Valley public pension mess linked to Bay actuary [The Fresno Bee, Calif.]

Apr. 12--Investment managers, labor unions and politicians often get the blame for exploding debt in government pension plans. But critics also point to a less familiar culprit: actuaries, the financial experts who are expected to make sure the plans are sound.

The case of one Bay Area actuary shows what can happen when mistakes are made in benefit calculations. Ira Summer and the firm he owns, Public Pension Professionals, have been accused of errors that cost local-government plans in California and Florida millions of dollars.

Some of the losses were sustained by Fresno and Kern counties, where growing debt is threatening the financial health of county pension plans.

Actuaries are responsible for the economic and demographic assumptions needed to make sure employees and employers pay enough money into a plan. They estimate how much money a plan will make from investments, how long retirees will live, what will happen to salaries and many other things.

Actuaries can hurt pension plans by overestimating investment returns. They also may underestimate how long pensioners will live or how much salaries increase, causing plan costs to go up.

Actuarial science is complex and involves risk -- it's essentially forecasting. But practitioners have to follow accepted standards or they can cost clients millions of dollars.

Pension boards approve the assumptions, but because they're based on complex information, board members often rely on the expertise of actuaries.

In separate lawsuits, Fresno and Kern counties successfully sued Summer and his firm for professional negligence. The San Joaquin Valley Air Pollution Control District won a judgment against Summer and his firm, which also have been accused of shoddy work by pension managers in San Mateo, Tulare and Imperial counties, and in Florida.

Insurance problems

Some communities might have skipped legal action because Summer let his insurance lapse in 2006. Summer said he couldn't comment for this story because he's involved in a dispute with insurers over his coverage.

Records show, however, that Summer has acknowledged mistakes in plans he handled. In 2006, when Fresno County's retirement board had his work audited, Summer promised to correct errors that were made, according to the board's minutes.

That same year, Summer told a retirement board in Palm Bay, Fla., that his firm had erred in some calculations, including a "stupid mistake" of wrongly listing an expense as being negative when it was positive, according to that board's minutes.

When a pension plan replaced Summer, the new actuary found an error by Summer had caused a "significant financial impact," according to a report last year by the Conference of Consulting Actuaries. The report doesn't identify the plan or the financial impact, and the conference won't discuss the report with The Bee.

Summer refused to help the actuary get to the bottom of the mistake and later failed to cooperate in the conference's investigation of his conduct, according to the conference, which took the rare step of publicly reprimanding Summer.

Summer has made millions of dollars by contracting with local governments in California, some of which retained him for several years. In one year, he made about $400,000 from five California counties where his firm provided actuarial service, according to figures provided by plan administrators.

In a short conversation with The Bee, Summer said he continues to work as an actuary in California, but declined to say where.

Actuaries blamed

As governments have struggled to manage pension debt, some communities have started to blame actuaries for their losses.

In Alaska and in Milwaukee County, Wis., for instance, officials say mistakes by Mercer, a large human-resources firm, led to huge loses in their pension plans. The state and the county sued Mercer in separate lawsuits.

Mercer has denied wrongdoing, but agreed to settle the Milwaukee County lawsuit for $45 million. The Alaska case is pending.

In 2007, the Securities and Exchange Commission sued a Southern California firm, accusing it of covering up the true financial condition of San Diego's troubled pension plan. The firm settled the case. The city was the first place in recent memory where pension debt threatened to bankrupt a city -- leading newspapers to dub San Diego "Enron by the Sea."

In a 2005 report, the Reason Foundation, a free-market think tank, pointed to bad actuarial assumptions as a major reason for the country's growing public pension debt. The biggest mistake made by actuaries: assuming investments would make more money than they did, researchers said.

That assessment has proved more true over time, said Adam Summers, a policy analyst who co-wrote the report.

"The actuaries should share some of the blame," he said. "Their inaccurate and optimistic assumptions led to the problem."

The actuarial profession essentially polices itself. While a spokesman for the American Academy of Actuaries says the industry takes complaints seriously, some question whether more regulation is needed.

The Actuarial Board for Counseling and Discipline, which investigates complaints for the profession, recommends public discipline of actuaries about once a year.

