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Chicago Transit Authority rate of return ‘optimistic,’ Illinois auditor says

Chicago Transit Authority Employees Retirement Plan is using an “optimistic assumption” for its 8.5% assumed rate of return as the funded status of the plan plummeted below the state-mandated 60% minimum funding level at the end of 2011, according to a report from the office of Illinois Auditor General William Holland.

The auditor general reviewed the plan's Jan. 1, 2012, actuarial valuations and concluded they were “not unreasonable in the aggregate,” but questioned whether the assumed rate is too high. The Illinois State Auditing Act requires the CTA plan to submit its most recent actuarial valuations to the auditor general by Sept. 30 every year for a review.

A decrease in the assumed rate of return would put the plan in more peril as the funded status dropped to 59% at the end of 2011 from 70% at the end of the prior year, triggering increases in employer and employee contributions. The plan had $1.66 billion in assets and $2.81 billion in liabilities at the end of 2011.

“The Jan. 1, 2012, valuation contained no analysis justifying the reasonableness of the 8.5% rate of return or a presentation of different rates of return and the impact they would have on the required contribution rates,” the report states.

The plan's actuary reports the pension fund has a “50/50” chance of hitting its 8.5% assumed rate of return and concluded the rate complies with actuarial standards of practice. The rate of return was lowered from 8.75% in 2011 and will be reviewed by the plan again in 2013.

“However, the 8.5% rate of return assumption is at the upper end of rates of return used by other retirement plans in the United States,” the report states. “It also exceeds other rates of return projected by other industry indexes.”

The Illinois Pension Code requires the CTA plan administrators to determine new employer and employee contributions needed to reach at least a 60% funded status within 10 years and all subsequent years through 2039.

In 2013, employer contributions will increase to 14.25% from 11.3%, while employee contributions will increase to 10.125% from 8.65%.

John Kallianis, executive director of the pension plan, did not immediately return a telephone call by press time.