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Retirement Benefits Policemen & Firemen 1973 I I I I I I I I I I I I I I I MARTIN E. SEGAL COMPANY CONSULTANTS AND ACTUARIES I I I I I I I I I I I I I I I I I I I Submitted by Martin E. Segal Company May, 1973 ACTUARIAL STUDY OF THE COST OF RETIREMENT BENEFITS FOR CURRENT POLICEMEN AND FIREMEN Report to: CITY OF SALINA I I I MARTIN E. SEGAL COMPANY CONSULTAl','TS AND ACTUARIES 730 FIFTH AVENUE NEW YORK, N. Y 10019 ' 12121 586-5600 I I May 4, 1973 ATLANTA BOSTON CHICAGO CLEVELAND DALLAS DENVER HARTFORD HOUSTON LOS ANGelES NEW ORLEANS PHOENIX SAN FRANCISCO SAN JUAN WASHINGTON, DC. I City of Salina City-County Building 300 West Ash Street Salina, Kansas 67401 I Gentlemen: I We are pleased to submit this report on our actuarial study of the cost of providing retirement benefits for policemen and firemen employed by the City of Salina as of January 1, 1973. Police and firemen hired a.:f'ter that date will become members of the Kansas Police and Firemen's Retirement System. I I The report is presented in the following sections: I. INTRODUCTION MEMBERSHIP AND FINANCIAL DATA ACTUARIAL ASSUMPl'IONS RESULTS OF ACTUARIAL CALCULm'IONS I II. III. IV. I I I Our actuarial certification statement is included at the end of the report. Sincerely, MARTIN E. SEGAL COMPANY I By: (p. p(~ I I John P. Mackin, Ph.D. Vice President JPM:ns I I On January 1, 1973 the City of Salina affiliated with the Kansas Police and Firemen's Retirement System (KP&F) with respect to newly hired police and firemen. This report presents the results of our actuarial study of the cost of providing retirement benefits for the City's police and firemen in active service on January 1, 1973 on the following three bases: I I I I I I I I I I I I I I I I I I I 1. INTRODUCTION 1. All current police and firemen continue to be covered under the local retirement systems (established under K.S.A. 13-14a, as amended by City Charter Ordinances Nos. 5, 6, and 7). 2. Current police and firemen electing such coverage become members of KP&F on January 1, 1974, with those not electing such coverage continuing to be covered under the local retire- ment systems. 3. All current police and firemen become members of KP&F on January 1, 1974. The cost figures presented in this report are based on the following: 1. The laws applicable to KP&F and the local retirement systems. 2. The data on police and firemen employed by the City of Salina as of January 1, 1973. 3. The data on pensioners and beneficiaries receiving payments from the local retirement systems as of January 1, 1973. - 1 - I I I I I I I I I I I I I I I I I I I 4. The assets of the City's policemen's and firemen's pension systems as of December 31, 1972. 5. The actuarial assumptions and funding methods described later in this report. - 2 - I I I II. MEMBERSHIP AND FINANCIAL DATA CUrrent police and firemen I I We received information on 56 policemen and 70 firemen employed by the City of Salina on January 1, 1973. Tables 1 and 2, which follow, present detailed distributions of these two groups of employees by age and by years of service. I The characteristics of current police and firemen are summarized below, with separate figures shown for those electing KP&F coverage and those not electing KP&F coverage. I I I Electing Not electing KP&F KP&F Total Number: Police 47 9 56 Firemen 55 15 70 Total 102 24 126 Average age: Police 32~ 50~ 35~ Firemen 3~ 43~ 33~ Average years of service: Poli ce 6 17~ 8~ Firemen 61. l~ l~ 2 Total annual payroll: Police $357,900 $ 81,600 $439,500 Firemen 380,200 125,300 505,500 Total 738,100 206,900 945,000 Average annual salary : Police $ ~r ,615 $ 9,067 $ 7,848 Firemen 6,913 8,353 7,221 Total 7,236 8,621 7,500 - 3 - I I I I I I I I I I I I I Pensioners and beneficiaries I As of January 1, 1973, a total of 35 individuals were receiving benefits under the local retirement systems. The distribution of pensioners and beneficiaries between the policemen's and firemen's systems are shown I below. Policemen's Firemen's System System Total Pensioners 7 14 21 Beneficiaries 4 10 14 Tot al 11 24 35 I I I I The pensioners receiving benefits under the policemen's system were considerably older than those receiving benefits under the firemen I s system, with the youngest police pensioner being age 70 except for a disability pensioner age 59. On the other hand, 10 of the 14 pensioners receiving benefits under the firemen's system were between ages 50 and 59. I I The monthly benefits being paid to the pensioners and beneficiaries range in amounts from $61 to $520. I As s et s I As of December 31, 1972, the local policemen's system had assets of approximately $48,400 and the local firemen's system had assets of approxi- mately $44,000. The local systems are financed by employee contributions of 3% of salary (plus a $5 initiation fee) ano by local taxes. I I I - 4 - I I I ------------------- Table 1 Census of Policemen in Active Service on January 1, 1973, by Age and by Years of Service Years of service Age Total 0 - 4 5 - 9 10 - 14 15 - 19 20 - 24 25 - 29 Total 56 27 15 6 3 4 1 . . . . . 