General Memorandum 598

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Executive Summary

Each employer's "Preliminary Notice of Illinois Municipal Retirement Fund Contribution Rate for Calendar Year 2011" will be available the week of April 5, 2010.

• The notice shows the actuarial required contribution rate, or "ARC," for 2011 for each employer plan as well as the optional phase-in plan rate, if applicable. Out of the 3,008 employers in the Regular plan, 58% will not be offered a phase-in rate since their ARC is lower than the phase-in rate.
  
  
• The higher ARC rate was calculated by IMRF's actuaries and reflects the recovery of your employer's actuarial accrued unfunded liability.
  
  
• The lower rate, the optional phase-in contribution rate, is based upon the IMRF Board of Trustees' phase-in plan.
  
  
• Beginning in 2010, employers who choose to contribute less than the ARC will be required to record a net pension obligation (NPO) on their books for the difference between what they actually contributed and what would have been contributed using the ARC.

  To help employers determine their NPO, IMRF developed an Excel spreadsheet which will assist you in doing the calculation. Please right click on the following link to download the spreadsheet.

Spreadsheet to calculate the Net Pension Obligation

• Employers have until August 31, 2010, to select their 2011 contribution rate. Please advise IMRF in writing (fax 630-368-5398, email coreylockwood@imrf.org, or U.S. Postal mail) of your selection.
  
  If IMRF does not receive a written response from an employer by August 31, 2010, we will assume the employer has selected the optional phase-in rate.
  
  
• While the phase-in rate is lower and results in lower contributions currently, it does result in higher contributions over the long term due to the additional carrying costs on the resulting higher unfunded liability. IMRF encourages employers who have the financial capability to contribute at the higher level.
  
  
• If an employer is concerned with its ability to sustain a commitment to a higher contribution level, it could select the lower phase-in rate for 2011 and make additional voluntary contributions to reduce its unfunded liability. This would allow the employer to reduce its long term pension costs while maintaining maximum flexibility to manage its contribution rate in future years.
  
  
• If an employer wishes to contribute an amount above the optional phase-in rate in connection with the normal monthly wage reporting process, contact IMRF.
  
  
• Employers should carefully consider their selection of their 2011 contribution rate since the rate selected for 2011 will impact the choices that will be available in 2012.

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• Preliminary 2011 Rate Notice
• Options Available for 2011 Employer Contribution Rates
  • Choice letters: Employers that are more than 120% funded
  • Lump sum payments
• Recording Net Pension Obligation
• Impact of 2011 Choices on 2012 and Beyond
• IMRF’s Annual Review of the Optional Phase-in Plan
• Questions
• Exhibit: Making additional contributions using IMRF’s Electronic Funds Transfer System
• Excel Spreadsheet: Determining your Net Pension Obligation

Preliminary 2011 Rate Notice
We advised you that your employer’s “Preliminary Notice of Illinois Municipal Retirement Fund Contribution Rate for Calendar Year 2011” was available. This notice provided two rates for each IMRF plan your employer offers, e.g. Regular, Sheriff’s Law Enforcement Personnel (“SLEP”) or Elected County Official (“ECO”) plans, if applicable:

• The higher rate, the annual required contribution or “ARC,” was calculated by IMRF’s actuaries and reflects the recovery of your employer’s actuarial accrued unfunded liability (“Funding Adjustment”) over 30 years for employers who can levy property taxes and over 10 years for employers who cannot.
• The lower rate, the optional phase-in contribution rate, is based upon the IMRF Board of Trustees’ decision.
  
  
  • If you were not offered an optional phase-in rate
    If an employer was not offered an optional phase-in contribution rate for one of its plans, that means that the employer’s ARC rate for that plan was lower than the optional phase-in rate. Out of the 3,008 employers in the Regular plan, 58% were not offered a phase-in rate since their ARC was lower than the phase-in rate.
    
    
  • If your rate includes ERI or SLEP enhancement
    For most employers, the optional phase-in plan contribution rate will be 10% higher than their 2010 contribution rate. Employers who have an Early Retirement Incentive (ERI) or SLEP Enhancement component of their contribution rate may have an increase more or less than 10% because ERI and SLEP Enhancement costs are based on a fixed liability and are not directly impacted by investment returns.
    
    
  • If you were overfunded as of 12/31/08 but underfunded as of 12/31/09
    Employers who were overfunded as of December 31, 2008, but were underfunded as of December 31, 2009, and had a 2010 employer contribution rate that was less than the full cost of the IMRF program will be required to pay—at a minimum—the full cost of pension service earned by its IMRF members in 2011. The average full cost of current service for 2011 is 8.48% for the Regular plan, 12.88% for SLEP, and 18.11% for ECO.
    
