REPORT DIGEST

REVIEW OF INFORMATION SUBMITTED BY THE
RETIREMENT PLAN FOR CHICAGO TRANSIT
AUTHORITY EMPLOYEES

2015 ANNUAL REVIEW
Release Date:  November 2015

State of Illinois, Office of the Auditor
General
WILLIAM G. HOLLAND, AUDITOR GENERAL

To obtain a copy of the Report contact:
Office of the Auditor General, Iles Park
Plaza, 740 E. Ash Street, Springfield, IL
62703
(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

SYNOPSIS

The Illinois State Auditing Act requires the
Retirement Plan for Chicago Transit
Authority Employees (Retirement Plan) to
submit to the Office of the Auditor General
(OAG) an audit, an annual statement, and an
actuarial statement by September 30 of each
year.  The OAG reviewed the documents
submitted by the Retirement Plan and
concluded that they met the requirements of
the Auditing Act.

The Illinois Pension Code (40 ILCS
5/22-101(e)(3)) requires the Retirement Plan
to determine, based on a report prepared by
an enrolled actuary, the estimated funded
ratio of the Retirement Plan’s total assets
to its total actuarially determined
liabilities.  The Plan is also required to
determine the employee and employer
contribution rates needed to meet funding
requirements established by the Pension
Code.  The Auditor General is required to
review the determination and the assumptions
on which it is based and determine whether
they are “unreasonable in the aggregate”.
This report does not constitute an audit as
that term is defined in generally accepted
government auditing standards.

The OAG and our consultants, Aon Hewitt,
reviewed the Retirement Plan’s assumptions
contained in the January 1, 2015 Actuarial
Valuation and concluded that they were not
unreasonable in the aggregate.  However, we
believe that three of the assumptions should
continue to be monitored and justified on an
annual basis.

• Investment return assumption:  The 8.25
percent investment return assumption used by
the Plan remains at the upper end of
investment return assumptions used by other
plans.  Both the Plan’s actuary and
Investment Consultant conducted projections
that concluded the Plan’s investments have a
reasonable likelihood of achieving an
investment return of 8.25 percent over a 10
to 20 year period.  We recommend that the
Plan continue to annually review the
reasonableness of its investment return
assumption.

• Mortality assumption:  The mortality
assumptions used by the Plan were chosen
before final 2014 mortality tables were
issued by the Society of Actuaries.  We
recommend that a new mortality analysis be
conducted for the Plan, on a benefits-
weighted basis, in time to reflect the
results in the assumptions that are adopted
and used for next year’s valuation.
• Active participant assumption:  For the
first time in four years, the active
participant headcount increased slightly.
However, the ratio of actives to annuitants
continued to decrease.  Given the impact
such a decline can have on future
contribution levels, we recommend that the
Plan continue to monitor the use of a
constant headcount assumption.

The funded ratio of the Retirement Plan
decreased from 60.9 percent in the January
1, 2014 Valuation to 58.2 percent in the
January 1, 2015 Valuation.  When the funded
ratio declines below 60 percent, the Pension
Code requires that contribution rates be
increased so that the funded ratio is
projected to reach 60 percent within 10
years.  The contribution rates adopted by
the Retirement Plan Board for 2016 remained
unchanged from the 2015 contribution rates,
as the  January 1, 2015 Actuarial Valuation
concluded that the contribution rates should
result in the Plan’s funded ratio reaching
the statutorily required 60 percent level
within 10 years.

ANNUAL REVIEW RESULTS AND CONCLUSIONS

STATUTORY REQUIREMENTS

The Illinois State Auditing Act (30 ILCS
5/3-2.3(e)) requires the Retirement Plan for
Chicago Transit Authority Employees
(Retirement Plan) to submit to the Office of
the Auditor General (OAG) an audit, an
annual statement, and an actuarial statement
by September 30 of each year.

• On October 1, 2015, the OAG received these
documents from the Retirement Plan.

• The OAG reviewed these documents and
concluded that they met the requirements of
the Auditing Act.

In addition, the Illinois Pension Code (40
ILCS 5/22-101(e)(3)) requires the Retirement
Plan to determine, based on a report
prepared by an enrolled actuary, the
estimated funded ratio of the Retirement
Plan’s total assets to its total actuarially
determined liabilities.

• The Plan is also required to determine the
employee and employer contribution rates
needed to meet funding requirements
established by the Pension Code.

• The Auditor General is required to review
the determination and the assumptions on
which it is based and determine whether they
are “unreasonable in the aggregate”.
(pages 3-5)

REVIEW OF ACTUARIAL VALUATION

The Retirement Plan submitted the Actuarial
Valuation as of January 1, 2015, to the OAG
on October 1, 2015.  This Actuarial
Valuation was presented to the Retirement
Plan Board at its September 29, 2015
meeting.  At that meeting, the Board of
Trustees accepted the January 1, 2015
Actuarial Valuation and certified the
employer and employee contribution rates for
2016.

