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By: Mark Glennon*


Detroit last week gave us a glimpse of what to expect on a much larger scale in Chicago and across the country as the sheets are gradually pulled off on public pensions.


Reality ultimately invalidates wrong assumptions. In the public pension world, that means taxpayer liabilities eventually will spike. Scapegoats will be found, fairly or not. Lawsuits will come. Heads must roll as anger erupts — all financial meltdowns are that way. Officeholders and voters bear primary responsibility, but that won’t matter.


Detroit’s mayor announced the startling (to some) conclusion that the city’s two pensions, even after liabilities were reduced in bankruptcy, face a long term shortfall of almost $500 million that wasn’t anticipated or incorporated in its reorganization plan. Somebody must be to blame and ought to pay, he figures, so he asked his legal department to look into who he can sue.


Some background: Prior to bankruptcy, Detroit officially reported its pensions were in pretty good shape — over 90% funded, based on work by Actuary A. After filing for bankruptcy, Detroit’s emergency manager thought that was too optimistic and ordered a new report from Actuary B, which concluded the pensions were in far worse shape — under 60% funded. Detroit based its reorganization plan on Actuary B’s work, and bonds and pensions were cut based on it. But Actuary B was still too optimistic, Detroit is now saying, which is why the funding schedule approved in its bankruptcy will be almost half a billion dollars short.


And here’s a strange part: It’s Actuary A that’s now reportedly advising Detroit that Actuary B’s work was too optimistic. Actuary A was already sued for allegedly understating pension problems in its pre-bankruptcy work.


Whatever. The point here is not to figure out who, if anybody, is blameworthy in Detroit. I don’t know. Detroit is alleging its new shortfall results from use of a mortality table that was too optimistic, but that’s a complex issue in this case that reporting to date hasn’t really covered, according to a couple actuaries I talk to.


The point, instead, is what Detroit portends and the lessons it offers:


• Blame for unfunded pension liabilities far beyond those officially reported will be imposed. Other assumptions used by pensions besides mortality tables are suspect if not outright senseless. When experience voids them, politicians and taxpayers will want blood. But they, most reporters and juries still won’t entirely understand pensions, so don’t expect any fairness in who gets smeared or sued.


• Consider the next levels of liability. Detroit’s anger reportedly is focused on an actuary and, perhaps, its former emergency manager and his law firm, which negotiated the reorganization plan. But think about bondholder reaction as pension projections prove false. Once their damages are ascertainable, isn’t litigation against a range of municipal bond industry regulars, including law firms, rating agencies, underwriters and accounting firms all but certain? That kind of litigation attracts the most aggressive class action lawyers.


Again, actual guilt won’t necessarily matter. Remember Arthur Andersen? The entire firm was shut down over its accounting work for Enron, throwing thousands of people out of work who never heard of Enron.


• Even bankruptcy won’t help if defined benefit pensions are maintained. Detroit’s experience shows their core deficiency, which is that taxpayer liability for them is little more than biased guesswork making a reliable reorganization plan — or any other rational fiscal plan — impossible. As now-retired U.S. Bankruptcy Judge Steven Rhodes warned Crain’s Detroit last year, “cities need to consider switching to 401(k)-style defined contribution plans in order to grapple with mounting liabilities.” Detroit blew its chance to do that.


Dozens of Illinois municipalities have pension problems far worse than Detroit’s, whether before, during or after its bankruptcy — including Chicago. The stone silence of much of Chicago’s business community about the severity of our crisis has many causes — laziness, ignorance, crony capitalism and cowardice about confronting political leadership intent on denial.


But there’s probably one other factor at work, which is fear of liability. It’s safe to assume that nothing written here would surprise people in law firms, actuaries, ratings agencies, underwriters and accounting firms who have worked on pensions and bond transactions. Some have to be, well, peeing in their pants — even the ones that behaved honorably.


Politicians will want scapegoats. Plaintiff’s lawyers will want deep pockets. It’s just a matter of time.


*Mark Glennon is founder of WirePoints. Opinions expressed are his own.