    Individual employers’ full cost of 2011 current pension service can vary from these averages. If an employer’s 2010 contribution rate was less than the full cost of current service in 2010, the employer will see their 2011 contribution rate increase to at least the full cost of current service for 2011. In all cases these employers will see at least a 10% increase in their 2011 employer contribution rate.

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Options Available for 2011 Employer Contribution Rates
Employers may select:

• The optional phase-in employer rate,

• The ARC, or

• A rate between the optional phase-in rate and the ARC.

If an employer wishes to contribute an amount above the optional phase-in rate in connection with the normal monthly wage reporting process, contact IMRF staff.

Employers have until August 31, 2010, to select their 2011 contribution rate. Please advise IMRF in writing (fax 630-368-5398, email coreylockwood@imrf.org, or U.S. Postal mail) of your selection.

If IMRF does not receive a written response from you by August 31, 2010, we will assume you have selected the optional phase-in rate. This rate will be reflected on your “Final Notice of Illinois Municipal Retirement Fund Contribution Rate for Calendar Year 2011,” which will be available in November 2010.

If you have the financial capability to select the higher ARC contribution rate, IMRF encourages you to do so since higher contributions will lower your pension costs over the long term. An employer’s actuarial accrued unfunded liability is subject to interest charges based upon IMRF’s actuarial assumed rate of return, currently 7.5%. By selecting the higher ARC rate, you will reduce your unfunded balance more quickly thus reducing the long-term carrying costs of the unfunded liability.

Choice letters: Employers that are more than 120% funded
Approximately 62 employers are more than 120% funded on a market value basis as of December 31, 2009. These employers have an additional option. They may chose a lower minimum contribution rate calculated by IMRF.

I n May, IMRF will mail these employers a “choice letter” explaining this additional option.

Lump sum payments
In addition to paying normal contributions through the monthly wage reporting process, employers can make lump sum contributions to reduce their unfunded liability.

While these contributions can be made at any time throughout the year, from the employer’s perspective it is most advantageous to make such payments in December since IMRF grants interest on beginning of the calendar year balances.

Any employers thinking of making additional payments may want to contact IMRF staff before doing so. (See Exhibit 1 of this memorandum for detailed instructions on how to make additional contributions using IMRF’s Electronic Funds Transfer system.)

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Recording net pension obligation
From a financial accounting perspective, an employer’s pension expense is based on its ARC rate. The fact that an employer is allowed to contribute something less than its ARC does not change the employer’s actual pension cost.

Beginning in 2010, employers who choose to contribute less than the ARC will be required by generally accepted governmental accounting principles to record a net pension obligation (NPO) on their books for the difference between what they actually contributed and what would have been contributed using the ARC. GASB Statement 27 “Accounting for Pensions by State and Local Governmental Employers” has a detailed example on how to account for this difference.

To help employers determine their NPO, we developed an Excel spreadsheet which will assist you in doing the calculation. Please right click on the following link to download the spreadsheet.

Spreadsheet to calculate the Net Pension Obligation

The spreadsheet includes instruction on how to use it and how to journalize the amount it calculates.

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Impact of 2011 Choices on 2012 and Beyond
IMRF believes that the optional phase-in plan placed into effect for 2010 will extend beyond 2012. At the present time, IMRF intends to offer optional phase-in rates for 2012 which will be capped at 10% in a manner similar to 2010 and 2011. Thus for most employers, the 2012 optional phase-in rate will be 10% higher than the 2011 contribution rate selected by the employer. The rate an employer selects for 2011 will impact its rate in 2012.

Assuming IMRF were to earn 7.5% on its investments in 2010, it is estimated that the average ARC for the Regular plan would increase approximately 1.7%.

As noted above, IMRF strongly encourages employers with the financial ability to contribute at the higher ARC level because it is cost beneficial. However, we realize there is a great deal of economic uncertainty at this time and employers may be reluctant to commit to higher contribution levels in 2011 in light of its impact on 2012 and later years.

If an employer is concerned with its ability to sustain a commitment to a higher contribution level, it could select the lower phase-in rate for 2011 and make additional voluntary contributions to reduce its unfunded liability. This would allow the employer to reduce its long term pension costs while maintaining maximum flexibility to manage its contribution rate in future years.

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• Exhibit: Making additional contributions using IMRF’s Electronic Funds Transfer System
  
  
• Excel Spreadsheet: Determining your Net Pension Obligation

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