After former actuary suspended, Elgin sees 26% increase in required pension contributions
A year after its former actuary got a two-year suspension from a national professional organization, the city of Elgin has to contend with a $4 million jump in required public safety pension contributions.
The Elgin City Council unanimously voted Wednesday to use general fund reserves to contribute $2 million each to the fire and pension funds. That means homeowners will again see a flat property tax levy increase for police and fire pensions next year, just as they did this year, City Manager Rick Kozal said.
"I think we are managing this appropriately. I think we are showing fiscal responsibility," Councilman Terry Gavin said.
The city's current actuary, Kevin Cavanaugh of the firm Lauterbach & Amen, told council members that Elgin's required contribution next year will total $18.8 million for both funds. That's a 26% increase over this year's $14.9 million contribution calculated by Elgin's previous actuary Timothy Sharpe of Geneva. Sharpe was disciplined in August 2018 by the American Academy of Actuaries for failing to comply with professional conduct precepts.
The increase is "substantially higher than we'd expect to see," Cavanaugh told the city council.
Cavanaugh said there are multiple reasons for the increase - such as fund performance, salary increases and demographic changes - but the two primary factors, accounting for $2.5 million altogether, were Sharpe's decisions regarding funding policy and mortality calculations, he said. The new actuarial report includes the added expectation that people will continue to increasingly live longer, and a year's worth of interest to the recommended contribution, which Sharpe failed to add, Cavanaugh said.
Still, it's not unusual for calculations to differ among actuaries, Cavanaugh said. His firm has taken over other funds that Sharpe worked with and in some cases, the required contribution came up lower than Sharpe's calculation, he said.
"I don't feel like Tim Sharpe ever made any inappropriate determinations in our valuations," Elgin Chief Financial Officer Debra Nawrocki said.
As of Dec. 31, Elgin's police pension fund was valued at $120.9 million and its fire pension fund was valued at $87.9 million, both amounting to about 50% of required funding. Cavanaugh said his firm on average sees municipalities hover at about 55% funding, but Elgin is doing better than most because it contributes the full, recommended amount, Cavanaugh said.
"I wish that was the case in every municipality," he said.
State law requires 90% funding by 2040, but Elgin is going above that with a 100% funding goal by 2040.
Elgin's police and fire pension funds suffered losses of more than 4% last year, but they have since recouped that with earnings of 11.8% and 13.3% respectively, by July 31, city officials said.
Both pension fund projections assume a 7% return on investment each year, but Mayor David Kaptain cautioned that "may not be realistic in the near future" because of expectations regarding bond returns and especially if there is a recession. Kaptain asked city staff members to come up with a "worst case" scenario actuarial projection.
"I don't want to sound like a gloom-and-doom guy, but I just speak in realities here," he said.
Elgin's general fund budget for this year projected $49.1 million in reserves, or 41% of operational expenses. However, the city got $4 million more in revenues, mostly sales taxes, than expected, so there is no net change in reserves after the extra $4 million contribution to the public safety pension funds, Nawrocki said.