N002193
Monday, January 21, 2002 7:45 PM
Comments on documented Interim Rules
To:
Kenneth Feinberg
Deborah E. Greenspan
Office of the Special Master
Re:
Comments on the Interim Rules of the 9/11 Victim Compensation Fund
From:
We have received from your office the additional information on the presumed
economic loss calculations for the September 11 Victim Compensation Fund,
and we have comments on the Interim Rules for calculating damages. First,
we want to thank you for making this information available.
We agree with comments to us that much confusion
has occurred over the past month concerning the interpretation of the
Interim Rules, and that a number of families of victims have, rightly or
wrongly, been disturbed by the presumed economic loss calculations for the
VCF. We would point out that this confusion partially results from the lack
of detail and explanation contained in the original release of the rules on
December 20. It was impossible to replicate or adjust the calculations
given the level of information provided. The first explanatory release
contained no specific information or documentation on effective tax rates,
self-consumption rates, work-life expectancy, fringe benefit rates, or
decipherable application of age-earnings growth rates. Whether the last
formulas were part of the original calculation, or were added in response to
criticism, is really irrelevant. We are grateful that that information has
now been released and we have an additional set of observations concerning
the accuracy and fairness of the calculations. You have not provided
information related to documented sources that you relied upon, or will be
relying on, to determine "effective tax rates" or the sources of the
life-cycle earning adjustments (you simple state two actuarial boards). You
have provided no detail regarding how the discount rate was determined and
then adjusted for taxes, and the information regarding the self-consumption
rates appears to be deficient. We hope that you will release this
information as a part of the final rules.
You are correct that no one model will be viewed as fair or appropriate to
all groups, or that one set of compensation tables will be relevant to a
specific individual. You have stated that individual factors will be
considered in each case of compensation, and that individuals may appeal
your findings through the submission of an alternative set of compensation
assumptions. No one can predict the outcome of such appeals in advance, but
we are sure that you will strive to give a fair hearing to all claimants.
Obviously, families will be reluctant to sign-up as claimants for the VCF
without knowing the outcome of the final compensation in advance, but the
same would be true in a litigation arena. We appreciate the opportunity to
provide you with recommendations for enhancing the procedures for
compensating the September 11 victims and their families. We know this is a
difficult and unenviable task for you as Special Master. We have talked to a
number of families of victims, as you have, and we can understand their
anxieties about the compensation process. Our comments are directed at
assuring the families that the process will be fair and accurate.
Specific changes to the methods of compensating economic damages can still
be made that will address some of the concerns of economists and the
victims' families. Below we offer some comments that fit broadly as a part
of the plan. There are many specific issues that we do not address. We
continue to offer a group meeting with you and your experts along with
leading authorities in the academic study of forensic economics to go over
the many necessary adjustments to your basic structure that will force a
response on a case-by-case basis.
The most obvious deficiency in the plan is the omission of lost services as
an economic loss suffered by families of victims who were working on
September 11. The plan calls for the calculation of the value of such lost
services for non-working or part-time working victims, but provides no
direct compensation to families of working victims as clearly referenced in
the "Act." Lost household services are almost universally recognized as an
element of economic loss in personal injury/death litigation. There are a
number of statistical sources and procedures for making such calculations,
and their absence in the plan to all victim families is inappropriate.
The following are comments in the order matching your "Explanation of
Process for Computing Presumed Economic Loss" that you released Friday,
January 18, 2002 as follows:
1. Establish the victim's age and compensable income.
You should adjust the three years of earnings information to a 2001 constant
dollar base. For example, in 1998 the Consumer Price Index for All Items
(CUUR0000SA0) was 163.0, in 1999 it was 166.6, in 2000 it was 172.2, and in
2001 it was 177.1. Under this one approach, you would multiply 1998 total
earnings by 177.1/163.0, 1999 total earnings by 177.1/166.6, and 2000 total
earnings by 177.1/172.2. The average earnings will now be in base 2001
dollars for projection into the future.
As an example of the appropriateness of this calculation, it is easy to see
that you would never average nominal earnings in 1990 (say $12.00 per hour)
with nominal earnings in 2000 (say $20.00 per hour), for an expected
earnings level of $16.00 per hour in 2001. The same logic applies when
averaging 1998-2000 earnings for a 2001 earnings base.
