1992 Police Pension Fund Annual Report of Conditions ITEM XI. (N)
TO: President and Board of Trustees
Village of Buffalo Grove
FROM: Buffalo Grove Police Pension Fund
DATE: July 1, 1992
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 1992 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, 1993 through December 31, 1993.
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 July 1, 1992, 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 $ 62,398.43
In Pension Fund Escrow Account .70
In U.S. Treasury Notes @ 8.375% 307,000.00
In U.S. Treasury Bonds @ Various Rates-Zero Coupon 8,146,635.00
In Money Market Funds 205,776.03
U.S. Government National Mortgage Assn. 395,967.04
Asset Value-July 1, 1992 $ 9,117,776.57
The amount unearned discount on securities purchased as of July 1, 1992
was $2,082,283.19 which equates to a net investment value of $7,035,493.38
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
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 $948,469.33 or 15.58% over the comparable
point in time in 1991.
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
1993 is $2,813,336.50. 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, $253,200.26 should be received, at a minimum, from the basic
payroll deduction for contribution during calendar 1993.
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 1992 tax
levy, based on the actuarial study performed, as of April 30, 1991, the
following tax levy is recommended per the actuarial information as utilized
by the State:
To provide for the employers normal actuarial cost $ 289,307
requirements the Fund
To amortize the unfunded actuarial liability of 80,971
$990,430 as contemplated by Section 3-127
Total Levy $ 370,278
This compares to the suggested 1991 property tax levy of $327,513, an
increase of 15.50%. However, the Village utilized an alternate tax levy
prepared by it's independent actuary, which was $173,284. The increase
proposed levy to final 1991, is 113.68%, and the methodology supporting 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 1991 tax levy determination and this independent
review, which used local Fund performance rather than the statewide actuarial
application of methodology, permitted a reduction of 47.09% from the
Department of Insurance recommendation of $327,513. 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
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. 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 has again been 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 has
proposed a tax levy based upon their analysis for consideration by the Board
of Trustees for calendar, 1991 in the amount of $257,400, an increase of
48.54% from 1991 but 30.48% under the Department's recommendation.
The final recommended tax levy will be levied in calendar, 1991, for
collection in calendar, 1993. It is anticipated, based on historical
collection effort, that approximately 99.5% of any tax levy will be collected
and credited against the requirements of the Fund. This would equal
approximately $256.113.00 in collections in calendar, 1993 based on the
Hewitt Associates levy recommendation.
Estimated Receipts from Corporate Personal Replacement Taxes: The Fund will
receive to it's credit approximately $2,140.00 in distribution of the
replacement 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, 1992 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 non-discount accrual investments by year-end, 1992 should total
approximately $150,000 at par, value for a January 1, 1993 balance of
approximately $900,000, assuming no changes in current investment policy
procedures. During 1993, approximately $550,000 in net cash receipts should
flow into the fund from all sources. This would equate to an average
calendar, 1993 investment balance of $1,175,000. The current weighted yield
equals nearly 6.00%, and this yield will be considered the average for the
entire calendar period. Under the assumptions, nearly $70,000.00 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, 1993 to pay retirement and other pension plan
obligations, although there will be additional employed members who will be
eligible by having reached 20-years of credible service but at the time of
the preparation of this Report had not made any decisions relative to
employment continuation. The amount estimated for payment in calendar, 1993
for retirement benefits is $19,865. It will also be assumed that there will
not be any service related disabilities in 1993. Other costs that could be
anticipated are for possible separation refunds, investment management fees,
physical fitness evaluations and the annual registration 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 4/30/91, the
amount required to be provided totaled $7,186,411 with net present assets
totaling $6,195,981, for an unfunded actuarial liability of $990,430. The
liability is the unfunded reserve requirement of 3-127 determined by the
actuarial study, and is the April 30, 1991 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 28.670 years. The 1992
tax levy requirement is $80,971 as contemplated per the language of Section
3-127. The unfunded liability increased from $785,270 in 1991 to the current
$990,430 for 1992.
It should be noted, however, that the above values are based on the actuarial
assumptions of the Department of Insurance for the year ending April 30,
1991. For the period ending April 30, 1991, the independent actuary
determined that the Fund's unfunded liability should be $320,331, which will
require an amortization of $25,564 as part of the 1992 levy proposed above
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.
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,
VILLAGE OF BUFF LO GROVE
Police Pension Fund