For purposes of measuring the net pension liability, deferred outflows of resources, and deferred inflows of resources related to pensions and pension expense, information about the fiduciary net position of the pension plan and additions to/deductions from the pension plan’s fiduciary net position have been determined on the same basis as they are reported by the pension plan. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value.
Plan description
The City’s defined benefit pension plan provides retirement, disability, and death benefits to plan members and beneficiaries. The City’s defined benefit pension plan is affiliated with the Municipal Employees’ Retirement System of Michigan (MERS), an agent, multiple-employer, statewide public employee retirement system established by the Michigan Legislature under Public Act 135 of 1945 and administered by a nine-member Retirement Board and acts as a common investment and administrative agent for municipalities in Michigan. MERS issues a publicly-available financial report that includes financial statements and required supplementary information. This report may be obtained by accessing the MERS website at www.mersofmich.com.
Funding policy
Contribution rates for each participating employer and its covered employees are established, and may be amended, by each participating unit. The contribution rates are determined based on the benefit structure established by each employer. Covered employees are not required to contribute to the plan. Participating employers are required to contribute amounts necessary to finance the coverage of their employees through periodic contributions at actuarially-determined rates. Administrative costs of the plan are financed through investment earnings.
How quickly a plan attains the 100% funding goal depends on many factors such as: The current funded ratio
The future experience of the plan The amortization period
CITY OF ALLEGAN, MICHIGAN ANNUAL BUDGET FY 2020-2021 FINANCIAL SUMMARY
Benefits provided
The City’s defined benefit pension plan provides certain retirement, disability, and death benefits to plan members and beneficiaries and covers employees of the City’s police department. Retirement benefits for eligible employees are calculated as 2.50% of the employee’s five-year final average compensation, times the employee’s years of service, with a maximum of 80% of final average compensation. Normal retirement age is 60 with early retirement at a reduced benefit at age 50, with 25 years of service, or age 55, with 15 years of service. Deferred retirement benefits vest after 10 years of credited service but are not paid until the date retirement would have occurred had the member remained an employee. Covered employees, hired after June 2011, are required to contribute 2.71% of compensation to the plan. An employee who leaves service may withdraw their contributions, plus any accumulated interest. Benefit terms, within the parameters of MERS, are established and amended by the authority of the City Council.
MERS - Michigan Employees Retirement System (MERS)
The City provides a defined benefit retirement plan for the Police Department only. The City shall provide to all full-time bargaining unit members the MERS retirement benefit program of B-4, F- 55/20 and E-2 riders. For employees hired on or after July 1, 2011, the Employer's maximum contribution shall be 10% of the Normal Cost. Employees shall contribute by payroll deduction any amounts necessary to fund the plan above 10% of the normal cost.
Employees covered by benefit terms
At the December 31, 2018, measurement date, the following employees were covered by the benefit terms:
Active Retirees/Beneficiaries 8 Vested Former Employees 4
Active Employees 9
Total Participants 21
Annual pension cost
For the year ended December 31, 2019 (MERS Actuarial Report dated 12-31-2018), the City’s annual pension cost of $136,581 for its defined benefit pension plan was equal to the required and actual contributions. The City also recognized a net pension liability, associated with its defined benefit pension plan, in the amount of $1,902,798.
Contributions
The City is required to contribute amounts at least equal to an actuarially determined rate, as established by the MERS Retirement Board. The actuarially determined rate is the estimated amount necessary to finance the cost of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. Covered employees may contribute to the plan. For the fiscal year ended June 30, 2019, City contributions ranged from 4.66% to 71.99% of monthly covered payroll. For the fiscal year ended June 30, 2019, the City contributed $201,750 to the plan, while employees contributed $3,852.
CITY OF ALLEGAN, MICHIGAN ANNUAL BUDGET FY 2020-2021 FINANCIAL SUMMARY
year pension ending cost (APC)
06/30/2011 $135,474 06/30/2012 $152,844 06/30/2013 $153,830 06/30/2014 $152,937 06/30/2015 $177,408 06/30/2016 $299,083 06/30/2017 $341,037 06/30/2018 $289,053 06/30/2019 $346,812 Funded Status and Funding Progress Changes in the Net Pension Liability
The funded status of the plan as of December 31, 2018, the most recent actuarial date, is as follows:
MERS Actuarial accrued
Cal value of liability (AAL) Unfunded Funded Year assets entry age AAL (UAAL) ratio
(a) (b) (b-a) (a/b)
2010 $ 2,884,473 $ 4,022,271 $1,137,798 71.7% 2011 $ 3,048,589 $ 4,232,060 $1,183,471 72.0% 2012 $ 3,234,874 $ 4,223,695 $ 988,821 76.6% 2013 $ 3,467,283 $ 4,446,999 $ 979,716 78.0% 2014 $ 3,488,993 $ 4,572,186 $1,083,193 76.3% 2015 $ 3,428,756 $ 5,148,422 $1,719,666 78.4% 2016 $ 3,787,258 $ 5,522,862 $1,735,604 68.8% 2017 $ 4,273,676 $ 5,783,835 $1,510,159 73.9% 2018 $ 4,094,009 $ 5,996,807 $1,902,798 68.3% Actuarial Assumptions By Year
2010 valuation reflects the following changes in the actuarial assumptions:
Temporary lower wage inflation assumption of 1.00% for calendar years 2011 through 2014, instead of 4.50%
Final average compensation increase assumption is now 0.00%
2011 valuation reflects the following changes in the actuarial assumptions:
Temporary lower wage inflation assumption of 1.00% for calendar years 2011 through 2014, instead of 4.50%
Final average compensation increase assumption is now 4.00%
2012 valuation reflects the following changes in the actuarial assumptions: Revised rates of expected employee retirement
Revised rates of merit/longevity pay increases
CITY OF ALLEGAN, MICHIGAN ANNUAL BUDGET FY 2020-2021 FINANCIAL SUMMARY
2013 valuation reflects the following changes in the actuarial assumptions: There are no changes in actuarial assumptions
The minimum funding requirement for poorly funded closed divisions is fully phased in. 2014 valuation reflects the following changes in the actuarial assumptions:
Methods and assumptions used to determine contribution rates:
Actuarial costs method Entry-age normal cost
Amortization method Level percentage of pay, open
Remaining amortization period 26 years
Asset valuation method 10-year smoothed market
Inflation 3 - 4%
Salary increases 4.5%
Investment rate of return 8.25%
Retirement age - Experience-based tables of rates that are specific to the type of eligibility condition
Mortality - 50% Male - 50% Female blend of the 1994 Group Annuity Mortality Table 2015 valuation reflects the following changes in the actuarial assumptions:
Methods and assumptions used to determine contribution rates: The mortality table was adjusted to reflect longer lifetimes.
