HomeMy WebLinkAbout2006 08 23 Regular 300 Actuarial Evaluation Report
COMMISSION AGENDA
ITEM 300
Regular
August 23,2006
Special Meeting
MGR. / IDEPT.
Authorization
REQUEST:
City Manager requesting the City Commission to review the Actuarial
Evaluation Report of the City Actuary and consider approval of the
Actuaries' Recommendations.
PURPOSE:
This agenda item is needed for the City Commission to consider approval of the
recommendation of the City Actuary regarding the need for additional
contributions to the Pension Trust Fund.
CONSIDERATIONS:
The City Manager requested the City's Actuaries to perform an analysis of the fiscal
performance of the City's Pension Plan to determine if additional levels of contributions will be
required to ensure the fiscal soundness of the plan in light of increasing benefits. This analysis
was completed and delivered via the attached letter dated August 16, 2006.
On August 16, 2006, the Board of Trustees voted unanimously to recommend to the City
Commission that contributions to the City's Pension Plan be increased by an additional 1% per
recommendation ofthe City's Actuaries.
FUNDING:
Funding for the additional 1% contribution is programmed into the City Manger's FY 2007
Preliminary Budget.
RECOMMENDATION:
The City Manager recommends the City Commission approve the recommendation of the Board
of Trustees and the City Actuaries to increase contributions to the City's Pension plan by an
additional 1 %, effective 10/1/06.
ATTACHMENTS:
Letter from City Actuary dated August 16, 2006
COMMISSION ACTION:
Retirement Plan Specialists, Inc.
Employee Benefits Administrators, Actuaries and Consultants
P.O. Box 622857
Oviedo, Florida 327562-1582
407-365-3490 (office)
407-366-5154 (fax)
To: Winter Springs Board of Trustees (Pension Board)
From: Sandra Turner, Retirement Plan Specialists
Donald D. Chapman, Retirement Plan Specialists ~
Date: August 16, 2006
Subj: Retirement Plan Actuarial Valuation Study Report
On May 9, 2005 the City Commission adopted a plan to incrementally raise the 3% retroactive retirement
benefit from 2% to 3% resulting in the retirement benefit being 3% for all years of service as opposed to the
existing 3% for all years going forward from October 1, 2000 and 2% for all years going backwards from
October 1,2000.
Utilizing an actuarial asset valuation method and the following actuarial assumptions the actuarial studies
recommended that the percentage of payroll contributions be raised from 13% to 15% to fund the retroactive
3% benefit.
Actuarial Assumption
· 10-30-year funding of past service liability
. 8% investment earning
. 3% average annual increase in salaries
. actuarial standard turnover table 8
· Normal retirement, age 65
. Actuarial assumed average retirement age of 60
. Early retirement, age 55 - 10 years service
The City Manager instructed our firm to perform an evaluation of the city's retirement plan to determine how
the plan is performing in accordance with original assumptions. The city's principal concern is related to
what could be an anomaly or bubble in the plan caused by an unusual number of retirements occurring
between 2008 and 2013 when the full 3% retro benefit goes into effect. This could result from employees
retiring earlier than the actuarial assumed average 60 years of age as soon as the full 3% benefit becomes
effective for those eligible for unreduced early retirement.
The concern is that individuals eligible for unreduced early retirement would cause an abnormal number of
employees retiring immediately and prior to age 60 thus causing a financial shortfall impact greater than
anticipated in the original study. Therefore, in order to determine if additional increases in contribution rates
are needed to maintain the soundness of the plan our firm was asked to determine three things:
1. The current funding status of the plan with 2.25% backward and 3% forward benefit, and actuarial
assumed average retirement age 60 using current employee and asset plan data.
2. The anticipated projected status of the plan on October 1, 2008 assuming an actuarial average
retirement age of 60, and full 3% benefit for all years of service using current employees and asset
plan data.
3. The anticipated projected status of the plan on October 1, 2008 assuming the worst case in which
participants eligible for unreduced early retirement elects to do so immediately with the full 3%
benefit based upon current employees and asset plan data.
Methodoloe:v
In response to this request we tested the following three scenarios utilizing two different methods:
Scenarios
1. Current Case - reflects the current funding status of the plan including 2.25% benefit for service
prior to October 1, 2000 and 3% benefit going forward from October 1, 2000, and the actuarial
assumed average retirement age of 60, based upon current plan data.
2. Normal Case - reflects the anticipated projected funding requirements of the plan on October 1, 2008
when the full 3% benefit is effective and the actuarial assumed average age is 60, based upon current
plan data.
3. Worst Case - reflects the anticipated projected funding requirements of the plan with the expectation
that participants eligible for unreduced early retirement prior to the actuarial assumed average age of
60 and elect to do so during the period October 1,2008 through October 1,2013, based upon current
plan data.
