Anyportionofthisarticlemaybequotedprovidedpropercreditisgiventoitsauthor.

Permissionisherebygrantedtodistributethisarticleinitsentiretytoanyparticipantofthe
ChicagoTeachersPensionFund.Permissiontopublishordistributethisarticleinitsentirety
underanyothercircumstanceisprohibited.

ActuarialFailuretoRecognizeAssetDepletionRiskofBabyBoomerRetirementsLedto
DeathSpiralinChicagoTeachersPensionFund

ByTheodoreKonshak

TheodoreKonshakisaformerEnrolledActuary.From1981to1994,Mr.Konshakwasemployedasapension
actuaryintheChicagoofficesofWilliamM.MercerandtheAonCorporation.Hewouldlaterteachmathematicsat
MenomineeIndianHighSchoollocatedontheMenomineeTribalReservationinKeshena,Wisconsin.Mr.Konshak
receivedhisB.A.inmathematicsandsociologyfromNorthwesternUniversity.

WhenGeorgeW.BushwaselectedPresidentoftheUnitedStates,privatizationoftheSocial
Securitysystemwashotlydebated.Atthattimesomeadvocatesofprivatizationwouldclaim
thatthefutureretirementsoftheBabyBoomgenerationwouldbankrupttheSocialSecurity
system.

DeathspiralisatermthatthePensionBenefitGuarantyCorporation,thefederalinsurerof
privatesectorpensionplans,hasusedtodescribethesituationwherethecontribution
requirementsspiralupwardstoapointwheretheemployercannolongeraffordtofundthe
pensionplan.TheskyrocketingcostsoftheChicagoTeachersPensionFundarean
underlyingcauseofapotentialstrikeactionbytheChicagoTeachersUnionagainstthe
ChicagoPublicSchools.

ThedeathspiralintheChicagoTeachersPensionFundresultsfromtheretirementsofthe
BabyBoomgeneration.Thereisasubstantialandcontinuingincreaseinthedisbursements
fromthefundduetotheseretirements.WiththeBabyBoomerretirements,theChicago
TeachersPensionFundceasedtobeinanaccumulationphaseandenteredintoa
disbursementphase.

Individualssavingfortheirretirementareinanaccumulationphase.Individualsmanagingtheir
assetsaftertheirretirementareinadisbursementphase.Individualswhoaccumulatetoosmall
ofaretirementfundmayexperiencefinancialdifficultiesinthelateryearsoftheirretirements.
ThecurrentproblemsoftheChicagoTeachersPensionFundarenodifferentfromthefinancial
difficultiesofthoseindividuals.ThefundaccumulatedbytheChicagoTeachersPensionFund
priortotheseBabyBoomerretirementswastoosmall.

ThecashnecessarytopaythepensionbenefitsoftheChicagoTeachersPensionFund
ultimatelycomesfromeitherthecontributionsintothetrustfundortheinvestmentincomeon

thosecontributions.Theactuarialinterestrateistraditionallydefinedastheexpectedrateof
futureinvestmentreturn.Itdeterminestheportionexpectedtocomefromfutureinvestment
income.Higheractuarialinterestratesassumealargerportionofthiscashwillcomefrom
futureinvestmentincome.

TheChicagoTeachersPensionFundhasbeenunderfundedthroughtheuseofanactuarial
interestrateassumptionthathashistoricallybeensetattoohighofalevel.Toomuchofthe
cashnecessarytopaythesepensionbenefitswasexpectedtocomefromfutureinvestment
income.Notenoughofthecashwasexpectedtocomefromfuturecontributions.

InitiallythisactuarialinterestratecausedtheplantoreceivenocontributionsfromtheChicago
PublicSchoolsforaperiodoftenyears.Nocontributionswerenecessarysincethesuperior
investmentreturnsofthosedayswereexpectedtocontinuefarintothedistantfuture.No
contributionsbeingmadeininsurancetermsisknownasapremiumholiday.

Aftertenyearsofthispremiumholiday,thecontributionscalculatedthereafterbytheactuaries
wouldprovetobeinsufficient.Atthattime,inspiteoflowerinvestmentreturns,theactuaries
stillexpectedthesuperiorinvestmentreturnsoftheolddaystocontinuefarintothedistant
future.AftertheBabyBoomerretirementscommenced,thesesuperiorinvestmentreturnshad
stillnotreturned.Thetrustfundwastoosmallandwoulddepleteduringthisperiodoflower
investmentreturns.

Intheearlystagesofthisdeathspiral,theChicagoPublicSchoolswouldobtainapartial
premiumholidayfrom20112013fromtheStateofIllinois.Thiswouldfurthercompoundedthe
depletion.TheappetiteofthedeathspiralformorecontributionsfromtheChicagoPublic
Schoolswouldnotbeabatedbylegislativeaction.Favorableinvestmentreturnmayprovidea
briefrespitehereandtherebutthedeathspiralwilldemandmoreandmorecontributionsfrom
theChicagoPublicSchools(CPS).TheCPScontributionshavetospiralupwardsto
compensatefortheabsenceoftheexpectedinvestmentdollars.

InselectingtheactuarialinterestrateassumptionfortheChicagoTeachersPensionFund,the
actuariesfailedtoconsidertheriskoftheBabyBoomerretirementsontheassets.Theyonly
consideredtheBabyBoomerretirementsasademographicriskaffectingthecalculationoftheir
actuarialliabilities.

Theactuarialinterestrateisalsotraditionallydefinedasthe
average
rateoffutureinvestment
return.Asanaveragerateofinvestmentreturn,theactuarialinterestrateassumptionmightbe
achievedinthelongtermbuttherewouldstillbeadepletionriskwheretheinvestmentreturnin
actualdollaramountscanbelessthanexpected.Forexample,fortheChicagoTeachers
PensionFund,theannualinvestmentreturnontheActuarialValueofAssetsforthefiveyear
periodfromJuly1,2007toJune30,2012was1.62%.Withanannualinvestmentreturnof
14.38%inthefollowingfiveyears,theinvestmentratewouldaveragetothethenexisting8%
assumedrateofreturn.Sustainingsuchahighrateofinvestmentreturnisimprobablebutthe

actualinvestmentreturnindollarswontaverageanyway.Therewillbeashortfallinthose
actualdollarreturns.

Thisshortfallistheinvestmentincomethatwouldhavebeenearnedontheassetsthatwentout
thedoorfromJune1,2007toJune30,2012intheformofbenefitpayments.Becauseofthe
BabyBoomerretirements,thosebenefitpaymentswereonethirdoftheplansassets($5.132
billion).Anannualinvestmentreturnof14.38%wouldnotbeearnedonthatthirdinthe
subsequentfiveyearperiod.

ThedepletionriskoftheseBabyBoomerretirementsshouldhavebeenconsideredbythe
actuarieslongbeforethoseretirementsactuallyoccurred.Itwasntanunanticipatedevent
beyondthecontroloftheactuary.

OnlymembersoftheAmericanAcademyofActuariesmeetingitsQualificationStandardscan
performandcertifytheactuarialvaluationresultsofpublicsectorpensionplans.Inselecting
theactuarialinterestrate,theactuariesfortheChicagoTeachersPensionFundperformedtheir
taskasspecifiedbytheAmericanAcademyofActuariesanditsActuarialStandardofPractice
No.27(ASOPNo.27).TheriskofassetdepletionassociatedwiththeseBabyBoomer
retirementswasnotconsideredbytheactuariesunderthisASOPNo.27.

StatutoryContribution

ThereisastatutorycontributioncalculatedunderthetermsofIllinoisStateLawanda
calculationoftheActuariallyDeterminedContributionundertherequirementsofthe
GovernmentAccountingStandardsBoard(GASB).Thecashcontributionintothetrustfundis
determinedunderthestatutorycalculationandtheGASBcalculationdisclosesthefinancial
positionoftheplan.Theybothusethesameactuarialinterestrate.

TheDeathSpiral

DuetoarevisionintheGASBrequirements,therewasachangeintheirterminology.The
AnnualRequiredContribution(ARC)wouldbecometheActuariallyDeterminedContribution
(ADC).TheaccelerationintheannualamountsoftheARCandADCdeterminedunderthe
GASBrequirementsshownbelowisthedeathspiral.