The assumed annual rate of investment return, net of all expenses, was lowered from 8% to 7.75%.
The asset smoothing was changed from 10 to 5 years.
The amortization period was moved to a fixed period amortization for the December 31, 2014 annual valuations.
The period will continue to gradually decrease for both open and closed divisions until the current unfunded accrued liability (UAL) is completely paid off.
o Moving to this type of “fixed period amortization” means that all unfunded liabilities will be fully funded by a specific date in the future.
o Once the amortization period drops below 15 years (10 years for closed divisions), any future liability and asset gains or losses will be spread over a 15-year fixed period for open divisions and a 10-year fixed period for closed divisions — creating “layers” of UAL on an annual basis.
o This transparent method allows tracking of what changed your UAL, and sets a fixed period in time in which that UAL change will be fully funded.
2016 valuation reflects the following changes in the actuarial assumptions: Methods and assumptions used to determine contribution rates:
The asset smoothing was changed from 10 to 5 years. The gain (loss) recognized each year will be 20% of the current year’s gain (loss) plus 20% of the gain (loss) from each of the 4 preceding years. The cumulative difference between the market value and valuation assets as of December 31, 2015 will be recognized over 4 years.
CITY OF ALLEGAN, MICHIGAN ANNUAL BUDGET FY 2020-2021 FINANCIAL SUMMARY
Annual changes in Unfunded Accrued Liability (UAL) will be amortized over fixed periods, creating “layers” of UAL. This will require removing and creating “layers” of UAL on an annual basis.
o Once the amortization period drops below 15 years (10 years for closed divisions), any future liability and asset gains or losses will be spread over a 15-year fixed period for open divisions and a 10-year fixed period for closed divisions — creating “layers” of UAL on an annual basis.
o This transparent method allows tracking of what changed your UAL, and sets a fixed period in time in which that UAL change will be fully funded.
2017 valuation reflects the following changes in the actuarial assumptions: Methods and assumptions used to determine contribution rates:
Increase in Final Average Compensation FAC Increase Assumption - All Divisions - 2.00% Withdrawal Rate Scaling Factor
Withdrawal Rate Scaling Factor - All Divisions - 100% Miscellaneous and Technical Assumptions
Loads – None.
Amortization Policy for Closed Divisions
Amortization Option - All Closed Divisions - Accelerated to 5-Year Amortization 2018 valuation reflects the following changes in the actuarial assumptions:
The total pension liability in the December 31, 2018, actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement:
Inflation 2.50%
Salary increases 3.75% in the long term
Investment rate of return 7.75% net of investment expense, including inflation Mortality rates were based on a blend of the RP-2014 Healthy Annuitant Mortality Tables, with rates multiplied by 105 percent; RP-2014 Employee Mortality Tables; and RP-2014 Juvenile Mortality Tables all with a 50 percent male and 50 percent female blend. For disabled retirees, the RP-2014 Disabled Retiree Mortality Table with a 50 percent male and 50 percent female blend is used to reflect the higher expected mortality rates of disabled members.
The actuarial assumptions used in the December 31, 2018, valuation were based on the results of the 2015 Experience Study, which is the most recent actuarial experience study.
The long-term expected rate of return on pension plan investments was determined using a model method in which the best-estimate ranges of expected future real rates of return (expected returns, net of investment and administrative expenses, and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by
CITY OF ALLEGAN, MICHIGAN ANNUAL BUDGET FY 2020-2021 FINANCIAL SUMMARY adding expected inflation. The target allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following schedule:
Asset Target Long-term expected
Class allocation real rate of return
Global equity 55.50% 8.65%
Global fixed income 18.50% 3.76%
Real assets 13.50% 9.72%
Diversifying strategies 12.50% 7.50%
Discount rate
The discount rate used to measure the total pension liability is 8.00% for 2018. The projection of cash flows used to determine the discount rate assumes that employer contributions will be made at the actuarially determined rates for employers. Based on these assumptions, the pension plan’s fiduciary net position was projected to be available to pay all projected future benefit payments of current active and inactive employees. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability.
City of Allegan