With any luck you’ll die soon: Part 4, Misleading the village board

September 1, 2015 | Actuaries, Bankruptcy, Cities, Doublethink, Illinois, Investment, Municipal bankruptcy, Pension funds, Principal-agent risk, Real estate taxes, Speculation, US News | No comments 135 views

[Continued from yesterday’s Part 3 and the preceding Part 1 and Part 2.]

By: David A. Smith

‘But don’t give up hope.’

The pension-fund doublethink takeover described in earlier parts would have triumphed indefinitely, but for two events: the collapse of asset values in 2008 which dragged financial failure and financial chicanery into the light, and the rise of armchair experts who, by virtue of the Web’s ubiquity and public-sunshine access to information, were able to piece together what was going on, and to send up individual blog flares of outcry.


They’ve been lying to us!

Principal sources used in this post

The Wall Street Journal (2 June 2015; brick red font)

New York Times (8 July 2015)

New York Times (July 10, 2015; forest green font)

These could be seen and picked up by others.

Mr. Palermo, who works in financial services, determined Mr. Sharpe [village actuary] was using a table from 1971, which tracked a group of people born from 1914 to 1918, who retired from 1964 to 1968.  It is seldom used these days.

Yes, there’s been no medical advances, or changes of diet.  How about decline of smoking between 1971 and 2015 (cool gif here)?


In 1970, Americans annually smoked roughly 115 packs of cigarette per adult


By 1990, consumption was down to ~90 packs annually


By 2012, we were down to just over 50 packs a year

Does a 60% drop in smoking suggest perhaps your 1971 table might be obsolete, and that you’d better use an updated one?


How should I know?  I’m just the actuary

A table from 2000 is considered more accurate, and in 2014 the Society of Actuaries issued an even newer one.

Reading this story, one perceives the Society of Actuaries struggling against the coils of doublethink.

Mr. Palermo researched mortality rates in the American work force and found no evidence that police and firefighters die younger than other public workers. Finally, he sent a confidential complaint to the Actuarial Board for Counseling and Discipline, which deals with actuaries who stray from the profession’s standards of practice.

Good for him!


You won’t be in the club any more if you do that

A few months later, his complaint was written up in a village manager’s report and distributed at a public meeting. Mr. Palermo had accused Mr. Sharpe of making statements that were “frequently erroneous and incomplete,” it said. He had accused Mr. Sharpe of misleading the village board and persuading it to incorporate the wrong mortality assumptions into the local tax levy.

The news media pounced.

Yes, the media can’t follow abstruse logical argument, but they can read ‘misleading’ and love tearing somebody apart on fragmentary evidence.


I smell … smear campaign!

The village manager’s report strongly suggested that Mr. Palermo was a troublemaker with few allies in the local government.  It said he had acted on his own and that most of the village board was on Mr. Sharpe’s side.

As if arithmetic was something to be decided by committee vote. 


Oh, I forgot; to a politician, arithmetic is fungible.  Polls move; deficits are abstract and future; everything is beyond the political event horizon (the next election).  To a policy maker, the purpose of political capital is to make permanent beneficial change; to a politician, it’s to make more political capital.

Mr. Sharpe sent a letter [February 7, 2013] to The Doings, La Grange’s newspaper, saying that he had the unanimous support of the police and fire trustees. “I will not be intimidated,” he wrote.

We are, of course, delighted to hear Mr. Sharpe wasn’t intimidated.


Are you the company you keep?

In a phone interview, Mr. Sharpe said that he had been instructed to use the 1971 mortality table by the Illinois Insurance Department.  

Mr. Sharpe chose to offer a double defense: I was told to do it, and It’s better anyway.  Either of those by itself would be more credible than the two of them in combination.


You really want me to buy that?

If La Grange projected life spans the way Mr. Palermo wanted, he added, it would “be collecting taxes to pay for pensions to people assumed to live to age 120,” a needless expense.

 “In Illinois, our pensions start very early, at age 50 for police and fire,” he said. “There’s a 3% compounded cost-of-living increase that goes on for life. So the pensions at the later ages of life — I’m talking about after 100, for instance — get very, very large. The person who gets a $50,000 pension at age 50 would get a $250,000 pension by age 100.”

Mr. Sharpe is dissembling, for even if the benefits increase at 3% annually, the discount rate back to present value will be greater than 3%.

In a separate interview, Mr. Palermo said he could not discuss his complaint, which has been resolved

I presume that means a settlement between Mr. Palermo and the town with mutual releases, confidential, and non-disparagement provisions, provisions that do not apply to Mr. Sharpe (who was likely not a party to the settlement), leaving him free to say whatever he wishes, unrebutted.

– but said that by focusing on the oldest years of the mortality tables, Mr. Sharpe was diverting attention from the much more relevant middle years, where the probability of death was much greater in the 1971 table.  For 50-year-olds, for example, the risk of death was seen as more than double in 1971 than what is expected in the later table.


