View the May 12, 2016, program presented by IMRF Executive Director Louis Kosiba and CFO Mark Nannini.
2016 Rate Meeting Webinar Resources
On Thursday, May 12, IMRF concluded its 2016 Employer Rate Meeting series with the Employer Rate Meeting webinar.
Louis W. Kosiba, Executive Director, and Mark Nannini, Chief Financial Officer, provided an in-depth review of the impact of year-end financial and actuarial data on IMRF, and the data's estimated impact on individual IMRF employers. During the presentation, attendees were invited to submit real-time questions, which were addressed before the conclusion of the program.
This recap of the Employer Rate Meeting webinar includes a link to view the webinar program in its entirety, a link to download the presentation's slides, attendee comments, and a transcript of the questions posed during the program, with detailed answers.
- "This was a smooth and engaging presentation."
- "Keep having webinars. They are very beneficial."
- "This is a great way to participate in the Employer Rate Meeting and share among decision-makers."
Question and Answer Presentation
Q.: Does IMRF use a specific published mortality table or do you use internally generated mortality statistics?
A.: MN (Mark Nannini) – We use a mortality table called RP 2014, which is a standard. That is reflected in our CAFR as well as in our Evaluation Report.
LK (Louis W. Kosiba) – Also, in talking with our actuaries, they will customize the mortality table to reflect what is happening at IMRF.
Q.: Please provide an explanation why IMRF only returned .44% last year. Who makes the investment decisions?
A.: LK – Some of the key sectors we’re in performed less than others. For example, we have a bent toward small cap stocks. We’re also in international equities that did not necessarily perform as well as our average benchmark. We also had individual managers that did not perform well. IMRF’s Investment Staff tries to understand the issue. We will work with a manager through a market cycle. For example, if you have a value-oriented manager and value did not do well, but growth stocks did do well, you want to see how that manager is doing and whether or not they can recover. Frequently they do. We do have firms that are placed on a watch list for several different reasons. One reason could be poor returns; another reason could be because there were dramatic changes at an investment management firm. If there’s been a major change, we will monitor that firm. We do terminate firms – some for poor performance, but also because some of the key personnel may have left.
Q.: Our GASB 50 and GASB 68 funded status is very different. Is that only because of the annuitant/retiree pool being included in the GASB 68 calculation?
A.: MN - Under GASB 50, the annuitants are not part of the calculation for the Total Funded Status. GASB 68 does allow for annuitants to be included in that calculation. That’s what makes them so distinctly different.
LK – One good thing about GASB 68 is that it has leveled the playing field with cities and villages that have local police and fire pension funds. Previously, when you looked at the funding status of those funds, it always included employer contributions, employee contributions, and the monies set aside for retirees. In the past, we would only look at a portion of the city’s assets to compare them to police and fire. We were only looking at the member contributions and the employer contributions. With GASB 68, we’re now including those retiree contributions so you will see a more favorable funding status for cities and villages when you compare IMRF to those local funds.
Q.: Are individual employers charged for shortfalls in investment earnings (when less than 7.5%) for employees who are guaranteed to earn a 7.5% return on their Voluntary Additional Contributions to IMRF? Does employee participation in the program impact individual Employer Contribution Rates?
A.: MN – Yes. If the 7.5 % target is not met, the employer accounts are basically the balancing account for that equation. The Voluntary Additional Contributions to IMRF are guaranteed by the Pension Statute to earn 7.5%. That’s part of the balancing process and there is a residual impact to the employers, as a whole, and to their reserves.
LK – In order to fund the Voluntary Additional Contributions accounts, IMRF will take that out of investment returns before we have any distributions that go to the Employer Reserves.
Q.: If it's true our retiree's reserve accounts are fully funded and we are never charged more, why were we charged $85,000 in interest on our ECO account when we had fully funded all retirees? We were told it was because of poor market performance, but I cannot reconcile that with the idea that once we are charged upon retirement, we are not charged again.
A.: MN – We’d have to look at this specifically but typically to have such an impact in an ECO account, something transpired in the past year – either a new retiree or someone who retired under another employer – that may have caused that charge. We’d have to look into this situation closer.
LK – Once a person retires, there is no direct cost to the employer for that retiree. In the nature of the defined benefit plan and in the nature of the three reserve accounts, we always have to make sure the Employee Reserve and the Annuitant Reserve are 100% funded. So when we do earn less than 7.5%, as is the case this year, what we need to do is take monies from the reserve account to make sure everything else is fully funded. So in that sense – and I’d call it an indirect cost – that may happen. Similarly, in the good years like 2013, the Employee and the Employer Reserve Accounts only received 7.5%. All the extra earnings were placed into the Employer Reserve Account.
The best way to think of this is there are never any excess earnings. Any earnings above the assumption are always due and payable to the employer so when a bad year comes along, the employer is in a better position to cushion that charge.
Q.: If the governor's agenda item of reducing local units of government comes to fruition, how would that impact remaining employer rates? For sake of the question, let's say 10% of IMRF employers go away. What is the impact?
A.: MN – While we currently have some types of those situations going on now – they’re called dissolutions where either special instrumentalities merged or are acquired by another unit of government – those liabilities transfer to whoever acquires that unit of government. The liability does not go away; it rolls into the acquiring unit of government.
Q.: Can the State of Illinois get a hold of IMRF funds?
A.: MN – IMRF is separate from the State of Illinois. We are not part of their budget process; we are covered under a separate section of the Illinois Pension Statutes.
LK – We have separate accounting, we’re not funded by the state. The state would have to pass an amendment to the Illinois Pension Code to access our funds. That’s not very likely. If the state got the assets, they’d also get the liabilities, so that would continue to exist.
