Getting Bucked

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.

One response to this post.

  1. Posted by Tough Love on February 27, 2013 at 4:25 pm

    What I find so very unfair, is that while material financial consequences are appropriate when there is a REAL financial loss incurred by the person (corp. or gov’t) suing. In cases like this, the consultants are recommending Plan contributions. A mathematical error that understates the contribution does NOT increase increase Plan liabilities (although an argument “could” be made that incremental interest costs due to the lower contribution are real).

    The worst case (for the party being sued) and assuming that the party suing would have indeed PAID-in the higher contribution (which is often mot true), is that the funds not used on the contribution were instead spent on some other secondary expenditure (hence benefiting those who received that benefit).

    While a stretch argument can be made that such errors have a “cost” to Taxpayers and should have some consequence, assigning a liability of 100% of the mistake (which is equivalent to the Plan liability actually having increased by that amount …. which it clearly did NOT) essentially says the secondary benefit purchased with the funds that would otherwise have been contributed to the Plan should be completely free. This clearly seems inappropriate and an extreme penalty.

    Which brings me to why lawsuits of this type happen …. greedy lawyers looking for a fat contingency fee.

    P.S. I recall that the actuarial consulting firm Millman was caught up in just such a lawsuit several years back …. and settled the claim out of fear of the risk of a much greater jury award. This was very unfair to Millman …. the suing city was essentially looking for free money (at least free money well beyond any actual loss).

    Reply

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