Fingering Public Pension Actuaries

It is only a matter of time before the public pension crisis, as enabled by a cabal of actuaries devising assumptions and methods primarily to understate contributions, finds fall guys.  It happened this week in Detroit and to Gabriel Roeder Smith & Company (GRS) as reported in the New York Times:

With the nation’s states and cities slowly sinking in a $3 trillion pension hole, the professionals who advise their pension plans have long wondered whether the fingers of blame might eventually point to them.

One of those fingers has surfaced in bankrupt Detroit, and it is singling out Gabriel Roeder Smith & Company, a top actuarial consultant for public pensions, which has hundreds of clients across the country that rely on it to keep track of data, calculate required annual contributions and advise on key assumptions like future investment returns.

Detroit has been a client of Gabriel Roeder since 1938, when the city first started offering pensions. Now the city is bankrupt, the pension fund is short, benefits are being cut and one of the system’s roughly 35,000 members, Coletta Estes, is suing the firm, contending it used faulty methods and assumptions that “doomed the plan to financial ruin.”

Gabriel Roeder’s job was to help Detroit’s pension trustees run a sound plan, she says, but instead the firm covered up a growing shortfall and encouraged the trustees to spend money they did not really have. Her complaint contends that the actuaries did this knowingly, “in concert with the plan trustees to further their self-interest.” The lawsuit seeks to have the pension plan made whole, in an amount to be determined at trial, and to have Gabriel Roeder enjoined “from perpetrating similar wrongs on others.”

The plaintiff is mostly right* and is paying the cost:

As the residents of other struggling cities have discovered, public pension promises, once made, are extremely hard to break, even if the city goes bankrupt. Now Ms. Estes has lost not only part of her pension but much of the savings tied up in her house, while she and her neighbors overpay for paltry city services. She says she might have been spared some of the misery had Gabriel Roeder warned the trustees years ago that the pension system was unsustainable and recommended changes.

“We just got blindsided,” she said.

What GRS did was use every gimmick in book to keep contributions down:

  • open amortization
  • Normal cost as percentage of increasing salaries even when salaries were decreasing
  • asset smoothing which always ends up being higher than market value

GRS defended itself:

In its written statement, Gabriel Roeder said it was not a plan administrator, fiduciary or trustee for Detroit’s pension system and therefore did “not make decisions of any kind on behalf of the retirement systems.” It said it came to pension board meetings only when requested, usually just “a handful of occasions per year,” and based its analysis and recommendations on unaudited data supplied by the pension systems, the city or the county.

The big question is whether GRS, with their specialized knowledge, had any obligation to explain the real situation to all parties and, if they had done so, would they still be employed by those parties who select them to follow their orders?

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* Except for what Gabriel Roeder’s job was.  It had nothing to do with helping Detroit run a sound plan but everything to do with coming up with whatever was necessary to low-ball contributions at the behest of politicians who were in no position (and often had no inclination) to understand the consequences.

18 responses to this post.

  1. Posted by Tough Love on October 30, 2014 at 2:10 pm

    Anticipating this eventuality and to control their exposure, I thought that current Public Sector actuarial consulting firms are including judgement CAPS (1 or 2 times annual consulting fees) in their contracts which result from Civil judgements.

    Not sure if GRS does or if a Court can declare such CAP provisions invalid (lifting the CAP).

    Reply

  2. Posted by lgreene on October 30, 2014 at 7:38 pm

    The pension fund was well funded. Grs did nothing wrong.there might be debates over the accounting methods .but they were all within the rules. Detroit had lots of problems but an underfunded pension plan wasn’t one of them. They became the scapegoat for the corporate takeover and land grab by various creditors. 250 million in fees
    Unnecessary pension cuts.

    Reply

    • Posted by Tough Love on October 30, 2014 at 8:24 pm

      “Unnecessary” pension cuts ?

      Hardy. If if wasn’t for the “grand bargain” to protect the DIA’s atr from sale, the FAR FAR GREATER (and well justified … due to a generosity level not necessary or justifiable) pension reductions would have taken place.

      The retirees got away almost unscathed while creditors UNJUSTLY got screwed.

      Reply

  3. Posted by Anonymous on October 31, 2014 at 4:24 am

    John did you see the latest tirade by bully Christie. I am shocked he gets away with this. Christie is loses his temper and goes into one of his bully rants. Police escort protester away, who was a councilmen. I am still shocked that citizens find Christie s behavior acceptable and they even find it appealing. Imagine how Christie s children must be treated at home when the camera is off. What is your opinion of Christies behavior, John? http://www.app.com/story/news/local/neptune-wall/belmar/2014/10/29/christie-versus-heckler/18143665/

    Reply

    • It’s not at all funny when important things are at stake. Someone yelling out that he’s still fat when he’s trying to explain the pension issue – completely appropriate
      Sandy victim two years later asking for help – over the line.

      There’s also the facts of Christie’s rant. When was he ever in Belmar (ore even Iowa, New Hampshire, etc) when the cameras weren’t there? It’s one thing to snap after you’ve been getting the job done through herculean efforts on your part and some twerp heckles you as you’re explaining some point. What Christie has done is put New Jersey through 8 bond downgrades, still has it as the worst state for business, on the biggest issue facing the state he punted to some study commission that is now 30 days late in submitting some report and still runs a the most corrupt state in the union (I’m guessing here based on how Union County continues to get away with their fiscal shenanigans).