“It’s only a role.  I am an actress.” – Brooke shields, 1971

Neither man disclosed how the complaint was resolved. But their battle appears to have no clear-cut victor.

Only a person of supreme willful blindness would use mortality tables that overlook the massive decline in American smoking, to say nothing of the impressive rise of life-extending surgery and drugs. 

Mr. Sharpe, who now uses the newer mortality table, no longer consults for La Grange’s police and fire pension trustees. 

Though his conversion to common sense is welcome if absurdly belated, when intensively researching this (five minutes’ Google) I found that Mr. Sharpe really loves him some 1971 tables, and defends them vehemently – here, for instance, is a newspaper story on River Forest, IL from 2008:


What’s to worry about?

“Mr. Parry came in here every year saying, you better save for a rainy day, you better save for a rainy day,” Hoke observed. “They ridiculed him. They cut him off.” Hesitating a moment, Hoke added, “It’s raining,” then went on to accuse the board of routinely borrowing against the pension funds to pay for other budget items.

Sharpe expressed surprise that Tepfer took issue with his use of 1971 mortality tables, noting that the State of Illinois uses the same table. Tepfer, who said he uses updated 2001 mortality tables, responded, “Just because the state uses it doesn’t make it appropriate.”

That was in 2008, before things went so haywire:


Let me know when asset prices stabilize

Ppost-2008, those who pay have become much sharper in their questioning, and they have now the means to find each other and hence to support each other.

2008 is going to be seen as a double watershed era, a point where yet again, everything to do with financial markets (and even public-expenditure governance) changed, because it combined two intersecting phenomena:

1. The real estate asset price crash, which was catastrophe as essential precondition to fundamental reform.

2. The social-media explosion, an output of ubiquitous broadband coupled with the disintegration of the published-as-gatekeeper.  Now everyone’s ideas can get instantly into space, so instead of broadcasting (the maximum share of minimally interested) we have narrowcasting (the largest cluster of maximally motivated).

The crash roused from their couches those who until that moment were content to thumb-swipe on kitten pictures and Harlem-Shake videos, with the interim strategic goal of forcing everything into the public electronic realm.  The result is earthshaking change like this:


State and local governments will have to add hundreds of billions of dollars in retiree obligations to their books under rules enacted Tuesday that spotlight the growing costs of health insurance and other benefits owed to former municipal employees.


Now it all gets onto the balance sheet

Typically of a certain kind of journalism, this change – which is nothing short of seismic in its implications – earned only half a page worth of dry prose, but as the chart above shows, the effect will be in many cases to double the amount of liabilities towns and states are facing, and treat those liabilities just as if they were bond obligations. 

The new rules approved unanimously by the Governmental Accounting Standards Board, which sets accounting rules for states and municipalities, will require governments to carry their unfunded retiree-benefit obligations on their balance sheets—thus making their overall financial position look worse. Currently, governments are required only to disclose the benefit costs in the footnotes to their financial statements.

The result will be instant ‘book insolvency’ for those towns, cities, and states, followed by taxpayer outcry as the voters and property owners face up to the extent that others who have heretofore presented themselves as victims of a cruel local administration are now revealed to have a Rumpelstiltskin claim on the next decades of town revenue.  Voter revolts will ensue, as reported in the New York Times (July 10, 2015; forest green font):


We’re against it

The Actuarial Standards Board’s public hearing on Thursday was rare, reflecting mounting concern about the promises made to state and municipal retirees and the risk that actuaries might be blamed for fiscal disasters in places like Detroit, Chicago and New Jersey, where the promises now far exceed the money set aside. Puerto Rico recently reported that its main pension fund has only seven-tenths of a penny for every dollar the commonwealth has promised its public workers.

Those revolts will be accelerated when the Actuarial Standards Board takes the next step and compels greater disclosure of the sneaky and doublethink assumptions that have been used to overstate pension fund assets (absurdly high yield assumptions, counterfactual expectations of rising public employment with new young healthy workers paying into the system) and understate pension fund liabilities (mortality expectations).  The Board knows it must grasp the nettle, and is sick at heart having to do so.

“Everything I look at, I have found to be a study in obfuscation,” said Bradley D. Belt, a former pension regulator, who spoke near the end of a four-hour hearing by the Actuarial Standards Board.


“And you can imagine how I feel about obfuscation”

Mr. Belt is yet another one who woke up to the They-Live doublethink operation that had been running for decades – and was appalled at how he had allowed the world to be duped.


The scales fall from my eyes


And I see what’s really going on

From 2004 to 2006, Mr. Belt led the federal government’s pension insurance program, which covers company pensions but not those offered by states or cities.  

He acknowledged that he was not an actuary –


Just stop that ‘not an actuary’, okay?

Can we please stop already with the priesthood of actuaries?  Actuaries are simply people who use the same sort of compounding and discounting projections that today any normal person with an Excel help function can construct.  They are like pre-FIRREA appraisers, certified not by the public but by their own guild, and using the guild to create entry barriers for others.

– but said he had spoken with many of them who often told him they were pressed by politicians into reverse-engineering their calculations to achieve a predetermined result.

