March 11, 2019
In a series of blog posts last year, the Civic Federation examined the Illinois State Actuary’s first analysis of the Chicago Teachers’ Pension Fund (CTPF) actuarial assumptions and the impact changes to the actuarial assumptions recommended by the State Actuary had on the CTPF’s funded status. This blog post provides an update to those posts for decisions made during CTPF’s fiscal year 2018.
In the first State Actuary report on CTPF, it recommended that the fund reduce its expected rate of return on investment to 7.25% from 7.75%, as the CTPF’s own actuary recommended, as well as reducing its inflation increase assumption. The CTPF followed these recommendations in its 2017 fiscal year, leading to an increase in the unfunded liability of over $1 billion due to the changes.
The expected rate of return on investment—also called the discount rate or interest rate assumption—is a key assumption in estimating the value of pension obligations. It is the interest rate used to estimate the present value of future benefit payments. Reducing the rate increases the estimated present value because more money must be set aside now to pay future benefits. This present value, known as the actuarial liability, is compared with the value of pension assets to determine the funded status of pension plans and therefore how much must be contributed by Chicago Public Schools to the fund. Public pension funds generally use the long-term assumed rate of investment return to discount liabilities for funding purposes.
The Auditor General released the most recent State Actuary analysis to the public in December 2018 for the 2018 fiscal year ended June 30, 2018. The State Actuary in the most recent report agreed with the assumption changes adopted by the CTPF Board, including reducing the expected rate of return on investment to 7.0% from 7.25% and a decrease in the wage inflation assumption to 3.0% from 3.25%. The State Actuary also noted that the CTPF’s actuary recommended a series of demographic assumption changes as a result of the 2018 experience study, and the recommendations seemed reasonable.
However, the State Actuary stated that Chicago Public Schools had requested the Board not adopt two of the CTPF actuary’s demographic recommendations. Those recommendations were that assumptions be changed as a result of an expectation of continued decline in the number of active participants and a trend toward retiring early. CPS argued that the experience was due in part to the financial crisis and that membership behavior should return to previous trends. The State Actuary said it agreed with the CTPF Board process and the adoption of assumptions, but also agreed with the CTPF actuary that the assumptions not adopted should continue to be monitored and the assumptions changed if retirement and membership trends continue as observed during 2012-2017.
Impact of the Assumption Changes
CTPF has publicly released the actuarial valuation report for its 2018 fiscal year. The actuarial report states that the impact of all of the changes in assumptions on the fund’s actuarial liability was an increase of $621.8 million. The amount of actuarial liabilities not offset by accumulated assets, the unfunded actuarial liability (UAL), grew in total from $10.9 billion in FY2017 to $11.95 billion in FY2018, mainly due to the assumption changes. The actuarial funded ratio fell to from 50.1% in FY2017 to 48.4% in FY2018.
The CTPF is currently on a funding plan to reach 90% funded by 2059. The total employer contribution for FY2020, which starts on July 1, 2019 is projected at $854.5 million. Prior to 2017 CPS was alone among school districts in Illinois in being required to fund nearly all of the employer contribution to teachers’ pensions. Downstate and suburban districts had nearly all of their employer contributions covered by the State. However, 2017 legislation that created a new education funding formula for the State of Illinois also required the State to make the normal cost and retiree healthcare contribution for Chicago teachers’ pensions. The normal cost is the current-year pension cost. According to the FY2018 actuarial valuation for CTPF, in FY2020 the State will contribute its previously statutorily required $11.9 million plus an additional $245.5 million for the employer normal cost and retiree health contribution. CPS will be required to contribute the remaining $597.2 million.