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1997 Annual Police Pension -Municipal Compliance Report ITEM XI. (E) TO: President and Board of Trustees Village of Buffalo Grove FROM: Buffalo Grove Police Pension Fund DATE: July 1, 1997 SUBJECT: Annual Report of Condition Illinois Compiled Statutes, Chapter 40, Section 5/3-143 require that the Police Pension Fund Board of Trustees submit a report prior to the adoption of the Village's 1997 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 uses of funds as required by the Illinois Pension Code for the calendar period January 1 through December 31, 1998. In this Report of Condition, the 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) to pay pensions and other obligations provided in the Code (Chapter 40) and (b) to meet the annual requirements of the Fund as provided in Section 5/3-125. Each of the above reporting requirements shall be noted individually for presentation purposes. Assets in the Custody of the Board: As of July 1, 1997, 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, less any payments for operating expenditures and pension obligations, the following assets: Savings & Checking for Pension $ 234,213.26 Obligations Insurance Annuity Contracts (Equities) 1,111,863.95 Pension Fund Escrow .00 U.S. Treasury Bonds-Zero Coupon/Notes 13,643,750.00 Pegasus Money Market Fund 673,732.00 Illinois State Treasurer's Investment Pool 1,068,666.13 U.S. Government-National Mortgage Assn. 105.178.68 Total Asset Value-July 1, 1997 $16,837,404.02 The amount of unearned discount on securities purchased as of July 1, 1997 was $3,527,223.48 which equates to a net investment value of $13,310,180.54. The net discount is amortized annually following generally accepted accounting principals with discount amortized following either the straight line or interest rate method of amortization to maturity. It should also be noted that the investment in insurance annuity contracts has accumulated a total of $336,863.95 in unrealized gains since inception of the program. These gains are carried as deferred revenue in conformance with generally accepted accounting principles as they apply to equity investing. 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 considered a Non-Expendable Pension Trust Fund. Additional deposits will continue to be made into the Illinois State Treasurer's Investment Pool with eventual transfer to higher earning, 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. The total par value shown above for all assets as of the Report date compare to the 1996 value of $16,326,186.56, an increase of $511,217.46 or 3.13%. Estimated Receipts From Salaries and Wages: Chapter 40, Section 5/3-125.1 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 1998 is $4,058,970. This level of salary and longevity forecasting is consistent with salary calculations used by the Village to establish Fire Pension Fund, IMRF/FICA wage, and worker's compensation estimates for the same period. Based on the estimated salaries and longevity pay, $365,310.00 should be received, at a minimum, from the basic payroll deduction for contributions during calendar, 1998. Estimated Receipts From Property Taxes: The tax levy established by the Village Board should be sufficient to cover the following requirements of Section 5/3- 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 any unfunded actuarial liabilities as provided for in Section 5/3-127. The Illinois Department of Insurance has in the past prepared an actuarial computation that details the 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 in Section 5/3-127, that being 40 years from July 1, 1993. The normal cost is the cost to the Fund assigned to the current year, compiled as a level percentage of pay, such that the accumulated value at the expected retirement date of any individual is sufficient to pay benefits due. The total 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 current age. Additionally, factors such as attained age at time of disability or retirement, sex, annual salary or pension, and completed years of service of each individual participant of the date of the valuation balance sheet is them used in calculating the actuarial liabilities of the Fund. The unfunded actuarial liabilities equal the difference between the net present assets and accrued liabilities due to members. The difference, if negative, is to be amortized over 40 years as noted above. The amount to be applied towards the amortization of this liability in any one year shall not be less than the annual amount required to amortize said liability, including interest, through equal annual payments over the number of years remaining in the amortization period using the level dollar amount methodology, which is more conservative (provides a higher level of annual funding) and attempts to reduce this liability sooner when compared to the level percentage of payroll method, which is an acceptable alternative funding approach. The reserves to be accumulated shall be equal to the estimated total actuarial requirements of the Fund. The Village has taken a position regarding the levy of property taxes by utilizing the values provided by its independent actuary, Hewitt Associates. The Village is permitted to retain an independent, enrolled actuary in order to determine the required tax levy based on the requirements of Section 5/3-125. For 1996 the Village utilized the alternative levy recommended by Hewitt Associates which totaled $505,370. That review, performed for the 1996 tax levy cycle utilized local Fund performance and characteristics rather than the statewide actuarial applied methodology, led to a reduction of 9.52% from the Department's recommendation of $553,504. Based on the local fund analysis and following long term fund-specific assumptions, Hewitt has proposed a tax levy based upon their analysis for consideration by the Board of Trustees for calendar, 1997 in the amount of $498,270, a reduction of 1.40% from 1996. The components of the levy request are as follows: To provide for the employer' normal actuarial cost $ 354,101 requirements of the Fund To amortize the unfunded actuarial liability of 144,169 $216,878 as contemplated by Section 5/3-127 Total Levy $ 498,270 The final Actuarial Report as of April 30, 1996 is attached to this memo and should be accepted by motion along with this Report. Please note the content of the Report from Hewitt and the methodology followed in the preparation and recommendation of the levy proposed for 1997. It should be noted that State (although not now in use but remaining the basis for any future return to providing levy values) actuarial assumptions were modified beginning in 1993 for that and later year 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. 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 Assumption: Experience Tables Salary Progression: 5.5% Annually Status of Social Security: None Amortization of Unfunded Actuarial July 1, 1993 Liability-40 Years From: Where the local Fund deviates from the above values are in interest returns where 7.5% is assumed and in salary progression where 5.00% is considered valid over time. The Fund Board is also on record to reduce any accrued actuarial liability as quickly as possible. While the State follows a reduction method known as the level percentage of payroll method, the Village will apply the level dollar amount process. It is the opinion of the actuary that by using a level percentage of pay to amortize an unfunded liability would significantly lower the funded ratio of any particular pension plan over time. The level dollar amortization process is a much more conservative approach which will limit reductions in an overall funding ratio. The alternative levy will be requested for collection in calendar, 1998. It is anticipated, based on historical collection efforts, that approximately 99.5% of any tax levy will be collected and credited against the requirements of the Fund. This would equal nearly $495,780.00 in collection in 1998 based on the Hewitt levy alternative. Estimated Receipts From Corporate Personal Property Replacement Taxes: The Fund will receive to it's credit approximately $4,450.00 in distribution of the replacement tax in calendar, 1998. Estimated Receipts From Interest Earnings: Interest earnings assumptions take into consideration the holding of the current portfolio until maturity except for balances in money market or other near-cash investments that are managed based on interest rate trends, assumptions and pension board action. 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 quantified, and (2) the amortization of remaining net discount on securities held to be taken in 1998 will not be reflected as an interest receipt. The interest estimates reflect only direct cash earnings from investments. Interest earnings will be rolled over as quickly as possible in order to maximize the earnings potential of each cash receipt. Interest earnings will continue to increase substantially as greater balances become available and opportunities for investment broaden although the majority of investments will not generate cash investment income. It is estimated that approximately $125,000 in cash interest income will be earned during calendar 1998 depending on both the movement of interest rates and the mix of investments utilized by the Fund with that assumption based on the nature of the current portfolio in place as of the date of this Report. 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 necessary in calendar, 1998 to pay retirement and other pension plan costs and obligations. There will also be additional employed members, however, who will be eligible for a service-related pension having reached 20-years of credible service but at the time of the preparation of this Report not having made any decisions relative to employment continuation although some retirements are anticipated. The amount estimated for payment of calendar, 1998 retirement benefits is $215,000, assuming the current member profile, which includes seven retirees, including one former employee previously on deferred retiree status but now eligible to receive retirement benefits. In addition to the current retirees, one currently active member will retire in the fourth quarter of calendar 1996 and there remains one deferred retiree who has left service but has not yet reached age 50. This known retirement along with the possibility that additional participants will retire in 1998, an additional $50,000 will be required to pay earned benefits. Further, it is assumed that there will not be any service related disabilities in 1998. Other costs that could be anticipated are for possible separation refunds, investment management fees, physical and mental fitness evaluations, seminar and training costs and the annual registration payment to the Illinois Department of Insurance. These amounts will be minimal relative to the size of the Fund. Amount