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Maybe this makes sense, if what goes up must come down

February 12, 2016

The Firemen’s Annuity and Benefit Fund of Chicago is the pension plan for Chicago firefighters.  In the topsy-turvy world of public pensions, some of the assumptions underlying the financial reporting by this fund may take the cake.

See table 2A (page 13) on the fund’s latest Actuarial Valuation Report.  This table provides projections for the next 25 years for the value of plan assets, the accrued liability, the implied funding ratio, the ‘statutory contribution’ from the government employer, employee contributions, and benefit payments.

There are a number of remarkable expectations in these projections, including a six-fold increase in plan assets, which are projected to reach $6.8 billion in 2041 (up from $1.0 billion in 2014).  And the ‘statutory contribution’ is projected to rise from $109 million annually (about twice as high as employee contributions) to about $470 million annually (about six times as high as employee contributions).

But one really curious element deals with the discount rate used to estimate the plan’s present value liability.  Under new GASB accounting standards, plans are required to use a ‘blended rate’ for periods when they expect to run out of assets.  Under current interest rates, the blended rate is significantly lower than the rate used (the expected return on plan assets).  As a result, the math works to make the present value of the reported liability higher using the blended rate.

And the Chicago firefighter’s plan is using a blended rate, to discount the liability.  See the “Discount Rate” discussion in the plan’s annual financial report on p. 12 here.  The plan expects its fiduciary net position and contributions to be sufficient only through 2062.

A simple question arises.  How can the plan expect its funded ratio to rise from a woefully-low 26% in 2014 to 90% in 2041, with plan assets projected to rise from $1 billion to $6.8 billion over that time frame, yet still expect to run out of assets after that?

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