The OAG and our consultants, Aon Hewitt,
reviewed the Retirement Plan’s assumptions
contained in the January 1, 2015 Actuarial
Valuation and concluded that they were not
unreasonable in the aggregate.  While
recognizing the Plan’s policy of completing
an experience study every five years, we
believe that three of the assumptions –
investment return, mortality, and number of
active future participants – should continue
to be monitored and justified on an annual
basis.  Further, we recommend that a
mortality analysis be completed in time to
reflect the results in the assumptions used
for next year’s actuarial valuation.

The Plan’s actuary completed an experience
study for the five year period ending
December 31, 2012.  An experience study
assesses how well assumptions used by the
Plan align with the actual experience of the
Plan.  If past experience differs from the
assumptions used, then the actuary may
recommend revisions to the assumptions used
in future valuations.

As a result of the experience study, the
Plan lowered its investment return
assumption from 8.50 percent to 8.25 percent
in the January 1, 2014 Actuarial Valuation.
The January 1, 2015 Actuarial Valuation
continues to use the 8.25 percent rate of
return.

Our prior reviews have concluded that the
investment return assumptions used by the
Plan were at the upper range of investment
return assumptions for comparable plans.
The 8.25 percent investment return
assumption remains at the upper end of
investment return assumptions used by other
plans.  The Plan’s December 31, 2014
Investment Report shows that the Plan’s
investments have earned 6.8 percent over the
past 10 years.  Both the Plan’s actuary, as
well as the Plan’s Investment Consultant,
conducted projections that concluded the
Plan’s investments have a reasonable
likelihood of achieving an investment return
of 8.25 percent over a 10 to 20 year period.
However, we continue to recommend that the
Plan annually review the reasonableness of
its investment return assumption, rather
than wait for the next experience study.

The mortality assumptions used by the Plan
were also changed in the January 1, 2014
Valuation to account for future mortality
improvements.  The assumptions used in the
January 1, 2014 Valuation were used in the
January 1, 2015 Valuation.  However, the
assumptions were chosen before final 2014
mortality tables were issued by the Society
of Actuaries.  We recommend that a new
mortality analysis be conducted for the
Plan, on a benefits-weighted basis, in time
to reflect the results in the assumptions
that are adopted and used for next year’s
valuation.

For the first time in four years, the active
participant headcount did not decrease from
the prior year, but instead increased
slightly.  However, the ratio of actives to
annuitants continued to decrease.  The
Public Fund Survey Summary of Findings for
FY 2013 states “When combined with an
unfunded liability, however, a low or
declining ratio of actives to annuitants can
cause fiscal distress for a pension plan
sponsor.”  We recommend that the Plan
continue to monitor the use of a constant
headcount assumption.   (pages 4-10)

CONTRIBUTION RATES

The Pension Code requires the CTA to
contribute 12 percent of pay, less up to a 6
percent credit for debt service paid on the
bonds issued for contribution to the
Retirement Plan; employees are required to
pay 6 percent of pay.  The Pension Code
further requires that contribution rates be
increased if the funded ratio is projected
to decline below 60 percent prior to 2040,
with the CTA paying two-thirds and employees
one-third of the required contribution.

The funded ratio of the Retirement Plan
decreased from 60.9 percent in the January
1, 2014 Valuation to 58.2 percent in the
January 1, 2015 Valuation.  At January 1,
2015, the Plan’s assets totaled $1.856
billion and the actuarial accrued liability
was $3.186 billion, according to the Plan’s
January 1, 2015 Actuarial Valuation.  The
January 1, 2015 Valuation noted that the
primary reason why the funded ratio declined
was that the Plan’s assets earned a 4.8
percent actual rate of return in 2014, which
is substantially lower than the 8.25 percent
rate of return actuarial assumption used by
the Plan.

Since the funded ratio of the Plan declined
below 60 percent in the January 1, 2015
Valuation, the Pension Code requires the
Plan to “determine the increased
contribution required each year as a level
percentage of payroll during the years after
the then current year . . . so the funded
ratio is projected to reach at least 60% no
later than 10 years after the then current
year and include that determination in its
report.” (40 ILCS 5/22-101(e)(3))  The
contribution rates adopted by the Retirement
Plan Board for 2016 remained unchanged from
the 2015 contribution rates which were
14.250 percent for the employer (which is
net of the employer debt service credit of
6% of pay) and 10.125 percent for employees.
The January 1, 2015 Actuarial Valuation
concluded that the contribution rates
applicable for Plan year 2016 should result
in the Plan’s funded ratio reaching the
statutorily required 60 percent level within
10 years of 2015 (i.e., by 2024).  (pages 10
- 12)

AGENCY REVIEW

A draft of this Review was provided to the
Retirement Plan for their review.  The
Retirement Plan commented that with respect
to the review of assumptions, the Plan has
adopted a practice of having the actuary
perform an experience review every 5 years.
The next review will be performed in time to
be used for the January 1, 2019 valuation.
The Plan will continue to monitor these
assumptions with the annual gain and loss
process and make changes as needed.

This report does not constitute an audit as
that term is defined in generally accepted
government auditing standards.

WILLIAM G. HOLLAND
Auditor General

WGH:JS

This Annual Review was conducted by OAG
staff with the assistance of our
consultants, Aon Hewitt.