2. Determine after-tax compensable income
The tax rate data for this adjustment has yet to be published by your office
so comment is difficult. An average effective tax rate across various
household types can be deceiving. You note that you will consider the
victim's tax returns, please do so. Also keep in mind the differences in
tax rates possible based upon position in life with circumstances such as
home mortgage deductions, number of dependents, tax deferred income, etc.
For example, even though a person might earn $100,000 at their job, through
401(k) plans they might be able to defer up to $15,000 of that income. So,
current income taxes would be computed on $85,000 of W-2 taxable earnings
instead of $100,000. Simply applying some average statistics will not
satisfy the requirement for this adjustment. Perhaps a more appropriate
methodology would be to use the Consumer Expenditure Survey data, which
actually includes tax payments by level of household income. We find it
inconsistent that you are going to use national data for some major economic
adjustments, but for a subtraction from loss you are planning to use local
income tax rates, which are in many cases higher than national averages due
to domicile.
3. Add pension and other benefits.
You state, absent supplied information, that you will substitute $2,400 per
year in current dollars for loss of health insurance. To be made whole,
loss must be based upon the cost to secure replacement insurance in the
market by age and number of dependents. The $2,400 figure might be
insufficient in many cases to replace this loss. We urge you to probe each
claimant for the correct figures in each case.
Pension and other benefits can be very complicated. Many financial workers
will be accumulating stock options, profit sharing, ownership positions,
etc., which will require very detailed analysis. We urge you to consult
known experts when making these computations.
Whatever collateral source benefit you deduct, you will need to consider
adding the benefit back for an offset due to loss of benefit accumulation.
For example, you state that you are deducting current pension income as a
collateral source, so you rightly add it back in as a benefit. However, if
you deduct current Social Security collateral income, you may also need to
also add that benefit back in. For example, a survivor's Social Security is
based upon the decedents earned Social Security credit to the time of death.
A future Social Security benefit would be based upon additional Social
Security credits at a higher earning level. By receiving Social Security
now, lost Social Security may exist in the future. There is a literature in
the forensic economic field regarding these calculations.
4. Worklife expectancy
The use of the Ciecka Work-Life Expectancies is an improvement over the
previously unavoidable presumed use of Bulletin 2254 Work-Life Tables.
Officials at the Department of Labor had told us that your analysts
requested the Bulletin 2254 tables, and no mention of the Ciecka tables was
contained in the Interim Rules.
These tables, however, still must be used with caution. The tables
represent average labor force participation and death rates for males and
females, by age, which may have limited applicability to a specific
individual. A working single mother will likely have a longer worklife than
a married wife/mother who has elected to stay at home because of financial
security. Nevertheless, both are contained in the same average length of
expected labor force participation. Many forensic economists generally use
the "Male" category for career working females. We urge that education also
be considered when using the tables.
An inconsistency in your application of worklife and lost services reveals
itself in the case of women. Women often exit the labor force to provide
services for their family members. The difference in worklife for younger
women is 4 to 5 years shorter than younger men in the Ciecka table. You
would compute replacement services loss damages for families of part-time or
not in labor force (NILF) women and ignore their potential re-entry into the
labor market. However, by using the shortened worklife of women, you
implicitly consider the exit from the labor force of women in order to
provide services that you compensate those that are NILF on September 11.
You should recognize the 4-5 years of projected NILF status of women and at
least give them the same damages for these years that you give those that
were NILF on September 11. You should also give women who were NILF on
September 11, the expected value of their future earnings upon probable
future re-entry into the labor force. The problems you face using gender
specific worklife tables can be mostly avoided using other
gender-indifferent methods of determining worklife. We would be happy to
discuss those alternatives with you and your experts.
Finally, Professor Ciecka, through his own publishing company, sells an
expanded set of worklife tables based upon the exact methodology and data
contained within his JLE article. We urge that you use the accurate,
detailed tables that Professor Ciecka offers for sale instead of the
abbreviated tables published in the JLE.
