Detroit’s Fairy Tale Numbers

When Detroit wanted to borrow in the bond market or reduce pension contribution levels or increase participant benefits or even make pathetically weak reforms they gave everyone the impression that their pension system was only ‘modestly underfunded’ (estimated to be $644 million for Police and Fire).  Yesterday they had the need to default on their bonds and, as it turns out in regard to their Unfunded Actuarial Accrued Liability (UAAL) for pensions, Detroit’s Proposal for Creditors  explains on page 23:

“Further analysis by the City using more realistic assumptions (including by reducing the discount rate by one percentage point) suggests that pension UAAL will be approximately $3.5 billion as of June 30, 2013.”

How does a modestly underfunded plan collapse in one day?  The headline at the top of page 31 of that Proposal tells all you need to know about Detroit (and the the actuarial profession):

Pension Liabilities Are Not Fully Funded     Shortfall Has Been Understated.

Aggressive Actuarial Assumptions Generate a Perception that Pensions are Modestly Underfunded.

Then for two pages those ‘aggressive’ assumptions are outlined:

  • 7.9% Investment Rate of return
  • Asset Valuation Method: 7-year smoothed market
  • Amortization Period: 30 years

Basically the same assumptions every other government plan that’s not yet in bankruptcy has been using for decades including for the June 30, 2012 valuation of the Police and Fire Retirement System of Detroit which was released three weeks ago with the following assurance:

This report has been prepared by actuaries who have substantial experience valuing public sector retirement systems. To the best of our knowledge, this report is complete and accurate and was made in accordance with standards of practice promulgated by the Actuarial Standards Board of the American Academy of Actuaries. The actuarial assumptions used for the valuation produce results which, individually and in the aggregate, are reasonable.
In the interest of having an accurate valuation report out there that agrees with the new truth changes will now need to be made.  Either all the calculations will have to be redone revising every number or one word can be changed wherever it appears: ‘reasonable’ to ‘bullshit’.

21 responses to this post.

  1. Posted by Tough Love on June 15, 2013 at 4:13 pm

    Detroit’s financial manager just did this presentation to meet the requirements to ultimately enter bankruptcy. With the debtors being offered 10 cents on the dollar, and material cuts to PAST service Public Sector pensions accruals (and the substantive ending of retiree healthcare), only a fool would believe these stakeholder groups will “accept” this (or anything even close) … especially the Public Sector Unions who still think only the “banksters” should pay.

    What’s interesting, is that while there seems to be a lack of any real “desire” of Stockton and San Sernadino CA. to cut Public Sector pensions, this one is clear.

    A US Bankruptcy Court ruling clarifying that State Constitutional and Contractual provisions hold no weight in a bankruptcy, will give many many other Cities a way out of the financial mess they are in do to the grossly excessive pension and benefit promises demanded by the Public Sector Unions and granted by the City’s self-serving elected officials.

    It about time the Taxpayers NOT riding this gravy train got some financial relief.


    • Going through the report I didn’t see how pensions or health care costs would be cut. But it’s interesting that the plan seeks to spend an extra $1.25 billion on new projects (last two pages of report – Appendix J) so instead of paying pensions and health insurance Detroit is going to replace the roof on the Manoogian Mansion among other things.

      That’s kind of what’s going on everywhere else though it’s not obvious to most public workers and retirees. In Union County that banquet center, courthouse, and ice rinks they built, are building, and will build respectively are going to eventually come out of bond payments and employee benefits (likely the latter) since taxpayers can’t afford it all.


      • Posted by Tough Love on June 15, 2013 at 5:13 pm

        With the exception of a few really BIG projects under consideration (e.g., the Bullet train in CA), most wasteful projects (even when added together), don’t hold a candle to just the UNNECESSARY and UNJUST excessive share of Public Sector pensions and OPEB.

        That’s where the REAL waste is and where Taxpayers must look if they want material tax relief.


        • Posted by George on June 16, 2013 at 7:20 am

          “With the exception of a few really BIG projects under consideration (e.g., the Bullet train in CA)”

          If you remove the really big projects then the rest are mostly chump change.

