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The City’s unfunded accrued liability to the police and firefighter pension funds has increased from $145.8 million as of March 1, 2008 to $158.9 million as of March 1, 2009, according to a memorandum prepared by Marty Lyons, Assistant City Manager, and Steven Drazner, assistant finance director, to the Mayor and City Council.

The $13.1 million increase is “primarily due to investment losses during the past year,” says the memo, which is based on actuarial reports prepared by the City’s actuary Gabriel Roeder Smith & Company (GRS).

The City’s Required Contributions

Under State law, the City is obligated to fully fund the shortfall by 2033. At the same time the City is making up the shortfall, it must continue to make annual contributions to the pension funds to meet the ongoing (normal) cost of pension benefits as they arise.

For this year, GRS has calculated that the City’s required contribution to the police and firefighter pension funds is $14.1 million, up $1.2 million from last year. Of this amount, $10.5 million is required to amortize the unfunded liability to the funds; and $3.6 million is required to meet the ongoing (normal) cost of pension benefits.

The City asked GRS to estimate the City’s liability to fully fund the pension funds through 2033. Mssrs. Lyons and Drazner state in their memo that the required contribution of $14.1 million (to be budgeted in fiscal year 2011) is projected to increase by about $1 million in each of fiscal years 2012, 2013 and 2014; and beginning in fiscal year 2015, the minimum contribution is expected to increase each year, but in lesser amounts, ranging from between $500,000 to $800,000 each year.

Rate of Return on Investments

Determining the unfunded accrued liability and the required contribution to the pension fund requires judgment and is based on assumptions of future events, such as the future rate of return on money contributed to the pension funds; the salaries in effect when employees retire; the age when employees will actually retire; and the length of time pension payments will be made.

The investment rate of return on the assets held by a pension fund is one factor that can either increase or decrease the estimated liability. According to GRS’ reports, for the year ending Feb. 28, 2009, the police pension fund had an investment loss of 15.2 percent on its assets, or $9.6 million; the firefighters’ pension fund had an investment loss of 11.1 percent on its assets, or $5.1 million.

Over the last three years, the police pension fund has had an average annual rate of return on investments of -2.0 percent; for the firefighters pension fund the average is -0.4 percent.

In estimating the City’s accrued liabilities to the pension funds, GRS assumes the pension funds will have an annual investment return of 7.25 percent. If the actual investment return is less than 7.25 percent, it will have the impact of increasing the estimated accrued liability (and the unfunded amount); conversely if the actual investment return is higher than 7.25 percent, it will have the impact of decreasing the estimated accrued liability (and the unfunded amount). GRS’ reports say the funds investment policy and market conditions should be reviewed annually to ensure that the assumed rate of return of 7.25 percent can be supported.

Paying the Required Contributions

The Downtown II TIF terminates this year, says Mssrs. Lyons and Drazner’s memo, and the City will be able to levy an additional $1.9 million without affecting the City’s portion of the overall property tax rate, which may be used to help fund the increase in required payments to the pension funds. This, of course, would mean those funds cannot be used for other general operating purposes.

City Council is scheduled to discuss the pension fund obligations at its Oct. 12 meeting.