Frompage32oftheJune30,2012actuarialvaluationoftheChicagoTeachersPensionFund:

Frompage45oftheJune30,2014actuarialvaluationoftheChicagoTeachersPensionFund:

NoticethedecreaseintheActualContributionsintheyears20112013.Thiswasduetoa
partialpremiumholidayprovidedtotheChicagoPublicSchools.

Inapreviousresearchreport,negativeamortizationwasdiscussed.Whentalkingabouta
homemortgage,negativeamortizationmeansthemortgagepaymentisinsufficienttopaythe
interestontheloan.Asaconsequence,theloanbalancewillgrowlarger.Inpensionplan
terminology,negativeamortizationmeanstheamortizationpaymentisinsufficienttopaythe
interestontheunfundedliabilities.Asaconsequence,theunfundedliabilitieswillgrowlarger.

Negativeamortizationhasnoplaceinactuarialcalculationsandisofnoredeemingvalue.Itis
notpermittedunderfederalrulesapplicabletoprivatesectorpensionplans.Itsonlypurposein
publicsectorpensionplansisanunsavoryone.Byinappropriatelyreducingtheamountofthe
ActuariallyDeterminedContribution,negativeamortizationmakesthepensionplanlook

healthierthanitactuallyis.Intheabsenceofthisnegativeamortization,theActuarially
DeterminedContributionfor2014shownabovewouldincreaseby$185millionfrom$720
millionto$905million.

AlthoughthefailureoftheChicagoPublicSchoolstomakecontributionsisanundeniablefactor
inthedemiseoftheChicagoTeachersPensionFund,theinappropriatelyhighactuarialinterest
rateistheprimaryreasonbehindthesecontributionsnotbeingmade.Itisalsothereason
behindtheemergenceofthedeathspiral.Theassetsinthetrustfundweretoolowtosustain
thepensionpaymentsoftheBabyBoomergenerationandthefunddepleted.

SelectionoftheActuarialInterestRateAssumption

IntheChicagoTeachersPensionFund,theactuarialinterestrateassumptionwaschanged
effectivefortheJune30,2013actuarialvaluation.ThiswastheresultofanActuarial
ExperienceReviewfortheperiodofJuly1,2007toJune30,2012conductedbytheplans
actuaries.

Fromthetoneofthisreport,theactuariesdidnotexpecttheActuarialExperienceReviewtobe
reviewedbyanyoneotherthantheBoardofTrusteesoftheChicagoTeachersPensionFund.
Thiscontraststothetoneoftheactuarialvaluationreports.TheActuarialExperienceReview
wasobtainedthroughaStateofIllinoisFreedomofInformationActrequest.Actuarialvaluation
reportsareavailableonthewebsiteoftheChicagoTeachersPensionFund.

ThereportfortheirActuarialExperienceReviewdescribesonpage15howthatactuarial
interestrateassumptionwasdeterminedunderActuarialStandardofPracticeNo.27(ASOP
27):

Thefourbuildingblocksusedinconstructingtheactuarialinterestrateassumptionare(1)
inflation,(2)portfoliorealrateofreturn,(3)investmentexpenseand(4)riskadjustment.

Theadjustmentforinvestmentexpenseistheadministrativecost.Theriskadjustmentis
portfoliorisk.Inotherwords,stocksmightbemoreriskythanbondssoanadjustmentmight
havetobemadetoreflectthepensionplaninvestingmoreorlessofitsportfolioinstocks.

Theriskadjustmentisdescribedonpage17ofthatActuarialExperienceReview:

Theriskadjustmentshowninthetableaboveisonlyapaltry0.31%.Itisaportfoliorisk.The
depletionriskassociatedwithBabyBoomerretirementswasnotconsidered.Itsconsequences
arefarmoreexplosivethanapaltry0.31%.

Thecomponentsoftherecommendedactuarialinterestrateassumptionof7.50%alsototaled
toaniceroundnumberoftwodecimalpoints.Whataretheoddsofthat?

TheCommunicationsGame

IntheaforementionedActuarialExperienceReview,theactuariesfortheChicagoTeachers
PensionFundagreedwithmycontentionthatnegativeamortizationunderminesanyanalysisof
thesufficiencyordeficiencyofemployercontributions.Negativeamortizationoccursunderthe
levelpercentageofpayrollmethodofamortization.

Ratherthaneliminatingthenegativeamortizationofthatlevelpercentageofpayrollmethod,the
actuariesrecommendedfirstdecreasingtheamountofthenegativeamortizationbyclosingthe
amortizationperiod.Underthepreviousopenamortization,theunfundedliabilitieswere
amortizedeachandeveryyearover30years.Underclosedamortization,theamortization
perioddeclineseachyearbyoneyearaswouldoccurunderatraditionalfixedratehome
mortgage.Afteroneyearsworthofpayments,theremainingamortizationperiodundera
30yearfixedratehomemortgagewouldbe29years.

Closingtheamortizationperiodwasthestartingpoint.Afterwards,thenegativeamortization
maybesecretlyeliminatedifandwhenaformalfundingpolicybasedonsoundactuarial
methodsisimplemented.

Frompage9:

AccordingtotheactuariesfortheChicagoTeachersPensionFund,theGASBcalculationis
importantwhenanalyzingthesufficiencyordeficiencyoftheemployercontributionsbecause
thestatutorymethodoftheStateofIllinoisisnotactuariallysound.Thatiswhymyanalysisis
alsobasedontheGASBnumbers.

MyvisualanalysisoftheemployercontributionsundertheGASBrequirements,alongwithan
adjustmentfortheeffectsofthenegativeamortizationofthelevelpercentageofpayrollmethod
ofamortization,indicatesthattheChicagoTeachersPensionFundisinadeathspiral.

Formoreinformationonnegativeamortization,seemyseparateresearchreportonthe
negativeamortizationintheChicagoTeachersPensionFund.

ChangeinDisclosures

ThenegativeamortizationintheChicagoTeachersPensionFundoccursthroughtheuseofthe
percentageofpayrollmethodofamortization.Consistentwiththefuturedesiretosecretly
eliminatethenegativeamortizationofthisamortizationmethod,disclosureofitsusewould
mysteriouslydisappearfromtheactuarialvaluationreports.

Includedonpage11oftheJune30,2013actuarialvaluationreport:

Theannualrequiredcontributionisbasedonaclosed30yearlevelpercentageofpayamortizationofthe
unfundedactuarialaccruedliability.TheBoardofTrusteeselectedtoclosetheamortizationperiod,effective
July1,2013,aspartofthechangesfromthemostrecentexperience
review.

Notincludedonpage11ofthefollowingJune30,2014actuarialvaluationreport:

EffectiveJuly1,2013,theamortizationperiodwassetto30years,butwilldeclinebyoneyearineach
subsequentvaluation.AsofJuly1,2014,thereare29yearsremainingonthisschedule.

Actuariestraditionallyproducethecurrentyearsactuarialvaluationreportbymarkingupa
copyofthepreviousyearsreport.Changesareindicatedandasecretarywillmakethose
changeswhentypingthereport.Thatiswhyactuarialvaluationreportsaresosimilarfromone
yeartothenext.

AnexplanationoftheeffectsofnegativeamortizationappearsinafootnoteintheJune30,2012
actuarialvaluationreportbutthefootnotedisappearsintheJune30,2013actuarialvaluation
report.

Onpage35oftheJune30,2012actuarialvaluationreport:

Onpage35oftheJune30,2013actuarialvaluationreport:

IntheJune30,2014actuarialvaluationreport,conductedundernewGASBrequirements,there
isnosimilarexhibit.Disclosureoftheuseofthepercentageofpayrollmethodofamortization

wasalsoeliminatedonpage11ofthatreport.Theuseofthatamortizationmethodwouldno
longerbedisclosedanywhereinthatJune30,2014actuarialvaluationreport.

Theseattemptstosecretlyeliminatethedisclosureofthenegativeamortizationmethodandits
effectsareindicativeofitssleazyandunsavorynature.Formoreinformationonitssleazyand
unsavorynature,seemyseparateresearchreportonthenegativeamortizationintheChicago
TeachersPensionFund.

