How Actuaries Betray Detroit Retirees

My guess is that as early as this week 20,000 retirees in Detroit’s two retirement systems will have their pensions reduced by a flat percentage (25%) with a cap ($50,000 annually?) and no reductions for de minimus amounts (under $10,000 annually?) so that part of the pension trust fund can be used to repay bondholders.

The Detroit Free Press editorialized today against any benefit cuts since retirees were not to blame but failed to finger any culprit.  I will.

The newspaper referred to an unfunded pension liability of $3.5 billion that came out of a Milliman report reviewing the work of Detroit’s current actuaries (GRS) that seems to have been divulged only to those who:

  1. promised not to disseminate it; and
  2. would have had absolutely no clue on how to interpret the numbers therein (i.e. politicians and regular reporters)

Among the findings, according to the editorial:

The funds’ managers assume a rate of return on their annual investments between 7.9% and 8%….A report by actuarial auditor Milliman, commissioned last year, found that the pension funds used a few other accounting practices that — while legal — downplayed the brewing problems in the systems. One example is a 30-year open-ended repayment schedule for missed or delayed city payments. Because the schedule is recalculated every year, the city’s payments never significantly impact the principal of the debt. Milliman also questioned the assumed rate of return.

30-year open amortization!!!!!! 7.9 – 8% interest!!!!!! What kind of lamebrain would include those in their actuarial reports.  You’d have to be nuts to consider those reasonable.  What could GRS have been thinking?  Milliman would never consider using such unreasonable assumptions for the plans they administer.  Or would they?

As it happens Milliman is also the actuary for the New Jersey Teachers Pension and Annuity Fund and they produced an actuarial valuation report for the year ended June 30, 2012.  Page 43 of that report:

milliimannj

The editorial continues:

Another wrench in the works is the funds’ alternative investments,….In 2012, 12% of the general system’s assets were alternative investments; the police and fire fund’s total was 8%. These alternative investments, the funds’ annual reports note, don’t have a ready market value. So the value is determined by the pension systems’ managers, and that means the actual value could be significantly lower than what’s estimated.

Really!!!!! As much as 12% of the assets in investments of indeterminate value.  What idiot would take such risks?  Again we turn to New Jersey where that number is 38% for now but likely going to 43% if advisers get their way.

Retirees in Detroit (and New Jersey) might not be willing to take the blame but they’re going to take the fall.

9 responses to this post.

  1. Posted by Anonymous on July 14, 2013 at 4:01 pm

    does that mean if I make 17k per year in pension they would reduce 25 percent of 7k and not touch the first 10k. I dont think the economy is getting better anytime soon even though realtors are saying yes we are in a recovery you better hurry up and buy the houses now the prices are rising as we speak

    Reply

  2. Posted by skip3house on July 14, 2013 at 4:09 pm

    As said in so many ways in this blog over the years since Dunstan McNichol, at least, ‘promises should be funded by current taxpayers as the benefits are earned, not put off for future citizens to pay.’
    An example would be a type of ‘401k’ plan, with check stubs indicating the benefits, audited of course………..
    We failed to follow this common sense/native intelligence!

    Reply

  3. Posted by Tough Love on July 14, 2013 at 4:17 pm

    Quoting …”My guess is that as early as this week 20,000 retirees in Detroit’s two retirement systems will have their pensions reduced by a flat percentage (25%) with a cap ($50,000 annually?) and no reductions for de minimus amounts (under $10,000 annually?) so that part of the pension trust fund can be used to repay bondholders.”

    If you break that up into 2 parts , A and B, where A=”My guess is that as early as this week 20,000 retirees in Detroit’s two retirement systems will have their pensions reduced by a flat percentage (25%) with a cap ($50,000 annually?) and no reductions for de minimus amounts (under $10,000 annually?)”, and B= “so that part of the pension trust fund can be used to repay bondholders.” ….. I don’t see how you can conclude that A leads to B, especially since all articles suggest a MUCH greater cut for bondholders ….. and the retirees and Bondholders EQUAL-status general obligation creditors.

    As a matter of fact, BECAUSE Bondholders are likely getting a larger cut (90% has been proposed), a more accurate statement might be …. “My guess is that Bondholders will be getting a HUGE 90% cut in Principle so that 20,000 retirees in Detroit’s two retirement systems will have their pensions reduced by much SMALLER amounts …. a flat percentage (25%) with a cap ($50,000 annually?) and no reductions for de minimus amounts (under $10,000 annually?)” .

    Is the glass half full or half empty?

    Perhaps the City should sue GRS …. even if their individual assumptions were “legal”, perhaps they WERE grossly negligent in their totality. While I don’t know how “deep pockets” GRS is (or how much liability insurance they carry), a judgement would send a wonderful message to the actuarial profession that such practices won’t be tolerated.

    Reply

    • What underpins my guess is that I don’t see bondholders taking a cut. I see Orr taking real money out of the pension and segregating it for their benefit since the only route he sees out of this is more debt and nobody is going to want the words ‘Detroit’ and ‘bond’ together anywhere near their portfolio if past bondholders take anywhere near the hit proposed.

      What Orr is doing is laying a foundation for screwing retirees.

      Reply

      • Posted by Tough Love on July 14, 2013 at 6:26 pm

        While I certainly feel the promised pensions were materially excessive (by any metric, when compared to Private Sector pensions) retirees certainly should NOT get cut more than Bondholders.

        If future borrowing is very difficult, it’s certainly a well-earned punishment. Not sure if a bonding arrangement could be made with the Bondholders having 1-st dibs on Tax revenues. IF that could be arranged, AND expenses brought more in line with revenues (to allay potential Bond-buyer’s fears of a bankruptcy filing that could override such an arrangement), the Bond market may still be open to Detroit, albeit at a premium.

        P.S, I still can’t get my head around (what seems to be your position) that eliminating that potion of the promised pensions:

        (A) that is excessive VS Private Sector pensions, and
        (B) where that excess is reasonable associated with a you-scratch-my-back-and-I’ll-scratch-yours arrangement between the Public Sector Unions and Detroit’s elected officials (betraying their obligation to look out for Taxpayer interests)

        constitutes a TRUE “screwing” of the retirees.

        Reply

  4. Posted by Eric on July 15, 2013 at 9:10 am

    John:
    What is your prediction regarding health benefits for Detroit retirees?
    Thanks.
    Eric

    Reply

    • Don’t know enough about Obamacare or the Detroit OPEB situation but the game plan seems to be to avoid paying anything to retirees so I see offloading liabilities to the federal government to extent possible and having retirees pay part of the premiums out of whatever’s left of their pension checks.

      Reply

  5. […] conclusion in the case of Detroit.   Perhaps someday they may apply those same principles to their work in New Jersey before bankruptcy necessitates […]

    Reply

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