liberty retirement plan - fort worth,...

3600 American Blvd. West | Suite 500 952-356-3840

Bloomington, MN 55431 www.ajg.com

USA

February 11, 2019

Ms. Margaret Wise

Assistant HR Director

Human Resources

200 Texas Street

Fort Worth TX 76102 Re: Actuarial Audit – Employees’ Retirement Fund of The City of Fort Worth Dear Ms. Wise: Gallagher Benefit Services, Inc. is pleased to provide the enclosed documents which collectively represent the final report of the Actuarial Audit of the Employees’ Retirement Fund of The City of Fort Worth. Report Contents The following documents are enclosed:

The Preliminary Draft Actuarial Audit Report. The enclosed report is unchanged from the report provided to the Fund on December 13th. The report includes (1) a Plan Liability Audit to verify the accuracy of the Fund’s actuarial valuation, (2) an Actuarial Assumption & Cost Method Review to provide a thorough analysis of the economic and demographic assumptions and the actuarial cost methods used to determine the results presented by the Fund’s actuary, and (3) a Summary of Findings & Recommendations to restate the significant findings of the audit.

The Fund’s response to the Preliminary Draft Actuarial Audit Report. The Fund’s response consists of a letter dated January 11th from R. Ryan Falls at GRS, the Fund’s actuary.

Copies of emails verifying the above delivery dates.

Purpose of the Report This report is in response to the actuarial audit requirements of Government Code Chapter 802.1012. The law requires an actuarial audit of the actuarial valuations, studies, and reports for the five year period from January 1, 2013 through December 31, 2017. This report attempts to meet the requirements of the law as well as provide the City with other information that we believe is important to fully understand the current status and future of the Fund.

Ms. Margaret Wise February 11, 2019

Next Steps At the first regularly scheduled open meeting after receiving the final audit report, the governing body of the governmental entity (the City) shall (1) include on the posted agenda, for the meeting, the presentation of the audit results, (2) present the final audit report and any response from the Fund, and (3) provide printed copies of the final audit report and the response from the Fund for individuals attending the meeting. The City must then submit a copy of the final audit report to the State Pension Review Board no later than the 30th day after the date the final audit report is received by the City. Conclusion With regard to all findings and recommendations in the preliminary draft report, we encourage the reader to consider both our comments as well as those from the Fund and their actuary in the combined response. It is our opinion that no further clarifications are needed with respect to the documents provided. Gallagher Benefit Service, Inc. appreciates the opportunity to provide services to the City of Fort Worth. If you have any questions regarding our report, or if you would like additional information, please contact me. Sincerely, Jennifer Turk, EA, FSA, MAAA Actuarial Consultant Gallagher Benefit Services, Inc. (952) 356-0720 [email protected]

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Jen Turk

From: [email protected]: Friday, January 11, 2019 12:48 PMTo: [email protected]: [email protected]; [email protected]; Claire Kingstad;

[email protected]; [email protected]; [email protected]; [email protected]; [email protected]; Jen Turk

Subject: RE: Actuarial Audit preliminary draftAttachments: FWERF Actuarial Audit-Response.pdf

Ms. Wise, Attached is the Fund’s response to the actuarial audit. Please let us know if you need any additional information. Thanks, Ryan

R. Ryan Falls, F.S.A., E.A., M.A.A.A. Senior Consultant & Actuary 5605 N MacArthur Blvd | Suite 870 | Irving, TX 75038-2631 Office: 469.524.1802 | Mobile: 214.289.7869 [email protected]

The above communication shall not be construed to provide tax advice, legal advice or investment advice. Notice of Confidentiality: This transmission contains information that may be confidential and that may also be privileged. Unless you are the intended recipient of the message (or authorized to receive it for the intended recipient), you may not copy, forward, or otherwise use it, or disclose its contents to anyone else. If you have received this email in error, please notify me immediately and delete it from your system.

From: Jen Turk <[email protected]> Sent: Thursday, December 13, 2018 9:47 AM To: Benita F. Harper <[email protected]> Cc: Gunn, Kevin B. <[email protected]>; Margaret Wise <[email protected]>; Hinton, Joanne <[email protected]>; Claire Kingstad <[email protected]>; Gregory, Nathan <[email protected]>; Schomp, Monique <[email protected]>; Dickerson, Brian R <[email protected]> Subject: Actuarial Audit preliminary draft Hi Benita,

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Attached is the preliminary draft of the actuarial audit we completed for the Employees’ Retirement Fund of The City of Fort Worth, as required under Code Section 802.1012. As described in the cover letter, the Fund should provide any response you would like to include in the final audit report within 30 days (i.e., no later than Jan 12, 2019). Please let us know if you have any questions in the meantime. Thanks much, Jen Turk Actuarial Consultant

direct: 952.356.0720 | mobile: 701.730.5813

[email protected]

www.ajg.com

3600 American Blvd W, Suite 500, Bloomington, MN 55431

January 11, 2019 Ms. Margaret Wise Assistant HR Director Human Resources 200 Texas Street Fort Worth TX 76102 [email protected]

