How I make the sausage: Preparing an economic-loss determination
By John F. Sase, Ph.D.
with Gerard J. Senick
“There are two things you are better off not watching in the making: sausages and econometric estimates.”
–Edward E. Leamer, U.S. Economist, “Let’s Take the Con Out of Econometrics,” American Economic Review (1983)
“Some twenty years ago, as I was sitting in the House of Representatives of the Illinois legislature, watching its closing hours, a member who had never spoken during the entire session arose to address the House... He said: ‘...I have come to the conclusion that the making of laws is like the making of sausages – the less you know about the process, the more you respect the result.’”
–Frank W. Tracy, “The Report of the Committee on Uniform Laws, of the American Bankers Association,” Banking Law Journal 15: 542 (1898)
I (Dr. Sase) am a Forensic Economist. In effect, I determine the economic losses in court cases and prepare detailed written reports with copious spreadsheets. Based upon this research and writing, I render my opinion under oath at depositions and on the stand at trials. This month’s column is a response to the question that I have received from attorneys, “What the heck do you do exactly?” Therefore, in this month’s column, we will explain the process involved in preparing an economic-loss determination for clients.
Collecting the Ingredients for the Sausage
When I (Dr. Sase) am contacted and retained by attorneys to serve as an expert on new cases, I send out an engagement letter and include a request for essential documentation, information, and data for determining economic damages. The information requested includes name, gender, race, education, date of birth, date of injury, and other basic information. Gender enters into the determination of the clients’ expected work-life and natural-life expectancies and other issues. The level of education attained by clients will affect their work-life expectancies. However, the race of the clients may or may not affect their statistically-determined natural-life and work-life expectancies.
In addition, dates of birth of the clients are used to calculate their work-life expectancies as well as their natural-life expectancies. The dates of injury or death set a time for the point at which economic damages commence. These statistics also are used to determine the remaining years of both work lives and natural lives. In addition to obtaining the above information in a brief form on essential documentation sheets or, at least, verbal reports over the phone, I generally request the Complaint, the Answers to Interrogatories (Rogs), and Depositions (Deps) entered in the cases as well as any other pertinent documents.
In order to determine wage and benefit losses, I rely upon reports of hourly wages or annual salaries as well as detailed benefits received by the clients. Though initially I may rely upon self-reported information in respect to these items, I request documentation to support assertions of wages, hours worked, and fringe benefits as well as career advancement. Again, I find such information mentioned in official documents, such as Rogs and Deps of the clients and other parties involved as well as any official employment records supplied by the employer of record at the time of injury or death.
In the calculation of determined damages, I rely upon documents from insurance companies that have made payments on behalf of the client as well as some medical records or police reports in respect to client. I look for a number of items within these documents, such as workers compensation offsets, denial or approval of Social Security disability, and reviews by other professionals that may indicate the probability that the clients may or may not be able to return to work if injured.
Making the Casing
After garnering the essential information, I proceed to set up rough drafts of a series of spreadsheets derived from templates that I have developed over time. On the basic spreadsheets for clients, I include their names plus a pair of the delineated sections; these will include Pre-Trial Losses and Post-Trial Losses. In the Pre-Trial section, I set up spaces that will include Pre-Injury earnings of the clients, a calculation of the remaining fraction of their years of injury or death, a fraction for the trial years, and the Pre-Trial interest rate. In addition, I include subsections to contain all of the calculations of benefits as a percentage of income and, in certain types of cases, their hours. I also include the imputed rates of pay per hour of their Household-Service Losses.
Finally, in the Pre-Trial section, I establish date ranges and earnings-growth rates for each of the years preceding trial. These two factors will affect the determination of annual incomes, fringe benefits, and, possibly, household services. Such items are calculated for Pre-Injury, in respect to what those amounts would have been had the clients not been injured or died, along with what the clients now will earn (if anything) or contribute to the household in terms of services. For each of these loss categories, I calculate the difference between the “what-if” amounts and the actual amounts separately in order to determine the losses on a year-by-year basis.
