REPORT TO THE CITY COUNCIL
January 29, 2015
FROM: CITY OF FRESNO RETIREMENT BOARDS
BY: Stanley McDivitt, Retirement Administrator
Retirement Office
SUBJECT
Title
Submission for informational purposes, the Comprehensive Annual Financial Reports (CAFR) regarding the financial activities of the City of Fresno Retirement Systems for the Fiscal Year ending June 30, 2014
Body
RECOMMENDATION
The Retirement Boards have reviewed and approved the attached Comprehensive Annual Financial Reports for the fiscal year ended June 30, 2014 and recommend that the City Council receive and accept the reports submitted for informational purposes.
EXECUTIVE SUMMARY
Submitted for informational purposes, the Retirement Boards are proud to submit their June 30, 2014, Comprehensive Annual Financial Reports (CAFR) to the City Council to keep the City Council informed and to provide knowledge of the Retirement Systems activities from the past fiscal year.
BACKGROUND
At the January 14, 2015 Retirement Board meeting, the Boards approved the attached Comprehensive Annual Financial Reports (CAFR) for the fiscal year ended June 30, 2014 and directed the Retirement Administrator to submit each CAFR to the City Council, Mayor and City Manager and to keep the City informed on the activities of the Retirement Systems.
The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the City of Fresno Retirement Systems for each of their Comprehensive Annual Financial Reports for the fiscal year ended June 30, 2013. In order to be awarded a Certificate of Achievement, a government must publish an easily readable and efficiently organized comprehensive annual financial report. These reports must satisfy both generally accepted accounting principles and applicable legal requirements.
The two City of Fresno Retirement Boards, which oversee the administration of the Retirement Systems and combined investments of $2.5 billion as of June 30, 2014, respectfully submit the results of their fiscal year 2014 investment earnings and the funding status of the Systems.
Information contained in the CAFR is designed to provide a complete and accurate review of the year's operations. Responsibility for both the accuracy of the data, and the completeness and fairness of the presentation, rests with the management of the Systems. For a general overview of the Systems' finances, please refer to Management's Discussion and Analysis letter in the Financial Section of the reports.
In addition to the information in the CAFR reports (Attachments No. 7 and 8), I have prepared a Summary Highlights for Fiscal Years 2014 and 2013 which provides an overview of the City's Retirement Systems (Attachment No. 1). Also attached are graphs showing the ten-year history of the city's normal contribution rates (Attachments No. 2 and 3). For a summary of major initiatives of the retirement plans, see pages iv, v and vi in the Introductory Section of the attached Financial Reports.
The Financial Reports were prepared as of June 30, 2014, and consist of six sections:
1. The Introductory Section describes the Systems' management and organizational structure, a summary of the plan provisions and a listing of the professional services providers; and
2. The Financial Section contains the general purpose financial statements of the Systems and the Independent Auditor's Opinion Letter; and
3. The Investment Section includes a letter from the Systems' investment consultant, NEPC, recapping the fiscal year investment results and activities, along with performance and asset allocation information; and
4. The Actuarial Section includes the certification letter produced by the independent actuary, The Segal Company, along with supporting schedules and information; and
5. The Statistical Section which includes trend information and graphs; and
6. The Compliance Section which includes the Independent Auditor's Internal Control Letter.
For the year ended June 30, 2014, the Boards adopted and implemented all applicable new Government Accounting Standards Board (GASB) pronouncements in the fiscal years ended June 30, 2014 and 2013, as required by each statement. GASB Statement No. 67, Financial Reporting for Defined Benefit Pension Plans and Note Disclosure for Defined Contribution Plans (replacing GASB Statement No. 25 Financial Reporting for Pension Plans and GASB Statement No. 50, Pension Disclosures). GASB Statement No. 67 addresses accounting and financial reporting requirements for pension plans requiring changes in presentation of the financial statements, notes to the financial statements, and required supplementary information. Significant changes include an actuarial calculation of total and net pension liability. It also includes comprehensive footnote disclosure regarding the pension liability, the sensitivity of the net pension liability to the discount rate, and increased investment activity disclosures. The implementation of GASB No. 67 did not significantly impact the accounting for accounts receivable and investment balances. The total pension liability, determined in accordance with GASB No. 67, is presented in Note 4 and in the Required Supplementary Information beginning on pages 49 of the Employees CAFR and page 50 of the Fire and Police CAFR. This Statement is effective for financial statements for periods beginning after June 15, 2013. This Statement had a material impact on the System's financial statements beginning with the fiscal year ended June 30, 2014, as the disclosures, required supplementary information and notes to the required supplementary information were significantly altered to comply with GASB Statement No. 67.