There’s the problem with actuaries, as it was for appraisers before FIRREA (the Financial Institutions Reform, Recovery, and Enforcement Act). 

[Continued tomorrow in Part 5.]

With any luck you’ll die soon: Part 3, Providing cover for elected officials

August 31, 2015 | Actuaries, Bankruptcy, Cities, Doublethink, Illinois, Investment, Municipal bankruptcy, Pension funds, Principal-agent risk, Real estate taxes, Speculation, US News | 1 comment 58 views

[Continued from yesterday’s Part 2 and the preceding Part 1.]

By: David A. Smith

‘You are a difficult case.’

By now our exploration of yet another piece of the doublethink canon – the role of actuaries in understating future pension-fund obligations (and overstating expected future contributions by new participants) has revealed that the takeover, like many a takeover, acted with slow steady clandestine purpose and execute the coup before anyone noticed it had happened.

Principal sources used in this post

The Wall Street Journal (2 June 2015; brick red font)

New York Times (8 July 2015)

New York Times (July 10, 2015; forest green font)

Having done so, they wished their takeover to remain hidden until enough time had past to make it almost irreversible.

Other commentators have focused on the opacity of actuaries’ calculations and reports to the boards of trustees that govern public pension plans.

Doublethink requires fog.



“I foresee no problems”

Trustees need clear and honest projections and do not receive them, wrote a former pension trustee from Kentucky, Christopher Tobe, author of Kentucky Fried Pensions.


Tobe for Treasurer, or not tobe?  That is the question

He recalled seeing an assumption for future investment returns jump with no explanation from 4.5% to 7.75%.

Mr. Tobe also wrote this:

Based on my experience as a trustee I think there need to be tougher standards for rationalizing assumptions to protect honest actuaries from political pressure, and punish those dishonest ones who cut deals.


Chop off their tables!

While for the last 8 years Kentucky Government has shrunk in size, and is expected to not grow, the actuarial assumption of a 4.5% growth in payroll has been kept at KRS and related pensions.

It’s clear that the actuaries who testified see the pension funds’ actuaries as sustaining fraud against common sense, for instance in Detroit’s pension-fund doublethink,

Aside from issues of yield rates and inflation rates, any insurance or retirement plan also depends on two demographic streams:

1.  Spenders to workers.  The ratio of (R) Retired workers receiving benefits over (W) the number of current Workers paying in to the system.

2. Spendspan-to-earnspan.  The ratio of (L) Lifespan of benefits to the average retiree over (E) the Earnings career of the average current worker.

When the workers outnumber the spenders, then the burden of paying current benefits to retirees is distributed among more earners.  When Social Security was enacted, there were roughly 40 workers per 1 retiree; today the figure is under 3-to-1.


At some point the numbers don’t work any longer

When the years you spend a pension are short compared to the years you worked to earn it, the same favorable multiple-inputs-per-output dynamic works.  Again, when Social Security was created a man would work 40+ years, then retire and expect to live 13 more; today people retire after 25 or 30 years’ work [Not you! – Ed.], then live 10-15-20 or more years – a 3-to-1 ratio has become less than 2-to-1.

Actuaries putting together estimates of plan viability have to make forecasts of R, W, L, and E, and central to these projections has always been that America will keep growing, America’s cities will keep growing, and its public-employee workforce will grow at least as fast as the rate of population growth. 

Kentucky’s willingness to believe in continued new fools being hired by the state government, paying in to the system to enable the old sorts to retire with their defined-benefit pensions.

This has led to an overstating of funding probably in the hundreds of millions.

In other words, says Mr. Tobe, the pension fund is woefully underfunded and this is being doublethink concealed.

Kentucky (within the KRS system) has now what I think is approaching a 14% funded (worst-in-nation) pension KERS, which has had its investments commingled with the 60% funded CERS pension.

KERS 14% is mostly explained by receiving 50% ARC payments. However by law Cities and Counties pay every year 100% of the ARC payment and the actuary cannot (or will not due to political pressure) explain why the CERS plan is only 60% funded.

His testimony all but accuses of fraud the KRS actuary and several others who are unnamed but clearly enough described to be identified.

The change [boosting expected return from 4.5% to 7.75%] lowered the state’s pension obligations by more than a billion dollars, which in turn meant smaller contributions.

Couple that with the assumption of imaginary new employees making payments and it’s no wonder the KRS pension fund over-promised and over-promised to the point where it’s the nation’s worst-funded.


Well, that’s unfair as you’re comparing us with people who do better than we do

Another commentator, Mark Glennon, told the board that actuaries were churning out reports that no one but other actuaries could understand, providing cover for elected officials who were letting problems spin out of control.

The more I encounter these and other comments, the clearer it becomes that there’s a movement afoot: a movement by technocrats to take government back from those who, whether out of innumeracy, optimism, or venality, were willing to pile ever more debt and future obligations onto cities and states.

