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Agenda Item Details
Meeting Apr 03, 2019 - REGULAR MEETING OF THE MOUNT PROSPECT VILLAGE BOARD - 7:00 p.m.
- REVISED
Category 8. VILLAGE MANAGER'S REPORT
Subject 8.2 Public Safety Pension Funding Policy
Access Public
Type Action
Preferred Date Apr 03, 2019
Absolute Date Apr 03, 2019
Fiscal Impact No
Budgeted No
Recommended Action Approval of the proposed Public Safety Pension Funding Policy.
Public Content
Information
The Government Finance Officers Association (GFOA) recommends that every state and local government that offers
defined benefit pensions formally adopt a funding policy that provides reasonable assurance that the cost of those
benefits will be funded in an equitable and sustainable manner. The Village of Mount Prospect maintains two (2)
defined benefit plans supporting retirement, disability, surviving spouse, and dependent children benefits for its public
safety, police and fire, employees. The benefits provided for in these plans are guided by state statute. Funding for
the payment of these benefits is accomplished using a combination of employer contributions, employee contributions
and earnings from investments. The contribution rate of the employee is set by state statute. The employer
contribution is based on an actuarial valuation of the individual plan.
The attached draft policy outlines the components of the funding policy and directives for completing the actuarial
valuation. The policy is being developed in accordance with GFOA recommended best practice and in response to
feedback received by the bond rating agencies (Standard & Poor's and Fitch Ratings) during our last ratings call.
Having a formal pension funding policy in place is viewed positively by the ratings agencies. The policy simply
formalizes current practices in place, which meet funding guidelines developed by the National Association of State
Retirement Administrators and industry best practices.
The three major components of the policy include:
1. Actuarial cost method
2. Asset smoothing method
3. Amortization policy
The components in the policy are discussed in detail along with the Village's recommendation for each. Components
of the policy are intended to long-term in nature, consistent with the central focus of these plans. Demographic and
economic assumptions to be considered are also included in the policy. Plan assumptions will generally be considered
long-term in nature, but will be adjusted based on past experience, trends, external economic forces, and future
demographic and economic expectations.
The Village's Finance Commission will be reviewing the draft funding policy at their March 28 meeting. Any comments
from that discussion will be brought to the Village Board for consideration.
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4/10/2019
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Village staff will be on hand to make a detailed presentation on the draft policy and answer questions as needed.
Alternatives
1. Board approval of a Public Safety Pension Funding Policy.
2. Action at discretion of Village Board.
Staff Recommendation
Village staff recommends the Village Board approve the Public Safety Pension Funding Policy.
Administrative Content
Executive Content
Motion & Voting
Approval of the proposed Public Safety Pension Funding Policy.
Motion by Richard Rogers, second by Paul Hoefert.
Final Resolution: Motion Carries
Yea: William Grossi, Eleni Hatzis, Paul Hoefert, Richard Rogers, Colleen Saccotelli, Michael Zadel
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Village of Mount Prospect, Illinois
Public Safety Pension Funding Policy
Introduction:
The Village of Mount Prospect maintains two (2) defined benefit pension plans supporting retirement,
disability, surviving spouse and dependent children benefits for its public safety, police and fire,
employees. The benefits provided for in these plans are guided by state statute. Funding for the payment
of these benefits is accomplished using a combination of employer contributions, employee contributions,
and earnings from investments. The contribution rate of the employee is set by state statute. The
employer contribution is based on an actuarial valuation of the individual plan. This policy is intended to
be reviewed and modified as needed through formal action of the Village Board.
Purpose:
The purpose of this Public Safety Pension Funding Policy ("Policy") is to articulate the method by which
the Village will accumulate adequate resources for future benefit payments, in a systematic and
disciplined manner, during the active service life of the benefitting employees. The Village will formally
adopt a policy targeting a 100 percent funded ratio within the period set by state statute.
Components of the Funding Policy:
Elements included in this Policy address the Government Finance Officers Association recommended best
practice for adopting a pension funding policy. The Policy also meets pension funding guidelines
developed by the National Association of State Retirement Administrators which address the following
general policy objectives:
1. Have a pension funding policy that is based on an actuarially determined contribution.
2. Build funding discipline into the policy to ensure promised benefits can be paid.
3. Maintain an intergenerational equity so that the cost of employee benefits is paid by the
generation of taxpayers who receive the services.
