City of Dearborn Heights, MI Dearborn Heights Study Sessions, 7 Jun 2022

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From YouTube: Dearborn Heights Study Session (2) - 6/7/22

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The Dearborn Heights Study Session regarding the Act 345 Police and Fire Pension Board Actuarial Report taking place Tuesday, June 7th 2022 in the Dearborn Heights Council Chambers and via Zoom.

A

B

Next up we have francois peterson and he's got the act. 345, police and fire pension board actuarial report.

C

Good evening, mayor good.

B

Evening, I'm not the mayor.

C

Council chair, it's.

B

C

Sorry, um okay, so pretty much everything that jason said about the general retirement system is true for the police and fire retirement system contribution worked. The same way.

C

Contribution worked the same way. The data that we collected to do this valuation was collected as of june 30 2021.

C

We use generally accepted actuarial principles and roll it forward to july 1 2022, so that we can calculate the contribution requirement. We do the same with the financial information we collected, the financial information at june, 30, 2021 market value rate of return for the police and fire retirement system was 34.06 percent.

C

um Your assumption is seven percent, so yeah it was. It was a great year um echo what jason said this year doesn't look so great, especially the last couple of months.

C

Maybe a little silver lining, for that is that the first six months of the year were not too bad. So we will see what that does and how that helps.

C

So I'm quickly going to talk to you about the contribution requirement. Contribution requirement consists of two pieces. First piece is the normal cost. Second piece is your amortization payment because you have less assets than liabilities.

C

Your normal cost also consists of two pieces. The one piece is what the employees pay. Your police command. Members pay three percent, your firefighters pay, five percent and your police members pay seven percent of their pace and then whatever is left, um that's the city's requirement.

C

So the um series requirement this year is 18.67 of pay. um Last year it was 18.78 when we convert that to a dollar amount. This year it's 1.865 million dollars. Last year it was 1.69 million dollars. Now the reason for the increase it was about the 170 000 dollar increase. You had more people in the plan. You had 10 10, more people in the plan about 10 percent increase in pay, and that's why your normal cost dollar amount increased the the amortization payment decreased from last year. It was 3.4 million dollars.

C

Last year it was 353 million dollars. This year um you had very good investment returns um and we'll we'll talk about that. In a in a few minutes, um some of those investment returns were offset, though, due to pay increases for your police and fire members being slightly higher than expected.

C

Money was allocated to the bonus funds and that money cannot then be used by the pension fund and because we had more members entering the the drop or retiring than what we expected.

B

Can you give us a little bit more information as far as how the drop program has been affected by this report?

B

C

Okay, so the drop program is, is one of the retirement benefits for for this plan um instead of um retiring, a member can enter the drop instead of receiving a monthly payment. That payment goes into account balance and that account balance over a period of either 60 months for firefighters or 84 months for your police members get paid into this account and then accrue interest. The interest that's been paid while a member is still working for the city.

C

Is five percent um members do have the option to leave the money in the drop um once they leave the drop themselves and and retire, and then the the interestingness interest crediting is slightly different, but all the draw balances and all future drops that we anticipate happening is covered in your liabilities that that we calculated here and your drop balances are included in your financial information as well.

C

The net city contribution is slight increase from 5.12 million to a 5.186 million dollars about 60 thousand dollars more um on page a2.

D

Move on the same page.

C

D

The estimated percent of fake contribution how come it went down from 56.90 to 51. is.

C

That, though, because you've got a million dollars more in pay, because what there's a million dollars more in pay, pay in 2021 was expected to be nine million dollars in 2022 it's about 10 million dollars, and that's just due to the fact that you had 10 more members active in the plan this year. It shouldn't go up. Is that a good going down the the rate comes down? The dollar amount goes up.

E

Thank you, the um so there's a limit of 84 months or seven years for firefighters and the limit for police officers.

C

Was no it's it's it's five years or 60 months for firefighters and 84 months or seven years for your police. So just the other way around police and police commands.