      I thought he should have been gone earlier this year:
      https://burypensions.wordpress.com/2014/01/09/impeach-christie/

      and it (the situation) and he has gotten worse since.

      The Des Moines register probably said it best when it wrote his presidential obituary:
      “It feels almost like it used to when everyone was waiting to see what Rob Ford would do next. But Toronto’s former mayor was at least comical — Christie, not so much. As he jets around promoting candidates as head of the Republican Governors Association, one can’t help wondering when the next shoe will drop and what hopes it will dash.”

      http://www.desmoinesregister.com/story/opinion/columnists/iowa-view/2014/10/30/chris-christie-tantrums-turnoff/18215561/?utm_term=%5B%27Wake+Up+Call+NJ%27%5D&utm_campaign=%5B%27Wake+Up+Call%27%5D&utm_source=%5B%27Sailthru%27%5D&utm_medium=%5B%27email%27%5D

      Reply

  4. Posted by truthnolie on October 31, 2014 at 12:05 pm

    Said it before and I’ll say it here again…..his “Jersey tough guy, Tony Soprano” act will never fly in the midwest or south (or probably the west coast) and if he runs he’ll lose by a landslide.

    What is totally amazing is how people in this state (and many who post here) think he is some sort of hero of a bygone era who “gives us hell” when in reality he is just a corrupt, pathological lying demagogue lacking any redeeming qualities when you take off the rose colored glasses and see what he really is all about.

    Reply

    • Posted by Tough Love on October 31, 2014 at 1:01 pm

      Somewhat true, but when Gov. Christie says that we (the State, meaning taxpayers) don’t have to money to pay for the “sins of the past”, …. meaning the hugely over-promised but under-funded pension promises made by PAST politicians…. he is telling the truth and right on the money.

      Which is WHY, these Plans will hit pay-go (zero assets beyond returnable contributions of “actives”) in 3-5 years. And, if you think that even our Democratic legislators will raise taxes by $5 Billion to continue full pension payments, then I suggest you change your comment name from truthnolie to “big-boob”.

      Reply

  5. Posted by MJ on October 31, 2014 at 4:51 pm

    Either way, somebody has to take the fall, just a matter of who, what and when. Christie is nothing but a bag of hot air. Nobody is any better off now than when he took office. Taxes still went up, real estate taxes still the highest, no significant pension reform, no help to struggling families, he is nothing more than smoke and mirrors. Completely inappropriate with the way he reacts and yells at people. Meet with the person privately is something needs to be resolved in a mature manner. That’s what real leaders do both privately and publicly. Was that his wife standing there and laughing at his outburst. Disgusting.

    Reply

    • Posted by Tough Love on October 31, 2014 at 5:21 pm

      And there are only TWO “who’s” …. the Public Sector workers/retirees and the Taxpayers.

      My best guess (quite soon) …. a small increase in taxes (perhaps to “millionaires”) coupled with a BIG reduction in retiree healthcare subsidies, with the reduction in healthcare subsidies being used to continue pension payouts for a bit longer. A temporary solution at best.

      W/o VERY material (50+%) reductions in the pension accrual rate for the FUTURE Service of all (State AND Local Plan participants) CURRENT workers, we’re accomplishing almost NOTHING.

      Reply

  6. We have a significant breakthrough in Illinois on actuarial work. TRS’ actuary, Buck, yesterday delivered a radically new form of report highly critical of the state and very readable. We’ve been bitching to get this for years and an honest actuary in Illinois, Tia Sawhney, had filed a complaint. Results finally. See http://wp.me/p2Oseh-4UG

    Reply

    • Posted by Tough Love on November 1, 2014 at 9:46 pm

      Interesting. Looks like Buck may now be concerned less about keeping this business engagement than covering it’s ass (and building some protection from possible lawsuits when these Plans fail) with a much more forthcoming Report as to the shortcomings of the funding of Illinois pension Plans.

      Reply

  7. Posted by Andy S. on November 4, 2014 at 2:36 am

    Just curious, what is Social Security’s funding percentage? I bet you anything that if you divided the trust fund balance by the present value of all promised benefits, it would be substantially less well funded than any of the Illinois pension systems. Yet, somehow, this is not a problem. Why must state pensions be fully funded when Social Security has always essentially been pay as you go? I get that the Federal Government can print money while states cannot, but this is NOT an important distinction as a practical matter, because funding SS that way would lead to ruinous inflation. The bottom line is that both the feds and states have taxing power, and so long as taxes can be increased – and they can be, because we are far from the inflection point on the Laffer curve – there is no real crisis, only a manufactured one.

    Reply

    • Posted by Anonymous on November 4, 2014 at 3:39 pm

      FYI …….. The “Federal” Gov’t has a money tree (called a printing press). The last time I looked, States and Cities do not.

      But even putting that aside, with ZERO changes, current revenue will continue to be able to pay 75% of promised benefits forever …. and rather minor tweaks can fix that (gradual Full and Early retirement age increases, wages base increases, etc.).

      And not to be lost in this discussion, when you factor in BOTH the MUCH MUCH richer State and Local Public Sector pensions AND the much richer provisions (such as VERY young full/unreduced retirement ages), SS typically provides only 1/4 of the benefits of the ALWAYS grossly excessive Public Sector pensions.

      So picking on SS to attempt to justify the grossly excessive Public Sector pensions (AND benefits) is simply nonsense.

      There is ZERO justification for Private Sector taxpayers to fund such rich pensions and benefits for Public Sector workers.

      Reply

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