One of the city’s actuaries, Alan Perry, is back on the witness stand, discussing pension fund forecasting. The next witnesses, according to attorneys yesterday, are Vanessa Fusco, who works at Christie’s and will testify about art valuation, and Kim Nicholl, an actuary with Segal’s Chicago office.
After hours of testimony by two actuaries, let’s review the main issue:
The city puts the unfunded liability for the two pension funds for 2014 at about $3.4 billion. Creditors have questioned the accuracy of that amount. If the debt is less, the city can set aside less for pensioners, leaving more for other creditors.
Attorneys for some of the creditors are challenging actuaries who support the city’s plan and the actuarial assumptions that it’s based on, especially the 6.75 percent rate of return presumed for pension fund investments. Two witnesses today said they supported the city’s assumption that pension investments will yield a 6.75 percent return. But they also testified that amount is less than almost every other large public pension system in the United States.
Certainly those calling the shots in Detroit’s bankruptcy case have plenty of reasons to err on the side of conservative in the presumed returns on investments for the pension funds: prudence and history.
Kim Nicholl, an actuary with Segal, the actuarial firm used by the Official Committee of Retirees, testified today about the amount of cuts pensioners in the General Retirement System will face under the city’s Plan of Adjustment:
Reduction Number of Pensioners
5-10 percent 1,864
10-15 percent 2,910
15-20 percent 3,155
20-25 percent 1,627
25-30 percent 989
30-35 percent 1,083
35-40 percent 366
40-45 percent 16
We’re stopped for lunch, but not before we got a few minutes of testimony from Kim Nicholl, an actuary with Segal’s Chicago office who worked with the Official Committee of Retirees. Her resume is entered into evidence. See you at 1:30 p.m.
The two highest valued pieces of art in the Christie’s appraisal were Pieter Bruegel the Elder’s “The Wedding Dance” and Vincent van Gogh’s “Self Portrait.” Here’s what Vanessa Fusco said about them in her testimony.
The Wedding Dance:
This piece was valued in the appraisal at $100 million to $200 million.
“There are so few works by the artist, so you can’t rely upon market activity, trading works by this artist. So you have to look more broadly to 16th century Flemish artists. Of this quality, very little actually comes to the market. Most are in public collections,” Fusco said.
A work the team used to compare to “The Wedding Dance” was Peter Paul Rubens’ “Massacre of the Innocent,” which sold in 2002 for $77 million, Fusco testified. “Adjust for inflation and arrive at the lower end of our valuation range,” for “The Wedding Dance,” she said.
“We think if this work were to be sold, it would break all records,” Fusco said of “The Wedding Dance.”
The Self Portrait:
Valued in the appraisal at $80 million to $150 million
“Here we actually have more direct comparables to work from,” Fusco said, adding another van Gogh self portrait sold for about $26 million in 1990 and a second that went for $75 million in 1998. “If you adjust those for inflation, you’re at sort of the upper and lower end.”
She said the DIA van Gogh “Self Portrait” is worth less than those two because it is smaller and from earlier in his career. The Dutch artist painted them in 1888 and 1889, and “1888 is actually a pivotal point in the artist’s career where his style changed dramatically,” Fusco said. “Later van Goghs are more highly valued.”
She said that “trophy hunters” would likely be very interested in purchasing the DIA’s van Gogh “Self Portrait.”
“This is an iconic piece,” she said.
“It’s a spectacular and world class collection. I had been to the DIA before (twice) and was extremely impressed,” she said. She mentioned the Diego Rivera frescoes, the impressionist, modern and European collection and the Dodge and Scripps collections as particularly notable.
Like many museums, Fusco said, the DIA most valuable and notable work is on permanent display. She called the museum’s collection encyclopedic and said the city-owned work “covers a wide range of art history”
“Generally a museum will put its most important work on view for the public and that can also translate into the most commercially valuable work,” she said.
According to Fusco’s testimony, when the Christie’s team of 65 specialists started the appraisal, they believed they would review about 3,500 works that had been purchased by the city but that number fell to about 2,700 because several of the pieces were no longer in the collection or had been incorrectly counted. For example, a teapot and lid has been listed as two item when they are, by art collection standards, just one.
It’s not unusual for such lists to be revised during an appraisal, Fusco said.
The team also found about a third of the city-owned art at the DIA has “incredible minimal commercial value.”
Irwin asked her why.
“Museum collections tend to be very uneven valuewise. Very simply: not ever work of art in a museum is a masterpiece. That’s not unusual at all and the way museums, in this country in particular accept their collections, they were accepting large gifts, estates, so not every work that gets gifted to a museum is going to be of tremendous value,” Fusco testified.
She described the DIA staff as being “very cooperative” with the Christie’s team doing the appraisal and could not think of “any impediments that the DIA staff threw up for your work,” when Irwin asked.
The city interrupted its actuarial and pension witnesses and called Vanessa Fusco to the stand. She’s the vice president and associate director of the museum services department at Christie’s.
Fusco also was the project manager for the fair market appraisal done last year for a portion of the Detroit Institute of Arts collection at the city’s request. Since then, there have been “competing” appraisals of the collection by creditors and the museum.
City attorney Geoff Irwin, of the Jones Day law firm, questioned her.
As you can see from this Michigan Radio timeline produced earlier this year, the city and the museum have had complicated and unique relationship.
Various attorneys spent a few hours questioning Alan Perry about the appropriateness of the 6.75 percent assumed investment return rate for Detroit’s pension funds and how it compared to other public funds. Then Judge Steven Rhodes asked a few questions, ending with this telling exchange.
Judge Rhodes: Are you telling me that given Detroit’s insolvency, is it your view that prudence would suggest an even lower rate?
Perry: Yes, that might be true.
Judge Rhodes: No further questions.
Jonathan Wagner, an attorney for the holders of the Certificates of Participation (pension debt), questioned Alan Perry, an actuary with Milliman’s, the city’s actuarial firm, about interest rate assumptions used for pension fund forecasting.
In the Plan of Adjustment, the city and creditors agreed to an assumed 6.75 percent interest rate for the two funds – one for police and fire and another for general service retirees.
Wagner reviewed with Perry several other Milliman forecasts for public pension funds that are higher than Detroit’s. Several of the exhibits, entered with the court, were taken from Milliman’s 2013 Pension Funding Study. In the study, one chart showed that the interest rate assumption for public funds ranged from 6.4 to 8.5 percent. Perry testified that 95 percent of public pension fnds have a 7 percent or higher interest rate assumption.