Re: Response to Actuarial Audit Conducted by the City of Fort Worth Dear Ms. Wise: We appreciate the opportunity to respond to the actuarial audit conducted by Gallagher Benefit Services (Gallagher) for the City of Fort Worth. Our comments are based on their report titled “Actuarial Audit of the Employees’ Retirement Fund of The City of Fort Worth” and dated December 11, 2018. After reviewing Gallagher’s specific findings and recommendations, we believe the results of this actuarial audit are very positive. The primary findings relate to the actuarial assumptions which are currently under review as part of the Board’s regularly scheduled Actuarial Experience Study. It should be noted that Gallagher’s review of the assumptions was based on the actuarial experience study and report prepared in 2016 by the Fund’s previous actuary. Gallagher identified five specific findings in Section Three of their report. We have commented on each of these specific findings below. Liability Audit Results Gallagher Finding: GBS’s estimates of the total Actuarial Accrued Liability and Normal Cost are both within 5% of the amounts determined by the Fund’s actuary. However, larger percentage differences appear in the UAAL and ADEC due to the leveraging effect of taking differences to calculate these values. GRS Comment: On page 4 of Gallagher’s report, they also provide this comment: “The Plan Liability Audit indicates that the liability and normal cost estimates by GBS are in the aggregate reasonably close to estimates by the Fund’s actuary. Differences less than 5% are generally considered to be a reasonable match.” We believe it is important to reiterate that the auditing actuary believes they were able to get “reasonably close” to replicating our liability and normal cost calculations using the same actuarial assumptions, methods and benefit provisions.

mailto:[email protected]

Ms. Margaret Wise January 3, 2019 Page 2

Investment Return Assumption Gallagher Finding: The investment return assumption does not seem unreasonable on the basis of the investment allocation and comparisons to its peer group. The decrease in the investment return assumption is also in line with the decrease in the inflation assumption. However, details were not provided in the experience study regarding the Fund’s investment advisors expectations. GRS Comment: The investment return assumption is currently under review as part of the Board’s regularly scheduled Actuarial Experience Study. Our review will incorporate the expectations of the Fund’s investment advisors. It should be noted that the experience study reviewed as part of this actuarial audit was prepared by the prior actuary for the Fund. Consistency of Economic Assumption Changes Gallagher Finding: There appears to be some inconsistency in the magnitude of change in the economic assumptions. The inflation rate and investment return assumption was reduced by 0.25%, presumably to reflect lower future economic considerations. Whereas, the salary increases were reduced by 0.50%-0.75%. There is a correlation between investment returns and salary increases. For example, both use the 2.75% inflation assumption as a component. Therefore, adjustments for both assumptions should generally move in unison. Our point is primarily to note that the 0.25% reduction to the investment real rate of return seems relatively low when compared to the salary increase changes. GRS Comment: We concur that there should be consistency between each of the economic assumptions. The recommendations resulting from the Actuarial Experience Study currently underway will reflect the appropriate level of consistency between the economic assumptions. Conservative vs. Aggressive Assumptions Gallagher Finding: This Fund is unique in that the selection of assumptions could potentially have a direct impact on employee benefits via the Ad Hoc COLA. If aggressive assumptions are used, an irreversible benefit increase can occur, whereas a conservative assumption may not trigger the benefit. This is not an immediate issue given the current funding status of the plan, but is cause for careful consideration whether to weight the assumption to be conservative (perhaps favoring the taxpayer) or aggressive (perhaps favoring certain participants). Given the polarizing effect of conservative vs. aggressive assumptions, it may be prudent for the Fund to seek the middle ground whenever possible. GRS Comment: We concur with the challenges resulting from choosing assumptions that are too conservative as well as too aggressive. The Actuarial Experience Study currently underway will focus on recommending the most appropriate assumptions, both individually and in total.

Ms. Margaret Wise January 3, 2019 Page 3

Texas Pension Review Board Guidelines Gallagher Finding: The Texas Pension Review Board (PRB) adopted new pension funding guidelines, which specify that contributions should be sufficient to cover the normal cost and to amortize the UAAL in 30 years or less. GRS Comment: We concur that the current contribution rates are not sufficient to meet the Texas PRB Pension Funding Guidelines based on the current benefit provisions. We will continue to support the Fund in their discussions with the City regarding the most appropriate contribution rate and benefit provisions going forward. Our comments have focused primarily on the “Summary of Findings & Recommendations” found in Section Three of the Gallagher’s report. However, we would be happy to discuss any aspect of our actuarial valuation or the actuarial audit with you, your City Council, or the Fund’s Board of Trustees. Sincerely,

R. Ryan Falls, FSA, EA, MAAA

Senior Consultant cc: Ms. Benita Falls Harper

Interim Executive Director/General Counsel Fort Worth Employees’ Retirement Fund

3600 American Blvd. West | Suite 500 952-356-3840

Bloomington, MN 55431 www.ajg.com

USA

December 11, 2018

Ms. Margaret Wise

Assistant HR Director

Human Resources

200 Texas Street

Fort Worth TX 76102

Re: Preliminary Draft of Actuarial Audit - Employees’ Retirement Fund of The City of Fort Worth

Dear Ms. Wise:

Gallagher Benefit Services, Inc. (GBS) is pleased to provide the enclosed analysis summarizing the preliminary draft results of our Actuarial Audit of the Employees’ Retirement Fund of The City of Fort Worth. The preliminary draft report consists of the following three components:

A Plan Liability Audit to verify the accuracy of the Fund’s actuarial valuation. The participant data, assumptions and methods utilized by the Fund’s actuary, GRS, are programmed in GBS’s actuarial software in an attempt to either validate the liability, contribution rate, and amortization period estimates or identify poor estimates. Neither the participant data nor the assumptions and methods are audited during the Plan Liability Audit.