TheBlueCode

Theannualminimumrequiredcontributionforcorporatepensionplansintheprivatesectoris
determinedbyafederallylicensedactuaryunderthetermsoftheEmployeeRetirementIncome
SecurityActof1974(ERISA).Thiscontributionrequirementiscertifiedbytheactuaryona
ScheduleSBattachedtotheinformationreturn(Form5500)thatthecorporatesponsorannually
fileswiththefederalgovernment.Publicemployeepensionplanactuariesarenotsubjectto
thatfederallawandareselfregulatedthroughtheActuarialStandardsBoard.

Theabsenceofoutsideregulationcanraiseissuesregardingtheworkproductofpublicsector
actuaries.Apolicedepartment,forexample,mayconductaninternalinvestigationof
wrongdoingbyoneofitsmembers.Thereisalwaysanissueofthepoliceprotectingoneofits
own.ThesametypeofissueappliestotheActuarialStandardsBoard.Itisagroupof
actuariesestablishingrulesforthemselves.Andlikepoliceofficers,therewillbeanunwritten
ruleorbluecodethatactuariesshouldnot
reportonacolleague'serrorsormisconduct.

AcopyofmyresearchreportonthenegativeamortizationusedintheChicagoTeachers
PensionFundwasprovidedtoitsExecutiveDirectorpriortothepublicationoftheJune30,
2015actuarialvaluation.Thesecreteliminationofthisnegativeamortizationdoesnotbenefit
theChicagoTeachersPensionFund,theBoardofTrusteesoritsExecutiveDirector.Through
itssecreteliminationthecurrentactuaryavoidstheneedtopubliclyexplainwhythissleazyand
unsavoryamortizationmethodshouldbeeliminated.

Thismaybeanexampleofadherencetotheunwrittenruleorbluecodewhereactuariesdo
not
reportonthesleazyandunsavorypracticesoftheprofession.Ifnotsecretlyeliminated,the
actuaryfortheChicagoTeachersPensionFundmightreceivealetterofrebuttalfromthe
AmericanAcademyofActuariesforpubliclydisclosingnegativeamortizationasasleazyand
unsavorypractice.

VerificationofResearchResults

Accordingtomyresearchpublishedyearsago,therewouldbeaminimumcontribution
requirementthatplansponsorsintheprivatesectorwouldaccept,frequentlynolargerthan
zero,andthentheactuarieswouldmanipulatetheactuarialassumptionstoachievethatresult.

Theselectionoftheactuarialinterestrateassumptionwastheprimarymeansofachievingthat
result.

RichardA.Ippolito,aformerchiefeconomistatthePensionBenefitGuarantyCorporation,and
VictorModugno,anactuary,wouldreplicateandfurtherexpanduponmyresearchresults.

InaJanuary2007researchreportwrittenbyactuaryVictorModugnoandpublishedbythe
SocietyofActuariescalledTheImpactofReversionTaxesonPensionPlanFunding(Available
ontheSocietyofActuarieswebsite),loweringcontributionsthroughtheincreasinglyaggressive
selectionofactuarialassumptionsandcostmethodswasthecauseofdecliningfundingratiosin
privatesectorpensionplans.Thefundingratioisthepercentageoftheplansactuarialliabilities
thatarefundedbytheplansassets.

RichardA.IppolitoandVictorModugnowerebothadvocatingtherepealofthe50%excisetax
onassetreversions.Anassetreversionisareturnofthepensionplansassetstothe
employer.Paymentof50%ofthatreversiontothefederalgovernmentintheformofanexcise
taxhadeffectivelydiscouragedthepractice.

Thechangefromconservativeactuarialinterestratesin1980tooverlyoptimisticactuarial
interestratesin2004wasthemostimportantoftheseincreasinglyaggressiveactuarial
assumptions.VictorModugnoreferstotheactuarialinterestratehereastheinterestrateused
forfundingandthefundingrate.

Onpages1,4and5ofresearchreportwrittenbyVictorModugno:

The50%reversiontaxhasledtoadefundingofsingleemployerdefinedbenefitpensionplansthroughlower
contributions.Thisdeclineinfundingratiosthatoccurredafterthereversiontaxeswereenacteddespitefavorable
investmentperformanceresultedfromtheuseofincreasinglyaggressiveactuarialassumptionsandcostmethodsfor
funding.ChartB(attached)showsthedifferencebetweentheinterestrateusedforfundingandmarketinterestrates.
Thefundingratewentfrom5%belowmarketin1980to3%abovemarketin2004.Thisisoneofthemostimportant
causesofthedeclineinfundingratios

Publicemployeepensionplansneverhadthelevelofsurplusassetsofprivatesectorplans.
Butassetreversionsintheprivatesectorareindicativeofthementalitythatexistedwhenthe
ChicagoPublicSchoolsmadenocontributionstotheplanbeginningin1996.

NoContributionsfrom1996Through2005

TheChicagoPublicSchools(CPS)didnotmakecontributionsintotheChicagoTeachers
PensionFund(CTPF)from1996through2005.AsstatedbyCPSinitsFiscalYear(FY)2015
Budget,theschooldistrictdidnotresumemakingcontributionsintotheChicagoTeachers
PensionFunduntil2006:

CPSisrequiredtomakeanannualcontributiontoCTPF,basedonanactuarialcalculation,sufficienttobringto90
percentthefundedratioofactuarialassetstoliabilitiesby2059AsrecentlyasJune30,2001,CTPFhada
fundedratioof100percent,andaccordingtostatelawCPSdidnothavetomakeanemployercontribution.ByJune
30,2004,thefundedratiohaddroppedto86percent,belowthe90percentstatutorythreshold,andthereforeCPS
wasstatutorilyrequiredinFY06,tomakeemployercontributions.Sincethen,theannualpensioncontributionhas
skyrocketed

TheStateofIllinoiscreatedastatutorythresholdwherenocontributionswererequireduntilthe
fundingratiodroppedbelow90%.

NoContributionsDuetoActuarialInterestRateAssumption

TheactuarialinterestrateassumptionfortheChicagoTeachersPensionFundthroughthe
June30,2012actuarialvaluationhadbeen8%.Thisistheassumedrateoffutureinvestment
returnduringthelifetimeofthepensionplan.Itisnottheexpectedinvestmentreturnforone
year.Itistheexpectedinvestmentreturnuntilthelastpersoninthepensionplandies.

LookingonlyattheperiodoftimeaftertheBabyBoomersstarttoretire,whatistheeffectifthat
8%isnotearned?If,forexample,theinvestmentreturnassumptionwas8%tothedatewhen
theBabyBoomerswereexpectedtoretireand5%thereafter,theactuarialliabilitiescalculated
in1996wouldhavebeengreaterthanundertheassumed8%rate.Sincethoseactuarial
liabilitieswouldhavebeenlarger,thecontributionsrequiredtobedepositedintothetrustfund
wouldhavealsobeenlarger.

InthecaseoftheChicagoTeachersPensionFund,nocontributionsweremadebeginningin
1996becausetheplanwasfullyfunded.Theperiodofnocontributionslastedfortenyears.If
theactuarialliabilitiescalculatedbytheactuaryhadbeenlarger,achievingfullfundedstatus
wouldhaveoccurredatahighercalculatedliabilityandatrustfundofahighervaluewouldhave
tobeaccumulatedtoreachit.Contributionswouldhavetobepaidforalongerperiodoftime
untilthathigherlevelofcalculatedliabilitieswasachieved.

FundedRatiosfortheChicagoTeachersPensionFund:
Year UnfundedLiabilities

FundedRatio

2004 1,713,487,462

85.8%

2003 916,773,666

92.0%

2002 384,535,171

96.5%

2001 5,135,714

99.9%

2000 328,168,774

96.7%

1999 (68,180,082)

100.8%

1998 217,199,228

97.3%

1997 (16,582,199)

100.2%

ConsideringthefactthattheChicagoTeachersPensionFundwassoclosetothat100%fully
fundedlevel,inalllikelihood,theChicagoTeachersPensionFundwouldhaveprobablynever
achievedafullyfundedstatusifaloweractuarialinterestratehadbeenused.Contributions
wouldhavebeenrequiredinthose10yearswhennoneweremade.

