General Memo 612

Paperwork

Preliminary Notice of IMRF Contribution Rate for Calendar Year 2012

August 31, 2011

Please share this memorandum with your unit of government’s chief financial officer, other officials, and governing body members.

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Executive Summary

Each employer’s “Preliminary Notice of Illinois Municipal Retirement Fund Contribution Rate for Calendar Year 2012” will be available the week of April 4, 2011.

  • The notice shows the actuarial required contribution rate, or “ARC,” for 2012 for each employer plan as well as the optional phase-in plan rate, if applicable. Out of the 2,924 employers in the Regular plan, 74% will not be offered a phase-in rate.
  • The 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 which was adopted in 2009 in response to the significant investment losses in 2008.
  • 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 (Updated 6/2017)

  • Employers have until August 31, 2011, to select their 2012 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, 2011, 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 2012 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 2012 contribution rate since the rate selected for 2012 will impact the choices that will be available in 2013.

Preliminary 2012 Rate Notice

We advised you that your employer’s “Preliminary Notice of Illinois Municipal Retirement Fund Contribution Rate for Calendar Year 2012” 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:

Options Available for 2012 Employer Contribution Rates
Employers may select:

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, 2011, to select their 2012 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, 2011, 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 2012,” which will be available in November 2011.

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 150 employers are more than 120% funded on a market value basis as of December 31, 2010. These employers have an additional option. They may choose a lower minimum contribution rate calculated by IMRF.

In 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.)

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.

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, 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 (Updated 6/2017)

Impact of 2012 Choices on 2013 and Beyond
IMRF believes that the optional phase-in plan placed into effect for 2010 will extend beyond 2013. At the present time, IMRF intends to offer optional phase-in rates for 2013 which will be capped at 10% in a manner similar to 2010, 2011 and 2012. Thus for most employers, the 2013 optional phase-in rate will be 10% higher than the 2012 contribution rate selected by the employer. The rate an employer selects for 2012 will impact its rate in 2013.

Assuming IMRF were to earn 7.5% on its investments in 2011, it is estimated that the average ARC for the Regular plan for 2013 would decrease approximately 2.3%. 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 2012 in light of its impact on 2013 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 2012 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.

IMRF’s Annual Review of the Optional Phase-in Plan
When the IMRF Board adopted the optional phase-in plan at its February 27, 2009, meeting, it retained the right to review the phase-in plan annually and to modify it based on future investment returns and other relevant factors.

At this time, IMRF believes that the phase-in plan will not be modified for 2013 rate contribution purposes. If the IMRF Board believes that the plan will have to be modified for 2013 rates, IMRF will promptly communicate that information to employers. Since the current plan calls for increasing an employer’s contribution rate 10% a year until the rate reaches the ARC, the current phase-in plan has a built-in sunset provision.

Questions?
If you have any questions regarding the information presented in this memorandum, please call or e-mail IMRF Employer Relations Audit Supervisor Audrey Brown-Ryce at (630) 706-4246 or arbrown-ryce@imrf.org or IMRF Employer Account Analyst Analyst Corey Lockwood at (630) 706-4226 or coreylockwood@imrf.org.