An Actuarial Assumption & Cost Method Review to provide a thorough analysis of the economic and demographic assumptions and the actuarial cost methods used to determine the results presented by the Fund’s actuary. The assumptions and methods are evaluated for reasonableness on an individual and aggregate basis. The review includes an analysis of the results of Segal’s 2016 Actuarial Experience Study for the period from January 1, 2013 through December 31, 2015.

A Summary of Findings & Recommendations to restate the significant findings of the previous

two sections as well as to discuss recommended actions.

Purpose of the Report

This report is in response to the actuarial audit requirements of Government Code Chapter 802.1012.

The law requires the City of Fort Worth (the “governmental entity”) engage an independent actuary to

perform an actuarial audit of the actuarial valuations, studies, and reports for the five year period from

January 1, 2013 through December 31, 2017. This report attempts to meet the requirements of the law

as well as provide the City with other information that we believe is important to fully understand the

current status and future of the Fund.

We have focused our review on the December 31, 2017 actuarial valuation for the Fund. Previously we

had performed an actuarial audit, including a plan liability audit, of the January 1, 2013 actuarial valuation

report. The most significant difference between the January 1, 2013 actuarial valuation and the

December 31, 2017 actuarial valuation is benefit changes for future Fire employees, as well as a COLA

election. We have frequently reviewed the Fund’s actuarial work with regard to those changes without

finding any significant issue outside of what may be mentioned in this report. The Fund’s actuary has

also changed, from Segal to GRS.

Ms. Margaret Wise December 11, 2018 Page 2

Next Steps

The following is our understanding of the required steps of the audit process as outlined in Code Section

802.1012 based on today’s (December 11th) issuance of the preliminary draft report to the City:

1. Not later than the 30th day after the completion of the draft report (January 10th), copies of this

preliminary draft must be provided by Gallagher to the Fund for purposes of discussion and

clarification.

2. Not later than the 30th day after receiving the report the Fund may submit any response that the

Fund wants to accompany the final audit report.

3. Not earlier than the 31st day after the date on which the preliminary draft is submitted to the Fund,

or later than the 60th day, Gallagher must submit to the City the final audit report that includes the

audit results and any response received from the public retirement system.

4. At the first regularly scheduled open meeting after receiving the final audit report, the governing

body of the governmental entity (the City) shall (1) include on the posted agenda for the meeting

the presentation of the audit results, (2) present the final audit report and any response from the

Fund, and (3) provide printed copies of the final audit report and the response from the Fund for

individuals attending the meeting.

5. The City must submit a copy of the final audit report to the State Pension Review Board not later

than the 30th day after the date the final audit report is received by the City.

GBS appreciates the opportunity to provide services to The City of Fort Worth. If you have any questions

regarding our report, or if you would like additional information, please contact me.

Sincerely,

Jennifer Turk, EA, FSA, MAAA

Actuarial Consultant

Gallagher Benefit Services, Inc.

(952) 356-0720

Actuarial Audit of the Employees’ Retirement Fund of the City of Fort Worth

December 11, 2018

ACTUARIAL AUDIT OF THE EMPLOYEES’ RETIREMENT FUND OF THE CITY OF FORT WORTH

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Table of Contents

Section One – Plan Liability Audit

Comparison of Participant Data .................................................................................................................................................................................... 2 Comparison of Liabilities & Contribution Rates ............................................................................................................................................................ 3

Section Two – Actuarial Assumption & Cost Method Review

Economic Assumptions o Inflation Rate............................................................................................................................................................................................... 5 o Investment Return ...................................................................................................................................................................................... 6 o Salary Increase Rate .................................................................................................................................................................................. 7 o Overtime & Other Pay ................................................................................................................................................................................ 8 o Overtime Spiking Load ............................................................................................................................................................................... 8 o Total Payroll Growth Rate .......................................................................................................................................................................... 8 o Post-Retirement Cost of Living ................................................................................................................................................................... 9

Demographic Assumptions o Mortality Rates .......................................................................................................................................................................................... 10 o Retirement Rates ...................................................................................................................................................................................... 11 o Withdrawal Rates ..................................................................................................................................................................................... 12 o Disability Rates ......................................................................................................................................................................................... 12 o Accumulated Sick and Major Medical Leave Pension Service Credit ...................................................................................................... 13 o DROP Election.......................................................................................................................................................................................... 13 o Marriage & Spouse Age ........................................................................................................................................................................... 13

Cost Methods o Actuarial Cost Method .............................................................................................................................................................................. 14 o Actuarial Asset Method ............................................................................................................................................................................. 14

Section Three – Summary of Findings & Recommendations ............................................................................................................................................ 15