An actuary could have looked only briefly at some of its pension reports from years ago and seen the calamity to come.  Reporters, political leadership and most pension trustees could not.”

Most reporters, and most political leaders, can be given a pass for not knowing these issues.  Pension trustees cannot. 


Failure to understand the implications of the financial projections on which a pension fund was making binding multi-decade commitments is every bit as reckless as a climbing into the cockpit of an airplane with blacked-out windows

“Those who could understand were able to remain silent.”

Silence is essential to the code of doublethink.

Important sources relevant to public-employee pension funds

California’s self-tying knots (February 27, 2012; 5 parts)

[San Bernardino] Innumeracy precedes insolvency; December 4, 2012; 4 parts)

[Detroit] The fall of the Roamin’ Empire (September 25, 2013; 5 parts)

Stock-taking (October 15, 2014; 2 parts)

[Detroit] A fleeting miracle? (December 31, 2014; 2 parts)

[Detroit] Doublethink pension funding (January 5, 2015; 10 parts)

In re City of Stockton (pdf, also available in text here), issued February 5, 2015

[Stockton revitalization] Folly or catalyst? (May 13, 2015; 3 parts)

[Stockton: The curse of the gray PERL (June 9, 2015; 9 parts)

Until the rise of social media and the web, expert whistleblower voices were easy to marginalize, because the means of communication were monopolized by those who excluded technocracy in favor of headline.  Now they are not, and those with deep technical expertise can at least get their message out – and that allows them to connect with others of similar or complementary technical expertise.

Now they are enabled to come forward:

“Chicago represents the most glaring example,” wrote Mr. Glennon, the founder of an online news service, WirePoints, which covers the fiscal morass in Illinois.  


Broadcasting live from the morass

A quick glance at Mr. Glennon’s site reveals a handful of articles absolutely worth reading, with great teasers like this: “A particularly fine editorial on why the attempt to override Rauner’s veto of the labor arbitration bill may indeed be the “worst piece of legislation ever passed by the General Assembly.”

In La Grange, Mr. Palermo, who was elected in 2007, thought the pension funds were being shortchanged. More and more police officers and firefighters were retiring, and they were not dying according to the mortality table used by the actuary.

Where’s black lung disease when you need it?

Between them, the two pension funds had less than half the money they should. If this continued, he said, the money would eventually run short, and people would get hurt.

And not just in La Grange. The actuary, Timothy W. Sharpe, had the biggest market share of police and fire pension business in Illinois.

As we saw in California, if you want to loot a pension fund without causing a fuss, hire your pet actuary. 


You’re protecting me, aren’t you watch dog?

In fact, Mr. Sharpe is many Illinois cities’ favorite actuary, as reported a year ago in the Forest Park Review (September 9, 2014; buff blue font):

Sharpe earns about $3,500 per valuation.  He has a niche market and has prepared actuarial valuations for around 160 Illinois public safety plans – or more than 70 percent of Illinois towns that used a private actuary.

As Mr. Sharpe’s company employs a staff of “approximately 1 to 4”, he will be making a tidy living, and he’s also been doing it for many years.

He is, in short, a captive of his clients.


Yes, mighty Jabba, two and two does equal five

“I think it’s a moral hazard,” Mr. Palermo said.

Of course it is.

[Continued tomorrow in Part 4.]

With any luck you’ll die soon: Part 2, Misunderstood or unread

August 28, 2015 | Actuaries, Bankruptcy, Cities, Doublethink, Illinois, Investment, Municipal bankruptcy, Pension funds, Principal-agent risk, Real estate taxes, Speculation, US News | No comments 95 views

[Continued from yesterday’s Part 1.]

By: David A. Smith

‘It might be a long time,’ said O’Brien.

Yesterday’s post opened yet another chapter in the continuing unraveling of the pension-fund doublethink belief system, by focusing on the role of actuaries in understating the cost of future retirement annuities by overstating the rate at which the beneficiaries were likely to die (and hence to snuff out their annuity obligations).

Principal sources used in this post

The Wall Street Journal (2 June 2015; brick red font)

New York Times (8 July 2015)

New York Times (July 10, 2015; forest green font)

They were able to do so because the closed circle of doublethink cabalists controlled the information, and those outside were isolated from one another and unable to put the pieces together.  With the Great Recession and the rise of broadband connectivity (web pages, social media), the numerate have gradually awoken, one point of light at a time, to the scale of the fraud that has been perpetrated upon them.

It is only the second time in recent memory that the Actuarial Standards Board has held a public hearing, an indication of the gravity of the nation’s pension woes.

[It’s not the nation’s pension woes, it’s the public-employers’ pension woes. – Ed.]

The ASB took testimony from at least thirteen speakers, and received
written comments from 21 advisors, including Mr. Palermo, who stated:

In my role as Village Trustee in La Grange I relied heavily on reports from our actuarial consultant to make decisions on village spending and tax policy. I found those reports lacking contextual detail; frequently they were misunderstood or unread by my colleagues.