20 - 24 7 7 - - - - - ........ 25 - 29 16 11 5 - - - - ........ 30 - 34 12 5 4 3 - - - ........ 35 - 39 5 2 3 - - - - ........ 40-44 8 2 2 2 1 1 - ........ 45 - 49 5 - 1 1 2 1 - .....e1.. 55 - 59 3 - - - - 2 1 ........ Ci ty of Salina - 5 - ------------------- Table 2 Census of Firemen in Active Service on January 1, 1973, by Age and by Years of Service Years of service Age Tot a1 0 - 4 5 - 9 10 - 14 15 - 19 20 - 24 25 - 29 Total . . . . . 70 26 25 3 6 7 3 20 - 24 ........ 4 4 - - - - - 25 - 29 ........ 31 18 13 - - - - 30 - 34 ........ 19 4 12 3 - - - 35 - 39 ........ 3 - - - 3 - - 40 - 44 ........ 4 - - - 3 1 - 45 - 49 ........ 6 - - - - 6 - 50 - 54 ........ 3 - - - - - 3 Ci ty of Salina - 6 - I I III. AcrUARIAL ASSUMPl'IONS I The actuarial assumptions used to determine the cost of covering current police and firemen under KP&F were those approved by the Board of Trustees of the Kansas Public Employees Retirement System. These assumptions were also used to calculate the costs of the local retirement systems, with the following two exceptions: I I I 1. Retirement age - employees covered under the local retirement systems were assumed to retire, on the average, at age 50 (or upon completion of the 22 year service requirement, if later). I I 2. The withdrawal and disability rates used in the cal- culations were applied up to age 50 to determine the costs of the local retirement systems, rather than up to age 55 as in KP&F. I I I The actuarial assumptions used in annual actuarial valuations of KP&F are briefly summarized below. I Interest earnings I We have assumed that the net effective yield on the assets of the Retirement System will be 4t% per year. I Salary increases I Because the benefits provided by the System are based on a covered employee I s final average salary (his highest average salary in 3 of the 5 years immediately preceding retirement), increases in salaries during future years of employment have a major effect on the calculated employer contribution requirements. I I I - 7 - I I I The cost calculations are based on the assumption that salaries will increase at a constant annual rate of 3% per year, compounded. The 3%-per- year-salary-increase assumption projects salary increases as follows for various working lifetimes: I I I Working Lifetime (Years) 20 25 30 35 Percentage Increase in Salary to Retirement 80.6% 109.4 142.7 181.4 I I I Retirement age I Based on recent experience, we assume that employees will retire, on the average, at age 55, or upon completion of 20 years of service if after age 55. I Termination rates before retirement I I The termination rates used in an actuarial valuation are intended to reflect the probable terminations of employment before retirement for all causes, including disability, death, and withdrawal. The rates applied in the actuarial calculations are shown below for selected ages: I I Rates Per 1,000 Employees Disability Death Wi thdrawa1 Service Non-service Service Non-service ~ Connect ed Connected Connected Connected 27 .8 .3 1.4 .7 42.3 32 2.1 .6 1.8 .8 27.4 37 4.2 1.4 2.5 1.2 10.6 42 8.6 2.0 3.6 1.8 .0 47 13.0 3.0 5.3 2.6 .0 52 15.8 4.2 7.9 3.9 .0 I I I I I - 8 - I I I Mortality rates after retirement I I In estimating the amount of the reserve required at the time of retirement to pay an employee's pension for the remainder of his lifetime, it is necessary to make an assumption with respect to expected mortality after retirement. For this purpose, we assume that mortality among pensioners will follow the Group Annuity Table for 1960. I I I I I I I I I I I I - 9 - I I I I IV. RESULTS OF ACTUARIAL CALCULATIONS I Based on the data and actuarial assumptions described in the previous sections, and on the provisions of the applicable retirement laws, we have cal- culated the costs to the City of Salina of providing retirement benefits for current police and firemen. I I I Local Retirement Systems I The results of our actuarial valuations of the local police and firemen's systems are presented below, based on the assumption that all current employees continue to be covered under the local systems. I I Present value of benefits: Active employees Pensioners and beneficiaries I Total I Assets Present value of benefits unfunded Present value of