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Section One – Plan Liability Audit This section provides a comparison of the liabilities calculated by GBS and those presented by the Fund’s actuary, GRS in the December 31, 2017 Actuarial Valuation for the Employees’ Retirement Fund of the City of Fort Worth. Comparison of Participant Data Participant data from the December 31, 2017 Actuarial Valuation was obtained from the Fund’s actuary. The December 31, 2017 participant data was not specifically audited, rather the participant data was checked only for reasonableness compared to the data sections of the December 31, 2017 Actuarial Valuation. A summary of the demographic information presented in the December 31, 2017 Actuarial Valuation and the participant data provided to GBS are shown below:

Actuarial Valuation GBS Difference Comments

Members

There were no significant issues obtaining the Fund participant data from the Fund’s actuary or loading that data into GBS’s software system. The data was reviewed for reasonableness and no major outliers were found.

Actives 6,579 6,579 0.0%

Inactives 5,490 5,490 0.0%

Total Participants 12,069 12,069 0.0%

Active Demographics

Average Age 44.1 44.2 0.2%

Average Service 10.8 10.8 0.0%

Member Contributory Payroll $ 442,444,781 $ 437,888,162 -1.0%

Inactive Demographics

Average Annual In-Pay Benefit $ 41,282 $ 41,377 0.2%


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Comparison of Liabilities & Contribution Rates Liabilities were calculated using GBS’s actuarial software system. GBS uses the ProVal software system developed by WinkleVoss Technologies, LLC. The software system was programmed primarily based on the Summary of Plan Provisions section of the December 31, 2017 Actuarial Valuation. The valuation results in this report reflect the results summarized by GRS and exclude all future Ad Hoc COLAs. A plan liability audit is not explicitly required as part of the actuarial audit process. However, we have taken the step to complete a plan liability audit because, in our opinion it is the most efficient method to determine the reasonableness of liabilities. The following briefly describes the two most significant liabilities developed by GRS which we have attempted to match. Entry Age Normal Accrued Liability: An actuarial funding method is a method of developing the costs of a pension plan so that the payment of the costs will accumulate to the reserve required at normal retirement age. Under the Entry Age Normal funding method a part of this accumulation is assigned to service prior to the valuation date and the remaining part to service after the valuation date. The part assigned to service prior to the valuation date is called the Actuarial Accrued Liability (AAL) and the part assigned to service after the valuation date is called the Present Value of Future Normal Costs (PVFNC). Entry Age Normal Cost: The amount of the PVFNC to be paid for the year following the valuation date is called the Normal Cost. This amount is the estimated value of benefits earned by active employees during the plan year. It depends on the member’s service, salary, and age at retirement. Actuarial assumptions such as rates of salary increases or other benefit increases are used to determine the benefit amount at retirement. Other assumptions such as rates of termination, disability, retirement, and mortality are used to estimate when the benefit payments commence and how long they are expected to be paid. The Entry Age Normal Cost is determined in a manner such that for an individual employee, the amount when expressed as a percentage of pay will be constant from their entry date into the plan until their assumed retirement date(s). As a result, the normal cost is usually considered the true cost of providing benefits under the plan. It represents the cost that would occur if all assumptions in the past and in the future are met. GRS uses the “replacement life” variation of the Entry Age Normal cost method. This variation assumes that each member who leaves the Fund is replaced by a new member, so normal cost for existing members is calculated based on the benefit plan for new hires. This can produce counterintuitive results when benefit changes occur. The most common source of confusion is that benefit reductions for future employees can increase the Actuarial Accrued Liability for current members. Although the method can be confusing when considering benefit changes, it does have a favorable feature of emphasizing the normal cost as the ultimate expected cost of the Fund. Also, there is little difference between the traditional Entry Age Normal method and the Replacement Life method when determining the amortization period.


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A summary of the liabilities presented in the December 31, 2017 Actuarial Valuation and those calculated by GBS are shown below:

Actuarial Valuation GBS Difference Comments

Present Value of Benefits $ 4,400,726,393 $ 4,212,763,532 -4.3%

The Plan Liability Audit indicates that the liability and normal cost estimates by GBS are in the aggregate reasonably close to estimates by the Fund’s actuary. Differences less than 5% are generally considered to be a reasonable match.

Larger percentage differences appear in the UAAL and ADEC due to the leveraging effect of taking differences to calculate these values.

Gross Normal Cost Amount $ 56,190,487 $ 56,100,227 -0.2%

Actuarial Accrued Liability $ 3,956,724,359 $ 3,769,474,708 -4.7%

Actuarial Value of Assets $ 2,288,265,169 $ 2,288,265,169 0.0%

Unfunded Actuarial Accrued Liability (UAAL)

$ 1,668,459,190 $ 1,481,209,539 -11.2%

Actuarially Determined Employer Contribution (ADEC)

28.11% 25.57% -9.0%

Expected City Contribution 19.99% 19.99% 0.0%

Contribution Surplus/(Deficit) -8.12% -5.58% -31.3%

Funding Period Infinite Infinite 0.0%


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Section Two – Actuarial Assumption & Cost Method Review

