1993 Police Pension Fund Annual Report of Condition ITEM NO. XI. (K)
TO: President and Board of Trustees
Village of Buffalo Grove
FROM: Buffalo Grove Police Pension Fund
DATE: July 1, 1993
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 1993 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, 1994.
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, 1993, 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:
In Savings $ 45,755.82
In Pension Fund Escrow .40
In U.S. Treasury Notes 307,000.00
In U.S. Treasury Bonds-Zero Coupon 7,736,635.00
In Money Market Funds 1,574,560.03
U.S. Government-National Mortgage Assn. 345,893.48
Total Asset Value-July 1, 1993 $10,009,844.73
The amount of unearned discount on securities purchased as of July 1, 1993 was
$1,920,816.95 which equates to a net investment value of $8,089,027.78. 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
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 the Report date are $1,053,534.40 or 14.97% over the
comparable point in time in 1992.
Estimated Receipts From Salaries and Wastes: 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 1994 is
$3,343,665.03. This level of salary and longevity forecasting is consistent with
salary calculations used by the Village to establish Fire Pension Fund and
IMRF/FICA wage estimates for the same period. Based on the estimated salaries
and longevity pay, $300,929.85 should be received, at a minimum, from the basic
payroll deduction for contributions during calendar, 1994.
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 prepares on an annual basis 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 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 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 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
of the Fund.
The Village has taken a position regarding the levying of this tax by utilizing,
as a maximum, the values provided by the Department of Insurance which is
extended against all assessed and equalized valuation within the Village. For
the 1993 tax levy, based on the actuarial study performed as of April 30, 1992,
the following tax levy has been recommended per the base information as utilized
by the Department:
To provide for the employer' normal actuarial cost $ 356,875
requirements of the Fund
To amortize the unfunded actuarial liability of 125,847,
$1,521,246 as contemplated by Section 5/3-127
Total Levy $ 482,722
This compares to the suggested 1992 property tax levy of $370,278, an increase
of 30.36%. However, the Village utilized an alternate levy prepared by it's
independent actuary, which was $257,401. The increase against the Hewitt
Associated proposal for 1992 is 87.53% and the methodology supporting the
alternate levy is explained below.
The Village has the option, with the consent of the Pension Fund, to retain an
outside, independent registered actuary to determine the required tax levy based
on the requirements of Section 5/3-125. As noted, this review was performed for
the 1992 tax levy cycle determination and this independent review, which used
local Fund performance rather than the statewide actuarial applied methodology,
permitted a reduction of 30.48% from the Department's recommendation of $370,278.
The Department's recommendation should be considered as the maximum levy that
will be requested regardless of the outcome of the independent review.
It should be noted that State actuarial assumptions were modified for 1993 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 Assumption: Experience Tables
Salary Progression: 5.5% Annually
Status of Social Security: None
Optional Amortization of Unfunded Can remain at 1/1/80 or begin as
Actuarial Liability: July 1, 1993
The recommended levy is again being audited on an actuarial basis by Hewitt
Associates in order to independently assess its validity based on the parameters
of the local Fund operations, which when combined with any pension law changes
enacted, incorporate the values above. As with the optional amortization, the
Board has opted to remain with the January 1, 1980 start date. While a change
would lower slightly the amount necessary to amortize the liability, in later
years the cost will exceed any higher amount now levied by remaining under the
current system. Hewitt has proposed a tax levy based upon their analysis for
consideration by the Board of Trustees for calendar 1993 in the amount of
$298,951, an increase of 16.14% from 1992 but 38.07% under the Department's
recommendation.
The above levy will be requested for collection in calendar, 1994. 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 $297,460.00 in collections in 1994 based on the Hewitt
levy alternative.
Estimated Receipts From Corporate Personal Property Replacement Taxes: The Fund
will receive to it's credit approximately $2,075.00 in distribution of the
replacement tax in calendar, 1994.
Estimated Receipts From Interest Earnings: Interest earnings assumptions take
into consideration the holding of the current portfolio until maturity except for
money market investment programs that are managed based on interest rate trends
and assumptions. It is further assumed that: (1) amy 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 remaining net discount on
securities held to be taken in 1994 will not be reflected as an interest receipt.
The interest earnings estimate will reflect only direct cash receipts from those
investments generating cash flow. 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, 1993 should total
approximately $150,000 at par for a January 1, 1994 balance of approximately
$1,000,000, assuming no changes in the current investment policy but reflecting
a liquidation of some of the current balance in the money market with a
corresponding increase in the U.S. Government securities position. During 1994,
nearly $600,000 in net cash receipts should flow into the Fund from all sources.
This would equate to an average calendar, 1994 investment balance of $1,000,000.
The current weighted yield is approximately 5.00% and this will be considered the
average for the calendar period. Under the assumptions, nearly $50,000 in
interest earnings on the portfolio would be generated for credit to the Fund,
assuming no further changes in the investment mix from that generating cash
interest to that which earns return on an amortization of either discount or
premium.
Amount Required to Pav All Pensions and Obligations: Based on the current and
assumed service profile of the member police officers, there will be amounts
.
estimated in calendar, 1994 to pay retirement and other pension plan obligations.
There will be additional employed members, however, 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, 1994 for retirement benefits is
$19,865, again assuming the current membership profile. In addition to the
current retirees, there is one deferred retiree who has left service but has not
yet reached age 50.
It will also be assumed that there will not be any service related disabilities
in 1994. Other costs that could be anticipated are for possible separation
refunds, investment management fees, physical and mental fitness evaluations, and
the annual registration payment to the Illinois Department of Insurance.
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 4/30/92, the amount required to be
provided totaled $8,586,248 with net present assets totaling $7,114,431, for an
unfunded actuarial liability of $1,521,246. The liability is the unfunded
reserve requirement of 5/3-127 determined by the independent actuarial study and
is the April 30, 1992 value of liabilities for the active participants less the
net present assets. The Village is required to amortize this liability over the
next 27.670 years, although recent legislative action permits a longer term. The
1993 tax levy requirement is $98,687 as contemplated by the intent of Section
5/3-127 to clear this liability and this amount differs from the amount of
$125,847 provided by the Department of Insurance. The unfunded liability
increased from $990,430 in 1992 to the current $1,521,246 for 1993.
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
IN -t.
William H. Brimm
Staff Liaison