As it happened, I was able to locate and download one of Mr. Sharpe’s reports, for the Village of Clarendon Hills, and aside from the ‘usual’ highly generous vesting provisions –

Employees attaining the age of (50) or more with (20) or more years of creditable service are entitled to receive an annual retirement benefit of (2.5%) of final salary for each year of service up to (30) years, to a maximum of (75%) of such salary.

[Work thirty years, paid the whole while and with full medical, then retire with 75% of your salary for the rest of your life: yes, that seems generous – Ed.]

– aside from the vesting provisions, the report provided a whole series of numbers, together with a list of the assumptions that went into them, but omitting (x) any of their calculations or analyses, (y) any sensitivity analysis, or (z) any contextualization of the assumed yield rates or mortality rates or how these compare with market comparables or recent market behavior.

State and local governments have promised several trillion dollars’ worth of benefits to retirees — the exact amount is in dispute.

Whatever number they quote will be too low.


The sky’s the limit!

Now, with large numbers of public workers retiring, the money set aside is turning out to be at least a trillion dollars short.

Tell that to the Greeks, the Spaniards, and the Puerto Ricans.

Taxpayers are in no mood to bail out troubled pension funds.  

Some are looking for scapegoats.

‘Scapegoat’ implies that the catastrophe is no one’s fault.  That is not so.  It is many people’s fault


As Poirot discovered, they were all in on it

“Actuaries make a juicy target,” said Mary Pat Campbell, an actuary who responded to the board’s call for comments.

Certainly stupid or crooked ones do – and I expect that’s what Ms. Campbell meant, given a comment I found in an interview she gave:

For my research job, my main peeve is talking with reporters who don’t do their homework (or expect me to write their articles with absolutely no credit).”


Peeved by the innumerate and impatient

She expressed concern that elected officials were using actuaries to lend respectability to “questionable behavior” like funding pensions with borrowed money, picking risky investments and “enacting benefit improvements based on lowballed costs.”

They absolutely were, as I demonstrated, at terrifying length, first in my ten-part series on Detroit:

Let us be clear: the system America has used for decades to create and pretend to fund public-employee pensions is nothing short of a massive doublethink fraud that will progressively explode throughout this decade, damaging millions of people involved in it wittingly or unwittingly. 

An underfunded plan today – and make no mistake, virtually every public-employee pension fund in America is underfunded, some as much as 60% underfunded – has only three endgames:

1.     Insolvency and collapse, with plan dissolution and payouts at percentages of face.

2.     Continued underfunding and irresolution.

3.     Restoration of solvency through asset replenishment faster than liability accumulation, which can be done either (a) with radical surgery, as through electroshock recapitalization, or (b) over a forced-march of years or short decades of above-equilibrium contributions.

And really, Endgame 2 is no strategy at all, because as we’ve seen, a pension without a strategy becomes progressively more insolvent.  So, as Andy Dufresne put it in The Shawshank Redemption, Either get busy living or get busy dying.”


Even if you have to crawl through a river of shit to come out clean the other side

Today, however, most doublethink pension funds are still busy dyin’. 

And then in California, with my nine-part series on CalPERS:

A well-written judicial decision is a work of it not art then fine craftsmanship, and an absorbing treat for those who are of the right disposition and interest and who have or can somehow wangle the time to read it carefully – and one such is In re City of Stockton (pdf, also available in text here), Case 12-32118-C-9, as decided by Christopher M. Klein, chief bankruptcy judge of the eastern District of California, whose ruling in the Stockton bankruptcy I originally thought unfair to a group of bondholders. 


A judge who will sleep better knowing that the AHI blog has validated his opinion: Christopher M. Klein

In parsing through the decision, I realized that not only is it fine work for itself – as a ruling in a municipality bankruptcy cast – it does much more.  In addition to settling some key questions once and for all (assuming that if appealed it is upheld, which I am confident it will be), it does two other tremendously valuable things, if only we have the wit to see them,

In that post, I went exhaustively into CalPERS’ legislative coup, enacting a law to make itself invulnerable to later political challenge, a stranglehold that the tentacular fund maintains today:


What do the actuarial tables say about your life expectancy?

The Public Employee Retirement Law (PERL) hands over fiscal accountability to unaccountable actuaries

[The law] allowed the PERS board to hire its own actuaries–experts who calculate the contributions needed to keep the fund sound–instead of using those named by the governor, as state law requires.

Translation: We become bulletproof and accountable to no one but the public-employee unions.


File all the legislation you want, see if I care

It was a bloodless coup, and the plotters spent big to make it happen:

Backers of the initiative raised $1.6 million by Sept. 30, Common Cause reported, while there is no organized financial effort in opposition.

Ron Roach of the California Taxpayers Association. said the change would “create a lack of accountability and give public employee pension boards–which often are dominated by public employee unions–control over the amount of taxpayer contributions, which are in fact taxpayer dollars.”

CalPERs controls the actuaries, and the unions control CalPERS.