In the Post-Trial section of this spreadsheet, I map out spaces in which to enter the expected trial dates, the end of natural-life and work-life dates, and the growth rates used to carry the losses forward in time. For each category of losses determined in the first section, comparable spreadsheet calculations are made throughout the Post-Trial years. However, before completing the layout in this section of the spreadsheets, it is necessary to determine both the natural-life and work-life expectancies in order to establish the respective final years for all damages.
Putting Life into the Mix (Not Like Sweeney Todd...)
In the determination of natural-life expectancy, I rely upon the United States government tables from the National Vital Statistics Reports, which are published by the National Center for Health Statistics. This federal agency has delineated these tables by race and gender for the entire U.S. population. Given dates of birth and injury of clients in order to calculate their ages at time of injury or death, I employ the data from these life tables to determine expected end-of-life dates and end-of-life ages.
In contrast, I rely upon six different sets of tables for determination of work-life expectancies. I do this in order to determine expected ages that are rated as High, Mid, and Low as well as the respective dates of retirement. Generally, I rely upon the Social Security Full Retirement Age tables for the high-end determination. These tables report retirement ages in partial-year increments from ages 65 to 67. The retirement ages are calculated and grouped by age cohorts that are delineated by the birth dates of clients. The low-end retirement ages are determined as statistical averages. I calculate these averages from two separate government tables prepared by the Bureau of Labor Statistics and three tables from studies that used data with origin from government sources. Finally, I report a middle value for ages as the medians between the lows and the highs.
Stretching the Skin (“Put the Lotion in the Basket”)
Typically, I provide a range of determinations based upon three retirement ages that are cross-tabulated with three growth rates. Going forward in time from trial dates, I enter Low, Mid, and High growth rates for each year until the expected end-of-life for each client. Likewise, I utilize a spread of three average interest rates, applying them to Pre-Trial losses. All of these rates come from tables in the most recent annual report published by the Social Security Administration Old-Age, Survivors, and Disability Insurance (OASDI) Trustees Report. In these studies, the growth rates have been calculated using reported earnings for covered employment (wages for which Social Security has been withheld).
Stuffing the Sausage
Normally, I prefer to determine fringe benefits from information provided in employer records. In lieu of third-party sources, which often are difficult to obtain, I must rely upon survey data collected by the U.S. Chamber of Commerce Employee Benefit Studies. This data covers a number of different industries in both the manufacturing and non-manufacturing sectors. Even if usual benefits, such as health insurance, are not received by a W-2 status employee, “invisible” benefits still accrue. These benefits include the employer-matching contribution to Social Security and Medicare along with payments for Workers Compensation Insurance and Unemployment Compensation.
Occasionally, I report medical benefits and pensions as items separate from the remainder of benefits. I do this because of the usual magnitude of these two benefits and the fact that precise amounts can be determined for specific employers. For those employees who work until they are eligible for full-pension benefits, these amounts often equal 60% of final average pay.
In some cases, the values of lost household services are determined. For such determinations, I rely upon one or more professional studies that have obtained very large survey samples that address the various categories of household services performed on a weekly basis. These studies provide measurements in terms of both hours and the fair-market-replacement wage of the chores. For adults working full-time, the number of hours of household services performed is significant. Typically, males contribute between 10 and 12 hours per week on such services while females contribute between 18 and 22 hours. In summary, the value of lost services is determined in respect to the cost of replacement through the time of other family members or outside help that has been hired.
In cases involving wrongful death, certain offsets to the losses must be made. As it is normal for the decedent to have consumed a separable portion of household income and services, a deduction commonly is made. From the results of numerous studies conducted over the past five decades, it appears that this consumption percentage averages about 30% for an adult male or female in a two-adult household.