          I doubt Cali is able to get a railroad working, let alone the most complicated and unfamiliar kind. It is also pretty clear that the way to travel from San Francisco to LA is by air. The problem there is ever since 911 airports in the US have turned into a chaotic boondoggle.

          The Union county golf course could work out, for example Bethpage NY is top notch. At minimum it could be sold off later to finance the pension scheme, which I think may be the plan.


          • Posted by Tough Love on June 16, 2013 at 9:17 am

            Why should County “assets”(that really belong to the Taxpayers) be sold off ?

            Fundamentally it’s no different than cash in the bank.

            If the root cause of the problem is excessive pension & benefit promises, then instead of trying to find money to pay for something than is “excessive’, eliminate the excess.

            At a minimum, FUTURE service pensions accruals for CURRENT workers need to be HALVED …. and even after doing so, they would STILL be greater than what the vast majority of Private Sector workers get in retirement benefits from their employers.

  2. Posted by eatingdogfood on June 15, 2013 at 10:07 pm

    ” Mo Town ” Is A Sewer !!! Let The Liberal DemoRats And The Criminal Unions Sort It Out !!! It’s Pay Back Time, Baby !!!


  3. Posted by Javagold on June 15, 2013 at 11:44 pm

    It is better to be one year too early than one day too late.


  4. Posted by Al Moncrief on June 16, 2013 at 2:18 pm

    Like the Vallejo bankruptcy, Stockton’s bankruptcy will trim not a penny of its public pension debts:

    “Under the deal with some 1,100 retired employees – Stockton’s largest group of unsecured creditors – the city will pay a lump sum of $5.1 million to reflect the loss of their health benefits in retirement and leave their current pension benefits intact.”

    State and local governments in the U.S. have three times much bonded debt as they do public pension debt. How is public pension debt such a burden while all other state and local government debt (300 percent greater debt) is not a burden? ($2.8 Trillion according to the U.S. Census Bureau.)

    How is the fact that state and local governments have not “banked” the three percent of future revenues needed to support their public pension debt a “crisis,” while the fact that state and local governments have not banked the 97 percent needed for all other future public expenditures is not a “crisis.” Doesn’t fit the political agenda does it?

    The return assumption for PRIVATE sector defined benefit pension plans in the U.S. is now 8.1 percent, higher than the return assumption for most public sector defined benefit pension plans. Good enough for the private sector, not good enough for the public sector?

    The ratings agencies, Fitch and S&P believe public pension systems to be well-funded at 80 percent actuarial funded ratios, the average funded ratio for US public pension systems is currently in the 70s. Why is the debt owed by “well-funded” pension systems considered to be a “crisis”?

    Advancing the public pension reform debate . . . Al


    • Posted by Tough Love on June 16, 2013 at 8:43 pm

      Al, You’re getting more delusional as that “agreement” can (and likely will) be ignored by the Bankruptcy Court Judge. as there simply isn’t sufficient money to pay for the ridiculous pensions promises.

      Do you really think the Bondholders (or their insurers) will get 10 cents on the dollar (as proposed) and the workers will get 100% of their pensions?

      If so, I’ve got a bridge to sell you.


      Any when are you going to give up on that 3% lie. It’s not 3% even if ONLY State budgets are considered. When ALL gov’t entities’ budgets are included, pensions often eat up 10-20% and it’s rising quickly


      • Posted by Al Moncrief on June 16, 2013 at 11:05 pm

        Hi TL, it’s difficult for me to give up that 3 percent “lie.” In part, due to the fact that so many (including the U.S. Census Bureau) continue to advance it:

        February 14, 2011

        Keith Brainard, Research Director, National Association of State Retirement Administrators testifies before the a subcommittee of the U.S. House of Representatives:

        “Only 30-40 years ago, most public plans were financed primarily on a pay-as-you-go basis.” “Even after the most recent and unprecedented financial downturn, most state and local government pension trusts have plenty of assets to continue to pay promised benefits for years, and values already have rebounded sharply since the market low.” “The percentage of all state and local government spending on pensions has hovered around three percent during the last decade.”