TheKookyMonster

TheChicagoTeachersPensionFundmadenocontributionsfortenyearsfrom1996through
2005duetoitsfullyfundedstatus.Thefullyfundedstatusofapensionplancancausea
fundamentalshiftinmentalityoftheplansponsorandoftheotherbenefactorsofthatfully
fundedstatus.Thatmentalitymaypersistlongafterthefullyfundedstatusdisappears.The
continuanceofthismentalityamongthevariousstakeholdersoftheChicagoTeachersPension
Fundwouldacceleratethedeathspiralthatwasstartingtoemerge.

EllenE.Schultz,investigativereporterforthe
WallStreetJournal
,wroteabookcalled
RetirementHeist
detailingthevariousschemesusedtotapintothesocalledsurplusassetsof
privatesectorpensionplans.Havingbeenontheinsideoftheactuarialprofession,Iseethe
storiesinherbookasbeinganalogoustotellingyourselfthatyouwilleatonlyonecookiefroma
box.Thenyounoticethatallthecookiesinthatboxaregone.

Ininsuranceterms,whentheChicagoPublicSchoolsmadenoannualcontributionsintoits
pensionplan,itiscalledapremiumholiday.Itishardtohavejustonepremiumholiday.After
eatingacookie,thereisdesiretohaveanotherone.Intheprivatesectorpensionplansofthe
Schultzbook,youmaywanttokeepeatingthosecookieseventhoughtherearentanysurplus
assetsanymore.InthecaseoftheChicagoTeachersPensionFund,thestakeholdersmay
wanttokeepeatingthosecookieseventhoughthepensionplanisntfullyfundedanymore.

Technicallyspeaking,tappingintosocalledsurplusassetsiseatingthecookiesinthecookie
jarwhilepremiumholidaysareeatingthecookieswhileintheprocessoftransferringthem
fromtheboxintothecookiejar.

TheStateofIllinoisgrantedtheChicagoPublicSchoolsapartialpremiumholidayfrom
20112013eventhoughthepensionplanwasntevenclosetobeingfullyfunded.Inthis
instance,thementalityofthepremiumholidaywouldpersist.Asinreallife,peeringintothe
emptycookiejardoesntalleviatethehungerforanothercookie.

Autumnof1996

PriortotheretirementsoftheBabyBoomergeneration,thetrustfundofapensionplanwillbe
inanaccumulationphase.AftertheretirementsoftheBabyBoomergeneration,thetrustfund
willbeinadisbursementphase.

ThefollowingstatementsweremadeintheAutumn1996issueof
Compensation&Benefits
Management
duringaperiodofsuperiorinvestmentreturnsandpriortotheretirementsofthe
BabyBoomergeneration.
Compensation&BenefitsManagement
wasajournalpublishedfora
humanresourceaudience.

Onpage67ofmyarticleTheThreeFacesoftheCorporatePensionPlanActuary:

Pensionplansintheaccumulationphasewillhavealowratioofretireestoactiveemployees,anddepositswill
exceeddisbursementsfromthefund.Pensionplansinthedisbursementphasewillhaveahigherratioofretireesto
activeemployees,anddisbursementswillexceeddepositsintothefund.

Theeffectsofinvestmentreturnsnotmeetingexpectationsaremarkedlydifferentforpensionplansinaccumulation
anddisbursementphases.Whenthepensionplanisinanaccumulationphase,theinvestmenthorizonislongand
thereissufficienttimetowaitforthereturnofsuperiorinvestmentreturns.Whenthepensionplanisina
disbursementphase,assetsarebeingpaidoutandsuperiorinvestmentreturnswillneverbeearnedonthosepension
planassets.Thefinancialconditionofapensionplaninadisbursementphasecandeterioraterapidlyduringaperiod
oflowerinvestmentreturns.

MostdefinedbenefitpensionplanswillnotbeinadisbursementphaseuntiltheretirementsoftheBabyBoom
generation.

TheassetdepletionriskoftheBabyBoomerretirementsontheChicagoTeachersPension
Fundshouldhavebeenconsideredbytheiractuariesbeforethoseretirementsactually
occurred.Itwasntanunanticipatedeventbeyondthecontroloftheactuary.

InDisbursementPhase

TheChicagoTeachersPensionFundiscurrentlyinadisbursementphaseduetothe
retirementsoftheBabyBoomergeneration.TheretirementsoftheBabyBoomergeneration
willcauseanaccelerationinthebenefitpaymentsactuallybeingpaid.Whenthisacceleration

occursduringaperiodoflowinvestmentreturns,itcancausethetrustfundofanunderfunded
pensionplantodeplete.

Below,thetablefrompage22oftheJune30,2012actuarialvaluationreportdemonstratesthe
accelerationinthebenefitpayments.Theymorethandoubledfrom2003to2012.Meanwhile,
becauseoflowerinvestmentreturns,theActuarialValueoftheAssetshasactuallydeclinedby
10%from$10.430billionin2003to$9.364billionin2012.

Intheaboveexhibit,thebenefitpaymentsmadeinthefiveyearsfrom2008through2012total
to$5.132billion.Attheendofthatfiveyearperiod,theactuarialvalueofassetswas$9.364
billion.Thatsumsto$14.496billion.Morethanonethirdoftheplansassets($5.132billion
dividedby$14.496billion)wentoutthedoorduringthatfiveyearperiodintheformofbenefit
payments.

IntheActuarialExperienceReview,theactuariesweretalkingabouttheiractuarialinterestrate
assumptionbeingtheaveragerateofreturnover20years.Insomeyearslessthan7.50%will
beearned.Inotheryearsmorethan7.50%willbeearned.Hypothetically,therateof
investmentreturnwouldaveragetoan7.50%rateofreturnoverthat20yearperiod.

TheannualrateofinvestmentreturnontheActuarialValueofAssetsforthefiveyearperiod
fromJuly1,2007toJune30,2012intheActuarialExperienceReviewwas1.62%.Withan
annualinvestmentreturnof14.38%inthefollowingfiveyears,theinvestmentratewould

averagetothethenexisting8%assumedrateofreturn.Buttheactualinvestmentdollarswill
notaverage.Therewouldbeashortfallinthedollaramounts.Aninvestmentreturnof14.38%
willnotbeearnedonthatthirdoftheassets($5.132billion)thathadwentoutthedoorinthe
formofbenefitpayments.

20YearAveragingPeriod

Theactuarialinterestrateselectedbytheplansactuarieswouldbeanexpectedaverageovera
20yearperiod.Focusingonan
average
rateofinvestmentreturncanprovidedeceptiveresults
duringthedisbursementphaseofapensionplan.Theresultsbecomemoredeceptivewhen
lengtheningtheaveragingperiod.Intheshortterm,thoseassetswillactuallybegoingoutthe
doorintheformofbenefitpayments.

IftheChicagoTeachersPensionFundwasinsolvent,theChicagoPublicSchoolswouldmake
acontributionanditwouldbeimmediatelypaidtotheretirees.Therewouldbenoinvestment
return.Theaveragingperiodwouldbezero.AstheChicagoTeachersPensionFundgradually
movestowardinsolvency,thatsocalledaveragingperiodshouldgraduallydeclinetozero
ratherthanhaveitfalloffacliffattheexacttimeofinsolvency.

DebateinDecemberof1995

AfterIhadpublishedaresearchreport,therewasadebateintheDecember1995issueof
EmployeeBenefitNews
betweenaspokespersonfortheAmericanAcademyofActuaries
namedLarrySherandmyselfregardingtheactuarialinterestrateassumption.

Intheexcerptbelow,thePensionBenefitGuarantyCorporation(PBGC)istheagencyofthe
federalgovernmentthatpartiallyinsuresthepensionbenefitspayablefrominsolventprivate
sectorpensionplans.TheChicagoTeachersPensionFund,asapublicsectorpensionplan,is
noteligibleforthisinsolvencyprotection.

LarrySher,vicechairoftheAmericanAcademyofActuariesPensionPlanCouncilbelievesthefindingsareflawed,
unfairandaninsulttothevastmajorityofactuariesoutthere.Sher,whosalsoKwashaLiptonLLCschief
actuary,believesthestudyisflawedbecauseitIgnoreslowinflation,superiorinvestmentperformancepatterns,
andcompanyand/orindustryspecificfactorsthatcouldexplainwhyanactuaryleanedtowardliberalassumptions
dictatinglowerminimumdepositfees

AccordingtoKonshak,whenactuarialserviceprovidersplayfastandloosewiththerules,itunderminespension
plansolvencynottomentionfiduciaryresponsibilityandraisestheprospectthatemployerswillpayhigher
premiumstothePensionBenefitGuarantyCorporation

AsforSherscontentionthatcertainconditionssuchaslowinflationorhighratesofreturnoninvestmentsmay
explainchangesinactuarialassumptions,Konshakadoptsacautiousoutlook.