In the Plan Liability Audit section of this report, the assumptions and methods used by the Fund’s actuary to calculate liabilities were applied to determine the accuracy of the estimated liabilities. In the Actuarial Assumption & Cost Method Review section, the assumptions and methods are examined for reasonableness, and the impact of changes to the assumptions and methods is also explored. The key assumptions and methods consist of economic assumptions regarding investment returns, salary increases and loads, and inflation adjustments and demographic assumptions related primarily to individual participant expectations for turnover, disability, retirement, and death. From time to time, assumption changes are warranted. The most effective way to study and update assumptions is to perform an experience study to evaluate actual plan experience versus expectations. Experience studies are common for public sector plans and are typically done in five-year intervals. The results of the most recent Employees’ Retirement Fund of The City of Fort Worth Experience Study prepared by Segal were provided to us. The study covered the period from January 1, 2013 through December 31, 2015 and resulted in assumption changes adopted by the Fund as of March 23, 2016. The Fund’s actuary determines the value of liabilities and assets using actuarial cost methods. An actuarial cost method is used to separate the total liability into past service and future service components and convert current liability estimates into recommended funding requirements. An Actuarial Asset Value is used to determine how asset values should be determined each year. Other cost methods are used to determine how assumptions should be applied to value liabilities. The key assumptions and cost methods used by the Fund’s actuary, along with analysis regarding the reasonableness of each assumption and method are discussed in this section.

I. Economic Assumptions

Actuarial Valuation Assumption

GBS Analysis

Inflation Rate: Inflation Rate:

2.75% per year The inflation assumption should reflect long-term future expected inflation. The inflation assumption is only implicitly used in the actuarial valuation as a component of the investment and salary increase assumptions. The experience study notes that the Consumer Price Index for All Urban Consumers (CPI-U) when measured over the past 5, 10, 20, and 30 years has averaged 1.62%, 1.92%, 2.22%, and 2.66%, respectively. A range of 2.50% - 3.00% was considered reasonable based on NASRA survey responses and other public sector plans. Segal recommended lowering the existing assumption from 3.00% to 2.75%, the midpoint of that range. It should be noted that Texas Municipal Retirement System (TMRS) has lowered their assumption as well, to 2.50%.


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I. Economic Assumptions (continued)

Actuarial Valuation Assumption

GBS Analysis

Investment Return: Investment Return:

7.75% per year, net of investment-related expenses (composed of an assumed 2.75% inflation rate and a 5.00% real rate of return)

The experience study that was used to recommend lowering the assumption from 8.00% to 7.75% cited both comparisons to other plan’s investment assumptions as well as investment consultant expectations. Historical investment return rates are provided in the valuation report. The comparison to other plans indicated that the prior assumption of 8.00% was on the high end of the plans considered. A national comparison to plans that responded to a National Association of State Retirement Administrators (NASRA) survey indicated a median rate of just over 7.50% with a 7.62% average. Also noted was that more than 50% of the plans surveyed reduced their investment return assumption since fiscal year 2008. Missing from the above comparisons is how the Fund’s asset allocation compares to other City or State plans. The Fund’s investment allocation appears to be similar to other plans. According to the Fund’s Investment Policy Statement, the target allocation is 22% high growth, 44% growth, 10% diversification, 15% capital preservation, 8% inflation, and 1% cash. By comparison, the report on the Asset Allocation and Investment Performance of Texas Public Employee Retirement Systems published by TEXPERS for periods ending September 30, 2017 shows the average allocation for the responding member local pension systems was 48.5% equities (US, Non-US, and Private), 22.2% fixed income, 27.3% alternative strategies (such as real estate and private equity), and 2.0% cash. The assumption of 7.75% is higher than the average investment return assumption of 7.50% for the TEXPERS survey respondents. The other key influence on the assumption should be investment consultant expectations. Presumably this is also addressed in survey information as one would hope that all plans in the survey set their own assumption without simply responding to what everyone else is doing. The experience study stated that Segal reviewed R.V. Kuhns’ capital market assumptions, but further detail was not provided regarding this review. In summary, the Fund’s current 7.75% assumption does not seem unreasonable on the basis of the investment allocation and comparisons to its peer group. The decrease in the investment return assumption is also in line with the decrease in the inflation assumption from 3.00% to 2.75%. However, details were not provided in the experience study regarding the Fund’s investment advisors expectations.


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Actuarial Valuation Assumption GBS Analysis

Salary Increase Rate: Salary Increase Rate:

Inflation rate of 2.75% plus productivity component plus step-rate promotional increase as shown:

