No, Lightfoot’s budget in Chicago does not make an “actuarial” pension contribution
In late September, Chicago Mayor Lori Lightfoot delivered her 2022 Budget speech to city council. It was filled with a long list of new spending programs, including $ 400 million for community safety / violence reduction plans, $ 52 million for increased mental health services, $ 240 million for subsidized housing programs, $ 20 million for artists, and the list goes on. And among the achievements she lists, there are the following:
“In 2022, with the budget we are proposing, we will increase our pension ramp, which means that for the first time in the history of our city, and the four pension funds will be paid on an actuarially determined basis. It’s huge.”
Now, what she identifies as an “achievement,” after completing the climb up the pension ramp, is actually state law that left her no choice in the matter. But that’s not the only incorrect part of his statement. Even after finally getting off the ramp, plans are not funded on an “actuarially determined basis”. They are funded based on the Illinois Legislature’s decision on a funding schedule that, for police and fire plans, is sufficient to reach 90% funding in 2055, and for the plan municipal and workers, not before 2058. Yes, if you do the math, it’s 34 and 37 years from now.
In fact, actuarial valuations of plans calculate a number called the actuarially determined contribution. For the Fire plan (19% funded), the City’s contribution was only 79% of ADC; for the Police plan (23% funded), the City’s contribution was only 75% of ADC. And those are the two shots that hit the top of the ramp last year!
But, in this case, there is more to the story.
The actuarially determined contribution is a figure used for financial reporting purposes, and it is quite common to report whether a plan contributes at least as much as the CDA, in order to verify whether a plan is properly funded. But financial reporting for public pension plans actually works differently than for private sector plans; public plans have always had great latitude in how they “determine” the actuarially determined contribution. Indeed, the method of determining the contribution is not at all decided by actuaries but by the Pension Board for the respective schemes! (See, for example, the municipal actuarial report.)
And it turns out that the particular calculation method used, a “rolling” amortization period, is, in the long run, no better than the current 37-year funding policy. It’s the equivalent of refinancing your residential mortgage every year and resetting the balance to a new 30-year repayment period. Or, to put it another way, it’s a 30-year-old version of Zeno’s paradox, in which the runner runs half the distance, then half the remaining distance, and so on, never reaching the goal, but this time it’s 1 / 30th the distance each time.
A more suitable method of determining the ADC is what is called a “fixed amortization”, which, as the name suggests, is like a real 30-year mortgage, in which contributions are set to pay off the debt afterwards. 30 years from the start of the financing plan.
Here is a comparison of the three methods for the 23% funded municipal pension plan, using their current actuarial report and recalculating the projected funded status under the three funding methods, assuming everything else stays as expected.
In a true “closed” ADC, the plan would be 90% funded in 2048 and 100% funded in 2050, to a point where, in the existing funding plan, it would only be 47% funded. Under the “rolling” ADC, even until 2069 (final date of the actuary’s projection), it would only be funded at 57%.
And there is more to the story.
It turns out that the “slippery” ADC is generally recognized by the actuarial profession as a improper calculation. A 2014 white paper from the Conference of Consulting Actuaries Public Plans Community described this as “unacceptable practiceAs recognized in a 2015 presentation by an actuary of Segal – the very firm that the Municipal Employees Retirement System hires for its valuations.
In fact, the accounting standard that governs public pension plans, GASB 68, simply states that the actuarially determined contribution must be determined “in accordance with the standards of actuarial practice”. And the relevant actuarial standard of practice, ASOP number 4, states (3.14) “When choosing an amortization method, the actuary shall choose an amortization method which should produce total amortization payments which should fully amortize. actuarial expenses accumulated within a reasonable period of time or reduce the unfunded actuarial liability by a reasonable amount within a sufficiently short period of time ”- a requirement which is interpreted as prohibiting the use of such long rolling amortization periods.
Now there is another difficulty, and that is that the passage I just quoted is from the third exposure draft, as this Standard of Practice is under review, having been last revised in 2013. From plus, in 2015 the ADC, in the GASB requirements, replaced what had been called the actuarial required contribution, and in the old standard, the 30-year rolling amortization was considered acceptable, or at least not unacceptable . This means that when the new standard of practice is finally finalized, the city will have to change its ADC calculation. And what that means is that the gap between the actual contribution of the city and the ADC will be even greater, in the short term, with the advantage that the debt is repaid much sooner. (Note that in the graph, there is a jump in employer contributions in 2062 when the employee contribution decreases.)
So what does all of this mean, other than a short lesson on pension funding?
It is clear from Mayor Lightfoot’s speech that, unlike in the early days of his tenure, funding pensions is the furthest thing on his mind – and, indeed, the now usual Monday morning report of the number of shootings on the weekend makes it clear that there are many questions that should rightly be on his mind. But the mayor’s sweeping spending plans are based on short-term federal money that will disappear soon enough. This will require careful decision making. No matter how determined Lightfoot is to increase spending for the needy now, it is godly believing that having good intentions is enough to solve the city’s long-standing debt problems.