C

C

Your accrued liability this year is 243 million dollars. It's an increase of about 10 and a half million dollars. From last year, your assets increased um to 203 million dollars, um it's about an increase of 13 and a half million dollars. So your unfunded liability came down by about three 3.2 million dollars funded rate this year, 83.6 percent, so you've already got 83.6 pennies for every dollar of liability and that increased from last year's 81.5 and to echo what jason said, these plans are some of the better funded plans around around the state.

C

um 70 80 are fairly decently funded. We've we've got plans that are lower and much lower than that.

C

For your um so each year when we like, I said when we collect information, we collect financial information. We collect your market values. We do not use that market values because they're very volatile.

C

We calculate what we call a funding value of assets. We use 20 of gains this year or 20 of losses and then so forth for the next four years.

C

This year we we anticipated that the system would have 12.5 million dollars in income. The system actually had about 58 million dollars in income, so there was a excess income of about 45 million dollars.

C

We do not use that 45 million dollars immediately. We use nine million dollars this year next year and so forth until the last one is used in 2026.. So.

D

You I'm sorry, so you use the same thing. Like jason said the five year five year project exactly.

C

D

Do you guys use the same um 20-year like.

C

uh Amortization: payment um for the police and fire system, 16 16, 16.

C

So that 9 million gets added to last year's loss of about 2.7 million dollars and prior years gains and losses for a total investment gained this year of about 8.8 million dollars.

C

So due to your financial information due to the great performance in the market value, there was 8.8 million dollars more in the plan than what we expected.

C

The unrecognized gains over the next four years is about 27 million dollars, so you've got a buffer of 27 million dollars sitting out there to either if the market returns decently, lower contributions or if the market does not return decently, that will act as a buffer and cover your your your contribution so that it doesn't increase too much or stay stays level.

C

um On page a4, um if you look at the right-hand column, um you can see how volatile the market values are. um Like I said this year is 34.06 percent.

C

um Just a year ago it was negative, zero point, six, four percent um we've got a seven percent assumption, but we never actually eat the seven percent we either higher or or we lower than that. We just hope that in average we get your seven percent assumption um and so that um you so that we can calculate your contribution rate and dollar amount based on that.

E

Say that again, I'm sorry you presumably I must have seven percent market return.

C

We we use a seven percent discount rate, so we assume that the plan is going to earn seven percent. We know that in most years you can you're not going to eat seven percent exactly, but we hope over a long period of time that that would be the aggregate return would be seven percent.

E

Average of seven percent.

C

C

On page a5, um we've got your gain and loss for the year. Remember a couple pages ago, I said that due to your investment performance, you had about 8.8 million dollars in gains in total for the system, um assets and liabilities.

C

We only had 2.4 million dollars in gains and the reason for that decreased amount. um It's about six and a half million dollars was due to the fact that money was allocated to the bonus funds, but then also pay increases for your police and fire members was slightly higher than expected.

C

Higher pay increases lead to higher liabilities, and then we had members retiring or entering the the drop program earlier than what we expected. So those payments will be made for a longer period of time, creating higher liabilities.

C

The two 2.375 million dollar gain. That is, what caused your amortization period payment to drop by that almost 150 thousand dollars.

C

Okay, um like I said thirty, four point: zero six percent- that was your market return. um We we do not um use that market value to offset against your liabilities. If we did, your contribution requirement would be 2.8 million dollars instead of 5.2 million dollars, and the plan would have been ninety five point: six percent funded.

B

That's pretty good clarification. So when we have this type of return.

F

Of around thirty four percent- yes, it's obviously great yeah the next year. Should we not logically have less contributions? I mean it seems like that's what would be the case.

C

Well, yeah, um due to your asset performance, your contribution should come down, but you did have losses on a lot on the liability side. You had money that was allocated to the bonus funds about 3.3 million dollars. You had pay increases for your members that were higher than expected. That leads to a loss, and you had more members retiring or entering the draw program. What.

E

Is the bonus fund.