future employee contributions I I Present value of future City contributions (unfunded liability) I Present value of future salaries I Present value of future City contributions divided by present value of future salaries I Total salaries of employees under assumed retirement age I Current contribution requirement I I Policemen's System Firemen's System $2,641,700 296,300 $2,938,000 48,400 $2,889,600 $3,126,900 1,020,600 $4,147,500 44,000 $4,103,500 146,900 166,900 $2,742,700 $4,896,200 $3,936,600 $5,562,400 56.02% 70.77% $ 421,300 $ 236,000 $ 475,500 $ 336,500 - 10 - I I I Based on the aggregate cost ~~ding method, the City contributions required to fUnd the unfUnded liability by retirement of the last active employee are approximately 54i of salary for the police and 6710 of salary for the firemen. Under thi s fUnding method, however, the dollar amount of the contribution requirement would decline as current employees retired and the total salary of the remaining active employees decreased. I I I An alternative approach to financing the local systems would be to contribute a level dollar amount each year for a period of from 10 to 30 years. The amount of the annual contribution requirement will vary depending on the length of the amortization period, as follows: I I I Amortization Policemen's Firemen's period System Syst em Total 10 years $339,600 $487,600 $827,200 20 years 206,600 296,600 503,200 30 years 165,100 236,800 401,900 I I I If all current police and firemen remain under the local systems, and the city decides to fUnd the systems by annual payments of a level dollar amount, ,.,e would recommend that the amortization period not be in excess of 30 years. I KP&F and Local Retirement Systems I If the 47 policemen and 55 firemen who elected coverage under KP&F become members of KP&F on January 1, 1974, the City contributions to KP&F for 1974 would vary depending on the length of the amortization period. The Kansas Police and Firemen's Retirement Act provides that the amortization period may not exceed 40 years. The F..P&F cost factors for the City of Salina are presented on the following page, along with the City contributions for 1974 based on amortization periods of 20, 30, and 40 years. I I I I I - 11 - I I I I I I I I I I I I I I I I I I I city of Salina Cost Factors - KP&F Police Firemen Total Normal cost $ 52,200 $ 55,500 $ 107,700 Accrued liability 737,700 727,700 1,465,400 Total Contribution for 1974 Percent Percent Percent Amortization of of of period Amount payroll Amount payroll Amount payroll 40 years $ 91,500 25.6% $ 94,300 24.8% $185,800 25.2% 30 years 96 ,600 27.0 99,300 26.1 195,900 26.5 20 years 107,800 30.1 110,300 29.0 218,100 29.5 In addition to the cost of covering those current police and firemen under KP&F who elect such coverage, the City would also be required to pay benefits to existing pensioners and beneficiaries and to finance the benefits to be provided for the 9 police and 15 firemen who elect to remain under the local systems. These costs are presented below: Present value of benefits: Active employees not electing KP&F Pensioners and beneficiaries Policemen I s Firemen's System System $597,700 $ 984,800 296,300 1,020,600 $894,000 $2,005,400 48 ,400 44,000 $845,600 $1,961,400 9,100 17,000 $836,500 $1,944,400 $302,600 $ 565,000 276.44% 344.14% $ 63,400 $ 95,300 $175,300 $ 328,000 Total Assets Present value of benefits unfunded Present value of future employee contributions Present value of future City contributions (unfunded liability) Present value of future salaries Present value of future City contributions divided by present value of future salaries Total salaries of employees under assumed retirement age Current contribution requirement - 12 - I I I Thus, if the City affiliated with KP&F on January 1, 1974 with respect to current employees who elected such coverage, and decided to fund the remaining liabilities of the local systems by the time the last active employee retired, it would need to contribute 215% of the salary of the 9 policemen and 262% of the salary of the 15 firemen who continue to be covered under the local systems. Alternatively, the City could amortize the remaining liabilities of the local systems by annual level dollar payments over a period of from 10 to 20 years, as follows: I I I I 20 years 10 years Policemen's System $ 86,500 52,600 Firemen IS System $222,300 135,200 Tot al - Amortization period I $308,800 187,800 I If the only active employees that remain in the local systems are those not electing KP&F coverage, there may be some difficulty in meeting benefit pay- ments on the basis of a 20 year amortization schedule. In our opinion, the period of