All is clouded by desire

The result, as Judge Klein methodically laid it out, is a board that is controlled by public employees’ representatives:

Once a municipality agrees to a CalPERS contract, the CalPERS board gets into a position to block changes in the municipality’s pensions by saying a local change would adversely affect the system. 

These PERL provisions creating the termination lien and the immunity from Bankruptcy Code contract modification are non-uniform. They selectively protect only CalPERS and CalPERS pensions. They do not apply to any other California municipal pension.

How on earth could the great state of California be so asleep in 1992 as to allow this lock-stock-and-barrel takeover of a chunk of state government by a self-interested body?


We were multitasking

Though back then I asked the question rhetorically, the answer is practical: they were artfully, aggressively, and consciously deceived.

[Continued tomorrow in Part 3.]

With any luck you’ll die soon: Part 1, Not dying on schedule

August 27, 2015 | Actuaries, Bankruptcy, Cities, Doublethink, Illinois, Investment, Municipal bankruptcy, Pension funds, Principal-agent risk, Real estate taxes, Speculation, US News | No comments 147 views

By: David A. Smith

‘Tell me,’ he said, ‘how soon will they shoot me?’

The longer a retiree lives, the more he or she should save for retirement, so if you’d like to save less today, plan on dying sooner tomorrow?


“I’m not scared of dying?”

Principal sources used in this post

The Wall Street Journal (2 June 2015; brick red font)

New York Times (8 July 2015)

New York Times (July 10, 2015; forest green font)

Even better is to talk someone else into funding your retirement, as long as you want to live, based on that person’s belief you’ll die soon, even if you know you intend to live longer.  The moral hazard risks of this have dawned on even the New York Times (8 July 2015):

Bad Math and a Coming Public Pension Crisis

By Mary Williams Walsh

Busted US governmental entities appear to be Ms. Williams Walsh’s beat: she’s written regularly on Puerto Rico, Illinois, and pension issues.

When Jim Palermo was serving as a trustee of the village of La Grange, Ill., he noticed something peculiar about the local police officers and firefighters.  According to pension tables, they were not going to live as long as might be expected,


Why would the police and firemen be projected to die so rapidly?

Mr. Palermo has stumbled into the land of pension-fund doublethink.


And I’ll never grow up, either

Doublethink depends on horizons beyond which one is allowed not to think and where the sun never shines. 

Important sources relevant to public-employee pension funds

California’s self-tying knots (February 27, 2012; 5 parts)

[San Bernardino] Innumeracy precedes insolvency; December 4, 2012; 4 parts)

[Detroit] The fall of the Roamin’ Empire (September 25, 2013; 5 parts)

Stock-taking (October 15, 2014; 2 parts)

[Detroit] A fleeting miracle? (December 31, 2014; 2 parts)

[Detroit] Doublethink pension funding (January 5, 2015; 10 parts)

In re City of Stockton (pdf, also available in text here), issued February 5, 2015

[Stockton revitalization] Folly or catalyst? (May 13, 2015; 3 parts)

[Stockton: The curse of the gray PERL (June 9, 2015; 9 parts)

For the doublethinker, the horizon is information.  Any doublethinking will be encoded in jargon – comprehensible to other dialect-speakers but unintelligible to outsiders – that under no circumstances may be translated into plain speech.


So far, so good

For the beneficiary, the horizon is temporal, the unpredictable (and therefore unquantifiable) future.  If no catastrophe is certain within the temporal horizon, why worry about anything beyond that?


Nothing to worry about, as long as you feed me

For both groups, all future catastrophes are implicitly equivalent, so one might as well choose whatever works best, right here, right now.


I’m Walter Blunt – right here, right now

That mentality prevails until those who have to pay run out of money, or until they wake up to the imminence of inability to pay.

After Mr. Palermo dug into the numbers

Mr. Palermo’s no yokel; he’s “a director and securities analyst with Chicago Equity Partners,” which is “a multi-asset class investment platform with approximately $10 billion in assets under management.”


Advising on $10 billion of other people’s money; now advising on his own

– he found that the actuary — the person who advises pension plan trustees about how much money to set aside — was using a mortality table from 1971 that showed La Grange’s roughly 100 police officers and firefighters were expected to die, on average, before reaching 75, compared with 79 under a more recent table.

How would you feel if, after you’d taken out your loan, the bank wrote you saying it had decided to extend the loan’s maturity four more years, and you’d be making the same payments, just 48 more of them?


Four more years?

As we saw when exploring France’s en viager housing arrangement, annuities are the temporal mirror image of mortgages:


Turn a mortgage inside out and it’s an annuity

Like a mortgage in reverse, the longer the annuity runs, the more you need up front. 

When actuaries calculate the numbers for a pension plan, mortality rates are a powerful hidden factor. If an actuary predicts the workers will live to an old age, it means they will be drawing their pensions for more years. That, in turn, means the employer should set aside more money up front, to keep from running out later.

For public-employee retirees, the annuity’s term is the same as the en viager resident’s – the rest of your natural-born life.

Assuming shorter life spans reduces annual contributions and frees up money for other things, like bigger current paychecks.