C

The bonus fund it pays um for for the for the pre uh 2001 retirees there is. It works on a point system.

C

It's like a 13th check that gets paid to the retirees and then the same for your post, 2001 retirees they have to be retired for five years, and then they get a 13th payment.

F

But that was only up to 2001. You said.

C

uh There's two categories: pre pre-2001 works on a point system: post 2001.

C

You have to be retired for five years at least to get a payment, so somebody that retires today will only get a payment if they still collecting a retirement benefit after be they've, been retired for five years.

B

Same question I asked before what are the two points that you feel are uh great assets after having done this report in our particular city, and what are the two major concerns that you've got.

C

um The the the market return is is obviously a great asset and um your investment consultant- it's not just this year, but it seems like your investment consultant, is beating the market um or beating other investment consultants on a regular basis. Even when the market is down, he returns more than what they do.

C

Another positive is the city is making its contributions um contribution. It's it's not easy to make these contributions. um Five million- um it's been growing um three four five million um a year um and and the city is making these contributions um and and negatives or not negatives. What are your concerns concerns? um I don't really have concerns for this plan. The plan is well-funded.

C

You are making your contributions. The funded ratio is trending in in the right direction, um maybe the amortization period as well. We had 16 years now. Also we use the level percent of pay amortization where your payment is growing um with with pay.

C

There are other methods we we can introduce what we call layered amortization where each year, your unfunded liability is amortized over the same period, but over over time it gets paid off. So you add a layer this year at 16 next year. You've got 15 years left on that, but then the new layer gets added at 16.

C

that creates more stability, but other than that, I I think the plan is plan is doing really well excellent. Glad.

E

uh Two two questions for answer. One number: one is: how much of this money on average over the years is, is invested in the stock market? Is it most of it? Is it fifty percent?

E

um My stock market right now is that it has been up until a few months ago at an all-time high, but it's going to is: is it 90 in stock market.

C

No, I it's probably not 90., it's probably between 60 and 70 percent. um Each retirement system um board got its own investment allocation.

C

I believe that the michigan constitution, if they don't have it anymore up to a certain point, they had guidelines of how to invest money. um You cannot put everything in in in stocks. You cannot put everything in fixed income, but the majority is most likely in stock.

E

And is it a, I suppose, it's definitely a concern that each year, there'll probably be fewer and fewer participants in the pension plan, the city's employees are all going away from pensions and other other forms of retirement. Do you have you seen that with our system.

C

Not not in your system, your system is still open to new wires and, as we saw this year, you had actually 10 more active members in the plan. We do have a lot of surrounding your surrounding neighbors and a lot of systems in michigan that are close to new wires.

C

So, as people retire out of the plan, they cannot be replaced, and um so they eventually it becomes a retiree-only plan.

E

So the more the more new and active participants younger people working paying into the plan, the better for the pension to play.

C

Well, it certainly helps the plans and plan um stay stay along um it. It certainly helps funding the plan yeah. Okay, thank you. Any.

B

Other questions.

F

From council members sure but councilman.

A

Thank you now on in the drop program. If I'm not mistaken, uh the participants are guaranteed a five percent uh interest under in their deposits.

C

The members that are still employed with the city- they get five percent members that leaves the employment and leave their draw balances um with the retirement system. They have a different interest crediting. What is that? um I believe? It's five and a half or half off market.

A

So if you leave employment from the city, you get a higher return. That's.

C

Guaranteed, that's what was that's, what was the goal.

A

In the event that the investment for that particular year is below five percent, where does the money come from to pay that five percent.

C

I believe that comes from the retirement system, retirement system itself, yeah.

A

Okay, what about it when it gains like 34?

A

Where does that how's that money distributed.

C

Well, according to the contracts, then half should go to the drop balance for that year. Yeah, you say: 50 of the market return yeah.

A

So so, if I, if I had if I was a retiree in the job program and I'm guaranteed five percent, but we had a 20 return that year, I'd get 10.

