While the Blue Ribbon Committee formed to review the police and firefighters’ pension funds is still gathering and reviewing information, there seems to be a consensus that the City’s former actuary, Ted Windsor, used aggressive assumptions in estimating the City’s annual required contributions to the pension funds and in estimating the amount of the City’s unfunded liability to those funds. Committee member Jim Young said even with the aggressive assumptions, Mr. Windsor estimated the City’s unfunded liability at about $96 million.

The City’s new actuary, the firm of Gabriel Roeder Smith (GRS), using more conservative assumptions, pegged the unfunded liability at about $140 million.

A memorandum prepared by Mark Metz, chairman of the Committee, summarized various reasons proffered for the shortfall, including the use of improperly aggressive actuarial assumptions, the City’s alleged failure to contribute the required amounts, the low rate of return earned on the amounts contributed to the pension funds, and the State’s increasing the amount of pension benefits and reducing the required number of years to qualify for retirement.

Mr. Metz said in his memo that the Committee should make a meaningful estimate of the percentage of the unfunded liability attributable to each of the proffered causes, so the citizens could understand how the City got into the current situation. “Once we reach consensus on the causes, we can focus on the solutions,” he said.

Committee member William Testa said it was important to find out how this happened in order to correct the process, so it does not happen again.

One assumption the Committee discussed was the rate of return the pension funds would earn on their investments. Mr. Windsor assumed the rate of return would be 7.5%; GRS assumed the rate of return would be 7.25%. Mr. Young said the actual rate of return for the last five years, after netting out fees, is closer to 6.6%. Based on this analysis, even an assumed rate of return of 7.25% may be aggressive.

Committee member Peter Morris said the pension funds may only invest 45% of the contributed funds in equities, and the balance must be invested in fixed investments, limited to those issued by the government or government agencies. Mr. Testa questioned whether a 7.25% assumed rate of return was reasonable in light of these restrictions.

Mr. Morris asked Steven Drazner, the City’s acting finance director, to have GRS calculate the amount of the unfunded liability using three different assumed rates of return, 7.0%, 6.75% and 6.5%, to determine the impact if these lower rates of return were used. Committee members recognized that using these lower rates of return would increase the amount of the unfunded liability. Mr. Drazner said he could not provide any assurance that he would be authorized to retain GRS to make the calculation.

Mr. Testa said Committee members would probably not all agree on the assumptions, but said the Committee should concur on a set of reasonable assumptions. He suggested that the Committee could calculate the unfunded liability based on those assumptions and also calculate what the unfunded liability would be based on more aggressive and more conservative assumptions, so City Council could see the variances and the risks of using different assumptions.

Given the complexity of the issues, several Committee members said they thought aldermen would need to rely on the City’s actuary and on the City’s staff in deciding how much to contribute to the pension funds. In light of this, Mr. Testa said it was important that City Council use best practices in selecting and evaluating an actuary, in deciding what percentage of a pension liability would be permitted to remain unfunded and in other matters. He said he would review industry guidelines to determine what constitutes best practices in this area.

Under State law, the City must fully fund the pension liability by 2033. The Committee considered the possibility that the legislature may extend that date. Mr. Testa said, “Making up the unfunded liability in 20 years would be prudent for us, because we’re a mature community.” He added that he did not think the City should have an unfunded liability because it was important to know the “all-in cost” of putting a police officer or firefighter on the street and because “when you consume a service, you should pay for it.”

The Committee has not yet made any findings or conclusions. The next meeting is scheduled for June 3. The Committee is still planning to issue its report by the end of July.

Larry Gavin

Larry Gavin was a co-founder of the Evanston RoundTable in 1998 and assisted in its conversion to a non-profit in 2021. He has received many journalism awards for his articles on education, housing and...