Ithinkitsprettyhardtogeneralizethathighratesofreturnandlowratesofinflationaregoingtocontinuethroughthe
lifeofthepensionplan,hesays.Idontthinkthatsaconsistentlongtermexpectationyouwillhave.Beingso
optimisticwhenmakingsuchassumptionsmaynotalwaysbetherightthingtodo,headds.

Theactuarialinterestratewastoohighofarateextendedovertoolongofatimeperiod.In
understandingtheramifications,theemphasisshouldbeplacedonthedurationofthisactuarial
interestassumptionoronthelengthofthetimeperiodinwhichitwasassumedtobeineffect.
Thosehighratesofinvestmentreturnandlowratesofinflationwerenotgoingtolastuntilthe
lastparticipantinthepensionplandied.

JaneBryantQuinn

ThesesuperiorinvestmentreturnsassumedbyMr.Shernotcontinuingintotheretirementyears
oftheBabyBoomgenerationwouldhaveresultedinanunderstatementoftheplansactuarial
liabilitiesandatrustfundatthattimewhichwouldbetoosmall.Thesponsorsofpensionplans
wouldhavetoincreasetheircontributionsaftertheBabyBoomerretirements.

ThisriskmanagementpointofviewwouldstrikeachordwithfinancialreporterJaneBryant
Quinnwhenshereportedmyresearchinhersyndicated
WashingtonPost
columnofDecember
17,1995:

Pensionplansfacesignificantfuturefundingrisks,especiallyforthebabyboomgeneration
whentheboomers
starttoretireintheyear2012andbeyond,pensionfundswillstartsellingstocksandbondstopaymonthlyretirement
checks.Thatdoesn'tmeanthemarketswillcrash(therewillbeotherbuyersathand).Butmarketpricesmayflatten
out.Corporationsmayhavetoaddextramoneytotheirplanstogeteveryonepaid.Corporationsinfinancialtrouble
mightnothavethecashtospare.

What'smore,somecompaniesmanipulatetheirpensionaccountingtomaketheplanslookhealthierthantheyreally
are.It'sanactuary'sjobtodecidehowmuchmoney,ifany,acompanyhastoputintotheplaneachyear.By
changingcertainassumptions,anactuarycanreducethecompany'scost

Konshakconcludesthatsomecompaniesshopforactuarieswhoarewillingtouseeveryloopholetohold
contributionsdown.Acompany'scurrentactuaryalsomaydecidetousetheloopholestoavoidlosingthebusiness.
Onpaper,aplanmaylookfullyfunded,Konshaksays,butthatmaynotbethecase

Intheprivatesector,nocontributionwasrequiredortaxdeductibleifthepensionplanwas
100%funded.Theactuarycouldlowertheamountoftheactuarialliabilitiesandattaina100%
fundedstatusbyincreasingtheactuarialinterestrate.Thedesiredresultofazerocontribution
wouldtherebybeachieved.

FallingUponDeafEars

Teacherswouldindirectlybenefitfromthat10yearpremiumholidayenjoyedbytheChicago
PublicSchools.Therewouldhavebeenmoremoneytospendinupdatingtheirclassrooms.
Therewouldhavebeenmoremoneytoincreasetheirsalaries.In1995,duringthisperiodof

superiorinvestmentreturns,whenreadingthatcolumnofJaneBryantQuinnaboutpension
plansonlylookingfullyfunded,Chicagoschoolteacherswouldnothavebeenaloneinbeing
apatheticandignoringitsmessage.Whenthepensionplanisearningcloseto20%onits
assets,anactuarialinterestrateassumptionof8%doesntappeartobetoohigh.

Themoneysavedfromthat10yearpremiumholidaywentsomewhere.Teachersmayreceive
salaryincreases.Taxpayersmayreceivetaxrelief.Whenthisfullyfundedstatusdissipated,
theseotherbenefactorswouldhavealsopotentiallyexperiencedthesymptomsofcookie
withdrawal.WhentheStateofIllinoisgrantedtheChicagoPublicSchoolsapartialpremium
holidayfrom20112013,theoppositionoftheteachersunionmayhaveonlybeenperfunctory
sinceitmighthavefreedupmoniesforsalaryincreasesoritmighthavepreventedlayoffs.

ProvidingPromotionalMaterialsforYourCustomers

ActuaryVictorModugnoinhisarticlewrittenforthePensionSectionoftheSocietyofActuaries
saidthattheloweringofemployercontributionshadledtothedefundingofprivatesector
pensionplans.HedidnotmentionthefutureretirementsoftheBabyBoomgenerationbecause
theneedtoincreaseemployercontributionswasnotthethemeofhisarticle.Norwasitthe
desiredresult.Thatwouldhavemadetheclientsofthesepensionactuariesunhappy.
Removaloftheexcisetaxonassetreversionswasthedesiredresult.Thatwouldhavemade
theclientsofthesepensionactuariesveryhappy.

ThearticlewrittenbyVictorModugnoresultedfromaRequestforProposal(RFP).Itwas
solicitedbythePensionSectionoftheSocietyofActuariesandVictorModugnowas
compensatedbythePensionSectionforwritingit.VictorModugnowasformerlyemployedas
anactuarywiththefailedinsurerExecutiveLife.

Pensionactuarieshaveevolvedintoaserviceindustrythathassoughtthecontinuingapproval
ofitscustomers.Theyanticipatewhattheirclientsandotherpeoplewantandthentheygive
thoseresultstothem.Myverifiedresearchstudyin1995indicatedthatpensionactuarieswere
givingthecorporatesponsorsofpensionplansthelowercontributionamountsthatwouldmake
themhappy.Highercontributionamountswouldhavemadethemunhappy.

Duringtheperiodofsuperiorinvestmentreturns,pensionactuariesgavepeopletheresultsthat
wouldmakethemhappy.Duringtheperiodoflowerinvestmentreturnsthatfollowed,pension
actuarieswouldnotgivethemtheresultsthatwouldhavemadethemunhappy.Decreasingthe
actuarialinterestrateassumptionwouldhaveincreasedthecontributionrequirementsand
wouldhavemadethemunhappy.Theirclientsmayhavegottenangryandhiredsomebody
elsetocollectthoseactuarialfees.

Duringthisperiodoflowerinvestmentreturns,therehasbeenmountingcriticismofpublic
sectoractuariesforusingtoohighofanactuarialinterestrate.Whereastheprivatesector
actuaryhastheregulatoryandlegislativeoversightofthefederalgovernment,thepublicsector

actuaryissubjectonlytotheselfregulationoftheactuarialprofessionandtheselfserving
oversightoftheindividualstates.Inmostcases,theindividualstatesareprovidingoversightto
theverypensionplansthattheysponsor.

Theresistanceofpublicsectoractuariestodecreasesintheactuarialinterestrateisfurther
evidenceofthevalidityofmyresearchperformedin1995.

MorethanBabyBoomerRetirements

The101%fundedratiooftheChicagoTeachersPensionFundin1999mightlookimpressive
todaybutmanyprivatesectorpensionplanshadfundedratiosof150%ormorein1999.Ifan
8%rateisappropriateforthepensionplanwitha150%fundedratio,thentheactuarialinterest
rateassumptionfortheChicagoTeachersPensionFundshouldbesomethingless.The150%
fundedpensionplanhasmoretoleranceforriskthanthe101%fundedChicagoTeachers
PensionFund.Eventhoughtwopensionplansmayinvestinthesamemastertrust,the
actuarialinterestratesshouldbedifferentbasedontheirfundedratiosandtoleranceforrisk.

Publicsectorpensionplansin1995and1999didnotnecessarilyenjoythesamelevelof
fundingasprivatesectorpensionplans.However,thehigheractuarialinterestrate
assumptionsusedbyprivatesectorpensionplanswouldinfluencetheirusebypublicsector
pensionplans.Theirlowerfundedratiosandlesstoleranceforriskmaynothavebeen
considered.