5. Project compensable income
The assumed growth rates in future earnings will likely overcompensate the
lower paid (low human capital) individuals under 30, while under
compensating the highly educated and high earner individuals. The
methodology you employ is not generally accepted in the abundant literature
regarding life-cycle earnings. The use of established age-earnings cycle
formula by level of human capital would be preferable to the methods you
employed in the proposed loss tables. Age-earning cycles should be
recomputed based upon human capital. You have also not provided citation to
the life-cycle growth rates in your calculations.
6. Present value
You continue to not document the source for the interest rate and the
procedure you used to adjust the interest rate for income taxes. In
footnote 5, your statement of the net discount rates is mathematically
incorrect, using a simple subtraction of growth rates from the discount rate
rather than a geometric subtraction.
You will have to use a non-tax adjusted interest rate (i.e. pre-tax nominal
interest rate) when figuring the present value of some collateral sources.
For example, some collateral sources will generate taxable income (e.g.
Social Security survivor benefits may be taxable given the level of future
other income and most pension benefits would also be taxable) and using an
after-tax interest rate to compute present value for the annuity collateral
benefits will overstate their present value.
Reducing loss for pension, thrift or profit sharing payments and life
insurance creates a set of potential difficulties in calculating loss. For
example, the future marriage of a surviving spouse could revoke payments in
specific pension or survivors benefit payments that would occur in the
future. Yet, the loss might already be reduced for such payments. The
calculation of net losses and gains in Social Security and pension payments
because of early death or disability is very complex. These collateral
income reductions will be a continuing source of conflict between the VCF
and the families of victims.
7. Self-consumption
Self-consumption rates appear to be liberal in many cases. It is troubling,
however, that you list Table 2 of the CES 1999 as the source for the
computations. Table 2 simply presents consumption in households by total
income level up to $69,999 and then $70,000 and over. Additional data would
be required to make the calculations you show. For example, you compute
rates for single households where no data for single households exist in
Table 2. The understanding of the data is also limited by your comment
about low-income households. Low-income households and low-earning
households do not necessarily correspond. There is a portion of households
in the low household total income range that are, in actuality, very wealthy
households. For example, farmers owning 1000's of acres of land with
millions of dollars of cash flow and expenditures could show $2,000 of total
household income figuring huge farming losses. Such outlier households, in
Table 2, are averaged with living poor with an actual $2,000 of total income
and cash flow. The Consumer Expenditure Survey is a relatively small sample
and just a few households can skew estimates. We urge caution when working
with data at the low and high end of these income categories.
8. Computation methodology favors claimants
Statements you make in this paragraph are non-economic. You believe that
your methods favor the claimants, but fail to provide relevant comparators.
For example, a projected worklife of 20 years would benefit a person dying
of cancer on 9-11, but it could hardly be applicable in the case of many
career-working females.
Your last statement is without basis and can easily be turned around with
relevant economic analysis. Your "wage growth" as stated in your documents
is 1.03*1.005-1 = 3.52%. Your post-tax discount rate is 5.13%. The
combination of these rates computes to a net post-tax discount rate of
1.56%. A post-tax net discount rate of 1.56% is not uncommon to see in
wrongful death damages litigation. Unfortunately, you are confused in your
secondary application of a series of life-cycle adjustments to account for
growth due to individual productivity with the concept of the "net discount
rate" that is used in the academic literature. In the academic literature,
the net discount rate is the difference between the discount rate and the
general rate of price or wage rate growth absent individual productivity.
The application of life-cycle adjustments adds a concept outside the net
discount rate term and your remark has no comparator in the literature.
Every case generates a net discount rate that can be compared across cases,
but it also generates a unique value of life-cycle adjustment. Your
statement may provide confusion to academic work presented in courtrooms in
the future that follow the generally accepted approach of comparing net
discount rates.
Although you do not provide documentation of your pre-tax interest rate, we
can turn around your arguments in this section with a simple adjustment.
Suppose that you made a 25% adjustment to the interest rate to account for
taxes. Dividing 5.13% by 75% yields a pre-tax discount rate of 6.84%, a
reasonable figure if you are taking a historical average. Now, the relevant
net discount rate that you are using must be figure on 6.84% and 3.52% to be
comparable to those net discount rates in the literature. Under the 25%
assumed tax adjustment, the net wage rate discount rate would be
1.0684/1.0352-1 = 3.21%, which would fall at the higher end of observed
pre-tax net discount rates, not the lower.
Individual Comment