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Preface: The following was submitted by “A Recovering Pension Actuary” – somebody I believe to be knowledgeable and credible who asked to be kept anonymous. I certainly think it’s true that actuaries shouldn’t bear too much blame for the problems with Chicago Teachers’ Pension Fund and our other unfunded pensions. Beyond that, I’ll let you judge for yourself.

-Mark Glennon


No one blames the coroner for a homicide that he examines; people hold the killer accountable. Likewise, we shouldn’t castigate the actuaries for the funded status of the CTPF – the real villains are the legislators in Springfield. About ten years ago they enacted a new minimum funding provision in the Illinois Pension Code, which sets minimum funding standards for public pension plans in Illinois. However, this requirement is absurdly weak. It requires contributions to be calculated so that a plan will become 90% funded by 2045. But the funding method in the statute is the Projected Unit Credit method, which usually recognizes costs slower than the Entry Age Normal method that the GASB requires for accounting. And the statute also allows unfunded amounts to be amortized as a level percent of payroll, which does not even cover interest on the Unfunded Actuarial Liability in the early years. Using the latest CTPF actuarial report as an example, Normal Cost plus interest on the Unfunded Actuarial Liability is about $1,068M, compared to the expected employer contribution (on page v) of $635M plus employee contributions of $195M (on page 34). And what is the reason that the target is only 90% instead of 100%, other than a 90% target allows lower contributions than 100% would require?


The decline in funded status roughly parallels the enactment of the 90% funding target in the Illinois Pension Code. Exhibit II of the report (on page 35) shows CTPF was about 80% funded in 2006 and is 53% funded in 2015.


But wait, there’s more. Exhibit 3 of the GASB 67 portion of the report (on page 54) compares the contributions that were actually made in the last ten years to the Actuarially Determined Contributions in each of those years. No one should be surprised that the plan sponsor contributed about $2B less than the Actuarially Determined Contributions over the last ten years. If the Actuarially Determined Contributions had been made during this period and earned the annual interest rates of the fund shown in Chart 10 (on page 8), there would be approximately another $3B in the fund, raising the Funded Status to around 68%. Still not good, but better than 53%!


You might ask, “What are the actuaries saying about this situation?” Page 3 of their report contains this statement, “The methods mandated by the Illinois Pension Code are inadequate to appropriately fund CTPF.” They also make the following statement on page ii, “Compared to the actuarially determined contribution of $749,796,517, the contribution deficiency is $114,726,517 as of July 1, 2015. Each year there is a contribution deficiency leads to an increased deficiency in all future years.” While the actuaries cannot force the plan sponsor to adequately fund the CTPF, they do tell the plan sponsor (and the public) that the Illinois Pension Code funding requirement produces inadequate contributions.


What else can the current actuaries do? If they resign, another actuarial firm would be all too happy to get a new client.


The politicians in Springfield are the real villains in this story, not the actuaries. The politicians kicked the can down the road ten years ago, and they continue to allow public pension plan sponsors in Illinois to inadequately fund their plans.


A Recovering Pension Actuary




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If Mark is right, and the politicians in Springfield are the villians, then we as voters are accountable for the politicians we elect in our representative system. If the blame lies not with the actuarial experts but with the politicians that hired those experts. Then the blame lies with the voters who hired the politicians. Its the voter who also pays the bill/taxes.


That also doubles as the boilerplate answer to public sector advocates who fall back on the “Well, YOU elected them” defense to all things pension related. Which conveniently places 100% of the liability on the voter/taxpayer while shedding the other side of the bargaining table from any liability whatsoever. No sale.


But it is true Nixit that the electorate is responsible for who does or doesnt get elected. This is America isnt it? Are voters blameless for who they put in office? I dont think so. Blame the politicians…then blame the voters who put them in office. Even when the truth hurts. Then again guess you could make up a story how the sy stem is broken and Rauner and the other politicians got into power …not from the will of the voter…but through some other conspiracy.


My comment was more towards where the actual buck stops, which always seems to be the taxpayers and no one else (union and banks alike). But I suppose I can play the game by those rules too…

CTU should sign that new contract CPS proposed as-is. After all, they elected Rahm, so they must have agreed with his policies.

AFSCME should sign that new contract the state proposed as-is. After all, they elected Rauner, so they must have agreed with his policies.