GASB Statement No. 68, Accounting and Financial Reporting for Pensions (revises and establishes new financial reporting requirements for most governments that provide their employees with pension benefits, replacing Statement No. 27 for Employer reporting. This Statement is effective for financial statement periods beginning after June 15, 2014 and will be implemented by the City of Fresno for its June 30, 2015 fiscal year-end.
System's Funding Status
As the two highest funded Public Retirement Systems (City of Fresno Fire and Police Retirement System 113.6% and the City of Fresno Employees Retirement System 104.6% as of June 30, 2014 on an actuarial basis and if measured on a market value of assets basis the City of Fresno Fire and Police Retirement System 124.4% and the City of Fresno Employees Retirement System 114.3%) in the State of California, the Systems have continued to achieve favorable investment returns for the Systems when compared to other institutional investors.
Retirement Board Adopted City Actuarial Rates for Fiscal Year 2016
Additionally, the Retirement Boards at their Board meeting December 10, 2014, adopted the following City Normal Pension Contribution rates for Fiscal Year 2016:
|
|
CAFR |
Current |
Adopted |
|
System |
FY 2014 |
FY 2015 |
FY 2016 |
|
Employees Retirement System |
11.01% |
11.65% |
12.04% |
|
Actual/Est. City Normal Contributions |
$11,440 |
$13,167 |
$13,613 |
|
|
|
|
|
|
Fire and Police Retirement System (Blended Tiers) |
20.19% |
20.83% |
20.14% |
|
Actual/Est. City Normal Contributions |
$18,575 |
$20,803 |
$20,108 |
Employees System
The net City contribution rate of 12.04% for the Employees System is an increase of 0.39% over the current fiscal year 2015 net rate of 11.65%. This increase is the net result of (i) a refinement in the Normal Cost rate calculation to reflect changes in the actuarial assumptions; (ii) phasing in another one-third of the impact on contributions from the 2013 changes in actuarial assumptions, and (iii) changes in membership demographics, offset somewhat by (iv) the difference between the actual and the estimated 2014/2015 plan year contributions.
The projected increase in dollars is approximately $446,000 for fiscal year 2016. The net increase in the City's and employees' cost are primarily due to the reduction in the investment return assumption from 8.00% to 7.50%. Without the three-year phase in of the reduction in the investment return assumption, the net City rate determined in the 2013 valuation would have increased 1.17%. The fiscal year 2016 contribution increase of 0.39% in the Employees System will be spread across the various Enterprise Funds, Internal Service Funds and to the General Fund.
With the final phase-in of interest rate assumption fully recognized in fiscal year 2016, contribution rates for fiscal year 2017 are likely to be increased by a minimum of $396,000.
Fire and Police System
The blended Fire and Police System rate of 20.14% for fiscal year 2016 is a decrease of 0.69% from the current fiscal year 2015 City contribution rate of 20.83% and will temporarily decrease the City's payments to the Fire and Police System by approximately $695,000.
The net decrease in the City's and employees' cost are primarily a result of (i) the difference between the actual and the estimated 2014/2015 plan year contributions after taking into account surplus available as of June 30, 2014, (ii) the contribution offset available for the 2015/2016 plan year based on a projection of the surplus from June 30, 2014 to June 30, 2015, and (iii) changes in membership demographics, offset somewhat by (iv) phasing in final one-third of the impact on contributions from the 2013 changes in actuarial assumptions.
With the final phase-in of interest rate assumption fully recognized in fiscal year 2016, contribution rates for fiscal year 2017 are likely to be increased by a minimum of $989,000.
Investment Return Information
For the fiscal year ended June 30, 2014, our investment activities returned gross of fees 17.58 percent; for the past five years our gross of fees return was 13.73 percent annualized and 7.64 percent annualized over the prior ten years as of June 30, 2014.