Service General

Employees Police

Officers Firefighters

0 4.00% 16.00% 14.00%

1 3.90% 10.00% 8.00%

2 3.80% 8.00% 7.00%

3 3.70% 6.00% 6.00%

4 3.60% 5.50% 5.00%

5 3.50% 4.00% 4.00%

6 3.40% 4.00% 3.50%

7 3.30% 4.00% 3.00%

8 3.20% 4.00% 3.00%

9 3.10% 4.00% 3.00%

10 3.00% 4.00% 3.00%

11 3.00% 4.00% 3.00%

12 3.00% 4.00% 3.00%

13 3.00% 4.00% 3.00%

14 3.00% 5.00% 3.00%

15 3.00% 5.00% 3.00%

16 3.00% 5.00% 3.00%

17 3.00% 2.75% 3.00%

18+ 3.00% 2.75% 3.00%

In general, the salary rates were lowered as a result of the experience study, which incorporated six years of historical data. The ultimate rate of 3.50% for all groups was lowered to 3.00% for General Employees and Firefighters, and 2.75% for Police Officers. The ultimate rate for Police Officers is the same as the general inflation rate of 2.75%, so it appears that no step-rate promotional increases are assumed for employees late in their career. A review of bargaining agreements or discussions with City Staff would be prudent to confirm reasonability. It was also noted that for Police “up-and-down changes are not clear in the actual data” so their salary scale has smoothed. The prior assumption for this group increased and decreased based on biennial bargaining agreement timing. It is possible that grouped data from the experience study might not show this phenomenon; if everyone gets a larger increase in a certain calendar year, about half would be receiving this for an even-year anniversary and the other half would be for an odd-year anniversary. However, the impact of this smoothing should not have a great impact on the liabilities overall. For example, if the actual increases are alternating between 5% and 3% every other year, an average assumption of 4% for all years would be used. We have one small concern about the consistency with the inflation and investment return changes. The inflation and investment return assumptions were reduced by 0.25%, presumably to reflect lower future economic considerations, whereas the ultimate salary increases were reduced by 0.50%-0.75%. There is a correlation between investment returns and salary increases. For example, both use the 2.75% inflation assumption as a component. Therefore, adjustments for both assumptions should generally move in unison. The difference in the changes in these assumptions may be due to the investment return assumption being driven by investment consultant expectations whereas the salary increases may be driven by City Staff expectations. Also, it may be reasonable to argue that the two assumptions were previously out of line with each other and the changes reflect an effort to realign them. As stated earlier, we do not necessarily question the resulting assumption. Our point is rather to note that a 0.25% change in real rate of investment return is for the most part negated by a 0.50%-0.75% change in salary increases. These two assumption changes, when considered together may not necessarily be a move to a more conservative set of assumptions.


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Overtime Pay: Overtime Pay:

The upcoming year’s gross salary is determined by applying loads to their base salary rate as shown:

Group Overtime Pay Load

General Employees 3.50% Police Officers 7.00% Firefighters 9.62%

Overtime and other pay is included in the Blue pension benefit for General employees hired before July 1, 2011; Police employees hired before January 1, 2013; and Firefighters hired before January 10, 2015. A load is added to base salaries to account for this additional pay. Segal reviewed overtime amounts for each group as a whole, compared to rates of pay. As a result, overtime loads were lowered for Police Officers and Firefighters. The approach used to develop this assumption seems to be reasonable.

Overtime Spiking Load: Overtime Spiking Load:

Members’ final average earnings are determined by applying the loads as shown:

Group Overtime

Spiking Load


In addition to overtime and other pay loads added to each year’s compensation, an overtime spiking load is added to final average pay to account for additional overtime worked by employees nearing retirement. Segal reviewed overtime amounts for those within three years of retirement eligibility, and as a result the load was eliminated for General Employees, Lowered for Police Officers, and increased for Firefighters. The approach used to develop this assumption seems to be reasonable.

Payroll Growth Rate: Payroll Growth Rate:

Member Contributory Payroll is assumed to increase 3.00% per year.

The payroll growth assumption was decreased from 3.25% to 3.00%. The decrease in the total payroll growth assumption increases the UAAL amortization payment. Intuitively, the 0.25% decrease seems reasonable when compared to the inflation and investment return assumption changes, which were also lowered by 0.25%. However, individual pay increases were generally decreased by approximately 0.50%-0.75%/year. Given the adjustments to the individual assumptions that affect total payroll growth, a 0.25% change may be slightly low. The Fund’s actuary could analyze the validity of this assumption by performing an open group valuation with the new salary increase assumptions. This would be the best way to support the assumption. The experience study did not indicate that an analysis was performed.


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Post-Retirement Cost of Living: Post-Retirement Cost of Living:

For those members with the guaranteed annual 2% COLA, an annual assumption of a 2% increase in the base pension amount is assumed. For those members participating in the Ad Hoc COLA Program, there is no assumption for future COLAs built into the Fund’s liabilities.

For members electing the Ad Hoc COLA option, there is an assumption that the increase will be 0% in future years. Ad Hoc COLA’s are granted when certain funding period thresholds are met. Therefore 0% is currently an appropriate assumption, as the Unfunded Actuarial Accrued Liability is assumed to increase indefinitely.