Required to Maintain the Reserve Fund: Section 5/3-127 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 4/30/96, the amount required to be provided totaled $12,281,122 with net present assets totaling $12,064,245 for an unfunded actuarial liability of $216,878. The liability is the unfunded reserve requirement of 5/3-127 as of April 30, 1996 and is the value of liabilities for the active and retired/disabled participants less the net present assets. The Village is required to amortize this liability over a 40-year period ending June 30, 2033 under current pension code law. The 1997 tax levy requirement (for amortization of the unfunded liability) is $144,169 or 28.93% of the proposed levy as contemplated by Section 5/3-127 to clear this obligation. The unfunded liability decreased from $1,935,619 in 1995 to the current $216,878. Conclusion: The preparation and submission of this Annual Report of Condition satisfies the requirements of Section 5/3-143 of the Illinois Pension Code and conforms to assumptions and estimates previously used to calculate receipt and earnings estimates. Respectively Submitted Village of Buffalo Grove Police Pension Fund William H. Br Staff Liaison Hewitt Hew„tt Associates LLC February 17, 1997 100 Half Day Road Lincolnshire, IL 60069 Tel (847) 295-5000 Fax(847) 295-7634 w,"c.hcwittassoc.co„t Private and Confidential Amsterdam Atlanta Mr. William H. Brimm Bangalore Village of Buffalo Grove Bangkok 50 Raupp Boulevard Bedminster Beijing Buffalo Grove, IL 60089 Boston Brussels Buenos Aires Dear Bill: Charlotte Chicago Cincinnati Subject: Village of Buffalo Grove Police and Firefighters'Pension Funds Cleveland Actuarial Valuation as of April 30, 1996 Dallas Denver Detroit As you requested, Hewitt Associates did not perform a complete 1996 actuarial valuation for Dublin the Village of Buffalo Grove. Instead,we performed a skipped-year valuation. Eindhoven Geneva • Hong Kong Enclosed are the following: Lincolnshire Los Angeles • Certification to 1997 tax levies; and Madrid Mexico City Milan • Statements of projected benefit obligation(PBO) as of April 30, 1996. Milwaukee Minneapolis Montreal Mumhai Neuchatel Police Firefighters' New Delhi Newport Beach Normal Cost to be Paid by the Village of Buffalo Grove $ 354,101 $ 439,446 New York Paris Percent of Payroll 11.66% 16.11% Philadelphia Phoenix Amortization of Unfunded Accrued Liability $ 144,169 $ 89,409 Pittsburgh Richmond Rotterdam Tax Levy $ ••498.270 $ 528,855 xoway um Percent of Payroll 16.40% 19.39% St.Albans St. Lulus PBO $ 12,281,122 $ 5,520,855 San Antonio Payroll $ 3,038,070 $ 2,727,582 San Francisco San Juan Santiago Sao Paulo Singapore Stockholm Sydnc) Tampa The Woodlands f�kyo Toronto Uuccht Washington, D.C. Wellington Wiesbaden Ziirit Ii Hewitt • Mr. William H. Brimm Page 2 February 17, 1997 If you have any questions,or if we may be of further assistance,please feel free to call. Sincerely, HewittAssociates LLC get Richard W. Da to s RWD:rar Enclosure Mr. Byron N. Beebe, Hewitt Associates Mr. Jeffrey A.Padavic,Hewitt Associates VILLAGE OF BUFFALO GROVE POLICE PENSION FUND ACTUARIAL VALUATION AS OF APRIL 30, 1996 • Tax Levy Requirements Employer Normal Cost $ 354,101 Percent of Payroll 11.66% Amortization of Unfunded Accrued Liability $ 144,169 Percent of Payroll 4.75% 1997 Tax Levy $ 498,270 Percent of Payroll 16.40% Personnel Active Participants 62 Inactive Participants 7. Total 69 Payroll $ 3,038,070 Assumptions Investment Return 7.5% Salary Increases 5.0% Postretirement Benefit Increases - 3.0% Hewitt Associates has estimated the 1997 tax levy for the plan referenced above to be $498,270 based on the following: -Aggregate personnel data as of April 30,1996,as supplied by the Village of Buffalo Grove; -Plan provisions in effect on April 30,1996 as contemplated by 40 ILCS 5/3 of the Illinois Compiled Statutes;and -Acceptable actuarial valuation principles and practices according to"skipped" valuation procedures. The tax levy represents reasonable expectations of anticipated plan experience. • Richard W.Davids Date Enrolled Actuary Enrollment Number: 96-3866 \V4215096.wk4/05At Hewitt Associates • • VILLAGE OF BUFFALO GROVE POLICE PENSION FUND PROJECTED BENEFIT OBLIGATION AS OF APRIL 30, 1996 • Pension Benefit Obligation Retirees and Beneficiaries Currently Receiving Benefits and Terminated Participants Not Yet Receiving Benefits $ 1,559,642 Active Participants Accumulated Employee Contributions 2,206,147 Employer-Financed Actives 8,515,333 Total Pension Benefit Obligation $ 12,281,122 Net Assets Available for Benefits (12,064,245) Unfunded Pension Benefit Obligation $ 216,878 Assumptions Investment Return 7.5% Salary Increases 5.0% Postretirement Benefit Increases 3.0% Trend Information Fiscal 1996 Net Assets Available for Benefits as a Percent of the PBO 98.23% Unfunded PBO as a Percent of Payroll 7.14% Required Employer Contribution $498,270 Percent of Payroll 16.40% Hewitt Associates has determined the projected benefit obligation(PBO)as of April 30,1996 to be$12,281,122. The PBO is based on the following:" -Aggregate personnel data as of April 30,1996,as supplied by the Village of Buffalo Grove; -Plan provisions in effect on April 30,1996 as contemplated by 40 ILCS 5/3 of the Illinois Compiled Statutes; -Acceptable actuarial valuation principles and practices according to"skipped"valuation procedures;and -Hewitt Associates'understanding of Government Accounting Standards Board Statement No.5. \V4215096.wk4/05At Hewitt Associates