Detroit Pensioners Sue Actuarial Consulting Firm Over Allegedly Faulty Assumptions

Detroit

Lawsuits are rolling in against Gabriel Roeder Smith & Company, an actuarial consulting firm enlisted by pension funds across the country for advice on return assumptions and other calculations.

The firm has worked with Detroit’s pension funds for decades. Now, pensioners from several of Detroit’s public pension systems are suing the firm for playing a part in bringing the systems to “financial ruin.”

From the New York Times:

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.”

Lawsuits like the one Ms. Estes filed have also been brought against Gabriel Roeder by members of Detroit’s pension fund for police and firefighters, and the fund for the employees of surrounding Wayne County.

[…]

Gabriel Roeder said the three lawsuits “are factually, legally and procedurally infirm and reflect a gross misunderstanding of the nature of actuarial services.”

In a written statement, the firm also said that it was still providing services to all three pension funds and would vigorously defend itself against the lawsuits “without further public comment.”

More details on the lawsuits, from the Times:

The three lawsuits are separate from Detroit’s bankruptcy case. They were filed in Wayne County Circuit Court by Gerard V. Mantese and John J. Conway, Michigan lawyers who have tangled with Detroit’s pension system before. The lawsuits focus on the calculations and analysis that Gabriel Roeder provided to the trustees. Like many city and state pension systems, those of Detroit and Wayne County are mature, complex institutions, governed by trustees who do not necessarily have sophisticated financial backgrounds and rely heavily on the meaningful advice and accurate calculations of their consultants.

Detroit’s trustees did not get that, Mr. Mantese and Mr. Conway contend. Even as the city slid faster and faster toward bankruptcy, its workers kept building up larger, costlier pensions, and the actuaries “assured the trustees that the plan was in good condition.”

“Gabriel Roeder recommended that the plan could maintain and increase benefits,” Ms. Estes contends in her complaint, which was filed in September. That might sound odd, coming from a plan member who stood to enjoy any increases. But Detroit was making promises it could not afford, and Ms. Estes is also a Detroit homeowner and taxpayer who argues she was harmed as the city kept piling more and more obligations onto its shrinking tax base.

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.

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