SuperiorinvestmentreturnswereearnedbytheChicagoTeachersPensionFundfrom1995
through1999.Frompage8oftheJune30,2014actuarialvaluationreport:

LetterofRebuttal

Aftershehadpublishedtheresultsofmyresearchstudy,theAmericanAcademyofActuaries
wouldsendaletterofrebuttaltoJaneBryantQuinnfortwocolumnsshehadwritten.Shehad

expressedopinionscontrarytoitsofficialpoliciesandpositions.JaneBryantQuinnwasthe
voiceofadissident.

Onpage2oftheFebruary1996issueofthe
ActuarialUpdate
,apublicationoftheAmerican
AcademyofActuaries:

AcademyExplainsStandardstoQuinn

TwocolumnsbyfinancialwriterJaneBryantQuinnthatquestionedtheprofessionalismofactuarieshavedrawnan
AcademyrebuttalinaletterfromExecutiveDirectorWilsonWyatt,Jr.

InaJanuary7columnonlifeinsuranceillustrations,Quinncalledactuarialcertificationacleargainforconsumers,
butstatedthatactuariesareusuallyinfluencedbywhatthecompanywants.Wyattsresponsepointedoutthat
actuariesinsurancecompanyemployeesandconsultantsalikearegovernedbythestandardsofpracticeofthe
ActuarialStandardsBoardandtheCodeofProfessionalConduct.Failuretocomplycouldbringanactuarybeforethe
ActuarialBoardforCounselingandDiscipline,henoted.

WyattalsocommentedonaDecember17Quinncolumnthatreferstoanemployersurveyconductedbyenrolled
actuaryTheodoreKonshak.Seventeenofthetwentysurveyedcompaniesmadelowerpensioncontributionsafter
replacingtheiractuary.Wyattstatedthatthesurveysresultsdonotimplythatcircumventingorignoringstandards
ofpracticeiswidespreadamongactuaries.LarrySher,vicechairpersonoftheAcademysPensionPracticeCouncil,
alsowroteQuinntodetailtheflawsinthesurveysmethodology.

JaneBryantQuinninhercolumnonlifeinsuranceillustrationscautionedthatactuariesare
usuallyinfluencedbywhatthecompanywants.Actuarieswerecertifyinglifeinsurance
illustrationsforthecompanythattheywereworkingfor.Thiswasnothingmorethanrecognizing
thepotentialforbias.

ThereportingofmyresearchbyJaneBryantQuinnwastherunneruporthelastplacefinisher
inthisletterofrebuttaldependingonhowyoulookatit.Presumably,thepresentationtoJane
BryantQuinnincludedtheflawsmentionedintheDecember1995issueof
EmployeeBenefit
News
:thestudyisflawedbecauseit:Focusedonahandfulofextremecases,failingto
mentiontheresagoodchancethatthereareafairlylargenumberofcompaniesinwhichthe
changes[inrecommendedminimumdepositfees]isntsignificant

Myresearchwasbasedonthesamplingprocedureofabinomialprobabilitydistribution.The
oddsofrandomlyobtainingthatresultwas776to1.AlthoughasanactuaryLarrySherwould
haveunderstoodtheprobabilitiesofmyresearchstudy,hechosetoignorethevalidityofthe
mathematicsusedinthesamplingprocedureandinsteadpointedtoitasasampleofonly20
extremecases.Theoddsofmyresearchstudyweresoheavilyinmyfavorthatitshouldbe
nosurprisethatRichardA.Ippolitoobtainedthesameresultinhislongitudinalstudycovering
theperiodfrom1980to1995with1,900pensionplans.

IntheircommunicationswithJaneBryantQuinn,theAmericanAcademyofActuarieswas
demandingthatshewriteanothercolumnonmyresearchreportwhichwouldonlypresenttheir

pointofview.IattributemyexclusionfromthatpotentialcolumntotheDecember1995
EmployeeBenefitNews
article.TheAmericanAcademyofActuariesdidntwantthearticle
writteninthedebateformatusedinthatarticle.IwaspleasedatthetimeandIamstillpleased
withthejournalistprovidingbothsidesinthatarticle.Followingatelephonecalltomeabouta
lettershehadreceivedfromafriendofmine,JaneBryantQuinnwoulddecidenottowritethat
column.

SubmitIdeastoPartyOrganizationsforApprovalBeforeRelease

InthatDecember1995issueof
EmployeeBenefitNews
writtenbyBruceShutan,the
spokespersonfortheAmericanAcademyofActuariessubmittedtheirpositionregarding
publicizingthesetypesofissuesbeforethegeneralpublic.

BaffledthatKonshaksoughttopublicizehisresearchbeforeabroadaudience,KwashasShersaystherearemore
constructivewaysofaddressingtheissuesthatwereraised.Konshak,forexample,shouldhaveapproachedvarious
actuarialgoverningbodiestoensurethatstandardsandcodesofprofessionalconductarebeingfollowed,heexplains.
TwosuchorganizationsincludetheActuarialStandardsBoardandtheActuarialBoardforCounselingandDiscipline.

TheAmericanAcademyofActuarieshasalwaysengagedinanaggressivecampaignto
intimidateanymemberoftheactuarialprofessionthatpubliclyexpressesideascontrarytoits
officialpositions.Accordingtotheir
authoritarian
beliefs,anydifferenceinopinionshould
remainwithintheprofessionitselfandnotbediscussedinthepress.Thisintimidationof
dissidentsandtheirideaswithintheactuarialprofessioncanbeachievedthroughcomplaintsto
theActuarialBoardforCounseling&Discipline(ABCD).Thiscouldleadtojoblossdueto
beingexpelledfromtheprofession.

SinceJaneBryantQuinnhadnotsuccumbedtotheirdemands,hermerepresenceprovidedme
withtheleveragenecessarytosuccessfullyachieveadismissaloftheanonymousABCD
complaintfiledagainstme.AccordingtotherulesofprocedureoftheABCDandtheruleoflaw,
Iwouldhavetherightinatrialtoconfrontmyaccuser.Thenthatanonymouscomplaint
wouldntbeanonymousanymore.Oncedisclosed,Iwouldnothavehadanyintentofkeeping
thenameofthataccuserortrialanonymous.ThecolumnofJaneBryantQuinnappearedin
over100newspapers.Lookingforwardtoseeingyournameinthenewspaper?Itwouldhave
beenparticularlydamagingtotheactuarialprofessioniftheaccuserfilingthatanonymous
ABCDcomplainthaddonesoastheofficialspokespersonfortheAmericanAcademyof
Actuaries.

OthermembersoftheactuarialprofessiondonothaveaJaneBryantQuinntoserveastheir
protector.

FollowingthePartyLine

In2008,thesuperiorinvestmentreturnsofthepriordecadehadlongsincedisappeared.The
BabyBoomerretirementswerestartingtooccurandcausingproblemsintheChicago
TeachersPensionFund.AccordingtotheriskmanagementpointofviewpresentedtoJane
BryantQuinn,theactuarialinterestrateshouldhavebeenfarlessthan8%buttheactuaryfor
theChicagoTeachersPensionFundwasstillreluctanttochangetheactuarialinterestrateand
deviatefromthepartyline.

Frompage330oftheminutesoftheMay13,2008BoardofTrusteesmeetingoftheChicago
TeachersPensionFund:

Usingaloweractuarialinterestratewouldhaveraisedconcernsamongtheplanparticipantsas
itwouldhaveloweredthe79.4%fundedratiothatexistedasofJune30,2008.Theschool
boardwouldalsobeupsetasitwouldincreasetheircontributionrequirements.Thisincidentin
theseregardsfollowsmytheoryconcerningtheconductofpensionactuaries.Butthisincident
alsorunscountertomytheoryofactuariesprotectingthecontinuingpaymentoftheiractuarial
feesbydoingwhatthecustomerwants.

Therehadbeenamotiontoreducetheactuarialinterestratebyaminisculeamountto7.75%in
theApril15,2008meeting.Otheractuariesmayhavecompliedwiththatsimplerequest.Both
theloweringofthefundedratioandtheincreaseintheemployercontributionswouldnothave
beenthatsignificant.Frompage275oftheminutesofthatmeeting:

ChangetoLargerActuarialFirm

FouryearsfollowingthatMay13,2008exchangewiththeiractuary,theChicagoTeachers
PensionFundwasconductingaRequestforProposal(RFP)tohireanactuary.Theiractuary
fromthatMay13,2008meetingwasnotincludedamongthefinalists.Evenifthereisan
intentiontoreplaceanactuary,theexistingactuaryisusuallyprovidedtheopportunitytobidas
acourtesy.

