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At the July 24 City Council meeting, aldermen were presented with a dilemma about which, if any, valuation report of the police and firefighters pension fund they would accept: one prepared earlier this year by the City’s actuary, Gabriel Roeder Smith (GRS), or one prepared in October of last year by the State of Illinois. A third option – the one Council chose – was to review the GRS report and revisit some of the actuarial assumptions for the upcoming fiscal year.

The annual valuation report gives the value of the pension funds as of March 1 (the beginning of the City’s fiscal year), the unfunded liability to each pension fund and the percent each is funded. The GRS report estimated the combined unfunded liability at $174 million – $97.2 million to the police pension fund and $77.4 million to the firefighters pension fund. They based that estimate on certain assumptions about salary increases, retirement age, mortality and return on investment of assets in the funds.

For the March 1 valuation, GRS assumed a 7 percent return on investments, 0.25 percent below the assumption used in prior years. According to GRS, reducing the assumed rate of return from 7.25 percent to 7.0 percent increased the unfunded liability by about $8.6 million.

Pension Board Letter

On July 17, Timothy Schoolmaster and Ronald Brumbach, presidents of the police and firefighters’ pension boards, respectively, sent a letter to Mr. Lyons – who also serves as treasurer for the City and sits on both pension boards – objecting to the City’s action in commissioning the GRS report without obtaining input from either pension board and stating disagreement with some of GRS’s assumptions.

The 7.0 percent rate of return used by GRS, the letter said, was too high: “… [W]e must object to the use of any but the most conservative assumption.”

The letter said that GRS uses an assumed rate of return of 6.75 percent for other firefighter and police pension funds that it reviews and also stated that “some of the downstate funds are using 6.5 percent.”

City and GRS Comments

In a letter dated July 20, GRS responded to the pension board presidents’ letter and stated that it felt its approach to the assumptions and the assumptions themselves were reasonable and appropriate. The letter indicated, however, that GRS would be open to reducing the assumption on return on investment from 7 percent to 6.75 percent: “In the case of both the Evanston police and fire funds, we believe the current 7.0 percent investment return assumption is definitely in the range of reasonable assumptions. However, a rate of 6.75 percent is also in the range of reasonable assumptions. In fact, we will examine the specific factors … as part of a detailed experience analysis and develop a range of reasonable assumptions before we narrow it down and recommend a specific assumption within that range.”

Mr. Lyons recommended that the City stick with the 7 percent assumption. He recommended that the City not adopt a lower assumption, because lowered assumptions would in turn require higher contributions by the City and thus, by the taxpayers.

In a June 15 memo to City Council, Mr. Lyons noted that the annual required contribution (ARC) for the City to pay into those two pension funds this year increased by 13 percent over the previous year and showed a whopping 81 percent increase between 2006 and 2009. According to GRS, the ARC for this year is $8.8 million to the police fund and $7.1 million to the firefighters fund.

“When th[e] assumption is reduced, the income projected from investments is also reduced. Holding employee contributions constant, this means that City [contributions] will go up to address the reduced investment income,” Mr. Lyons’ memo said.

Council Discussion

Some aldermen appeared to side with Mr. Schoolmaster’s and Mr. Brumbach’s questioning of GRS’s assumptions.

Alderman Ann Rainey, 8th Ward, said she was “mortified” at the letter from Mr. Schoolmaster and Mr. Brumbach. “It was just stunning. We’d better look at the history,” she said.

Alderman Lionel Jean-Baptiste, 2nd Ward, said he felt the actuary’s figures were “as solid as smoke.”

Alderman Coleen Burrus, 9th Ward, said she wished to hear from Mr. Brumbach and Mr. Schoolmaster. “We have been underfunded because of our assumptions,” she said.

Mr. Lyons responded, “Let’s be honest. We can’t get out of this [pension liability] by changing the actuaries or the ARC.”

Mr. Schoolmaster said he felt there was still a possibility of having a pension-board actuary come up with assumptions to use in the next valuation report.

Mr. Lyons recommended that the City make no changes to its assumptions, since it is likely that some pension reform will be passed by the legislature. He also recommended that the City monitor the 7 percent assumption for two years, “based on our performance and based on the state pension legislation. If our investment performance does not improve to meet a 7.0 percent assumption, we may need to reduce our assumption to 6.75 percent by the valuation date of March 1, 2013.”

Council members said they plan to review some of the assumptions at the Aug. 9 City Council meeting.