1990 Police Pension Fund Annual Report �f v ITEM XI. (E)
TO: President and Board of Trustees
Village of Buffalo Grove
FROM: Robert Back
President-Buffalo Grove Police Pension Fund
DATE: June 1, 1990
SUBJECT: Annual Report of Condition
Illinois Revised Statutes, Chapter 108i, Section 3-143 requires that the
Police Pension Fund Board of Trustees submit a report prior to the adoption
of the Village's 1990 property tax levy regarding it's fiscal condition.
This Report of Condition has been prepared on behalf of the Village of
Buffalo Grove Police Pension Fund Board of Trustees by William H. Brimm,
staff liaison. The estimates provide for all sources and expenditures of
funds as required by the Illinois Pension Code for the calendar period
January, 1, 1991 through December 31, 1991.
In this Report of Condition, the Pension Fund Board is required to certify to
the Village Board the following:
1) Assets in the custody of the Board at the time of report preparation;
2) The estimated receipts during the next succeeding calendar year from
deductions from the salaries of police officers, and from all other
sources; and
3) The estimated amount required during said calendar year (a) pay all
pensions and other obligations provided in this Article, (Chapter 108i)
and (b) to meet the annual requirements of the Fund as provided in
Section 3-125.
Each of the above reporting requirements shall be noted individually for
presentation purposes.
Assets In The Custody of the Board: As of June 1, 1990, the Village of
Buffalo Grove Police Pension Fund had in it's depository custody from the
accumulation of property taxes, interest income, net gains on security
transactions, Corporate Personal Property Replacement Taxes, and salary
deductions, the following assets:
In Savings $ 14,932.36
In Pension Fund Escrow Account 18,000.00
In U.S. Treasury Notes @ 8.375% 307,000.00
In U.S. Treasury Bonds @ Various Rates-Zero Coupon 6,306,635.00
In Money Market Funds 214,873.32
U.S. Government National Mortgage Assn. 480,319.29
Total: Asset Value-June 1, 1990 $ 7,341,759.97
The net amount unearned discount on securities purchased as of June 1, 1990
was $2,076,324.66 which equates to a net investment value of $5,265,435.31
The net discount is amortized annually following generally accepted
accounting principals.
The funds and securities are maintained on behalf of the Fund by the Village
as part of it's overall financial accounting system, this Fund being
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considered a non-expendable pension trust fund. Under the Village's internal
accounting guidelines and policies, all deposits are accumulated within the
Fund with verbal or written notice transmitted from the Village's Finance
Department to Police Department personnel for transfer into authorized
investment programs. The Pension Board strives to maintain the least
possible level of low interest-bearing funds, those being savings, in order
to maximize the earnings potential of the portfolio.
Total assets as of report date are $737,170.49 or 16.28% over the comparable
point in time in 1989.
Estimated Receipts From Salaries and Wages: Chapter 108i, Section 3-125.1
establishes the basis for salary and wage contributions deducted from member
police officers eligible earnings. The basic deduction, effective as of
January 1, 1987, is 9% of salary and wages, such salary and wages to include
annual salary plus any longevity pay. The estimated wage base for calendar
1991 is $2,140,473.50. This level of salary and longevity pay forecasting is
consistent with salary calculations used by the Village to establish Fire
Pension Fund and IMRF/FICA wage levels. Based on the estimated salaries and
longevity pay, $192,642.62 should be received, at a minimum, from the basic
payroll deduction for contribution during calendar 1991.
Estimated Receipts from Property Taxes: The tax levy established by the
Village Board should be sufficient to cover the following requirements of
Section 3-125, which when added to the deductions from salaries and wages of
members, along with receipts from all other sources, will equal a sum
sufficient to meet the annual requirements of the Fund. The annual
requirements to be provided by such tax levy are equal to:
1) The normal actuarial cost requirements of the Fund for the year
involved, plus
2) The amount necessary to provide for the amortization of the unfunded
actuarial liabilities as provided for in Section 3-127
The Illinois Department of Insurance prepares on an annual basis an actuarial
computation showing a minimum tax levy required in order to meet the normal
actuarial cost requirements of the fund, along with an amount necessary to
amortize the unfunded actuarial liability proportionally over the period of
time permitted under Section 3-127, that being 40 years from January 1, 1980.
The normal cost is determined by the actuarial study of the membership and
takes into account service considerations such as payroll deductions from
members, member salaries and wages, earnings on investments, length of
service, and age. The attained age at time of disability or retirement, sex,
annual salary or pension, and completed years of service of each individual
participant as of the date of the valuation balance sheet is then used in
calculating the actuarial liabilities of the Fund. The unfunded actuarial
liabilities equal the difference between net present assets and accrued
liabilities to members. The difference, if negative, is to be amortized over
40 years subsequent to January 1, 1980. The reserve to be accumulated shall
be equal to the estimated actuarial requirements to the Fund.
The Village has taken the position regarding the levying of this tax by
utilizing the values provided by the Department of Insurance which is then
extended against all assessed valuation within the Village. For the 1990 tax
levy, based on the actuarial study performed, as of April 30, 1989, the
following tax levy is recommended per the actuarial information as utilized
by the State:
To provide for the employers normal actuarial cost $ 230,521
requirements the Fund
To amortize the unfunded actuarial liability of 60,593
$690,879 as contemplated by Section 3-127
Total Levy $ 291,114
This compares to the suggested 1989 property tax levy of $268,856, an
increase of 8.28%. However, the Village utilized an alternate tax levy
prepared by it's independent actuary, which was $132,205. The increase,
proposed levy to actual, is 120.20%, and the method behind the levy is
explained below.