In Michigan and other states, future losses are required by law to be discounted to their present value. In effect, future earnings have grown by rates applied to recent earnings. This growth is meant to adjust for future inflation and increases to productivity. However, for a payout today, these future dollar amounts must be returned to values that reflect the number of current dollars necessary to maintain comparable purchasing power and standards of living. In Michigan, a 5% discount rate is applied for each year. Since this rate is not compounded annually, the 5% discount rate results in a Present Value that comparably offsets a growth rate that approximates the long-term rate of inflation.
Tying Off the Sausage
After completing a full set of determinations, I condense the myriad losses into simplified summary sheets. Typically, I produce a set of summary sheets – one for each pair of three growth rates crossed with the three retirement ages. Three rates times three ages results in nine summary sheets in all. These simplified reports contain itemizations by general loss categories for Pre-Trial and Post-Trial time periods and for Future and Present Values. For added simplification and intelligibility, I create a Grand Summary in which I report only the Total Future and Present Values in the matrix by respective growth rates and retirement ages.
Finally, for clarification and better understanding, I summarize all of the elements of the completed determination in a thorough narrative. In this document, I report the range and average of losses, provide snapshots of the relevant sections of various tables of data used in the determination, and offer a detailed explanation of the processes used in the determination – all communicated in layperson terms. Within this detail, I provide clear citations to the various sources upon which I have relied. I have found that this approach helps depositions to go more smoothly. Importantly, this approach helps non-technical counsels to use the content within the determination reports to reach Pre-Trial settlements in a timely and cost-effective manner.
Packaged for Delivery
I have developed these methods in response to feedback from attorneys in respect to their needs, taking what I have learned from other economists over a period of three decades and drawing from a decade of experience in the field of labor research as the Head of Research at Focus: HOPE in Detroit. Over the years, I have listened to the comments of both retaining counsel and opposing counsel. Since most attorneys have not studied the techniques and processes of economic determination to the depth that an economist might, I have taken their input to design an intelligible and transparent format that everyone can understand, at least to some extent. One of the guiding lights in this approach has been the development of the ability to walk an attorney through the report over the phone. The form developed has followed the function of the reports.
As an expert, I strive to prepare reports that are objective and transparent by providing thorough detail in my work. By using standard spreadsheet techniques, I make my work replicable by any other economist (or accountant) working on the case. Though the liability issues of a case may be arguable, I submit spreadsheets and narratives that evidence both a range and the maximum likelihood of actual damages that rises above most valid arguments and debate. By basing my work upon solid principles, I am able to render an opinion that is supportable by abundant detail and solid determination techniques that follow the dictates of the Daubert Standard for scientific evidence entered into a court of law.
I continue to revise my methods as needed in a process of continual improvement. By using these methods, I hope to do my part to expedite the legal process and to do so in a cost – effective manner. Ultimately, I hope that my methods help my clients-the attorneys who have retained me-to settle their cases in a way that is satisfactory to both themselves and their clients. Mr. Senick and I hope that our readers now will have a better understanding of what economic experts actually do behind the scenes on the cases for which they are retained.
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A PDF copy of this article is posted at http://www.saseassociates.com/legalnewscolumn.html. We continue to post videos related to our monthly column on www.YouTube.com/SaseAssociates in
the Legal News Features playlist.
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Dr. John F. Sase of SASE Associates, Economic Consulting and Research, earned his MBA at the University of Detroit and his Ph.D. in Economics at Wayne State University. He is a graduated of the University of Detroit Jesuit High School. Dr. Sase can be reached at (248) 569-5228 and by e-mail at drjohn@saseassociates.com.
Gerard J. Senick is a freelance writer, editor, and musician. He earned his degree in English at the University of Detroit and was a Supervisory Editor at Gale Research Company (now Cengage) for more than 20 years. Currently, he edits books for publication and gives seminars on writing. Mr. Senick can be reached at (313) 342-4048 and by e-mail at gary@senick-editing.com.
