Study of Cost of Retirement Benefits for Police/Firemen 1
1
1
' ACTUARIAL STUDY OF THE COST OF
RETIREMENT BENEFITS FOR CURRENT
' POLICEMEN AND FIREMEN
Report to : CITY OF SALINA
1
' Submitted by
Martin E. Segal Company
May, 1973
1
MARTIN S. SEGAL COMPANY
CONSULTANTS AND ACTUARIES
730 FIFTH AVENUE NEW YORK, N. Y. 10019 12121 586-5600
ATLANTA
t BOSTON
CHICAGO
CLEVELAND
May 4, 1973 DALLAS
DENVER
HARTFORD
' HOUSTON
LOS ANGELES
NEW ORLEANS
PHOENIX
SAN FRANCISCO
SAN JUAN
' City of Salina WASHINGTON,D C.
City-County Building
300 West Ash Street
' Salina, Kansas 67401
Gentlemen:
' 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 after that date will become members of the Kansas
Police and Firemen's Retirement System.
' The report is presented in the following sections:
I. INTRODUCTION
tII. MEMBERSHIP AND FINANCIAL DATA
III. ACTUARIAL ASSUMPPIONS
IV. RESULTS OF ACTUARIAL CALCULACIONS
Our actuarial certification statement is included at the end of
' the report.
Sincerely,
' MARTIN E. SEGAL COMPANY
1 (P, n(
By:
John P. Mackin, Ph.D.
' Vice President
JPM:ns
1
1
I. INTRODUCTION
On January 1, 1973 the City of Salina affiliated with the Kansas
1 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 :
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) .
1 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
1 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 -
1
r
1
4. The assets of the City's policemen's and
firemen's pension systems as of December
31, 1972.
1 5. The actuarial assumptions and funding methods
described later in this report.
1
I
I
1
I
I
I
r - 2 -
I
I
I
III. MEMBERSHIP AND FINANCIAL DATA
' Current police and firemen
IWe 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
Idetailed distributions of these two groups of employees by age and by years
of service.
11 The characteristics of current police and firemen are summarized
below, with separate figures shown for those electing KP&F coverage and
Ithose not electing KP&F coverage.
rElecting Not electing
KP&F KP&F Total
INumber:
Police 47 9 56
11 Firemen 55 15 70
Total 102 24 126
IAverage age:
Police 321 502 351
11 Firemen 301 434 331
Average years of service:
Police 6 172 81
Firemen 62 192 io1
Total annual payroll:
Police $357,900 $ 81,600 $439,500
Firemen 380,200 125,300 505,500
Total 738,100 206,900 945,000
IAverage annual salary:
' Police $ 7,615 $ 9,067 $ 7,848
Firemen 6,913 8,353 7,221
Total 7,236 8,621 7,500
- 3 -
1
1
Pensioners and beneficiaries
' 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
1 below.
Policemen's Firemen's
1 System System Total
Pensioners 7 14 21
1 Beneficiaries 4 10 14
Total 11 24 35
The pensioners receiving benefits under the policemen's system were
' considerably older than those receiving benefits under the firemen'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.
1 The monthly benefits being paid to the pensioners and beneficiaries
range in amounts from $61 to $520.
1
Assets
1 As of December 31, 1972, the local policemen's system had assets
1 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) and by local taxes.
1
1
- 4 -
1
1
1
I
I
I .
IN
I H I I I I 1 1 H
rN
N
I1I 1 I I I H H N
N N
H
I H.' H
U H
V I 01 1 I I I H N I
N H
Ti) . .