The Village has the option, with the consent of the Pension Fund Board, to
retain an outside, independent registered actuary to determine the required
tax levy based on the requirements of Section 3-125. As noted, this review
was performed for the 1989 tax levy determination and this independent
review, which used local fund performance rather than the statewide actuarial
application of methodology, permitted a reduction of 50.83% from the
Department of Insurance recommendation of $268,856. The above 1989 tax levy
was that calculated for the Fund by the independent actuary. The Department
of Insurance's recommendation will be considered as the maximum levy that
would be requested by the Fund, regardless of the outcome of the independent
review.
It should be noted that State actuarial assumptions were modified for 1988
levies due to changes in benefits enacted into law, combined with the effects
of new actuarial information that has become the basis for new statistical
programming. New statewide values are as follows:
Funding Method Used: Entry Age Normal Cost
Interest Rate Assumption: 7.00%
Mortality Rate Assumption: 1971 Group Annuity Table
Disability Assumptions: Experience Tables
Salary Progression: 5.5%
Status of Social Security in Assumption: None
The above recommended levy will again be audited on an actuarial basis by
Hewitt Associates in order to independently assess its validity based on the
parameters of the Village's pension fund operations when combined with any
pension law changes enacted, which incorporate the values above. Hewitt will
be proposing a tax levy based upon their analysis for consideration by the
Board of Trustees for calendar, 1990. It is not known at this time what that
levy will be. However, it is anticipated that the above levy from the State
will be the maximum that will be requested for extension in calendar, 1991.
The final recommended tax levy will be levied in calendar, 1990, for
collection in calendar, 1991. It is anticipated, based on historical
collection effort, that approximately 99.0% of any tax levy will be collected
and credited to the requirements of the Fund. This would equal approximately
$288,202.86 in collections in calendar, 1991 based on the Department of
Insurance levy proposal. Any other levy will be collected at the same rate,
but proportionate to the final extension.
Estimated Receipts from Corporate Personal Replacement Taxes: The Fund will
receive to it's credit approximately $896.00 in distribution of the replace-
ment tax.
Estimated Receipts from Interest Earnings: Interest earning assumptions take
into consideration the holding of the current portfolio until maturity except
for the money market investment program that is managed based on interest
rate trends. It is further assumed that: (1) any cash gain or loss from
investment trading will not be calculated for this Report in that it is not
readily quantifiable, and (2) the amortization of the remaining net security
discount for calendar, 1991 will not be reflected as an interest receipt.
The interest earnings estimate will reflect only direct cash receipts from
those investments generating cash. Finally, interest proceeds will be rolled
over as quickly as possible in order to maximize the earnings potential of
each cash receipt.
Additional investments by year-end, 1990 should total approximately $100,000
at par, value for a January 1, 1991 balance of approximately $900,000,
assuming no changes in current investment policy procedures. During 1991,
approximately $450,000 in net cash receipts should flow into the fund from
all sources. This would equate to an average calendar, 1991 investment
balance of $1,053,000. The current weighted yield equals nearly 8.00%, and
this yield will be considered the average for the entire calendar period.
Under the assumptions, nearly $84,000 in interest earnings on the portfolio
would be generated for credit to the Fund, assuming no changes in the
investment mix from that generating cash interest to that which earns
interest on an amortization of either discount or premium.
Amount Required to Pay All Pensions and Obligations: Based on the current
and assumed service profile of the member police officers, there will be
amounts estimated in calendar, 1991 to pay retirement and other pension plan
obligations, although there will be members who will be eligible by having
reached 20-years of credible service. The amount estimated for payment in
claendar, 1991 for retirement benefits is $19,865. It will also be assumed
that there will not be any service related disabilities in 1991. Other costs
that could be anticipated are for possible separation refunds, investment
management fees, physical fitness evaluations and the annual $25.00 payment
to the Illinois Department of Insurance.
Amount Required to Maintain the Reserve Fund: Section 3-127 requires that a
reserve be established to insure the payment of all obligations incurred
under the Article. The reserve to be accumulated shall be equal to the
estimated total actuarial requirements of the Fund. As of 4/30/89, the
amount required to be provided totaled $5,360,615 with net present assets
totaling $4,603,704, for an unfunded actuarial liability of $756,911. The
liability is the unfunded reserve requirement of 3-127 determined by the
actuarial study, and is the April 30, 1989 value of liabilities for the
active participants less the net present assets. The Village is now required
to amortize the actuarial unfunded liability now over 30.674 years. The 1990
tax levy requirement is $60,593 as contemplated per the language of Section
3-127. The unfunded liability increased from $690,879 in 1989 to the current
$756,911 for 1990.
However, it should be noted that the above values are based on the actuarial
assumptions of the Department of Insurance for the year ending April 30,
1989. For the period ending April 30, 1988, the independent actuary
determined that the Fund did not have an unfunded liability based on Fund
performance in the past and forecast into the future. As with the tax levy
calculation noted above, the unfunded actuarial liability from the State is
considered the maximum that would have to be amortized pending the results of
the FY 1989 Hewitt Associates study which may note a different value.
Conclusion: The preparation and submission of this Annual Report of
Condition will satisfy the requirements of Section 3-143 and conforms to
assumptions and estimates previously used to calculate receipts and earnings.
Respectively submitted,
444 661.-
Robert Back
President
VILLAGE OF BUFFALO GROVE
Police Pension Fund
/rf
cc: William R. Balling
Police Pension Fund Board