Ya lost me Nixit. I am not sure what ya mean; still I am trying to understand. Lets keep it simple. Doesnt Rauner represent the Illinois taxpayers? Isnt he our governor? Wasnt he elected by the people. Of course yes to all of these? So where is the disconnect to where suddenly the electorate is not responsible for electing Rauner? Or how convienent it would be once the voters elect Rauner they are no longer responsible for his actions and policies? Dote voters get what they pay for with thier votes? Is there no voter accountability and consequences (both painful and benificial) for the policies and actions… Read more »
J.A. Herzrent
Sone satisfaction may result from blame, but that won’t get us closer to a solution. The legislators are immune from civil and criminal recourse. The actuaries have presumably disclaimed liability in their engagement letters or have qualified their reports. Even if a jury would find actuaries liable, their malpractice insurance and net worth would make little dent in the problem. The pensions and health care were too generous from the start, and COLA continues to make it worse. Bankruptcy or negotiated benefit reductions are the only answer, but the unions can’t negotiate for the retirees and the retirees are perfectly happy to keep getting their full benefits… Read more »
Actually, the 90% funding target is even worse than presented here. The target date is not 2045 (the date for IL state plans), but 2059 for Chicago Teacher (pp. ii, 38). I believe the technical term for that target date is “when hell freezes over.” As to the question of “what else could the actuaries do?” 3 points: (i) the actuary for the State Plans (e.g. Illinois Teachers) makes much stronger statements than the ones made here (e.g. calling the whole scheme “Illinois math”); (ii) more importantly, it would be interesting to see how strong — and how public — the actuarial objections are when such funding… Read more »
Robert: It’s not ‘sad’ that the actuary wishes to remain anonymous. He’s clearly pointing the finger at the legislators. But it could only hurt him and his firm to have his name released. I don’t see how it could help. Be that as it may the actuary for the CPS plan is not violating a code of conduct. It’s possible to argue 7.75% long-term investment assumption is reasonable. But it’s not prudent for the unions and legislators to saddle the taxpayers on a pension scheme for govt workers that is barely affordable, and then NOT affordable if assets only earn 5% or 6%. which is what’s happened… Read more »
How many of those legislators who voted in favor of this change are already gone, retired or doing something else? How many will be gone before this thing implodes? Then, how many who voted in favor of this will still be around? If any, will we be able or willing to try to hold any accountable? These are rhetorical questions — feckless career politicians ALWAYS kick the can down the road to garner votes and campaign contributions because they will not be around when ‘down the road’ arrives. It’s meaningless to them, a license to be irresponsible in the extreme, and no one will be held accountable.
Rex the Wonder Dog!
Relax folks, because Mr. Math is coming to town with the next down turn. He will cure all the ills of these unsustainable, outlandish and grossly over generous public pensions. Public pension funds ACROSS the nation have seen their funded ratio’s go down after the BIGGEST Bull Market in US history. Repeat, after the biggest bull market in US history funding levels for public pensions went down. CalPERS is 73% funded right now, CalSTRS is less at 69%, not counting this year which we are halfway through and returns are in the 2% range. If returns go negative the end will come even faster. Public Pensions have… Read more »
The real question is what is the distribution of the blame between unfunded retroactive pension increases and taxpayer underfunding of the pensions that had been promised to begin with. No one wants to talk about that. It varies from place to place. In NYC the unions get almost all of the blame. In Connecticut and New Jersey it is the taxpayers. Not sure about Illinois. Past contributions have been high, but many workers do not get Social Security. You can’t blame investment returns, because over the long term they have been fine. The problem has been raids when stock prices were up, to cut taxes and/or… Read more »
Tough Love
Quoting Larry Littlefield ….. “The real question is what is the distribution of the blame between unfunded retroactive pension increases and taxpayer underfunding of the pensions that had been promised to begin with.” That question SHOULD BE ………..”have Taxpayer contributions to date (with investment earnings thereon) have been sufficient to fund their share of a pension EQUAL TO but no greater than those typically granted comparable Private Sector workers”. If YES, then the taxpayers owe nothing, Public Sector workers NOT being “special”, and deserving of a better deal……. on the Taxpayers’ dime. THAT is is correct question because “funding” FOLLOWS FROM (and IN DIRECT PROPORTION TO) the… Read more »

Tough Love: Your comment is brilliant ! Can I state it like this?…… Why in the WORLD should WE the taxpayers pay our taxes to the govt so that it can contribute 30% of pay or more to its employees……when OUR taxes came from OUR income and ‘Er and our ‘Er just contributes 3% of pay for most of us to save on our own (which is fine, we accept it gladly to have jobs)…..but then the govt ‘ees get WAY too much from us to pay THEIR Rolls-Royce pensions. Where’s the fairness?