Thefundedratioof79.4%asofJune30,2008haddeclinedto59.7%asofJune30,2011.As
isthecasewithcorporationsandotherbusinessentities,strangethingscanstarttohappen
oncethatentityisontheroadtobankruptcyorinsolvency.Theweirdnessgrowsstrongeras
theinsolvencygetscloser.

Smalleractuarialfirmsfacegreaterriskfromprofessionalliabilitylawsuitsthanlargeractuarial
consultingfirms.Yearsago,allofthelargeractuarialconsultingfirmsparticipatedinthesame
offshoreprofessionalliabilityinsurancepool.Ifalargeactuarialconsultingfirmperformedan
actuarialauditandtestifiedagainstanotherlargeactuarialconsultingfirm,theirshareofany
judgementfromthisprofessionalliabilityinsurancepoolwouldbefargreaterthananyfeesthey
wouldhavecollectedfromperforminganactuarialauditandtestifyingagainstthatotherfirm.It
wouldbecomeimpossibleinaprofessionalliabilitylawsuittofindanactuaryfromalarge
consultingfirmwillingtotestifyagainstanotherlargeractuarialconsultingfirm.

Thisstoryabouttheoffshoreprofessionalliabilityinsurancepoolwasheardfromanother
actuarywhohadbeeninstructedthroughhiscorporateheadquarterstoceaseanddesistfrom
anyfutureactuarialauditingactivities.Theywerethefirmthathaddiscovereda$2billionplus
programmingerrorthatinvolvedtheLosAngelesCountyEmployeesRetirementAssociation.

Iwasservingasanoutsideadvisorinreviewingthecandidatesforapositionasactuary.This
candidatefromalargeractuarialconsultingfirmwouldultimatelybehired.Theprioractuary
hadworkedforasmalleractuarialfirmthatdidnothaveanyprofessionalliabilityinsurance.But
thisactuarialfirmhadalsostructureditselfsotherewerenoassetstoseize.Theprioractuary
himselfmighthavehadassetstoseizeinaprofessionalliabilitylawsuitbuthehadretiredback
tohisnativecountryofIndia.

AtthistimeinJuneof2012,whentheChicagoTeachersPensionFundwasconductingan
RFPtohireanactuary,theplanwasalreadyinthebeginningstagesofthedeathspiral.The
ChicagoPublicSchoolswouldobtainapartialpremiumholidayfrom20112013fromtheState
ofIllinois.Thingswerealreadyintheprocessofgettingweird.

TheactuarytobereplacedfromthatMay13,2008meetinghadhisownsmallactuarialfirm.To
protectagainstlegalcostsandapotentialjudgementinaprofessionalliabilitylawsuit,itwould
begenerallyexpectedthatthisprioractuarywouldeventuallyfindsomereasontoexit.
Actuariesfromlargeconsultingfirmswouldnotbereluctanttotestifyagainsthim.

Frompage812oftheminutesoftheJune21,2012BoardofTrusteemeeting:

IntheMay17,2012minutes,theBoardofTrusteeswerehiringanemergingmarketequity
managerandwereusinganoutsideadvisortovetthecandidates.TheBoardofTrusteesdid
nothireanoutsideadvisortovetthecandidatesforthispositionasactuary.

Consideringtheirfailuretouseanoutsideadvisor,thereasonfortheprioractuarynotbeing
amongthefinalistsisnotpreciselyknown.Thehiringoftheactuarymayhavebeenaforegone
conclusionandthepresentationsoftheotheractuariesmayhavebeenwindowdressing.The
prioractuarymayhaveawareofthesituationandconsideredanypresentationtobeawasteof
timeandeffort.


Thebusinessstrategyofactuarialconsultingfirmshasalwaysbeentoexpandyourexisting
serviceswithaclientintootherservices.Sothefirmbeinghiredmayhaveexpandedthe
servicestheyalreadyprovidedtotheChicagoTeachersPensionFundintothepositionas
actuary.

IntheminutesofthatJune21,2012meeting,thesalespresentationsofthevariousactuarial
consultingfirmswereimmediatelyfollowedbythehiringofSegalAssociates.Thedecisionhad
probablyalreadybeenmadebythethreememberCTPFcommitteeandtheBoardofTrustees
mayhavemerelybeenprovidingitsapprovaltothatdecision.Thefiduciarydecisionand
liabilityassociatedwiththehiringoftheactuarymaythereforeextendtothatthreemember
committeeaswell.

Inthebusinessstrategyofactuarialconsultingfirms,itisalsoimportanttodevelopapersonal
relationshipwiththedecisionmakers.Ifthedecisionmakerisafemale,afemaleactuaryis
morelikelytoprovidethesalespresentationandserveastheleadactuary.Ifitwasmoreofa
maledominatedoccupation,suchaspoliceofficersorfirefighters,amaleactuaryismorelikely
toprovidethesalespresentationandserveastheleadactuary.Speculationontheidentityof
theactualdecisionmakeronthatthreemembercommitteecouldthereforebebasedongender
oftheleadactuarythatwashired.

TheUnitedStatesDepartmentofLaborissuedaninformationallettertomeonDecember1,
1997ontheengagementofactuaries.

SinglePartyRule

TheChicagoTeachersPensionFundandotherpublicemployeepensionplansarenotsubject
tofederalregulation.

Actuariescertifyingactuarialresultsforpublicemployeepensionplansmustbeacardcarrying
MemberoftheAmericanAcademyofActuaries,designatedbytheinitialsofM.A.A.A.appearing
aftertheirnames,andmeettheirQualificationStandards.Asstatedinthetransmittalletterfor
theJune30,2014actuarialvaluationoftheChicagoTeachersPensionFund:

Similarstatementswillbeseenintheactuarialvaluationreportsofeverypublicsectorpension
plan.ThecertificationexclusivityoftheAmericanAcademyofActuariesisaformofoneparty
rulewheretheuglinessofnegativeamortizationispermittedtoexistinpublicsectorpension

plansbutpubliclyexpressinganopinionagainstnegativeamortizationmayresultinaletterof
rebuttalfromtheAmericanAcademyofActuaries.Thefederalgovernmentdoesnotpermit
negativeamortizationinprivatesectorpensionplans.ThecurrentactuaryoftheChicago
TeachersPensionFundwouldsecretlyandsurreptitiouslyattempttoeliminatethenegative
amortizationfromview.

TheintimidationofdissenterswithintheactuarialprofessionbytheAmericanAcademyof
ActuariesthroughpotentialcomplaintstotheirActuarialBoardforCounseling&Disciplinecan
beintenseconsideringtheconsequences.BeingexpelledfromtheAmericanAcademyof
Actuariescanmeananendtoyourcareerasapublicsectoractuary.Itcanalsomeanbeing
ostracizedbypartymembers.Avoidanceofboththispotentialintimidationfromtheparty
organizationandthepotentialostracismfromitspartymembersmayhavebeentherootcause
behindthissecretiveandsurreptitiousbehavior.

ThePoliticalRival

RatherthanmeetingtheQualificationStandardsoftheAmericanAcademyofActuaries,the
sameidenticalQualificationStandardscouldbecreatedwithinthelargerandmorepolitically
powerfulaccountingprofession.Thesameindividualpersoncertifyingtheresultsofthe
ChicagoTeachersPensionFundcouldbeamemberofanaccountingorganizationratherthan
oftheAmericanAcademyofActuaries.

Independencefromtheaccountingprofessionhasalwaysbeenoneofthehallmarksofthe
actuarialprofession.Accordingtothisdoctrine,ifactuariesoperatedwithintheaccounting
profession,thehighersalariesofsenioraccountmanagerswouldbepaidtoaccountantsrather
thantoactuaries.

StatutoryMethodasanUnreasonableActuarialCostMethod

TheactuaryfortheChicagoTeachersPensionFundapparentlywasgoingtosecretlyeliminate
thenegativeamortizationwhenaformalfundingpolicyandsoundactuarialmethodswere
implemented.Inotherwords,thestatutorymethodenactedbytheStateofIllinoisisnota
soundactuarialmethod.