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Actuaries can’t be sued, because they are just estimators. So their estimates were off a little, you can’t sue for the accuracy of an estimate, unless their contracts specifically stated that their estimate would be within a certain range of error. The blame lies in those who actually acted on the estimates with other people’s real money. The schmucks who believed the reports, then believed them again after tests in the marketplace proved the estimates wrong, but continued believing their own eyes. Cash accounting is no way to run a government.

mark glennon

Anybody can get sued if the claim and the facts are right, but I sure agree with the rest of your comment.

J. A. Herzrent

Actuaries were agents of fiduciaries and were acting in a fiduciary capacity. They knew or should have known that lawyers and CPAs would be relying on their “estimates” in the issuance of financial statements and in the contribution decisions of pension sponsors. They were accepting trust funds in payment of their services. They were, in effect. the guardians at the gate. To paraphrase the late great Johnnie Cochrane, Guardians At the Gate; They Cannot Skate.

Tough Love

Most Professional Sec vices contracts involving actuaries providing professional services to Public Sector pensions contain provisions that limit their liability to 1 or 2 year’s fees ……. far below making the legal costs worthwhile … IF those provisions cannot be broken.

J. A. Herzrent
The liability limiting clauses are part of a contract with the plan sponsor and/or with the plan fiduciary. The clauses may or may not hold up — fiduciaries and their agents have legal duties to the trust and to the public. And when they know that their liability “estimates” will be used in audited financial statements presented to bond buyers, the clause in the contract is unlikely to protect them because the actuaries have no contract with these buyers. Aiding and abetting fraud and misrepresentation should not be excused where the harm has reached as far as it has. We’ll know something in five or ten years… Read more »
Tough Love

The award-winning performance I’m anxiously awaiting is the squealing from the workers when their pensions are rightfully cut-back from the fraudulently-granted levels (their Unions BOUGHT from our elected Officials with campaign contributions and election support) to the level that likely would have been granted in the absence of that collusion.

Greed HAS consequences.

J. A. Herzrent
I agree on who should bear the consequences; the union employees and pensioners have swindled the taxpayers by gaming the political system. If we have a disagreement, it is how to get to that result without spending more public funds paying the lawyers for both sides. Bankruptcy may (or may not) get to the desired result. Cutting off the funding would eventually do that, but not before the older employees and retirees had bled-out the funds that already have been set aside. We can’t ignore courts and politicians who will continue to keep the banquet going as long as they can. The sooner taxpayers elect people who… Read more »
Tough Love

Quoting ….. ” Ultimately, it looks like the taxpayers have the upper hand because that’s where the money is now.”

AND, should the Public Sector workers get and KEEP the upper hand …. meaning FAR FAR greater taxes ….. PRODUCTIVE Taxpayers (those who pay high taxes) can move their homestead and businesses to more Tax-friendly States/Cities.

Check out Sandy Springs GA, a panacea for those fed-up with the decades-long financial “mugging” perpetrated upon Taxpayers by the insatiably greedy Public Sector Unions/workers.

J. A. Herzrent
Sandy Springs is MY kind f town. Moving away (as most of the productive people and companies did from Detroit and Flint) is the response to be expected. Relatively few property taxes paid on empty factories. Those who have dined briefly and well at public expense now want the rest of us to keep their good times rolling so they can enjoy risk-free old age … probably in a pleasant place with low taxes and good medical care paid for by those who remain in Chicago. Thanks to the departing public servants for the great school system you will leave behind. The great housing, the safe streets,… Read more »
Rex the Wonder Dog!
One issue I have repeatedly pointed out in CA where pensions were juiced, due to actual fraud on the part of CalPERS, is that cases where fraud was an issue could be brought under a civil RICO action, and it could name anyone and everyone, including the public unions who were involved in drafting such give-aways, the politicians who failed to conduct due diligence and the real perpetrators, pension funds themselves who pushed for and received juiced benefits (of any kind) based on fraudulent statements. In CA CalPERS fraud was the claim that SB400, the grand daddy of pension giveaways, would “not cost a dime” upon which… Read more »
Rex the Wonder Dog!