Tough Love
Steve-Oh, The proper “Total Compensation” (pay + pensions + benefits) goal should be equal Public/Private Sector compensation in reasonably comparable jobs where the employees have reasonably comparable skills, knowledge, experience, AND productive output. Because Public Sector pensions and benefits are now so undeniably greater in “value at retirement” …… TYPICALLY 3 to 6 times greater when one factors in not only the much greater Public Sector DB Plan “formula factors”, but also the much younger full/unreduced retirement ages, and COLA-increases (almost unheard of in Private Sector employer-sponsored Plans) …… there is no question that they must VERY materially be reduced for the future service of CURRENT workers.… Read more »

Tough Love: Boy did YOU NAIL IT ! QED !!

Larry: We’re into a ‘new normal’ now and it AINT GOOD ! Stocks right now are NOT expected to earn 9% or 10%/year in the future as they have for very LONG periods in the past. And bonds have reached a new “normal” kind of low. Auditors for DB companies sponsoring Pension Plans are commonly applying models and coming up with typical 60/40 portfolio of around 5% or 6% for Long-Term Expected Return. I’ll turn the tables on you with this practical a realistic problem in the 401(k) world: Let’s say someone retires at age 65 with $500,000 saved up. Should they expect a 60/40 portfolio to… Read more »
Actually Larry, you CAN blame investment returns, but with a different ‘shading’. The net investment returns of pension funds all over the country have been horrendous this century. Since 1/1/00, that’s 16 calendar years, the S&P500 index is up 4%/year compounded. Bond markets about 5 to 5.5%. A 60/40 investment portfoliio therefore, about 4.5% return, GROSS of investment expenses. Horrendous……and therefore a HUGE cause of actuarial “losses” over the past 16 yrs. But when I say the blame should be ‘shaded’, it’s this: The predictions of costs and calculations of cash-funding amounts, should NOT be with optimistic return on assets. Should be slightly on the conservative side,… Read more »

“Since 1/1/00.”

You are always going to get lousy returns from the peak of a bubble. If returns have been low since then, it is because asset prices were inflated then. A better measure is returns from 1995, pre-bubble, to 2015.

The real problem is that promises were made that could not be kept. The teachers for example went on strike every third year for better wages and benefits and the respective school boards were forced to cave in. Nobody considered costs or ability to pay for what had transpired. We see what happens when taxes go too high; taxpayers leave the taxing region and the growth is in the non taxpaying population. everybody in IL thinks the guarantee for the benefit is rock solid. My question is why? If a private pension goes under, say United Air many years ago, the participants received a benefit thru the… Read more »
Tough Love

Quoting …… “If a private pension goes under, say United Air many years ago, the participants received a benefit thru the Pension Guarantee Trust oif about 2/3 the original benefit–thats the way benefits are handled. ”

That’s incorrect. The PBGC pays 100% of the pensions UP TO a cap (which is a function of the participant’s age at the time of Plan Termination) which is re-set annually. In 2016 that maximum is $5,011.36/month at age 65 (assuming the straight-life annuity option).

Correct, the PBGC CAP is at $55K, and that is NOT Until age 65. If you tried to “retire” at age 50 the PBGC would give you 1/20th of that $55K. AND the PBGC is still underfunded, so that $55K is too high, and age 65 too low.

Red Raspberry

The low interest rates set by the FED are killing America. No way can the pension funds get high enough returns without investing in risky funds. The taxpayers just do not have the funds to pay for the benefits as they are now. Time for Constitutional change and fast.


Red Raspberry: wait til the stock market and junk bonds crash. All pensions get clobbered and they will quickly spend their trust corpus making the future rather bleak.

Jim Palermo

Red Raspberry, plenty of public plans in Illinois are already paying benefits that exceed employer and employee contributions.

Tough Love

Ask any Public Sector pension plan participant, and the answer you will get every time will be …. well, the Taxpayers will simply have to pay more.

Boy are they in for a rude awakening.