Also, there’s a misnomer out there that the state took monies away from the state-funded pension system. The state never borrowed or took money away from the state pension system; it failed to pay the actuarially required contribution and they’ve done that for a very long time.
Q.: Why doesn't IMRF decrease the investment rate assumption? What would the impact be to employers if the investment rate assumption was lowered?
A.: MN – If the investment interest rate assumptions were lowered, the contribution rates would go up. For ever quarter percent, the contribution rates would go up quite significantly. It’s easy to say we can reduce the rate, but the impact to each of our 2,972 employers could be quite significant.
LK – I read a study from our independent actuaries, Gabriel, Roeder, Smith & Company, and they estimated that if our assumptions went down by one-quarter to one-half percent, the investment interest rate assumptions would go up by one-and-one-half percent. So if your current Employer Contribution Rate and IMRF reduced its assumptions to 7-1/4%, your new rate would be 11.5%. Then the question would be, why it is going up so much. One reason would be because all those annuitant liabilities – and we have approximately $19 million in the Retiree Reserve Account. We’d assume we’d make 7.5% for that group. Now we’re saying we can only make 7.25%. So there would be hundreds of millions of dollars that would have to go from the Employer Reserve to the Annuitant Reserve to make sure we are still 100% funded.
Q.: We took advantage of lower phase-in rates earlier this decade. When will those resulting liabilities be fully paid off? Will that be corrected by GASB 68?
A.: MN – The phase-in will not be corrected by GASB 68. I think there’s a misnomer: the resulting liability will never be fully paid off because every year, you will incur additional liability for another year of service. In theory, yes, at some time it can be 100% funded or even above that, but each year you will incur another liability or a portion of that liability which will impact the funding level going forward.
LK – Because you made fewer contributions over a 4- or 5-year period, your unfunded liability grew and we’re currently amortizing that over 26 years. In theory, the additional liabilities for failing to make the full actuarial liability contribution should be paid over 26 years. At the same time, you are correct. With each new year of service credit, there is an additional year of liability. For each year, you’re paying that off as it comes due with the normal contribution rate. We’d still have the unfunded liability that is being amortized over that period of time.
Q: Where can we find our estimated 2017 employer rate?
A.: MN – That is part of the Preliminary Rate Notice we discussed in the presentation. You can look on your Employer Portal if you do not have that readily available.
Q.: How does the Net Pension Obligation Balance show in the employer rate?
A.: MN – The Net Pension Obligation Balance is the difference between your actuarial assets and actuarial liability. That unfunded difference works into the rate calculation that would actually increase your rate going forward to help achieve the 100% funding level we’re always striving for.
Q.: Does IMRF retain investment advisory firms? Who are they and what percent of total assets does each manage?
A.: LK – Yes. We have an investment advisory firm – Callan Associates Inc. – that works for our Board of Trustees and with our Investment Staff. We do not invest any money internally. Working together, Callan, the Investment Staff, and the Board will select investment managers. For example, we have been looking to allocate more money to real estate over the past few years. The target allocation is 9% and we’re not quite there yet, so the consultant and the staff will identify areas where we may put more money in, and they will go out and do an RFP [Request for Proposal] to solicit information from real estate firms. They will investigate those firms and do due diligence, then make a recommendation to the Board on whether or not to hire the firm. Not only are all these parties involved in hiring investment firms, they’re continuously monitoring those firms. If a firm is not performing as expected over a market cycle, our staff and consultants may recommend terminating them.
Q.: [The IMET, Illinois Metropolitan Investment Fund, invests public money on behalf of municipalities, pension funds, and local government boards.] Was IMRF affected by the IMET fraud?
A.: MN – No. IMRF was not invested in IMET and was not affected by that situation.
Q.: Is the employer charged 7.5% on the unfunded liabilities balance?
A.: MN – Yes, the unfunded liability balance is charged 7.5%. That’s an additional cost of not being fully funded. That occurs on an annual basis as of December 31st.
LK – We’re trying to achieve 100% funding, which means that for every dollar in liabilities a unit of government has, they will have a dollar in assets. When the actuaries develop Employer Contribution Rates, they’re trying to partially make-up for the monies that are not in that account, that is, make-up for the lost opportunity because the full funding was not there.
MN – We always advise employers that if you can fit it into your budget process, make additional contributions to reduce your future liability. It is intergenerational funding. The current generation is paying for their liability and not burdening future generations to pay those imputed liabilities.
Q.: On the Reserve Statement, under Member Information, how are those past employees determined? Not all of ours are listed.
A.: LK – The Reserve Statement will list the people who retired during a calendar year. What we are telling you on the Reserve Statement is someone retired last year and your employer was charged, which would come from your employer’s reserve. We have compensation and participation records that will show the employee worked for your employer and, given the present value of the cost of their pension, we’ve determined how much is attributable to your unit of government.
One thing that may be confusing is if someone worked 20 or 25 years ago and no one remembers them, and someone thinks they’ve made a mistake. If you feel you’ve made a mistake, always feel free to contact IMRF. We can confirm when the person worked for your unit of government. At the same time, you may have some people who worked for your unit of government but are no longer working there. You may think they’ve retired, yet they’re not showing up on your Reserve Statement. In this case, they may not have retired; they may have gone to work for another unit of government. When they eventually retire, they’re going to appear on the Reserve Statement.
Q.: With a poor investment return and an employee survivor annuity cost at retirement, the unfunded liability can increase by a substantial amount fast!
A.: MN – The most recent investment returns can have an impact on the actuarial side. We are doing the smoothing so there is not as much of an impact to the rate. When we don’t meet our 7.5% return, as we continuously strive to do, there will be some impact.