We ALL know this is not going to get fixed, or end well, until it implodes…so I say…Sit back, grab a bucket of popcorn, and enjoy the show.

Tough Love
You couldn’t be more correct, but we SHOULD keep in mind that much of the assumption/methodology “game playing” was to make the costs of the promised pensions (and benefits) look lower than their real cost was BECAUSE the promised pensions and benefits were simply WAY too generous (and always multiples greater in value at retirement than those granted Private Sector workers who retire at the SAME age, with the SAME pay, and the SAME years of service). That grossly excessive pension/benefit “generosity” is indeed the ROOT CAUSE of the problem……. NEVER being necessary (to attract and retain a qualified workforce), just, fair (to taxpayers), or affordable. Which… Read more »
J. A. Herzrent
This is absolutely correct. Bankruptcy is one solution, although the judge may (as in Detroit) favor pensioners over other creditors. However, no court can raise the citizens’ taxes. Only the legislature can raise taxes (subject to the governor’s right to veto). While pushing for bankruptcy, Taxpayers should also seek to elect legislators who will hold the line on tax increases and refuse to appropriate more money for pension contributions. While these efforts are going on, someone should figure out a way to keep those already retired from emptying the leaky bucket in the next five years (or however long the trust fund is slated to last —… Read more »
Peter A Quilici
The dampening of undergarments should extend to the errors and omissions insurers for the involved professionals. Assuming the potentially triggered coverages offer cost of defense, I expect the legal defense bills will be astronomical. If the defense costs erode coverage, many lawyers, actuaries, etc. may start squealing when it appears their defense costs and liability exposure are poised to hit their personal assets. Additionally, I am awaiting a full and thorough hearing on two issues in litigation: 1. Whether a state court judge entitled to a pension is required to recuse himself or herself from government pension litigation; and, 2. Whether many of the pension deals could… Read more »
J. A. Herzrent
Interesting points from Peter. Many of the E&O policies exclude coverage for fraud & for knowing violations of securities laws. The CPAs and actuaries may not be as culpable here, but the lawyers …? I imagine a lot of malpractice carriers are closely reading their exclusion clauses. And the professional firms are researching again how much personal protection is derived from becoming corporations or LLC’s. Consider, especially, the law ffirm conflicts of interest. Whom can they hire to defend them, with so many potential defendants’ counsel having banks, bond-holders and municipalities for clients? How did Jones Day represent Detroit in the bankruptcy when they also act as… Read more »
Great article Mark ! Maybe Detroit should sue the govt ‘ee unions for misleading and fraudulent cost-projections of the pay and bfts pckgs that were negotiated, ostensibly in good-faith ? Nah, that wouldn’t work. The legislators who agreed to the pension formulas should have known that you can’t promise pensions this rich and this early, under assumptions of 8% long term investment earnings. Because then you’re screwed if the earnings are actually 4% (which is closer to the truth since 1/1/2000, the last 16 years). Must be conservative in the assumptions, in determining whether pension formulas and ages of full retmt are affordable. And that was not… Read more »
Rex the Wonder Dog!

Wow, I just made the same type of comment, before even reading yours. Truth!

J. A. Herzrent
The bond lawyers have been loading up the debt for decades and failing to disclose (or actively obfuscating) the pension debt. The state agencies who approve the bond issues treated pension debt as irrelevant even though the pensions were ostensibly protected by the constitution. The lawyers “relied on” the CPAs and the CPAs “relied on” the actuaries, so the finger-pointing will require a Bolshoi coreographer. Even though these experts were familiar with FASB rules on disclosure, they hid behind the GASB standards which lagged FASB in implementation. (So arguably the accounting board was complicit.) Everyone knew that health benefits were unfunded and the state supreme court had… Read more »
mark glennon

Great points. It’s indeed that daisy chain of reliance by professional firms that is mighty suspect.

Sure appreciate the very informed commenters we have here, like you.