Shenanigans like Detroit’s gratuitous thirteenth-month bonuses, San Bernardino’s benefits boosting, or anything to do with CalPERS.

And if the plan bases pensions on pay, as those in most American cities do –


Not trusting her readers to know what a ‘defined benefit’ plan is, Ms. Walsh chooses to skip over that after the emergence of ERISA (which doesn’t apply to public entities), private employers all shifted to defined-contribution (like everyone’s 401k), while the public employee unions clung to their defined-benefit plans – almost as if they knew they were getting something better than they should.

– shortening the workers’ life spans on paper could lead to both fatter paychecks now and bigger pensions in the future.

Pay me now and pay me later – what’s not to like?  Especially when it wasn’t the employees’ risk, it was the taxpayers – and the taxpayers didn’t know they were taking this risk.

In La Grange’s case, those four years meant tens or hundreds of thousands of dollars to each retiree.

To each retiree means from the taxpayers.

But if more workers are retiring and not dying on schedule –

Retire earlier, live longer; isn’t that what they’re encouraged to do?


– it can be a recipe for financial disaster.

Who could have been so dumb as to let the village agree to this?

The recommendations made by pension actuaries, like which mortality table to use, are largely hidden from public view, but each decision ripples across decades and can have an outsize effect.

As we saw in California, CalPERS made very sure that the public employee unions who were its economic bosses would be able to choose the actuaries, and that no one could remove them – thus guaranteeing that they could overload the pension system at will. 


You can’t remove us

On Thursday, a panel of senior actuaries will consider whether to update, or elaborate on, the existing actuarial standards for public pensions.

Belatedly, the numerate have groggily awakened to the many-hundred-billion-dollar fleecing they have allowed to happen to them.


Oh, my god, what did I sign last night?

The pension-fund madrigal

A fraud for many voices

[To be sung slowly, with rising triumphalism]

[Actuary] We defrauded you on the cost of making promises.

[Fund manager] We defrauded you on your ability to pay for future promises.

[Public employee unions] Based on our frauds, you made the promises.

[Accountants] Then you caught on to our fraud]

[Public employee union lawyers] Too bad you can’t rescind your promises.

[All]  Ha ha.  Ha ha!


And ha ha ha!

And ho ho ho!

You’re doomed and damned

And now you know

[Continued tomorrow in Part 2.]

Double-entry urbanization: Part 3, 1J = 1A + 1C

August 26, 2015 | Affordability, Apartments, Berlin, Cities, Economic development, Homeownership, Housing, Infrastructure, Land value, Markets, Rental, Supply and demand, Urbanization | No comments 80 views


By: David A. Smith

[Continued from yesterday’s Part 2 and the preceding Part 1.]

Any object, wholly or partially immersed in a fluid, is buoyed up by a force equal to the weight of the fluid displaced by the object.

 – Archimedes’ principle of buoyancy


Urban displacement is inevitable

While Philip Oltermann, Anglo-German correspondent of The Guardian (11 February 2014) [Author’s loaded phrases in boldface red , occasionally compared with a journalistically appropriate alternative in boldface green] either was ignorant of the First Law of Urbanization and Economics – rising city yields rising property values – or despaired of its consequences, and that blinded him to the Second Law, whose implications are unquestionably worse – falling property values = declining city – even though the city about which Mr. Oltermann wrote, Berlin, is a perfect century-long laboratory of a city on the rise, its fissure, its fall, and now its rebirth.


For nearly two centuries, people have been misunderstanding what I wrote … are you any different?

Multiply the First Law’s impact on Kopenhagenerstrasse 46 by several hundred other properties, and the result is a Hegelian synthesis that demonstrates the Third Law of Urbanization and Economics:


The back courtyard at 46 Kopenhagener Strasse, Berlin. Under the guise of ‘renovations’ to make buildings more environmentally friendly, landlords are pushing up rents.

4. Successful economies require continuous affordable housing investment

Unlike the First and Second Laws, which are primarily descriptive, the Third Law contains an implied imperative of action:

The Third Law of Urbanization and Economics

1J = 1A + 1C

Add +1 Job to the economy = Add +1 Apartment and +1 Commute

In a rising city, jobs are being added, and as they are, government must enable that growth to be sustainable by adding affordable housing and effective affordable transportation. 

According to Hanover’s Pestel Institute, the German capital needs an additional 500,000 affordable homes, but the city hasn’t built new social housing since the early 2000s, and at the current rate it would continue losing around 4,500 [affordable] homes a year.

The homes aren’t being lost, they’re being upgraded, and when that happens, they are gained by middle and upper-income people; they are lost only to the poor.

Currently, the city senate claims to have found funds to support the building of around 1,000 affordable homes this year. But whether they will be in the centre or towards the Brandenburg outskirts, remains unclear.

Of course they’ll be where it’s cheaperon the outskirts – unless the Berlin government has the good sense to develop a proactive and well calibrated inclusionary zoning or linkage policy.  Now’s the time to do this.

