ILLINOIS PENSION CODE REQUIREMENTS
(iii)
The Board of Trustees shall make an annual assessment of the funding levels
of the Retiree Health Care Trust and shall submit a report to the Auditor
General at least 90 days prior to the end of the fiscal year. The report
shall provide the following:
(A) the
actuarial present value of projected benefits expected to be paid to current
and future retirees and their dependents and survivors;
(B) the
actuarial present value of projected contributions and trust income plus
assets;
(C) the
reserve required by subsection (b)(3)(ii); and
(D) an
assessment of whether the actuarial present value of projected benefits
expected to be paid to current and future retirees and their dependents and
survivors exceeds or is less than the actuarial present value of projected
contributions and trust income plus assets in excess of the reserve required
by subsection (b)(3)(ii).
If
the actuarial present value of projected benefits expected to be paid to
current and future retirees and their dependents and survivors exceeds the
actuarial present value of projected contributions and trust income plus
assets in excess of the reserve required by subsection (b)(3)(ii), then the
report shall provide a plan
of increases in employee, retiree, dependent, or survivor contribution
levels, decreases in benefit levels, or both, which is projected to cure the
shortfall over a period of not more than 10 years. If the actuarial
present value of projected benefits expected to be paid to current and future
retirees and their dependents and survivors is less than the actuarial
present value of projected contributions and trust income plus assets in
excess of the reserve required by subsection (b)(3)(ii), then the report may provide a plan of
decreases in employee, retiree, dependent, or survivor contribution levels,
increases in benefit levels, or both, to the extent of the surplus. [emphasis added]
Source: 40 ILCS 5/22-101B(b)(3)(iii).
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The Illinois State Auditing Act (Section 5/3-2.3(f)) requires the
Auditor General to annually examine the information on
the funding level of the Health Care Trust submitted
pursuant to the Illinois Pension Code.
The Pension Code requires the Health Care Trust to prepare a report that
meets the requirements delineated in the inset and submit it to the Auditor
General at least 90 days before the end of its fiscal year.
If the Health Care Trust projects a funding shortfall, it shall provide a plan to (1) increase
contributions, or (2) decrease benefits, or (3) both to cure the shortfall
within 10 years. If it projects a
surplus, it may decrease
contributions, increase benefits, or both, to the extent of the surplus.
If the OAG review determines the Health Care Trust’s assumptions are not unreasonable in the aggregate, the Trust
shall implement the plan.
Our review was
limited to the specific conclusions required by the State Auditing Act. This report does not constitute an audit as
that term is defined in generally accepted government auditing standards. This is our second
year of review.
The Health Care Trust submitted its Report to the OAG on September 30,
2009. The Actuarial Report as of January
1, 2009 included information required by the Pension Code.
As shown in Digest Exhibit 1, the Report concluded that the actuarial
present value of projected contributions and trust income plus assets in excess
of the statutory reserve exceeded the actuarial present value of the projected
benefits:
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Digest Exhibit 1
RETIREE HEALTH CARE TRUST ANNUAL
ASSESSMENT
OF ADEQUACY OF TRUST FUNDING
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ACTUARIAL PRESENT VALUE OF
PROJECTED BENEFITS
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ACTUARIAL PRESENT VALUE OF
PROJECTED INCOME AND ASSETS
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Actuarial present value of projected
benefits prior to reduction for retiree contributions
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$1,256,295,988
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Actuarial present value of
projected active contributions and trust income plus assets
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$789,983,611
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Less:
Projected retiree and dependent contributions
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($523,595,924)
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Less Statutory Reserve1
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($36,690,856)1
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Net actuarial present value of
projected benefits
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$732,700,064
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Present value of projected income
and assets, net of statutory reserve
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$753,292,755
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Projected Income and Assets Exceed
Projected Benefits by 2.8%
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Note: 1 Statutory Reserve is net of retiree
contributions
Source: RHCT Actuarial Report as of January 1, 2009
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- Net actuarial present value of projected
benefits: $732,700,064.
- Actuarial present value of projected contributions,
trust income, and assets: $753,292,755 (after $36,690,856 for reserve).
- Projected income and assets exceeded projected benefits by 2.8
percent and as such, no reduction in benefits or increase in contributions
was necessary. The Pension Code
gives the Health Care Trust the option to make changes if projected
benefits are lower than income and assets; no changes were proposed.
With the assistance of our
consulting actuary, Aon Consulting, we examined the Health Care Trust’s
assumptions in its Actuarial Report and did not find them to be unreasonable in
the aggregate.
Calculation of the Statutory Reserve
The Pension Code requires the
Health Care Trust to establish a statutory reserve (40 ILCS
5/22-101B(b)(3)(ii)). The Trust’s
Actuarial Report calculated the statutory reserve to be $36.7 million, which
was computed by taking the $61.7 million for
expected claims and administrative expenses and deducting $25 million for
expected retiree and dependent contributions. The netting or subtraction of expected
retiree contributions is not delineated in the Pension Code. If it is not netted, the statutory reserve
increases from $36.7 million to $61.7 million which results in the actuarial
present value of projected income and assets to be 99.4 percent of the
actuarial present value of projected benefits.
Our
actuarial advisors, Aon Consulting, indicated that it is not unreasonable to
subtract contributions from anticipated benefit payments when calculating a
reserve, because no benefits could be paid without corresponding contributions
being received.
Incurred and Unreported Claims
The Actuarial Report’s calculation
of the statutory reserve shows $0 for “incurred and unreported
claims” because the Health Care Trust had not started paying
benefits by January 1, 2009. We inquired
of Trust officials as to whether there were incurred or unreported claims from
2008, when the retiree health care plan was administered by the Retirement
Plan, that would reasonably be expected to become the responsibility of the
Health Care Trust in 2009. The Health
Care Trust’s actuary said they “had no information as to
whether any incurred and unreported claims from 2008 may or may not become the
responsibility of the RHCT in 2009.
Therefore, the valuation included only the costs associated with the
plan of benefits adopted by the RHCT.”
When asked whether the Health Care Trust
has paid claims incurred but not reported in 2008, the Health Care Trust’s
Executive Director (who also serves as the Executive Director of the CTA
Retirement Plan) responded that he could not verify whether any portion of such
claims were paid by the Retiree Health Care Trust.
Limitation on Retiree Contributions
The Pension Code (40 ILCS
5/22-101B(b)(5)) requires that the “aggregate amount of retiree, dependent and survivor
contributions to the cost of their health care benefits shall not exceed more
than 45% of the total cost of such benefits.” The Pension Code goes on to define “total cost
of such benefits” as the “total amount expended by the retiree health benefit
program in the prior plan year, as calculated and certified in writing
by the Retiree Health Care Trust’s enrolled actuary . . .” [emphasis
added].
The Health Care Trust’s actuary did
not address compliance with the requirements in Section 22-101B(b)(5). The Health Care Trust’s actuary said the limitation
on contributions is effective January 1, 2009; therefore, the actuary’s
understanding is that the first certification will compare contributions for
2009 to gross retiree health benefit costs and expenses for 2008. The
comparison and certification will be completed in 2010 when the 2009 figures
become available.
______________________________
WILLIAM G. HOLLAND
Auditor
General
WGH:AD
December 2009