A

C

You are if you're not active member with the city anymore. If you're active member of the city, you get five percent. If you left city employment, you left your money in the drop and you are. You are collecting your pension benefit. Then you get 5.5 percent or half of the market return. So.

A

The other, the remaining uh balance of the investment that the interest earned goes into a what kind of a fund in the in the retirement program. Where is it? Where does extra money go close to retirement system goes into right? What do you mean in retirement system? What's that mean.

C

It it the the money, is on account with the city, so this the city earns 34.06 or earned 34.06 percent or the retirement system earned 34.06. It pays out 17 to the members balance the additional 17 percent stays with the retirement system. Just.

D

Like a general fund, the whole thing.

C

A

Is that connected that excess be used for a year coming up where it's below five percent to pay? For that? The five percent, or whatever percentage that you have.

C

Well, if, if the returns are below five percent, then five five five percent gets paid to members, that's still employed or five and a half percent is paid to members that that retired haven't.

A

Come out they'll, probably.

C

Draw on that from the prior year, then.

A

To your knowledge, do you know? If is there any any time where the the residents have uh taken on the burden or the expense of uh paying the five percent? When it's been below five percent.

C

um Not to my knowledge, but if you don't earn your investment returns, um your contribution requirement goes up. That's part of the contribution requirement. The the liabilities is included in the contribution requirement. Okay, all right! Thank you. Thank you.

D

The constitution right.

B

D

In 2020 shows negative 0.64. Yes, that's below.

C

Well, this market value is based on the june 30 market value. I believe that the market value that's being used for drop calculations is slightly different. It's it's maybe a calendar year or it goes from the first three months of the of the year and the last three months of the prior year. So it's not exactly the same calculation, but um so, but the market value is calculated. I believe the last return that was added to members were about 11 percent.

D

Yeah, the past few years it didn't go below.

C

If it doesn't go below that did.

D

C

Well, it dip sorry, the I I don't know what the drop um interest was in the last five year or on the last couple years. We don't do the drop calculations, uh we just get the balances each year from the retirement system and the city yeah.

A

B

So we're gonna go ahead and go to anybody in the audience and then also anybody on zoom. Next. Anybody in the audience have any questions come on up if it pertaining to this particular subject right right, because the garbage is next. Okay, go ahead, come on up.

G

Just a general question because I have no fight in this either either way. Don't.

F

G

Your name in your street, oh my name, is ron frenzy live on fairwood durban heights. During the past five 10 15 years, inflation has been about 2 percent, more or less now, inflation is like skyrocketing, just terrific jamie dimon, who is the president of j.p morgan, which is the biggest bank in the country. Probably the smartest guy in the in the country on finance said this week that in six months to a year, we're looking at a financial hurricane that that just scared everybody.

G

So if inflation continues real high, which it is and continues that the next couple of years, how will that impact your program.

C

So if inflation is is, is higher, um like, like jason, said, with his plan with our plan, we make assumptions of what people are going to get in wage increases. Your increases might be higher.

C

We have not seen that yet with retirement systems where we did valuations this year, we have not seen wages going up because inflation is going up, but that might be one of the things that happens. um People are getting higher increases. You are competing against your neighbors for for for labor. um If they can go to the the neighboring city and get more doing exactly the same work, they might do that so most likely. What we will see is that your labor costs are higher, pays higher and then that will translate to higher liabilities.

C

Okay, thank you.

B

Friends why anybody else have any questions on this and we're going to try to keep it short, because we do have a 6 p.m. Meeting on uh kind of a popular subject here, so yeah we're going to talk some trash. um Anybody else have any questions for francois everybody on zoom have any questions for francois.

B

Francois peterson. Thank you very much. Thank you very much.

C

B

C

uh You got close.

B

Hello, french. In me, I got a little french. Thank you very much appreciate it. Thank you all right um at this particular point, ladies and gentlemen, what I'm gonna do is I'm gonna. Do like uh two three minutes: no, not ten minutes too long. Six minutes, two three four minute break and we'll go ahead and start on uh next uh popular subject.