States don't license actuaries, but a commission created by Gov. Arnold Schwarzenegger recommended three years ago that California create an advisory panel to oversee public pension actuaries.

The Legislature adopted the recommendation two years ago, and members have been appointed to the panel. But the group has yet to meet because no money was appropriated to the State Controller's Office to run the panel, office spokesman Jacob Roper said.

Work audited

Fresno County's pension liability has grown fourfold in the last five years, to almost $800 million last year. The increase is one of the biggest among the state's largest local government plans in that period.

Investment losses account for about one-third of the increased liability, records show. More was created by actuarial changes to the plan, including changes resulting from Summer's work.

In 2006, four years after he was hired, Fresno County's retirement association requested an independent audit of Summer's work. The association runs the plan on behalf of employees. Although aware of problems with Summer elsewhere, county retirement administrator Roberto Pena said the audit was done simply because it was considered good practice.

The audit by actuaries in the San Francisco office of the Segal Co. turned up a number of problems.

First, following Summer's advice, the county shifted the burden of cost-of-living increases in the plan to employees, breaking the plan's long-standing practice of splitting the cost with employers, auditors found. After concluding the practice was highly irregular, the county's retirement association decided to pay back the employees for those payments, further depleting the fund. The audit also turned up problems in how Summer calculated inflation for some pensioners.

The mistakes might not appear serious, but they had big costs -- because the county's plan is expensive.

"All of the changes that affect plan cost, the impact is multiplied for plans that have relatively larger benefits," said Paul Angelo, the Segal actuary who audited Summer and eventually replaced him as the county's actuary.

Fresno County, many say, has one of the most generous plans in the state. The county had to set up a supplemental benefit because then-Gov. Gray Davis vetoed the higher benefit county leaders agreed to in 2000.

As a result of corrections made because of the Segal audit, the county's pension debt grew by almost $160 million, records show.

In its lawsuit, Fresno County's retirement association accused Summer and his firm of causing $99 million in damage to the plan. The association's attorney said Summer was running a "sham company" out of his home, and the company had "a long and exotic history of failing to ensure that they have the assets or insurance necessary to satisfy the many claims against it."

Because of Summer's insurance problems, the retirement association agreed to settle the lawsuit for $250,000 last year, Pena said. He concedes that the association erred by not checking Summer's insurance, and routinely makes those checks now.

Fresno County hired Summer through a competitive bidding process. It's not clear why so many other places hired his firm, but government agencies are usually required to use the same kind of competitive process as Fresno County.

Problems surface

Summer's mistakes in Kern County also came to light when another auditor reviewed his work.

"They noted something right out of the gate, that something was unusual," said Anne Holdren, executive director of the county's retirement association.

Summer's firm significantly overestimated the number of people who would leave the plan, which meant the county was contributing far less money to the plan than it should have, Holdren said.

A Superior Court judge ruled in favor of the retirement association and the county, and awarded them $26 million in October 2008. Records show they have yet to collect from Summer.

In a separate case, the judge ordered Summer and his firm to pay $1.4 million to the San Joaquin Valley Air Pollution Control District for mistakes made in its pension plan. His firm underestimated the cost of benefits for the district.

Kern County's retirement board has learned from Summer's mistakes, Holdren said. Actuarial science is complex, "almost magical," and members of the retirement board struggle to understand it, she said. Now the board will get independent audits of its actuary every three to five years.

Other pension plans have had problems with Summer's firm. Officials in Palm Bay, Fla., threatened to sue Public Pension Professionals because the firm allegedly underestimated the city's contribution to the police and fire pension plan. But court records indicate the city never followed through.

In California, mistakes by Summer would have cost San Mateo County's pension plan millions of dollars if an audit hadn't caught them sooner, said Scott Hood of the county's retirement association. Summer made a number of incorrect assumptions, including about the mortality rate of plan members, he said.

Before the audit was finished, Summer resigned as the county's actuary, citing "workload and deadline issues."

In Tulare and Imperial counties, pension administrators said they decided not to keep Summer as an actuary because he failed to provide information in a timely manner.

The reporter can be reached at [email protected] or (559) 441-6679.

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