Due to the extreme volatility in the various economies of the world and the global financial markets over the past twenty to twenty-five years it is of utmost importance to examine the System's investment returns with a long-term view rather than a short-term focus which tends to distort the perception of how well the investments have actually performed. As an example, you cannot isolate the high returns during the Tech Bubble in the 1990's without including the Tech Bubble corrections in the early 2000's. The intermediate term (five, ten, and fifteen-year) performance rates demonstrate the extreme volatility of the markets; while the historical long-term performance rates of returns demonstrate that despite the short and intermediate term volatility the System has been able to meet or exceed its actuarial assumed rate of return of 7.50 percent over long periods. As of June 30, 2014, the System's 25-year annualized return is 9.16 percent and its 20-year annualized return is 9.19 percent (see Annual Return History - Attachment No. 4)
These investment returns have been achieved by the Boards on a risk controlled basis without the use of higher risk investment vehicles such as hedge funds and private equity.
System Membership Activity
A reconciliation of members and retiree data shows combined activity in the Retirement Systems during fiscal year 2014 resulted in a total net addition of 71 members, with Active membership increasing slightly despite the addition of 134 new members in the Employees Retirement System and 19 new members in the Fire and Police Retirement System for the one-year period ended June 30, 2014. The number of retirees has also increased modestly with the Systems' adding a total of 49 retirees for the one-year period ended June 30, 2014. See Attachments No. 5 and 6 for a ten-year history of membership.
Employees Retirement System
Reconciliation of Members/Retirees June 30, 2013 to June 30, 2014
|
Active |
Active |
Vested |
Active/ |
Retirees/ |
|
|
|
Non-DROP |
DROP |
Terminated |
Vested |
Beneficiaries |
|
|
|
Members |
Members |
Members |
Total |
Total |
|
Total |
As of June 30, 2013 |
1,528 |
311 |
245 |
2,084 |
1,708 |
|
3,792 |
New Members |
134 |
0 |
0 |
134 |
0 |
|
134 |
Terminations with Vested Rights |
(36) |
0 |
36 |
0 |
0 |
|
0 |
Contributions Refunds |
(19) |
0 |
(19) |
(38) |
0 |
|
(38) |
DROP Entry |
(74) |
74 |
0 |
0 |
0 |
|
0 |
Retirements |
(28) |
(38) |
(12) |
(78) |
78 |
|
0 |
New Disabilities |
(1) |
0 |
0 |
(1) |
1 |
|
0 |
Return to Work |
11 |
0 |
(7) |
4 |
(4) |
|
0 |
Died with or without Beneficiary |
(3) |
0 |
0 |
(3) |
(34) |
|
(37) |
As of June 30, 2014 |
1,512 |
347 |
243 |
2,102 |
1,749 |
|
3,851 |
Fire and Police Retirement System
Reconciliation of Members/Retirees June 30, 2013 to June 30, 2014
|
Active |
Active |
Vested |
Active/ |
Retirees/ |
|
|
|
Non-DROP |
DROP |
Terminated |
Vested |
Beneficiaries |
|
|
|
Members |
Members |
Members |
Total |
Total |
|
Total |
As of June 30, 2013 |
893 |
124 |
61 |
1,078 |
966 |
|
2,044 |
New Members |
19 |
0 |
0 |
19 |
0 |
|
19 |
Terminations with Vested Rights |
(13) |
0 |
13 |
0 |
0 |
|
0 |
Contributions Refunds |
(2) |
0 |
(3) |
(5) |
0 |
|
(5) |
DROP Entry |
(16) |
16 |
0 |
0 |
0 |
|
0 |
Retirements |
(1) |
(14) |
(1) |
(16) |
16 |
|
0 |
New Disabilities |
(9) |
0 |
0 |
(9) |
9 |
|
0 |
Return to Work |
1 |
0 |
(1) |
0 |
0 |
|
0 |
Died with or without Beneficiary |
0 |
0 |
0 |
0 |
(13) |
|
(13) |
As of June 30, 2014 |
872 |
126 |
69 |
1,067 |
978 |
|
2,045 |
ENVIRONMENTAL FINDINGS
N/A
LOCAL PREFERENCE
N/A]
FISCAL IMPACT
N/A
Attachments:
1. Summary Highlights for Fiscal Years 2014 and 2013.
2. Graph - City Normal Contribution Rate History - Employees Retirement System
3. Graph - City Normal Contribution Rate History - Fire and Police Retirement System
4. Graph - Systems Fiscal Year Total Fund Annual Returns
5. Graph - Active Members and Retirees - Employees Retirement System
6. Graph - Active Members and Retirees - Fire and Police Retirement System
7. Comprehensive Annual Financial Reports for the Employees Retirement System for the
years ending June 30, 2014 and 2013
8. Comprehensive Annual Financial Reports for the Fire and Police Retirement System for
the years ending June 30, 2014 and 2013