REPORT HIGHLIGHTS STATE ACTUARY’S REPORT OF THE ACTUARIAL ASSUMPTIONS AND VALUATIONS OF THE STATE-FUNDED RETIREMENT SYSTEMS Release Date:  December 19, 2024 State of Illinois, Office of the Auditor General FRANK J. MAUTINO, AUDITOR GENERAL To obtain a copy of the Report contact: Office of the Auditor General, 400 West Monroe, Suite 306, Springfield, IL 62704-9849 (217) 782-6046 or TTY (888) 261-2887 This Report Digest and Full Report are also available on the worldwide web at www.auditor.illinois.gov BACKGROUND: On June 18, 2012, Public Act 097-0694 was signed into law, which directed the Auditor General to contract with or hire an actuary to serve as the State Actuary.  Cheiron was selected as the State Actuary.  The Public Act directed the State Actuary to: • Review assumptions and valuations prepared by actuaries of the State-funded retirement systems; • Issue preliminary reports to the boards of trustees of the State-funded retirement systems concerning proposed certifications of required State contributions; and • Identify recommended changes to actuarial assumptions that the boards must consider before finalizing their certifications of the required State contributions. On August 31, 2017, Public Act 100-0465 was signed into law, which added a sixth retirement system to be reviewed by the State Actuary.  The Illinois Pension Code was revised to require the Chicago Teachers’ Pension Fund (CTPF) to submit information to the State Actuary similar to the requirement for the other State-funded retirement systems. Key Findings: • The State Actuary, Cheiron, reviewed the actuarial assumptions used in each of the six systems’ actuarial valuations for the year ended June 30, 2024, and concluded that they generally were reasonable.  Cheiron did not recommend any changes to the assumptions used in the June 30, 2024 actuarial valuations. • The combined total of the required Fiscal Year 2025 State contribution for the six retirement systems was $11.94 billion, an increase of $0.19 billion over the previous year.  Cheiron verified the arithmetic calculations made by the systems’ actuaries to develop the required State contribution and reviewed the assumptions on which it was based. • The Illinois Pension Code (for TRS, SURS, SERS, JRS, and GARS) establishes a method that does not adequately fund the systems. It requires the actuary to calculate the employer contribution as the level percentage of projected payroll that would accumulate assets equal to 90% of the actuarial accrued liability in the year 2045 if all assumptions are met.  This methodology does not conform to generally accepted actuarial principles and practices. Generally accepted actuarial funding methods target the accumulation of assets equal to 100% of the actuarial liability, not 90%. • According to the systems’ 2024 actuarial valuation reports, the funded ratio of the retirement systems ranged from 48.1% (CTPF) to 24.8% (GARS), based on the actuarial value of assets as a ratio to the actuarial liability.  If there is a significant market downturn, the unfunded actuarial liability and the required State contribution rate could both increase significantly, putting the sustainability of the systems further into question. • The interest rate assumption (also called the investment return or discount rate) is the most impactful assumption affecting the required State contribution amount.  The retirement systems use varying interest rate assumptions ranging from 6.50 percent to 7.00 percent.  The interest rate assumption remained unchanged for each of the systems for the 2024 actuarial valuations. • One of the historical sources of the increase in unfunded actuarial liability is due to actual contributions to the System being less than the tread water contribution (the amount needed to prevent the unfunded actuarial liability from increasing if all assumptions are met).  Actual contributions have been significantly less than the tread water cost.  Each year that total contributions remain below the tread water cost, the unfunded actuarial liability is expected to grow. Key Recommendations: Cheiron recommended changes for both the 2024 valuations and also changes for future valuations.  This year’s report contains 26 recommendations compared to 33 in last year’s report.  Recommendations included the following: • Cheiron recommends that the funding method be changed to employ a methodology that produces a reasonable Actuarially Determined Contribution and fully funds plan benefits within a reasonable period. • Cheiron recommends the Boards continue to annually review the economic assumptions (interest rate and inflation) prior to commencing the valuation work and adjust assumptions accordingly.  All of the systems complied with this recommendation prior to conducting the 2024 actuarial valuations. • Because experience studies are performed every three years, Cheiron recommended that the phase-in period for the impact of assumption changes be reduced to no longer than three years. • Cheiron assessed compliance with Actuarial Standard of Practice 51 (assessment and disclosure of risk).  Several recommendations in this area were implemented by the systems and not repeated in this year’s report.  However, there was one recommendation directed to TRS.  Cheiron recommended the actuary provide an assessment for each of the key risks identified. • Cheiron also assessed compliance with Actuarial Standard of Practice 4 (measuring pension obligations and determining costs) and recommended the TRS actuary disclose how long before the State Mandated Contribution is expected to exceed the normal cost plus interest on the unfunded actuarial accrued liability. • In future economic assumption studies, Cheiron recommends that the plan’s actuary disclose more information about the survey data used in their analysis, including a list of investment consulting firms who participated in the survey and the effective date of the capital market assumptions received.  This recommendation was directed to four of the systems (SERS, JRS, GARS, and CTPF). This annual review was conducted by Cheiron, the State Actuary, with the assistance of the staff of the Office of the Auditor General.