h U O ..7
q > H
o v2
111 I 0 \0 I I Cr) I N H I
W >4 H
I O
>1
61 I
HI
co 02
In
H > t to I to .-. en N H I I
d +' ?, to H r-
El C A
C
' g I ti ti H to N N 1 I
N H
N•
d >
0
•ri a
H
1 a rI
. p ‘0 ‘.0 N to CC) Ln M
0 In rl ri
to H
g
- 0
I -r1
N
rg M CO
El N N M m g' x106
I I I I I 1
4-,
I 01 N 0 m .°x -t tin U
I
1
1
I
1 N
I Cr) I I I I I I en
N
N
1 ^ I N I I I I ri VD I
M ON
ti
1 H
N rC\l
r0a I \O I I I en M I I
jY
k in
N ri
N
b U 0 -t
ri
1
to I M i I M I I I 1
CU
0)O k
U O• 0
1
O \O
I N. CO 1
w rn
A Y 'N I N I CO ri I
I I i
<d •r4 If\
b
I M CO I I I 1
i• ka
rI A
1 44
0
0
0 - H rn Cr) .* '0 m
Co o t-- m 1-1
C H
CO
C)
U
•
. I
q
rl
a)
•. m cn
I 0 H N N m m .7 .7 t!\ 0
I I I I I I 1
I .
0 If\ 0 If 0 If\ 0
Cu N m m �' u y•.a U
1
I
1
III. ACTUARIAL ASSUMPPIONS
1 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:
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) .
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.
The actuarial assumptions used in annual actuarial valuations of
' KP&F are briefly summarized below.
Interest earnings
We have assumed that the net effective yield on the assets of the
Retirement System will be 4 per year.
Salary increases
1 Because the benefits provided by the System are based on a covered
employee'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.
1
1
The cost calculations are based on the assumption that salaries will
I 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
1 working lifetimes:
I Working Lifetime
(Years) Percentage Increase
in Salary to Retirement
20 80.6%
I25 109.4
30 142.7
1 35 181.4
IRetirement age
Based on recent experience, we assume that employees will retire,
I
on the average, at age 55, or upon completion of 20 years of service if after
age 55.
I
Termination rates before retirement
The termination rates used in an actuarial valuation are intended to
I 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 :
1
Rates Per 1,000 Employees
IDisability Death Withdrawal
Service Non-service Service Non-service
I ARE!
Connected Connected Connected Connected
27 .8 .3 1.4 .7 42.3
32 2.1 .6 1.8 .8 27.4
I37 4.2 1.4 2.5 1.2 10.6
42 8.6 2.0 3.6 1.8 .0
1 47 13.0 3.0 5.3 2.6 .o
52 15.8 4.2 7.9 3.9 .0
I
- 8 -
I
1
1
Mortality rates after retirement
1 In estimating the amount of the reserve required at the time of
1 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
1 after retirement. For this purpose, we assume that mortality among
pensioners will follow the Group Annuity Table for 1960.
1
1
i
1
1
1
i
1
1
i
1
i - 9 -
1
1
I
IIV. RESULTS OF ACTUARIAL CALCULATIONS
1 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
Local Retirement Systems
IThe results of our actuarial valuations of the local police and
I firemen's systems are presented below, based on the assumption that all current
employees continue to be covered under the local systems.
Policemen's Firemen's
System System
IPresent value of benefits:
Active employees $2,641,700 $3,126,900
IPensioners and beneficiaries 296,300 1,020,600
Total $2,938,000 $4,147,500
IAssets 48,400 44,000
Present value of benefits unfunded $2,889,600 $4,103,500
IPresent value of future employee
contributions 146,900 166,900
IPresent value of future City
contributions (unfunded liability) $2,742,700 $3,936,600
IPresent value of future salaries $4,896,200 $5,562,400
Present value of future City
Icontributions divided by
present value of future salaries 56.02% 70.77%
ITotal salaries of employees under
assumed retirement age $ 421,300 $ 475,500
ICurrent contribution requirement $ 236,000 $ 336,500
I - 10 -
1
1
Based on the aggregate cost funding method, the City contributions
1 required to fund the unfunded liability by retirement of the last active
employee are approximately 54+% of salary for the police and 67% of salary
Ifor the firemen. Under this funding method, however, the dollar amount of
the contribution requirement would decline as current employees retired
1 and the total salary of the remaining active employees decreased.
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
1 on the length of the amortization period, as follows :
1 Amortization Policemen's Firemen's
period System System Total
1 10 years $339,600 $487,600 $827,200
20 years 206,600 296,600 503,200
1 30 years 165,100 236,800 401,900
IIf 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
1 amount, we would recommend that the amortization period not be in excess of
30 years.