Underthefederalrules,inclusionofhypotheticalemployeeswhohavenotyetbeenhiredasof
thedateoftheactuarialvaluationisdeemedunreasonable.Technically,thefederal
governmentcallsthisanunreasonableactuarialcostmethod.

ThestatutorymethodoftheStateofIllinoisincludeshypotheticalemployeesthatwillbehired
afterthedateoftheactuarialvaluation.Thatisjustthebeginningofitsunreasonableness.
.

Theunreasonablenessofincludingfuturehiresintheactuarialvaluationisperfectlyclearunder
federalregulations.UnderTitle26ofCodeofFederalRegulations1.412(c)(3)1(d)withthetitle
of
Prohibitedconsiderationsunderareasonablefundingmethod:

(2)
Anticipatedfutureparticipants.
Areasonablefundingmethodmustnotanticipatetheaffiliationwiththeplanof
futureparticipantsnotemployedintheserviceoftheemployerontheplanvaluationdate.

BecauseofthespecialonepartyrelationshipbetweentheAmericanAcademyofActuariesand
theStateofIllinois,theactuarieswiththatM.A.A.A.designationmaynothaveinitially
mentionedtheunsoundnessofthestatutorymethodintheiractuarialvaluationreports.Instead,
theseactuariesmayhavegivencredibilitytotheseunsoundmethodsbysayingnothing.When
theshipstartstosink,however,theactuarialprofessionmaystarttodistancethemselvesfrom
thisunreasonableactuarialcostmethodandotherunsavoryactuarialpractices.

Seemyresearchreportontheuseofthisunreasonableactuarialcostmethodforfurther
information.

RodentsJumpShip

TheActuarialStandardsBoardisconsideringchangesinitsstandardsinvolvingbothnegative
amortizationandthisunreasonableactuarialcostmethod.AsthePublicSectorRetirement
PracticeLeaderofSegalConsultants,theleadactuaryfortheChicagoTeachersPensionFund
addressedbothissuesinaJune12,2015lettertotheActuarialStandardsBoard.Herletteris
availableonthewebsiteoftheActuarialStandardsBoard.WhywasnttheActuarialStandards
Boardagainsttheseasininemethodswhentheyfirstappeared?

ItisnotagoodsignwhentheActuarialStandardsBoardcanbeseenrowingawayinalifeboat.
Arewesinking?

TheBabyTwoStepApproach

TheactuarialinterestratefortheChicagoPolicePensionFundhasbeenat8%since1990but
wasdecreasedto7.75%effectivefortheDecember31,2012actuarialvaluationandto7.50%
effectivefortheDecember31,2014actuarialvaluation.Asmallbabystepwastakeninthe
December31,2012actuarialvaluationfollowedbyanothersmallbabysteptwoyearslater.

Adecreaseintheactuarialinterestratewillincreasetheunfundedliabilitiesanddecreasethe
fundedratio.Thesewillbelessnoticeablewhentheactuarialinterestrateisdecreasedbyonly
of1%.Thisstrategywheretheactuariesavoiddrawingattentiontothemselvesthrough
minisculeactuarialinterestratereductionstwoyearsapartcanbecalledthebabytwostep
approach.

Basedonmy1995researchreportandmyexperiencewithintheactuarialprofession,intheir
ActuarialExperienceReview,theactuariesfortheChicagoTeachersPensionFundcouldhave
beguntheprocessofselectingtheactuarialinterestratewitha7.50%ratealreadyinmind.Itis
aniceroundnumberoftwodecimalpoints.Thenthroughthebuildingblockapproachof
ActuarialStandardofPracticeNo.27(ASOPNo.27),theycouldhavedevelopedthisnumber
thattheywanted.

OtherthanitnotbeingpossibletotaketwosmallbabystepstwoyearsapartifthatASOPNo.
27determinationhadresultedinarateof4.37%,thereisnoactualmeansofdeterminingifthe
actuariesoftheChicagoTeachersPensionFundhadusedASOPNo.27togetthe7.50%rate
thattheywanted.Ofcourse,therearealsotheratherlongoddsofapplyingASOPNo.27and
obtaininganiceroundnumberof7.50%exactlytotwodecimalpoints.

TheactuariesfortheChicagoTeachersPensionFundrecommendedanactuarialinterest
changeto7.50%intheActuarialExperienceReview.Theactuarialinterestratewaschanged
to7.75%effectivewiththeJune30,2013actuarialvaluation.

In1995,myresearchindicatedthatpensionactuariesweremanipulatingtheactuarialinterest
rateassumptiontogettheminimumcontributionrequirementthattheywanted.Arepension
actuariesnowmanipulatingActuarialStandardofPracticeNo.27togettheactuarialinterest
rateassumptiontheywant?

Conclusion

InapplyingActuarialStandardofPracticeNo.27(ASOPNo.27)totheselectionoftheactuarial
interestrate,theactuariesfortheChicagoTeachersPensionFundfailedtoconsidertheeffect
oftheBabyBoomerretirementsontheassets.ThebenefitpaymentsfromtheBabyBoomer
retirementsposeadepletionrisktothoseaccumulatedassets.UnderActuarialStandardof
PracticeNo.27(ASOPracticeNo.27),theactuariesonlyconsideredportfoliorisk.

ThedepletionriskassociatedwiththeBabyBoomerretirementsisdirectlyrelatedtothesizeof
thetrustfund.Iftheactuarialinterestrateassumptionhashistoricallybeensetattoohighofa
level,thetrustfundwillbetoosmallanditwillbedepletedinaperiodoflowerinvestment
returns.

TheoriginsofthedeathspiraloftheChicagoTeachersPensionFundoccurredtwentyyears
agowhennocontributionswerebeingmadeduringatenyearperiod.Thiswasduetotheplan
beingfullyfunded.Theplanwasfullyfundedonlybecausetheactuarieshadusedan
inappropriatelyhighactuarialinterestrate.

ConsideringthefactthattheChicagoTeachersPensionFundwassoclosetothat100%fully
fundedlevel,inalllikelihood,itwouldhaveprobablyneverachievedafullyfundedstatusifa
loweractuarialinterestrateassumptionhadbeenused.Beingsoclosetothat100%fully

fundedlevelalsomadetheChicagoTeachersPensionFundmorevulnerabletoasset
depletionthanapensionplanthatmighthavebeen125%or150%funded.

TheAmericanAcademyofActuarieshasalwaysengagedinanaggressivecampaignto
intimidateanymemberoftheactuarialprofessionthatwouldpubliclyexpressideascontraryto
itsofficialpositions.Accordingtotheir
authoritarian
beliefs,anydifferenceinopinionshould
remainwithintheprofessionitselfandshouldnotbediscussedinthepress.Theviewsofthe
actuarialprofessionshouldbeexpressedonlybyitsdesignatedspokespersons.Ineptand
unsavoryactuarialpracticesasdiscussedinthisarticlewillpersistwhenlimitsareplacedonthe
publicexpressionofviewsinthepress.

TheAmericanAcademyofActuariesandthestategovernmentsthatinstalledtheAcademys
singlepartyruleovertheirpensionplansshouldbeheldpartiallyresponsibleforthedemiseof
theChicagoTeachersPensionFundandothersimilarlysituatedpensionplans.The
relationshipbetweenthisSovietstyleAmericanAcademyofActuariesandstategovernments
hasbeenamutuallyadvantageousone.Stategovernmentsweretheonesthatgaveexclusive
certificationrightstotheAmericanAcademyofActuaries.

TheunreasonablecostmethodenactedbytheStateofIllinoiswasgivencredibilitybyAcademy
memberswhofailedtoprominentlymentionitsunreasonablenessintheiractuarialvaluation
reports.VigorouslycriticizeitsunreasonablenessandtheAcademymaylosethatexclusive
certificationright.ThesameidenticalQualificationStandardscouldbecreatedwithinthelarger
andmorepoliticallypowerfulaccountingprofession.

Independencefromthisrivalhasalwaysbeenoneofthehallmarksoftheactuarialprofession.
Accordingtothisactuarialdoctrine,ifactuariesoperatedwithintheaccountingprofession,the
highersalariesofsenioraccountmanagerswouldbepaidtoaccountantsratherthanto
actuaries.