Milliman’s Detroit Report

The report, dated July 6, 2012, is ten pages long and it is the justification Detroit is trying to sell to its creditors and pensioners that their pension funds are severely underfunded.  I have the report but on the bottom of each page appears this safety warning:

This analysis was prepared solely to provide assistance to the City of Detroit.  Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work.  Milliman recommends that any third party recipient of this analysis be aided by its own actuary or other qualified professional when reviewing the Milliman analysis.

Obviously this is for the protection of certain stakeholders who might be inclined to conclusions that are too correct.  So I have decided to walk you through aspects of the report on a daily basis before springing it all on you.

First up, Milliman took the June 30, 2010 official valuations prepared by Gabriel Roeder Smith & Company (GRS) and applied a methodology similar to what I have been doing to arrive at what, in the case of Detroit, they believe to be the real funded status of the two main plans.

OFFICIAL GRS NUMBERS @ 6/30/10 (in billions)
……………………………GENERAL…….PFRS……….TOTAL
Actuarial Assets…………3.2……………3.9……………7.1
Liabilities………………….3.7……………3.8……………7.5
Deficit………………………-.5………………..1…………..-.4
Funded Ratio……………87%………….102%……….95%

The funds did not really have $7.1 billion in assets at June 30, 2010. The ‘actuarial value’ in this case means a phony value which in the private sector is used to ‘smooth’ valuations but in the public sector is used to distort. Here are the figures when we use market value of assets:

OFFICIAL NUMBERS @ 6/30/10 Assets at Market (in billions)
……………………………GENERAL…….PFRS……….TOTAL
Market Assets…………..2.2……………3.0……………5.2
Liabilities………………….3.7……………3.8……………7.5
Deficit……………………..-1.5…………….-.8…………..-2.3
Funded Ratio……………60%…………..79%………..69%

Milliman also upped the liability numbers by 25% (as I predicted) when they noticed that the GRS actuarial assumptions “don’t hold water”:

MILLIMAN NUMBERS @ 6/30/10 Assets at Market (in billions)
……………………………GENERAL…….PFRS……….TOTAL
Market Assets…………….2.2……………3.0…………..5.2
Mill Liabilities……………4.7……………4.8……………9.5
Deficit……………………..-2.5…………..-1.8………….-4.3
Funded Ratio……………47%…………..63%…………55%

And the final twist was to adjust out those $1.3 billion in Pension Obligation Bonds that presumably Milliman believed would be taken out of the fund to repay creditors after those bonds default:

MILLIMAN NUMBERS @ 6/30/10 Assets at Market – POBs (in billions)
……………………………GENERAL…….PFRS……….TOTAL
Market Assets-POBs…..1.5……………2.4…………..3.9
Mill Liabilities……………4.7……………4.8……………9.5
Deficit……………………..-3.2…………..-2.4………….-5.6
Funded Ratio……………32%…………..50%…………41%

So there you have it.  Anyone taking the GRS valuations seriously is being misled and Detroit is lining up their experts to swear to that point.

Milliman makes some excellent points in their critique and my next few blogs will concentrate on each  specific issue they raise to justify their well-reasoned, logical conclusion in the case of Detroit.   Perhaps someday they may apply those same principles to their work in New Jersey before bankruptcy necessitates it.