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II. Demographic Assumptions


Mortality Rates: Mortality Rates:

Pre-retirement: RP-2014 Employee Mortality Table. Generational mortality improvements using Scale MP-2015 are projected from the year 2014. Healthy Annuitants: RP-2014 Healthy Annuitant Mortality Table set forward 3 years. Generational mortality improvements using Scale MP-2015 are projected from the year 2014. Disabled Annuitants: RP-2014 Disabled Retiree Mortality Table. Generational mortality improvements using Scale MP-2015 are projected from the year 2014. In Line of Duty Death: The percentage of pre-retirement deaths assumed to be in the line of duty are:

General Employees 0% Police Officers 10% Firefighters 10%

The experience study reviewed mortality over the past six years to improve credibility. Three categories of mortality experience were examined: post-retirement/healthy annuitants, pre-retirement, and disabled annuitants. The post-retirement mortality is the largest driver of liability, and experience for this component was close to assumed for males but slightly higher for females. The pre-retirement mortality experience was lower than expected and the disabled life mortality experience was higher than expected. However it was noted that the sample sizes were quite small so these components are less credible, and their impact on the overall liability is less than post-retirement mortality assumptions. The Society of Actuaries recently completed a large mortality study and published updated mortality tables (RP-2014) and improvement scales (MP-2014). The improvement scales have been updated annually as more experience emerges. As noted, many actuaries are updating to these new tables. Also auditors are expecting to see these new tables being used. As a result, the experience study recommended updating to the new RP-2014 mortality tables. For post-retirement mortality they added a three year set forward to adjust for actual plan experience. However the other components were used without adjustment, which seems reasonable considering the relatively low credibility. The generational improvement scale was also updated to MP-2015 for all components. The experience study notes that none of the deaths during the period were duty-related. No changes were recommended for General employees or Firefighters, and the Police assumption was lowered from 25% to 10%. This decrease seems reasonable considering there have been no duty-related deaths during the study period.


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II. Demographic Assumptions (continued)


Retirement Rates: Retirement Rates:

Unreduced retirement rates:

Year of Eligibility

General Employees

Police Officers Firefighters

1st 30% 30% 10% 2nd 40% 15% 10% 3rd 10% 15% 10% 4th 10% 15% 10% 5th 10% 15% 10% 6th 20% 15% 10% 7th 20% 15% 10% 8th 50% 15% 10% 9th 50% 15% 10%

10th 100% 100% 100%

Retirement rates are 100% at age 65 for Police Officers and Firefighters, and 100% at age 70 for General Employees, even if they are less than 10 years past first eligibility for Normal Retirement. Reduced retirement rates:

Age General

Employees Age

General Employees

50 2.00% 60 2.50% 51-54 0.75% 61 5.00% 55-57 1.25% 62 6.00%

58 4.50% 63 4.00% 59 3.00% 64 2.00%

Police Officers and Firefighters have zero probability of retiring prior to eligibility for unreduced retirement.

The recent experience study showed the number of actual retirements was close to expected for General Employees and Police Officers, but significantly lower than expected for Firefighters. It was also noted that General Employees were taking less early retirement than expected. The average retirement age for General Employees was slightly higher than expected, and lower than expected for Police Officers and Firefighters. This resulted in a recommendation to alter the unreduced retirement rates structure to be based on years from eligibility for Normal Retirement. Early retirement rates for General Employees were adjusted to closer match the experience. The method seems reasonable; however, charts showing actual versus proposed retirement rates were not included in the experience study review report so we can’t confirm the new rates are closer to actual experience.


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Withdrawal Rates: Withdrawal Rates:

Sex-distinct select and ultimate rates with 5 year select period for General Employees. Service-based rates for Police Officers and Firefighters.

The recent experience study showed more terminations than expected for short-service General Employees as well as longer service males. It showed fewer terminations than expected for Police Officers and Firefighters. Based on the experience, General withdrawal rates were increased for lower services employees and longer service males, rates for longer services females were unchanged. Rates for Police Officers and Firefighters were lowered to better match experience. These assumptions appear to be reasonable based on the results of the experience study.

Disability Rates: Disability Rates:

Sample Rates:

Age Rate

20 0.005% 25 0.006% 30 0.009% 35 0.013% 40 0.018% 45 0.027% 50 0.044% 55 0.076% 60 0.100%

In line of Duty Disability: The percentage of disability retirements assumed to be in the line of duty are:

General Employees 0% Police Officers 40%

Firefighters 15%

The prior experience study lowered disability rates, and this trend continued for the current experience study. There were only 6 disabilities during the period compared to 13.5 expected. Therefore the rates were lowered by 50% to better match experience. This assumption appears to be reasonable based on the results of the experience study. The experience study notes that four of the disabilities during the period were job-related, so there is limited data. Therefore no changes to the line-of-duty percentages were recommended.


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Accumulated Sick and Major Medical Leave Pension Service Credit:

Accumulated Sick and Major Medical Leave Pension Service Credit:

Retirement and terminated vested benefits are loaded by the following factors:

Group Sick-Leave

Load


The experience study reviewed actual data of retirees during the experience study. As a results of this review, loads for General employees and Firefighters were increased by 0.5% and 1.0% respectively. No change was recommended for Police Officers. This approach seems reasonable.

DROP Election: DROP Election:

50% of General Employees are assumed to elect a 3-year DROP, and 85% of Police Officers and 90% of Firefighters are assumed to elect a 4-year DROP.

The study reviewed DROP participation assumptions and found the majority of DROP participants are entering during the first couple years of eligibility. The DROP participation rates were close to expected for General employees and Firefighters, but lower than expected for Police Officers. DROP periods were close to assumed for all groups. As a result, the participation rate was reduced slightly for Police Officers, from 90% to 85%. No other changes were made to participation rates or average DROP periods. These assumptions appear to be reasonable based on the results of the experience study.