4. Make employer costs a consistent percentage of payroll.
5. Require clear reporting to show how and when pension plans will be fully funded.
Annually, the Village will perform a valuation for funding purposes and for calculating the Actuarially
Determined Contribution (ADC). The ADC will be the sum of a payment based on normal cost and payment
on the Unfunded Actuarial Accrued Liability (UAAL). The normal cost is the present value portion of
projected benefits allocated to the current year while the UAAL refers to the difference between the
actuarial value of assets owned by the plan and total benefits due to be paid. The normal cost and amount
of payment on the UAAL are determined by the following three major components of a funding valuation:
1. Actuarial cost method;
2. Asset smoothing method; and
3. Amortization policy.
The actuarial cost method is the method used to allocate the pension costs, and contributions, over an
employee's working career. The asset smoothing method is the method used to recognize gains or losses
in pension assets over some time period of time to reduce the effects of market volatility and provide
stability to contributions. The amortization policy determines the length of time and structure of
payments required to systematically fund accrued employee benefits not covered by the actuarial value
of assets.
1
Village of Mount Prospect, Illinois
Public Safety Pension Funding Policy
Actuarial Cost Method - While state statutes in Illinois permit the use of the Projected Unit Credit (PUC)
method for determining the normal cost rate and actuarial accrued liability, the Village will utilized the
Entry Age Normal (EAN) cost method.
Under the EAN method, normal cost is calculated using benefits based on projected service and salary at
the time of retirement and is allocated over the career of the individual as a level percent of payroll.
Normal cost rates under the PUC method only allocate the present value of benefits accrued as of the
valuation date and produce an increasing service cost over the members active service. Rates under EAN
are more stable and is the preferred method for funding the Village's public safety pension plans.
Asset Smoothing Method - This component guides the calculation of the actuarial value of assets used in
determining the UAAL. Options for this method include Market Value or Smoothed Actuarial Value.
Since the long range investment horizon of a defined benefit plan does not necessarily match with the
short range market volatility of investments the use of an asset -smoothing technique can be effective in
providing a more consistent measure of assets over time. Asset smoothing reduces the effect of changes
in the short-term value of assets by recognizing the effects of investment gains and losses over a period
of years. The Village will utilize a five-year smoothing of asset gains and losses in determining the value of
assets. The difference between actual market value investment returns and the actuarial investment
returns will be recognized over a five-year period.
Amortization Policy - This component sets the duration and pattern in which the difference between the
actuarial accrued liability and the actuarial value of assets is reduced. Once established for any component
of the UAAL, the amortization period will be closed and will decrease by one year annually. The duration
of the amortization policy is set by state statute. The percent funded level required by the end of the
amortization period is also set by state statute. While the method to be utilized by the Village will comply
with the closed amortization period as dictated by state statute, the Village elects to fund to a higher level
(100 percent versus 90 percent).
The Village will prescribe the following to its amortization period:
1. Closed level percentage of payroll amortization of 100 percent of the UAAL.
2. Annual payroll growth assumption of 4.0 percent.
3. Amortization period ending December 31, 2040.
If any future actuarial valuation indicates an overfunding identified by a negative UAAL, the ADC will be
set equal to the normal cost.
Actuarial Assumptions - In conjunction with the three major components of a funding valuation, the
Village applies other actuarial assumptions to develop the ADC rate. The actuarial assumptions are arrived
at through discussions between the respective pension board members, assigned actuary, and Village
staff and conform to the Actuarial Standards of practice issued by the actuarial Standards Board.
Village of Mount Prospect, Illinois
Public Safety Pension Funding Policy
The assumptions represent the best estimate of anticipated experience under the Village public safety
pension plans and are intended to be long-term in nature. Actuarial assumptions are generally grouped
into two major categories:
1. Demographic assumptions which include rates of termination, retirement, disability and
mortality.
2. Economic assumptions which include investment return, salary increase, payroll growth and
inflation.
These actuarial assumptions do not impact the total cost of the plan, but rather the timing of the
contributions. It is the intent of the Village to review the assumptions used and make adjustments when
prudent.
Conclusion:
This funding policy and factors used in calculation of the ADC rate will be subject to review on an annual
basis in conjunction with the performance of the actuarial valuation. Modifications to this policy will be
presented to the Village Board for final approval.
Reviewed by the Village of Mount Prospect Finance Commission on 2019
Adopted by the Village of Mount Prospect Board of Trustees on 2019