What to take from Detroit

Prichard,  AL and Central Falls, RI should have been a wake-up call to all taxpayers and participants in public pension plans.  They weren’t.  The rationalization was that they only involved a few hundred participants who had their pensions cut and that those cities were badly run and didn’t get the proper advice.

Detroit is different.  Twenty thousand retirees getting half-a-billion dollars annually can’t be ignored.  A big-time actuarial firm specializing in public plans certifying that these plans were 91.4% funded two years ago.  How can this be explained away?  How about the truth?

PARENTAL ADVISORY: It’s hot, I’m alone in the office, and the following will be written in the 46 minutes it takes to listen to the Dropkick Murphys’ Blackout.  Expect some profanity.

If they can make a law,
Then they can break a law.
If they can break a law,
Will the law break me?
It comes tumbling down again,
I can’t comprehend,
Is it destiny?

The Outsiders

Prophetic (if I heard the lyrics right).  All the protections placed in the law or the constitution or an employee handbook or a cocktail napkin turn to shit when the money runs out and nobody will lend you any more for that purpose.  If Detroit succeeds in resurrecting their city at the expense of past employees and lenders who have nothing more to give current taxpayers then we have the blueprint for every other distressed municipality (and state after they expand Chapter 9) starting with Chicago, Cook County, Los Angeles, San Bernandino County, San Diego County, and any other place not in the Milliman study of public plans that had a lower ‘official’ funded ratio than the Detroit plans.

So how is anyone to realize a plan is on the brink of insolvency when it reports a 91.4% funded ratio?  Here’s a rule of thumb: if an actuary who has ever been paid to do a valuation for a government plan is involved, be wary.  As Paul Newman so eloquently put it:

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To get hired to value public pensions you must know your role as the Detroit actuaries who took umbrage at their work product being criticized explained in the last line of a press release:

We are continuing to work with both Retirement Systems to provide meaningful long term solutions that all stakeholders can embrace.
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And those stakeholders are politicians who choose and pay them, public employees who want the biggest benefits they can get without it appearing to cost too much, and taxpayers who want the most services they can get while paying as little as possible.  All have a vested interest in inflating pensions while deflating costs which is what public plan actuaries get paid to work out for them.
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It should not be the job of the actuary to find “solutions that all stakeholders can embrace” but to value benefits dispassionately, independently, and accurately and leave it at that.  With the tools we have that should be easy.  What’s getting hard is developing ever more irrational machinations to make it appear that all stakeholders will get everything they want.  Eventually people catch on, if not when they notice on page 127 of the valuation report that the 5-year asset smoothing method has been extended to 7-years, then surely when their next annuity check is missing a digit or two.

11 responses to this post.

  1. Posted by Tough Love on June 18, 2013 at 6:15 pm

    Finding …“solutions that all stakeholders can embrace”” …. is impossible.

    In a situation as dire as Detroit (and quite a few others) finding solutions WITHOUT great pain to most (if not all stakeholders) is also impossible.

    Accepting that is the first step in trying to structure any solution.

    Reply

  2. Seems to me that the actuary’s job is to lay out the facts without bias and let the stakeholders come to a solution. No one is benefited by the so-called expert in the room taking a side and glazing over the plan’s financial position so that bona fide reform is delayed

    Reply

    • Posted by Tough Love on June 18, 2013 at 8:43 pm

      That’s the way it generally works with PRIVATE sector Plan valuations because the Corporation sponsoring the Plan is spending it’s OWN money and isn’t going to spend it unwisely.

      In Public Sector Plans, while the Taxpayers are CERTAINLY a primary stakeholder, they have virtually no say, with elected officials of the Plan Sponsor (the town, city, etc,) and the Public Sector Unions often in cahoots to provide the greatest pensions they can get away with since it not THEIR money, but taxpayers money. They do so by lying about and distorting the Plan’s true high costs …. often with the assistance of “cooperative” actuaries who know that they will ONLY get the high-paying engagement for services if they give their employer what they want to see ….. understated cost estimates.

      Reply

      • ‘Cooperation’ is a word I have seen in municipal memoranda on pension levies. The mayor or manager writes that the municipal body recognizes that the expected return is too high or some other assumption is bad, but due to financial difficulties, the necessary change will not be made until the economy perks up. Then comes the praise for labor and its ‘cooperation’ with the municipality. Never mind that only recently have pension benefits suffered for labor’s ‘cooperation’. In fact, payroll’ growth (and ultimate pension benefits) is higher for labor allowing the under contributions to go uncontested.

        Reply

        • Posted by Tough Love on June 18, 2013 at 9:53 pm

          “Cooperation” between Elected Officials (negotiating pay, pensions, and benefits) and Public Sector Unions is virtually synonymous with collusion … and always with the Taxpayers being screwed.

          Reply

      • Posted by ms on June 20, 2013 at 7:36 am

        @Tough Love
        This of course assumes that the ones at the top in the private sector plan are not out to put themselves ahead of the company’s interest. Something that has been shown innumerable times not to be true. How many company’s have imploded over the years throwing their plans unto the PBGC?

        Reply

        • Posted by Tough Love on June 20, 2013 at 10:33 am

          While it doesn’t justify the unnecessary/unjust excess in virtually all current Public Sector Pension Plans, I can’t argue with that … the Private Sector is not immune to pigs in the C-suite.

          As for dumping their Plans onto the PBGC, that’s getting quite a bit hard as the PBGC has wised-up and is MUCH more proactive when it looks like a sale/merger is setting up a pension Plan failure. E.g., they no longer allow an “AA” Credit-rated company with an underfunded Plan to spin it off to a newly-created “BB” Credit-rated company.

          Reply

  3. Posted by Anonymous on June 19, 2013 at 11:19 pm

    Anyone know what the average rate of investment return has been on the Detroit pension plans over the last 10 years? 30 years? 50 years?

    Reply

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