payment should certainly not be extended beyond 20 years. I I KP&F For All CUrrent Employees I We have also calculated the City's required contributions to KP&F for 1974, assuming that all current police and firemen become members of KP&F and that the City amortizes its liabilities over a period of 40 years. The results of these calculations are shown below: I I Percent of Amount payroll Police $128,000 29.1% Firemen 152,500 30.2 - TotaJ. $280,500 29.7 I I I - 13 - I I I I I In the event all current police and firemen become members of KP&F, the City's remaining liabilities under the local systems would be for existing pensioners and beneficiaries only, as follows: I I policemen's Firemen's System Syst em Present value of benefits for pensioners and beneficiaries $296,300 $1,020,600 Assets 48,400 44,000 Unf'unded liability $247,900 $ 976,600 I I I I We expect that the City would finance this liability by paying benefits to existing pensioners and beneficiaries on a "pay-as-you-go" basis as they become due. I I * * * I I The actuarial certification statement which we provide to each employer considering participation in KP&F follows this section. You will note that the cost figures presented in the actuarial valuation statement are based on those employees who elected coverage under KP&F. I I I I - 14 - I I I I I I I I I I I I I I I I I I I I I MARTIN B. SBGAL COMPANY CO:--:Sl'LT\:--:TS .\;,1) :\CTL\KIES ----------- 730 FIFTH AVENUE NEW YORK. N. Y 10019 . '212' 586-5600 April 25, 1973 ATLANTA BOSTON CHICAGO CLEVELAN D DALLAS DENVER H"'~TFOR D HOUSTON LOS ANGELES NEW ORLEANS PHOENIX SAN FRANCISCO SAN JUAN WASHINGTON. D C. Kansas Police and Firemen's Retirement System Actuarial Certification as of January 1, 1973 Municipality - City of Salina Coverage under Social Security - No Coverage under previous municipal retirement system - Yes Number of employees electing non-coverage Police - 9 Fire - 15 Data on employees electing coverage Police Fire Total Number 47 55 102 Average age 32t 30t 31t Average service 6 ~ ~ Annual payroll $357,900 $380,200 $738,100 . Employer cost factors Police Fire Total Normal cost Amount $ 52,200 $ 55,500 $107,700 Percent of payroll 14.6% 14.6% 14.6% Accrued liability $ 737,700 $ 727,700 $1,465,400 - I I I I I I I I I I I I I I I I I I I - 2 - Employer contribution for 1974 due January 1 Police Fir.e Total Percent Percent Percent Amortization of of of period Amount payroll Amount payroll Amount payroll 40 years $ 91,500 25.6% $ 94,300 24.8% $185,800 25.2% 30 years 96,600 27.0 99,300 26.1 195,900 26.5 20 years 107 , 800 30.1 110,300 29.0 218,100 29.5 ~~' son Vice President and Associate Actuary ML/k .. I I I I I I I I I I I I I I I I I I I MARTIN E. SEGJ\.L COMPANY C():\Sl"LT\:\TS .\:\D\CTl'.\RIES 730 FIFTH AVENUE NEW YORK,N.Y.10019 (212) 586-5600 ,April 25, 1973 ATLANTA BOSTON CHICAGO CLEVELAND DAL LAS DENVER HARTFORD LOS ANGELES PHOENIX SAN FRANCISCO SAN JUAN KANSAS POLICE AND FIREMEN'S RETIREMENT SYSTEM APPENDIX A Employer: Ci ty of Salina There are a number of pensioners, or beneficiaries, receiving benefits under a previous system. Payments to them are not to be provided under the Kansas police and Firemen's Retirement System. Some portion of these obligations are covered by current assets; the balance must be met by future employer and employee contributions. Our valuation of the cost of benefits for employees to be covered under KP&F was based on a funding method which tends to produce level costs over the amortization period and somewhat lower costs thereafter. A fundamental assumption in such a calculation is that the size of the group remains constant and that the terminating employees are replaced by new workers. This method is not appropriate for a small closed group of pensioners, such as those under the previous retirement system. Since the bulk of the benefits to be paid to these people will be dis- bursed in the relatively near future, the important problem is to have enough funds on hand to meet the immediate outlays. The build-up of reserves to meet future obligations is a secondary question and one subject to a great deal of uncertainty. That is, in a small closed group the laws of actuarial probability have little chance to operate and wide fluctuations from the normally expected experience are not surprising. In view of these facts it seems that the benefits could continue to be · provided for members of the old retirement system as they arise. A reserve should probably be held to cover any unusual costs which may arise a year or so ahead but it does not seem necessary to look further into the future. We are not now in a position to estimate the outlays for individual years.