Evanston’s new pension actuary says a series of aggressive assumptions by the city’s former actuary helped create the city’s pension funding crisis.

Alex Rivera of Gabriel Roeder Smith & Company told aldermen today that individually each of the assumptions made by former actuary Ted Windsor might have been justified, but taken together they doomed the fire and police pension funds to suffer increasing funding shortfalls.

Rivera said the aggressive assumptions included expecting higher investment returns, later employee retirement ages, shorter pensioner life spans and smaller employee salary increases.

In addition, Rivera said, the former actuary failed to adjust the projections after several years of actual performance showed the fire and police pension plans failing to meet their investment targets. And, Rivera said, he also apparently failed to adjust his projections to account for state-mandated benefit increases for pensioners.

City Manager Julia Carroll said she invited Windsor to attend Saturday’s City Council meeting but he was unable to appear.

The new actuary’s report adjusts the anticipated rate of return on the pension investments from 7.5 to 7.25 percent.

Rivera said there is roughly a 40 percent probability that the funds will achieve the new, lower targeted rate of return over the long haul, compared to only a 25 percent chance with the old rate of return assumption. 

Alderman Ann Rainey, 8th Ward, said that under the previous actuary “we knew we were a tad under funded.”

The city’s unfunded liability under the old actuary’s assumptions had grown from $48 million in 1997 to $98 million in 2006, according to the city’s 2007 Comprehensive Annual Financial Report. And the combined funded ratio had fallen from 56 to 50 percent — during a time when the funded ratios should have been improving.

Once the new city manager and finance director started questioning that performance and called in the new actuary to take a fresh look at the funding needed to meet state requirements that the pension programs be fully funded by 2033, the estimate of the size of the problem grew dramatically, raising the projected total unfunded liability to $140 million.

Bill Smith is the editor and publisher of Evanston Now.

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  1. Aggressive Assumptions or the council’s lack of oversight?
    The council interestingly enough is looking to transfer the blame of the pension crisis. If any of these council members run again for reelection no doubt they will point to the fact the acturary screwed up and not the council. The weak minded and stupid in town will no doubt try to spread this nonsense.

    The truth is the council had the oversite responsibilty and did not follow through every time there was a warning and there were plenty. It also is clear they were underfunding this for years.

    Take a good look now how they are lowing the property taxes – they are taking the money out of reserves – clearly this is not responable and they know it.

    What do you think is going to happen next year a 15% tax hike unless they start cutting. People need to understand they can not keep on raising fees to keep property taxes low.

    Ask your self what was the purpose of this presentation – to go over the assumptions does it really matter? A fool could have figured out that the previous actuary assumptions were very aggressive but the question who form the city should have been reviewing these assumptions so where was the oversight? yesterday’s presentation was for the political purposes of the council to try to place the blame on someone else.

    People should realize this is not the only item the council is lacking in providing the proper oversight more bad news will no doubt come.

    1. Weak Minded and Stupid?
      Tell me, Junad: since you have attended numerous budget hearings and city council meetings over the years, how many times did you identify the pension underfunding? Where – amongst the many posts to this site and others – did you raise the issue prior to Moodys and others pointing it out?

      You can’t have your cake and eat it too. If you want to be viewed as a citizen budget hawk then you must acknowledge that you whiffed on this one as well. Does that make you “weak minded and stupid” too? Your poor command of the english language would lead me to assume so……..

      1. Another anonymous poster- who is afraid to sign his name
        Since I do not know who you are, I have no idea if you have attend a council meeting. You could no doubt be a friend of someone on the council. Maybe a city employee or one of the members of the special interest groups in town who control some of the council members.

        By the why I asked at the prior budget hearings in 2007 – why they were not dealing with the pension – go take a look at the record it is in the minutes. I know Mr. Schoolmaster gave the council members plenty of information over the years whch they could have acted on.

        There are plenty of other problems beyond the pension – maybe one of the council members will appoint you to the panel to help them figure out what to do with the pensions? Seems like the list is a secret at the moment.

  2. Aggressive Assumptions
    Is this another word for “muscular bollixing?” Had we been duped by an idiot? The former guy is like a Tastee Freeze: he delivered smooth comfort on a sugar cone.

  3. Past exonerative
    Aggressive assumptions indeed! What we have here is a classic case of the past exonerative : “mistakes were made.”

    The council, as with any public board, is ultimately responsible. Did it dawn on anyone after:

    -The pension fund sued
    -Pension qualification was changed from 35 to 30 years
    -Survivor share was raised to 100% from 45%
    -Defined benefit plans were in hot water

    that they should question the status of the pension funding?

    This is the same Council that believes in an imaginary pipeline and applies it to a tall, not iconic, building proposal with no apparent public benefit.

    Conclusion: DUH?

  4. The assumed rate of investment return
    Mr. Rivera stated that there is a 40% probability that the pension funds will return 7.25% over the next 30 years. For future taxpayers, it would be much wiser to have a lower assumed rate of return with a higher probability of realistic success.

    1. Investment Yield
      7.25% seems high to me, but GSB seems to have put a lot of thought into it. According to the council meeting minutes at he the Sept 5, 2007 meeting Mr. Rivera recommended that the pension fund be monitored year after year to ensure that this return is actually achieved. The council should follow this recommendation and have an auditor who annually report on the investment performance of the fund. This audit in addition to actuarial reviews of the funding level would help the city not build another bigger crisis.

      The fund allocates 45% of its assets to equites and 55% to fixed income instruments. Right now fixed income yieds on investment grade corporate bonds are 3.5%-6.25% depending on the quality and duration. Long bonds have a lot risk, so 4.75% would be a reasonable exptation of return of the 55% of assets in bonds. A reasonable expected retrurn for the 45% in stocks is harder to pin down. For my personal money management I assume 7.5-8% compound annual growth rate from stocks. So that averages out 6-6.25%.

      1. Pension Update on “Blue Ribbon Panel”
        Does anyone know the status of the “Blue Ribbon Panel” that is being formed to analyze the pension fund situation ? Who’s going to serve, how are they being selected, when are they going to start and more importantly when will they complete their work ? The clock is ticking. Every wasted day costs Evanston taxpayers more money since interest and returns compound daily.

  5. Weak Minded and Stupid?
    One would think a lawsuit would have been a wake up call. Instead the city spent big money for a court battle to keep funding the pension the way they were, not the way it was suppose to be … Does the council need someone to hold their hand on every issue? Shouldn’t common sense play into it at some point?

  6. The city sets the assumption
    The most important function of the ROA is that it drives the value of the City’s pension contributions. This 7.5% number was determined in a closed door meeting between the actuary and the City. An actuary will meet with a city, and provide various calculations detailing the impact on contributions of different ROAs, i.e. 8%, 7.75%, 7.5%, 7.25%, etc. A city will then look at their annual budget, and make a determination of what annual contribution the city wants to make, dependent upon other budgetary issues. Even a 7.25% ROA, with an allocation of 45% to equities, and 55% to U.S. Treasury and Agency bonds is too high.

    Now that the Fed has lowered rates again, we should be looking at issuing bonds to pay off the unfunded liability, as it will be easier to outperform the cost of issuing the bonds, then it will to outperform the accrual of pension benefits.

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