REPORT DIGEST

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

ANNUAL REVIEW
PERFORMED IN ACCORDANCE WITH PUBLIC ACT
95-708

Release Date:  November 2020

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, 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

EXECUTIVE SUMMARY


The Illinois State Auditing Act requires
the Retirement Plan for Chicago Transit
Authority Employees (Retirement Plan or
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 funded ratio of the Retirement Plan
decreased slightly from 52.62 percent in
the January 1, 2019 Valuation to 52.55
percent in the January 1, 2020 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 certified by the
Retirement Plan Board for 2021 were
unchanged from the 2020 contribution
rates.  For both 2020 and 2021, the
employer contribution rate is 20.647
percent (which is net of the employer
debt service credit of 6% of pay) and the
employee contribution rate is 13.324
percent.

The January 1, 2020 Actuarial Valuation
concluded that the contribution rates
applicable for Plan year 2021 would
result in the Plan’s funded ratio
reaching the statutorily required 60
percent level within 10 years (i.e., by
2030) and therefore, there was no need to
increase the contribution rates.

The OAG and our consultant, Aon, reviewed
the Retirement Plan’s assumptions
contained in the January 1, 2020
Actuarial Valuation and concluded that
they were not unreasonable in the
aggregate.  However, we believe that two
of the assumptions, investment return and
inflation, should be monitored and
justified on an annual basis.  We have
consistently made this recommendation for
a number of years.  However, the
Retirement Plan failed to annually review
either of these two assumptions as
recommended.  If the Retirement Plan
again fails to monitor and justify these
two critical assumptions prior to next
year’s valuation, the likelihood
increases that these assumptions may fall
outside of what we consider reasonable.

The 8.25 percent investment return
assumption used by the Plan is at the
upper edge of reasonable based on the
Plan’s asset allocation and remains at
the upper end of investment return
assumptions used by other plans.  The
underlying inflation assumption is on the
upper end of the reasonable range based
on current and recent historical capital
market assumptions.  The Plan’s
investment advisor conducted projections
that found an expected 10-year return of
8.18 percent.

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

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 or 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 September 30, 2020, the Auditor
General 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 4-5)

REVIEW OF ACTUARIAL VALUATION

The Retirement Plan submitted the
Actuarial Valuation as of January 1,
2020, to the OAG on September 30, 2020.
This Actuarial Valuation was presented to
the Retirement Plan Board at its July 23,
2020 meeting.  At that meeting, the Board
of Trustees accepted the January 1, 2020
Actuarial Valuation and certified the
employer and employee contribution rates
for 2021.

The OAG and our consultant, Aon, reviewed
the Retirement Plan’s assumptions
contained in the January 1, 2020
Actuarial Valuation and concluded that
they were not unreasonable in the
aggregate.  The investment return
assumption continues to be higher than
most public plans but is supported by an
investment return analysis conducted by
the Plan’s investment advisor and a high
underlying inflation assumption. The
underlying inflation assumption is on the
upper end of the reasonable range based
on current and recent historical capital
market assumptions.

While we recognize the Plan’s policy of
completing an experience study every five
years, we believe that these two
assumptions, investment return and
inflation, should be monitored and
justified on an annual basis.  We have
consistently made this recommendation for
a number of years.

However, the Retirement Plan failed to
annually review either of these two
assumptions as recommended.  If the
Retirement Plan again fails to monitor
and justify these two critical
assumptions prior to next year’s
valuation, the likelihood increases that
these assumptions may fall outside of
what we consider reasonable.

In 2019, the Plan’s actuary completed an
experience study for the five year period
ending December 31, 2017.  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, several of the
assumptions used in the Plan’s January 1,
2019 Actuarial Valuation were revised.
However, the investment return assumption
remained unchanged at 8.25 percent.  In
the Plan’s January 1, 2020 Actuarial
Valuation, there were no changes in
actuarial assumptions compared to the
prior year.

Key Retirement Plan Information
Plan investment return assumption:  8.25%
10-year historical rate of return:  7.7%
Plan assets:  $1.883 billion
Plan liabilities:  $3.584 billion
Funded ratio:  52.62%
Employee contribution rate (2021):
13.324%
Employer contribution rate (2021):
20.647%

Our prior reviews have concluded that the
investment return assumption used by the
Plan was at the upper range of investment
return assumptions for comparable plans.
The 8.25 percent investment return
assumption is at the upper edge of
reasonable based on the Plan’s asset
allocation and remains at the upper end
of investment return assumptions used by
other plans.  The Plan’s December 31,
2019 Investment Report shows that the
Plan’s investments have earned 7.7
percent over the past 10 years.  The
Plan’s investment advisor conducted
projections that found an expected 10-
year return of 8.18 percent.  We
recommend that the investment return and
inflation assumptions should be monitored
and justified on an annual basis.

The Retirement Plan’s active participant
headcount decreased from the prior year.
Additionally, the ratio of active
participants to annuitants continued to
decrease.  A study sponsored by the
National Association of State Retirement
Administrators titled the Public Fund
Survey Summary of Findings for FY 2018
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….”  (pages 4-9)
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CONTRIBUTION RATES

The Pension Code requires the Chicago
Transit Authority (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 paying one-third of
the required contribution.

The funded ratio of the Retirement Plan
decreased slightly from 52.62 percent in
the January 1, 2019 Valuation to 52.55
percent in the January 1, 2020 Valuation.
At January 1, 2020, the Plan’s assets
totaled $1.883 billion and the actuarial
accrued liability was $3.584 billion,
according to the Plan’s January 1, 2020
Actuarial Valuation.

Since the funded ratio of the Plan was
below 60 percent in the January 1, 2020
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
certified by the Retirement Plan Board
for 2021 were unchanged from the 2020
contribution rates.  For both 2020 and
2021, the employer contribution rate is
20.647 percent (which is net of the
employer debt service credit of 6% of
pay) and the employee contribution rate
is 13.324 percent.

The January 1, 2020 Actuarial Valuation
concluded that the contribution rates
applicable for Plan year 2021 would
result in the Plan’s funded ratio
reaching the statutorily required 60
percent level within 10 years (i.e., by
2030) and therefore, there was no need to
increase the contribution rates. (pages
9-11)
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AGENCY REVIEW

A draft of this Review was provided to
the Retirement Plan for their review.
This report does not constitute an audit
as that term is defined in generally
accepted government auditing standards.

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

JOE BUTCHER
Division Director

This report is transmitted in accordance
with Section 3-14 of the Illinois State
Auditing Act.

FRANK J. MAUTINO
Auditor General

FJM:DJB