Evanston aldermen Monday voted to reduce the rate of return assumption for the city’s public safety pension plans, a move that will require them to put more money into the funds next year.
The decision came as part of a vote to accept the latest annual actuarial report for the two pension funds.
The vote reduced the forecast of what the pension funds will earn on their investments from 6.75 percent to 6.5 percent.
Assistant City Manager Marty Lyons said the new level represents a midpoint between what the two major bond rating agencies the city uses consider to be reasonable. Moody’s, he said, is now recommending 6 percent, while Fitch considers 7 percent to be a responsible assumption.
The actuarial consultant hired by the city, Arthur Tepfer, said he believes 6.5 percent is an appropriate rate to use.
“You can hope the funds will do better than that,” Tepfer said, “but you can’t assume the market will cooperate.”
Lowering the rate to 6.5 percent will increase by about $700,000 the amount the city must contribute to the pensions next year, compared to using the 6.75 percent assumption.
The city now spends about $15 million a year on public safety pensions.
One paradoxical result of the interest rate assumption change is that it will increase the apparent gap between the amount of money in the pension funds and the amount required to fully fund the pensions.
So while the city will be setting aside more money, its pension funding ratio will increase more than a percentage point less than if the investment return assumption hadn’t been changed and will still fail to crack the 50 percent funded barrier next year.