Illinois public pension plans are in critical financial condition and were benefits valued using reasonable assumptions the picture would be even worse. So what is Illinois doing about this? Last summer the state hired an outside actuarial firm to “review assumptions and valuations prepared by actuaries retained by the boards of trustees of the State-funded retirement systems….and…recommend changes.”
“Cheiron reviewed the actuarial assumptions used in each of the five systems’ actuarial valuations and concluded that they were reasonable.”
Which is what they were paid to conclude. However though Cheiron avers that “the interest rate assumptions for each of the five systems were reasonable at this time…..for three of the systems (TRS, SURS, and SERS), Cheiron recommended that the Boards consider lowering the interest rate assumption in the future.”
Those interest rates are: TRS – 8%; SURS – 7.75%; SERS: 7.75%;
The others: JRS: 7%; GARS: 7%
Though most people aren’t qualified (or inclined) to read through the report and argue actuarial concepts, there are some obvious questions that would give even a child* pause:
- If 7.75% – 8% is reasonable ‘at this time’ for 3 plans then why would 7% not be unreasonably low for the other two plans ‘at this time’?
- Even if these plans do get 8% returns, considering that they are severely underfunded wouldn’t the actual returns need to be much higher to bring in the dollar amount of money assumed in valuing the liabilities? (See the concept behind this point explained here).
- If 7.75% – 8% are reasonable rates ‘at this time’ then are interest rates expected to go lower in the future from what happen to be historic lows?
Awkward questions that children* are apt to ask. Not sure though about stakeholders in the Illinois public pension system who may scare easier.
* Assuming children of reasonable intelligence and not in the paid employment of the state of Illinois.