1 KP&F and Local Retirement Systems
1 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
Ifor 1974 would vary depending on the length of the amortization period. The
Kansas Police and Firemen's Retirement Act provides that the amortization
Iperiod may not exceed 40 years. The KP&F cost factors for the City of Salina
are presented on the following page, along with the City contributions for
1 1974 based on amortization periods of 20, 30, and 40 years.
1 - 11 -
1
ICity of Salina Cost Factors - KP&F
Police Firemen Total
INormal cost $ 52,200 $ 55,500 $ 107,700
IAccrued liability 737,700 727,700 1,465,400
ITotal Contribution for 1974
Percent Percent Percent
I Amortization of of
payroll of
period Amount payroll Amount yroll Amount payroll
I 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
I
I 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:
IPolicemen's Firemen's
System System
IPresent value of benefits : •
Active employees not electing KP&F $597,700 $ 984,800
IPensioners and beneficiaries 296,300 1,020,600
Total $894,000 $2,005,400
I Assets 48,400 44,000
Present value of benefits unfunded $845,600 $1,961,400
I Present value of future employee contributions 9,100 17,000
Present value of future City contributions
(unfunded liability) $836,500 $1,944,400
IPresent value of future salaries $302,600 $ 565,000
Present value of future City contributions
Idivided by present value of future salaries 276.44% 344.14%
Total salaries of employees under assumed
Iretirement age $ 63,400 $ 95,300
Current contribution requirement $175,300 $ 328,000
I - 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
Iwould 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.
I 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 :
IAmortization Policemen's Firemen's
period System System Total
20 years $ 86,500 $222,300 $308,800
' 10 years 52,600 135,200 187,800
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.
IKP&F For All Current Employees
IWe 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
I that the City amortizes its liabilities over a period of 40 years. The results
of these calculations are shown below:
I
Percent of I
Amount payroll
I I
Police $128,000 29.1% I
I
Firemen 152,500 30.2
ITotal $280,500 29.7
I
- 13 -
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 :
' Policemen's Firemen's
' System System
Present value of benefits
' for pensioners and
beneficiaries $296,300 $1,020,600
' Assets 48,400 44,000
Unfunded liability $247,900 $ 976,600
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
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.
1
1
' - 14 -
i
MARTIN F. SEGAL COMPANY
' CONsuurAN'1'S AND ACTUARIES
730 FIFTH AVENUE • NEW YORK. N. Y. 10019 • 12121 586-5600
I . .
ATLANTA
S OS TON
' CHICAGO
April 25, 1973
AND
DALLAS
DENVER
• HARTFORD
HOUSTON
I LOS ANGELES• NEW ORLEANS
PHOENIX
SAN FRANCISCO
SAN JUAN
WASHINGTON,D.C.
IKansas Police and Firemen's Retirement System
Actuarial Certification as of January 1, 1973
I 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 I
Data on employees electing coverage �
I
Police Fire Total'
I
i
I Number 47 55 . 102 I
1
Average age 321 3z 312
I • Average service 6 61 61 1
Annual payroll $357,900 $380,200 $738,100 F
IEmployer cost factors I
Police Fire Total
INormal cost I
I
I Amount $ 52,200 $ 55,500 $107,700 j
I
Percent of payroll 14.6% 14.6% 14.6%
IAccrued liability $ 737,700 $ 727,700 $1,465,400 I
I
I .
I
- 2 -
II
' Employer contribution for 1974 due January 1
I
Police Fire Total
IPercent Percent Percent
Amortization of of of
Iperiod 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
I
II Yours truly
i 2:8144-141
II Vice President and I
Associate Actuary
I
I
I MLA
•
1
II I
1
I 1
I
1
I
I
I
1
1
MARTIN E. SEGAL COMPANY
CONSULT'. NTS 1\I) ACTUARIES
730 FIFTH AVENUE • NEW YORK, N. Y. 10019 • (212) 586-5600
April 25, 1973 ATLANTA
' CHIOSCAN
A
CLEVELAND
DALLAS
DENVER
HARTFORD
'
LOS ANGELES
KANSAS POLICE AND FIREMEN'S RETIREMENT SYSTEM PHOENIX
SAN FRANCISCO
FRANCISCO
APPENDIX A SAN JUAN
' Employer: City 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 coverediby 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.
2
' 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.
1
1
1