Who Is To Blame for the Status of the Chicago Teachers’ Pension Fund? – WP Guest
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.
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