Methods
1. The Actuarial Asset Valuation Method (Long Range Yield Method) determines contribution levels
required to fund pension liabilities based upon spreading of significant gains and losses over a five
year period thus leveling out positive and negative spikes in the market value of the fund. This
method smoothes out significant fluctuations in the pension expense as a percentage of payroll from
year to year.
2. The Market Valuation Method determines contribution levels required to fund pension liabilities
based upon actual Market Value of Assets in the fund on the valuation date.
Of the two methods the Actuarial Asset Valuation Method is the most conservative and most predictable.
This method reflects the city's conservative fiscal practice. The city has utilized this method from the
inception of the defined benefit plan in 2001 through today. On the other hand, the Market Valuation
Method is subject to wide swings in contribution rates that making it a less predictable method, and thus,
difficult to budget.
2
Results
Overall as shown below, both methods demonstrate that the plan performs within the 10-30 year funding
parameters except the worst case scenario under the more conservative Actuarial Asset Valuation Method. In
that scenario the study indicates a need to increase contribution rates 1 %.
Results - Asset Valuation Method
30- Year IS-Year 10-Year
Funding Funding Funding
Scenario 1- Current Case
. ReQuired Payroll Contribution % 13.2 14.1 15.2
. Authorized Payroll Contribution % 14.0 14.0 14.0
00.8 (00.1 ) (01.2)
Scenario 2 - Normal Case
. ReQuired Payroll Contribution % 15.0 16.3 17.9
. Authorized Payroll Contribution % 15.0 15.0 15.0
00.0 (01.3) (02.9)
Scenario 3 - Worst Case
. ReQuired Payroll Contribution % 16.1 17.8 19.7
. Authorized Payroll Contribution % 15.0 15.0 15.0
(01.1) (02.8) (04.7)
Results - Market Valuation Method
30- Year 15-Year 10-Year
Funding Funding Funding
Scenario 1- Current Case
. Required Payroll Contribution % 11.2 12.1 13.1
. Authorized Payroll Contribution % 14.0 14.0 14.0
02.8 01.9 00.9
Scenario 2 - Normal Case
. ReQuired Payroll Contribution % 12.8 14.2 15.8
. Authorized Payroll Contribution % 15.0 15.0 15.0
02.2 00.8 00.8
Scenario 3 - Worst Case
. Required Payroll Contribution % 14.0 15.7 17.6
. Authorized Payroll Contribution % 15.0 15.0 15.0
01.0 (00.7) (02.6)
3
Conclusions
The approach to funding a pension plan is reflected in the philosophy of the organization and the risk the
organization is willing to accept. Winter Springs has adopted a very conservative pension plan approach that
has served it well in the past and will serve it well into the future if maintained. The success of this approach
is demonstrated by the fact that the present value of accrued benefits (current benefits earned to date by
participants under the plan) are 99% funded as of the current valuation date.
Based upon the more conservative Actuarial Asset Valuation Method, and assuming the worst case
retirement scenario which anticipates a spike in retirement activity in the years immediately following the
full 3% annual benefit becoming effective, we recommend the city increase its payroll contribution 1 % to
remain on target with the 10-30 year funding target.
The benefit of this approach is that the additional 1 % contribution would insure an added level of protection
and provide for continued financial soundness through the increased retirement bubble in future years, if it
occurs, and provide the city with three options after the bubble has passed as follows:
1. To maintain the extra one percent to accelerate the funding of the unfunded past service liability,
driving the retirement system toward 100% funding of past service liabilities.
2. To serve as a hedge against future increases in contributions necessitated by lower than anticipated
earnings, and higher than anticipated salary increases and expenses.
3. To provide for more conservative plan assumptions such as lowering the earnings assumption and or
raising the annual average payroll increase assumptions.
Recommendation
1. It is recommended that the city increase its contributions to the Pension Plan by 1 % to insure that the
plan meets its 10-30 year funding target under a worst case retirement scenario utilizing the Asset
Valuation Method.
2. It is recommended that an additional review and analysis of the fiscal condition of the plan be
performed in 2009 to determine what if any changes are indicated relative to desirable changes in
contribution rates and or plan assumptions.