        May 22, 2011

        Jennifer Paquette, PERA Chief Investment Officer, in the Denver Post:

        “In fact, employer contributions to pensions account for just 2.16 percent of all Colorado state and local government spending, according to 2008 U.S. Census Bureau data.”


        • Posted by Tough Love on June 16, 2013 at 11:39 pm

          Did you see the words “spending”. Do ANY of the 50States actually ‘fund” what they should to pay for these absurd promises over the working careers of thof those being “promised” … or 50% of it, 25% of it,or sometimes nothing at all?


          • Posted by Al Moncrief on June 16, 2013 at 11:50 pm

            Yes TL, many states have not “spent” what they should (have not paid their full ARCs.) Perhaps the “spending” required to remedy the states past “pension holidays” will push needed contribution rates (as a percent of total state and local spending) toward four percent of “spending” on average. Perhaps this remedial effort, with the recovery in equity markets, will bring US public pension actuarial funded ratios to a well-funded condition, 80 percent. Thanks for your concern, Al

          • Posted by Tough Love on June 17, 2013 at 12:10 am

            Al, my understanding is that for quite a few Cities and towns, it’s 10-20% NOW and expected to rise very rapidly.

            The only reason it’s a smaller % of State budgets is because of the very large items (medicare, education costs, prisons, etc.) included in the denominator of that ratio.

          • Posted by Al Moncrief on June 17, 2013 at 12:26 am

            “The only reason it’s a smaller % of State budgets is because of the very large items (medicare, education costs, prisons, etc.) included in the denominator of that ratio.”

            TL, the state workers providing these public services are also members of defined benefit plans. In seven states these workers are ineligible to participate in Social Security. These states save significantly on FICA contributions, and one might expect that public pension benefits would, accordingly, be more generous in these states. I believe you are correct that examples exist of municipalities that have irresponsibly ignored their contractual public pension debts in the past, and now must dedicate a significant portion of current spending to meeting those obligations. When taxpayers elect irresponsible politicians, taxpayers literally pay the price.

            I also find it interesting that total state and local government debt in the United States is 300 percent greater than total state and local government pension debt. Yet, few are calling for states and cities to default on their outstanding bonds or corporate debts. If one set of contracts is on the table, all sets of contracts must be on the table.

          • Posted by Tough Love on June 17, 2013 at 12:41 am

            Al, Same problem ….. while the official “:debt” figures are accurate,the “official” pensions liability figures (calculated by discounting the liabilities with the asset return assumption instead of a much lower rate consistent with the guarantees associated with pension liabilities) are perhaps 1/3 of the true liabilities.

            That alone (per YOUR statement above) would make the debt and pension liabilities of equal size, and most economists believe that the pension liabilities are considerably greater than outstanding debt.

          • Posted by Al Moncrief on June 17, 2013 at 1:03 am

            Well, even if you buy Pew’s “One Trillion” dollar “gap” figure (which some claim is an exaggeration), total state and local bonded debt is still three times the public pension estimate. It’s also difficult to refer to unfunded public pension liabilities as a “gap” or a “shortfall” when these obligations will not (completely) come due for the next 70 years. We don’t refer to the total face value of all outstanding state and local government bonds as “A Three Trillion Dollar Gap.” Another thing, last year’s equity market boom will soon be reflected in public pension funded ratios. We should see a healthy recovery, I predict 14 percent portfolio growth for Colorado PERA in 2012. We’ll know in a few weeks.

          • Posted by Tough Love on June 17, 2013 at 1:42 am

            Get with it AL, The “liability” figures you see are in Present Value terms…. i.e.,what should be on hand TODAY …. the fact that they are payable in the future having ALREADY been discounted.

  5. […] Detroit's Fairy Tale Numbers (and now it's like the =real= Grimm Fairy Tales. Don't read those to your kids, unless […]


  6. […] 1) Get actuaries to lie about real plan costs (link); […]


  7. […] 1) Get actuaries to lie about real plan costs (link); […]


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