Marriage & Spouse Age: Marriage & Spouse Age:

80% of male members and 60% of female members are assumed to be married. Male member is assumed to be four years older than female beneficiary; and female member is assumed to be the same age as male beneficiary.

The experience study showed that fewer participants than expected were electing the joint-and-survivor form of benefit, so this assumption was lowered from 90% to 80% for males and 60% for females. The experience study also showed that beneficiaries of male participants were more than three years younger, while beneficiaries of female participants were about the same age. Therefore the age difference assumption was changed to four years younger for males, and the same age for females. This approach seems reasonable.


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III. Cost Methods


Actuarial Cost Method: Actuarial Cost Method:

“Replacement Life” Entry Age Normal – Level Percent of Pay, with Normal Cost determined as if the current benefit accrual rate had always been in effect.

The Entry Age Normal cost method is one of the cost methods permitted by GASB and is the most commonly used in large public sector pension valuations, though the “replacement life” method is a less common variation. This method assumes that each member who leaves the fund is replaced by a new member, so normal cost for existing members is calculated based on the current benefit plan for new hires. The replacement life method can produce counterintuitive results when benefit changes occur. The most common source of confusion is that benefit reductions for future employees will increase the Actuarial Accrued Liability for current members. Although the method can be confusing when considering benefit changes, it does have a favorable feature of emphasizing the normal cost as the ultimate expected cost of the Fund. Also, there is little difference between the traditional Entry Age Normal method and the Replacement Life method when determining the amortization period. We support continued use of this cost method.

Actuarial Asset Method: Actuarial Asset Method:

MV - (4/5) x G/(L)1 - (3/5) x G/(L)2 - (2/5) x G/(L)3 - (1/5) x G/(L)4

With a maximum value of 120% of MV and a minimum value of 80% of MV.

MV = market value of assets as of the

valuation date G/(L)i = asset gain or (loss) for the i-th year

preceding the valuation date

This assumption smoothes potential volatility in future funding requirements. It does not affect long-term funding of the plan. Any smoothing method is reasonable provided that it is consistently used and is not created with the intent to bias results. This method is reasonable.


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Section Three – Summary of Findings & Recommendations The following summarizes our findings and recommendations that the City may consider:

Finding Recommendations

Liability Audit Results GBS’s estimates of the total Actuarial Accrued Liability and

Normal Cost are both within 5% of the amounts determined by

the Fund’s actuary. However, larger percentage differences

appear in the UAAL and ADEC due to the leveraging effect of

taking differences to calculate these values.

The plan liability audit was not a required component of the actuarial audit. However, our results demonstrate how sensitive contribution calculations can be when liability results are off by a small percentage (i.e. a less than 5% difference in liabilities resulted in a 30% difference in the contribution deficit). The City should ensure in the future that the actuarial results are closely scrutinized, particularly if the Ad Hoc COLA is close to being triggered.

Investment Return Assumption The investment return assumption does not seem unreasonable on the basis of the investment allocation and comparisons to its peer group. The decrease in the investment return assumption is also in line with the decrease in the inflation assumption. However, details were not provided in the experience study regarding the Fund’s investment advisors expectations.

Our review was focused on the actuarial valuation and the actuary’s recommendation to the Fund. We did not analyze any Fund deliberations on the decision to select a 7.75% investment rate of return. The City may ask the Fund to clarify to what extent the long-term return rate projected by their investment advisor was considered in their decision.

Consistency of Economic Assumption Changes

There appears to be some inconsistency in the magnitude of change in the economic assumptions. The inflation rate and investment return assumption was reduced by 0.25%, presumably to reflect lower future economic considerations. Whereas, the salary increases were reduced by 0.50%-0.75%. There is a correlation between investment returns and salary increases. For example, both use the 2.75% inflation assumption as a component. Therefore, adjustments for both assumptions should generally move in unison.

Our point is primarily to note that the 0.25% reduction to the investment real rate of return seems relatively low when compared to the salary increase changes.

The City may want to ask the Fund to comment on the relative magnitude of the assumption changes.


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Finding Recommendations

Conservative vs. Aggressive Assumptions

This Fund is unique in that the selection of assumptions could potentially have a direct impact on employee benefits via the Ad Hoc COLA. If aggressive assumptions are used, an irreversible benefit increase can occur, whereas a conservative assumption may not trigger the benefit.

This is not an immediate issue given the current funding status of the plan, but is cause for careful consideration whether to weight the assumption to be conservative (perhaps favoring the taxpayer) or aggressive (perhaps favoring certain participants). Given the polarizing effect of conservative vs. aggressive assumptions, it may be prudent for the Fund to seek the middle ground whenever possible.

No immediate action is required. The only recommendation is the Fund may want to carefully consider when setting future assumptions whether assumptions are either individually or collectively conservative or aggressive and the potential consequences of each selection.

Texas Pension Review Board guidelines The Texas Pension Review Board (PRB) adopted new pension funding guidelines, which specify that contributions should be sufficient to cover the normal cost and to amortize the UAAL in 30 years or less.

The Fund’s contribution rates are not sufficient to meet these new PRB funding guidelines. As a result, the Fund should seek to reduce their amortization period to 30 years or less by June 30, 2025.

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