4
CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ASSET VALUATION METHOD - SCENARIO 1
CURRENT CASE: CURRENT YEAR COST WITH 2.25% BENEFIT GOING BACKWARD
AND 3% BENEFIT GOING FORWARD. EFFECTIVE 10/01/05
30 Year Fund/no 15 Year Fundino 10 Year Fundina
Normal Cost $1,130,947 $1,130,947 $1,130,947
Past Service Cost 317.412 417.476 532.538
Total $1.448,359 $1,548.423 $1,663,485
Expected 2005/06
Est Covered Comp $10,947,426 $10,947,426 $10,947,426
Percent of Comp 13.2% 14.1% 15.2%
a) Present Value of Accrued Benefits: $11,290,585
b) Market Value of Assets: 11,251,277
c) Unfunded Present Value of Accrued Benefits: (a-b) $ 39,308 (99.7%)
ASSET VALUATION METHOD - SCENARIO 2
NORMAL CASE: PROJECTED COST OF FULL 3% BENEFIT ON 10/01/08 USING CURRENT
PLAN DATA AND ACTUARIAL AVERAGE RETIREMENT AGE OF 60 YEARS
30 Year Funding 15 Year Funding 10 Year Funding
Normal Cost $1,155,671 $1,155,671 $1,155,671
Past Service Cost 478.416 629.234 802.660
Total $1,634,087 $1,784,905 $1,958,331
Expected 2005/06 --
Est Covered Comp $10,947,426 $10,947,426 $10,947,426
Percent of Comp 15.0% 16.3% 17.9%
a) Present Value of Accrued Benefits: $13,009,606
b) Market Value of Assets: 11,251,277
c) Unfunded Present Value of Accrued Benefits: (a-b) $1,758,329 (86.5%)
Retirement Plan Specialists, Inc.
7/11/2006
ASSET VALUATION METHOD - SCENARIO 3
WORST CASE: PROJECTED COST OF FULL 3% BENEFIT THROUGH 10/01/13 USING CURRENT
PLAN DATA. ACTUARIAL AVERAGE RETIREMENT AGE OF 60 YEARS AND REFLECTING THOSE
ELIGIBLE FOR EARLY RETIREMENT BETWEEN 10/01/08 AND 10/01113
30 Year Funding 15 Year Funding 10 Year Funding
Normal Cost $1,178,517 $1,178,517 $1,178,517
Past Service Cost 583.783 767.818 979 .439
Total $1,762,300 $1,946,335 $2,157,956
Expected 2005/06
Est Covered Comp $10,947,426 $10,947,426 $10,947.426
Percent of Comp 16.1% 17.8% 19.7%
a) Present Value of Accrued Benefits: $14,002,742
b) Market Value of Assets: 11,251,277
c) Unfunded Present Value of Accrued Benefits: (a-b) $2,751,465 (80.4%)
Retirement Plan Specialists, Inc.
7/11/2006
CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
MARKET VALUATION METHOD - SCENARIO 1
CURRENT CASE: CURRENT YEAR COST WITH 2.25% BENEFIT GOING BACKWARD
AND 3% BENEFIT GOING FORWARD. EFFECTIVE 10/01/05
30 Year Funding 15 Year Funding 10 Year Funding
Normal Cost $903,421 $903,421 $903,421
Past Service Cost 317.412 417.476 532.538
Total $1,220,833 $1,320,897 $1,435,959
Expected 2005/06
Est Covered Como $10,947,426 $10,947,426 $10,947,426
Percent of Comp 11.2% 12.1% 13.1%
a) Present Value of Accrued Benefits: $11,290,585
b) Market Value of Assets: 11,251,277
c) Unfunded Present Value of Accrued Benefits: (a-b) $ 39,308 (99.7%)
MARKET VALUATION METHOD - SCENARIO 2
NORMAL CASE: PROJECTED COSlOF FULL 3% BENEFIT ON 10/01/08 USING CURRENT
PLAN DATA AND ACTUARIAL AVERAGE RETIREMENT AGE OF 60 YEARS
30 Year Funding 15 Year Funding 10 Year Funding
Normal Cost $924,144 $924,144 $924,144
Past Service Cost 478.416 629.234 802.660
Total ~ . - - ~ - $1,402,560 $1;853,378 $1,726,804
Expected 2005/06
Est Covered Como $10,947,426 $10,947,426 $10,947,426
Percent of Como 12.8% 14.2% 15.8%
a) Present Value of Accrued Benefits: $13,009,606
b) Market Value of Assets: 11,251,277
c) Unfunded Present Value of Accrued Benefits: (a-b) $1,758,329 (86.5%)
Retirement Plan Specialists, Inc.
rev 8/4/2006
MARKET VALUATION METHOD - SCENARIO 3
WORST CASE: PROJECTED COST OF FULL 3% BENEFIT THROUGH 10/01/13 USING CURRENT
PLAN DATA. ACTUARIAL AVERAGE RETIREMENT AGE OF 60 YEARS AND REFLECTING THOSE
ELIGIBLE FOR EARLY RETIREMENT BETWEEN 10/01/08 AND 10/01/13
30 Year Funding 15 Year Funding 10 Year Funding
Normal Cost $946,458 $946,458 $946,458
Past Service Cost 583.783 767.818 979 .439
Total $1,530,241 $1,714,276 $1,925,897
Expected 2005/06
Est Covered Comp $10,947,426 $10,947,426 $10,947,426
Percent of Como 14.0% 15.7% 17.6%
a) Present Value of Accrued Benefits: $14,002,742
b) Market Value of Assets: 11,251,277
c) Unfunded Present Value of Accrued Benefits: (a-b) $2,751,465 (80.4%)
Retirement Plan Specialists, Inc.
rev 8/4/2006