page schedule from Buck's draft 2012 Valuation Report detailing variances in the Pension System's unfunded liability between the draft 2012 Valuation Report and the revised numbers Buck obtained after reviewing its calculations in preparation for the meeting with D'Amico. See Exh. 1 1. Consistent with Buck's now demonstrable pattem of error, thirteen of the twenty-three line items on that schedule were incorrectly stated the first time. 52. Driscoll and Abazia first claimed that Buck had understated the City's unfunded liability as of June 30, 2012 by about $20 million because it had counted employee contributions twice in its calculations. Buck admitted that any careful, competent actuary would know that the employee contribution should be counted only once. 53. Next, Buck maintained that it had failed to account for COLA payments to surviving spouses. When a retired employee passes away and lists his surviving spouse as his pension beneficiary, the surviving spouse receives the pension payments, including COLAS. The operative date for determining COLAS is the retiree's date of retirement. Upon the retiree's death, however, the City's recordkeeping system changes the date on which the retiree became entitled to pension payments the date of retirement) to the date that the surviving spouse became entitled to pension payments the date of the retiree's death). However, the City continues to pay retirees and surviving beneficiary spouses COLAS based on the date of retirement. Upon information and belief, the data provided to Buck contains all of this information, including both of these dates. 54. Buck stated that it miscalculated the future value of payments for employees who retired before 1991 because it used the wrong date. Buck explained that it discovered this mistake when it examined the City's records to determine whether any employees received new COLAS that Buck did not anticipate. Buck allegedly performs the exercise of cross- checking COLA recipients every year, yet never discovered this fundamental error in its methods until it was forced to provide an alternate excuse to omitting the 2012 COLA from the calculations it performed for the City during its negotiations with the retirees and unions. Like a kid in math class, Buck claimed to have the right answer, but could not show its work. 57. If Buck has been misstating the City's unfunded pension liability all this time, then the City has been making smaller ARC payments than it should have been. Thus, the Pension System actually has been even more underfunded than the City has been told by Buck. Not only does this mean that the City's finances have been misrepresented for up to two decades, and that the City has been misappropriating funds that should have been used to make ARC payments for other purposes, but it also means that the City has suffered lost earnings that would have been realized on the investment of the additional funds that would have been contributed but for Buck's repeated errors. 58. Not content with its backfilling, by letter dated January 30, 2013, Buck did another about face, in a transparent attempt to create a defense to liability. Bonanno claimed provided to the City during the negotiations provided the same level of estimated savings reported in its May 25, 2012 letter. Exh. 12. Bonanno further maintained that the City had not been injured by its calculations at all, even stating that Buck's 2012 Valuation Report was more favorable to the City than initially anticipated. 1gl_._ Bonanno's current claims are flatly contradicted by the myriad admissions of error Buck acknowledged to the City just a few weeks prior. Moreover, Bonanno's letter also does nothing to explain the material variances in the final calculations presented by Buck. Remarkably, however, Bonanno had the temerity to close his letter with a familiar refrain: am a Member of the American Academy of Actuaries and meet the Academy's Qualification Standards to issue this Statement of Actuarial Opinion." L4. 60. It is clear that Buck made numerous substantial mistakes in its calculations that cost the City up to $10 million, if not more. Additionally, the City now feels compelled to expend scarce resources scouring decades of actuarial reports for other errors that may have been negatively affecting the City's bottom line for years. If the aforesaid legion of errors perpetuated on the City is indicative of how Buck conducts itself, the City can only wonder whether other local governments (including those in Cranston, Newport, and Smithfield) are the victims of similar errors by Buck. Buck's apparent incompetence seems particularly relevant to the City of Cranston Police and Fire pension, which is, upon information and belief, considering a ten-year COLA suspension similar to the one instituted by the City, also based on Buck's calculations and recommendations.