Berlin’s social housing stock is falling just as the demand is rising.

That is not a ‘just as’, it’s the compound outcome of the First Law and Third Law acting together.

Now many parts of Prenzlauer Berg look more modern than those in the old west of the city.

It’s called ‘urban renewal.’


Last squatters’ building before renovation during “Careful Urban Renewal”

The real threat facing Berlin at the moment, says Andrej Holm, a sociologist who writes a blog on Berlin gentrification, is not gentrification, but “gentrification without a rise in living standards”.

Being a sociologist, Mr. Holm can be forgiven his ignorance of the First Law, and I am confident he would embrace the Third Law and its imperative: Growing societies need affordable housing.  And as affordable housing does not exist in economic nature, it is created only when government plans for and funds affordable housing.

“The danger for Berlin is not that it will become like London, but that it will become like Paris, with the poor and elderly carted out to the edges of the city”, says Andrej Holm.

Mr. Holm can also be forgiven for not understanding Paris’s urban-housing dynamics or the history of its public housing high-rises.  They were built in the periphery as Paris expanded, so while the poor wound up in hideous isolation, they got there on move-in, not through urban renewal.

In upcoming areas such as Prenzlauer Berg, Neukolln and Kreuzberg, there have been numerous reports of landlords abusing the “energetic modernisation” rule: flushing out old tenants by announcing expensive renovations, only to then immediately put the flats on the market at a higher price without having made any significant improvements.

Since a number of these cases have gained attention in the media, the German government has promised a crackdown on such practices.

If Mr. Oltermann has his facts and his law correct (I’m skeptical because this sounds like oral history, which is always embroidered), then that is fraud and should be prosecuted.


Of course, such fraud possibilities are usually a side-effect of an overly-regulated system designed to suppress the market, and thus likely to be laws nullified more often than they are observed, but even so, if it’s the law (even an unwise one), it should be enforced.

The coalition agreement between Angela Merkel’s Christian Democratic Union party and the Social Democrats includes a pledge to bar landlords from signing new leases with rents that are 10% above the neighbourhood average, according to the guide to rental rates, the Mietspiegel (literally meaning “rent mirror”).

That’s a curious form of ‘soft rent control’, in that it will act (potentially) to slow the rate of increase per change, but probably result in shorter-term leases resulting in more frequent rent increases. 

Another cap would limit the period over which renovation costs can be passed down to tenants to 10 years – currently they can be passed down indefinitely.

Sunsetting rent increases approved to fund capital improvements is a step on the road to perdition (judicial rent control) because it makes no investment sense; it treats money being spent not as adding to the useful life of a building but as a maintenance surcharge, based (insofar as it has a logical basis) on the notion that after the ten years, the improvement will have ‘been paid for’ and will keep running, without obsolescence, without maintenance.  It would also be a nightmare to administer and track, as different improvements would overlap in time, and would entangle the city government in constantly oversight and quibbling with landlords and tenants.  Even New York City knows that (1) if you want affordability, provide government incentives (such as 421a tax abatements), and (2) such incentives should have a long running period (like 25 or 35 years).

Whether such proposals will solidify into legislation remains to be seen. Both investors and gentrification critics like Holm remain sceptical. They predict a gradual decline of the German tendency to favour renting and a growth in home ownership, especially in trendy areas such as Prenzlauer Berg.

Good God – homeownership?  Is nothing sacred?


Finally Mr. Oltermann stumbled upon the right question:

The poor and the elderly will be unaffected by the new rent cap – what they need is housing which is not at, but well below, the neighbourhood average.

As a consequence of the Third Law of Urbanization and economics, affordable housing always costs money – and that money must come, at scale, from government.  The sooner Berlin acts pro-actively, rather than reflexively, the better. 

NB: On Jun 29, 2015, Mr. Christmann posted that:

Just 4 month after sale launch, the last apartment in Kopenhagener Strasse 46 found new owners.  

Gotta love that circumlocution, as if the apartment was a lost soul desperately hoping to be adopted by a charming family.


Yes, we’re taking you to live with us in our magic castle at 46 Kopenhagenerstrasse

We congratulate our customers and are happy to handover the first finished apartments already in September.

Ignorance of the fundamentals of double-entry urbanization invariably leads populists (whether citizens or elected) into foolish first reactions, as the Guardian (1 June 2015) reported last month:

Berlin has become the first city in Germany in which rent-control legislation has come into force in a bid to put the brakes on some of the fastest rising rents in Europe.

From Monday, landlords in the capital will be barred from increasing rents by more than 10% above the local average. Such controls were already in place for existing tenants but have now been extended to new contracts.

Though the law may buy time for the City of Berlin to develop appropriate land-use and housing affordability incentives, if it’s regarded as a solution rather than a stopgap it not only won’t work but also will make things worse.

If the accounts do not balance, “that would indicate a mistake in your Ledger, which mistake you will have to look for diligently with the industry and intelligence God gave you.”

– Luca Pacioli,


It says so right here in the ledger