Uneducated Guessing

Detroit’s Police and Fire Pension Plan is either 50% or 96% funded depending on which actuary you believe.  mlive.com is wondering about that and they contacted a corporate law professor for the pat answer:

“This is all about guess work 20 years out from now,” said Peter Henning, a corporate law professor at Wayne State University.

He said both estimates are reasonable.

“The firefighters may be right. Orr may be right. I suspect the answer is somewhere in between,” Henning said.

Bullshit! There is an answer and it very well could be outside that range.

One of my favorite movie scenes ever:


So it is with actuarial valuations in the public sector which make sense in Fantasyland, USA where many politicians, actuaries, and public employees reside but in the real world ignore some significant factors:

  • Manipulations of salary and credited service to inflate benefits;
  • Governments that outright refuse to make their contributions, low-balled as they are;
  • All that money in alternative investments whose attractiveness for public plans lies in the vagueness of their values;
  • Liquidity needs where plans that have to pay out 20% of their remaining assets can’t be assuming they will get long-term investment returns.

In the case of Detroit there’s also that $1.4 billion in assets they think they have from those 2005-6 Pension Obligation Bonds that may be pulled out of the plan to pay creditors so for them a funded ratio of 40% is also ‘reasonable’, all things considered.

5 responses to this post.

  1. Posted by Eric on August 2, 2013 at 9:46 pm

    Switching back to “Jersey Strong” from Detroit, what is the current percent of assets held in “alternative investments” and what is the future projection of that percentage. I seem to remember that it is expected to increase. Again, how and who values these assets, Bernie Madoff?
    PS Great film clip. I greatly enjoyed it!


  2. Posted by Eric on August 2, 2013 at 10:22 pm

    Thanks. I will look. This is one reason why the Fed can never stop printing money since it must put a floor under the stock market for NJ, Ca, and IL. It is often called the Bernanke put. All of this talk of tapering quantitative easing is pure BS. The $85 billion per month is only the start. CNBC is beyond a joke with its comments. I watch it instead of Saturday Night Live. People wait with bated breath for a release of info. from the Fed. Sometimes Warren Buffett makes a guest appearance as John Belushi did on SNL.
    PS 38% sounds dire enough. I cannot believe that this would be pushed to 43%.


  3. Posted by eatingdogfood on August 6, 2013 at 7:43 pm

    To All Public Servants And Retirees; Repeat After Me : ” EVERYBODY GETS NOTHING ” !!! Repeat 1000 times !!! Now, Doesn’t That Feel Better !!!


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