The Firemens Annuity and Benefit Fund of Chicago (the Fund) N AV I G AT I N G T H E L E G A L I S S U E S SURROUNDING FUNDING BURKE BURNS & PINELLI, LT D . SEPTEMBER, 2017 Speaker: Mary Pat Burns, Partner Ms. Burns is the President and Founding Partner of Burke Burns & Pinelli, Ltd. Prior to forming Burke Burns & Pinelli, Ltd., Ms. Burns was a partner in the firm of Burke & Smith Chartered and prior to that clerked for the Honorable James C. Murray, Chief Judge of the Chancery Court in the Circuit Court of Cook County, Illinois. Ms. Burns' practice concentrates in governmental affairs, complex financial and real estate transactions, as well as complex civil litigation. Ms. Burns provides general counsel legal services, fiduciary counseling and investmentrelated counseling to various State of Illinois, County of Cook and City of Chicago multibillion dollar pension funds and their trustees. Ms. Burns has also rendered legal counseling and legal opinions in sophisticated financial transactions, municipal bond transactions and conduit financings in amounts in excess of a hundred billion dollars, variously as bond
counsel, underwriter's counsel, bank counsel, issuer's counsel and borrower's counsel. Ms. Burns also conducts civil litigation matters in both state and federal courts at the trial and appellate levels. Subject matters and issues litigated by Ms. Burns include, without limitation, civil RICO claims, civil rights claims, employment and labor disputes, fiduciary duty disputes, directors and officers liabilities, lender liability claims, real estate disputes, accountancy liabilities and anti-trust claims. Education Loyola University of Chicago (J.D. 1981). University of Notre Dame (B.A. 1978). Service Judge, Illinois Court of Claims (2009-present). Admissions The State Bar of Illinois; United States District Court for the Northern District of Illinois (Trial Bar); United States District Court for the Central District of Illinois (Trial Bar); United States Court of Appeals for the Seventh Circuit; and the United States Court of Appeals for the Eleventh Circuit. Professional Memberships The Chicago Bar Association; The Seventh Circuit Bar Association; and the National Association of Bond Lawyers. Government Speaker: Sarah Boeckman, Associate Practice Areas
Ms. Boeckman focuses her practice on litigation and transactional matters, mainly in the areas of governmental affairs, municipal law, and corporate law. She counsels both public and private sector clients on a wide variety of matters, including regulatory and compliance issues, real estate purchases and sales, leases, procurements and licensing. Ms. Boeckman also works extensively with the Firm's municipal clients and governmental pension funds. Education University of Wisconsin (J.D. 2012). University of Michigan, Ann Arbor (B.A. 2009). Legal Experience Ms. Boeckman is an Associate in both the Firm's transactional and litigation practice groups. Prior to joining the Firm, she spent four years with Attorneys' Title Guaranty Fund, Inc., where she worked on corporate matters, real estate and title issues, governmental and regulatory affairs, and constituent marketing and support. She also served as a law clerk on the Illinois Court of Claims. Admissions State Bar of Illinois, State Bar of Wisconsin. Professional
Memberships Illinois State Bar Association, Young Lawyers Division; Chicago Bar Association. Statutory Funding Prior to 2010: The Multiplier Historically, the City of Chicagos required funding level to the Fund was based on a multiplier of what employees contributed two years prior. The Funds multiplier was 2.26. That meant that the City contributed 2.26 times the amount of employee payroll deductions made two years prior to the Fund. Multiplier contributions do not adjust according to the actual cost of providing benefits. Public Act 96-1495: ARC Funding In December 2010, Governor Quinn signed into legislation Public Act 96- 1495. Public Act 96-1495 created a new tier of pension benefits for public safety employees in Illinois hired on or after January 1, 2011. Public Act 96-1495 also significantly changed the employer contributions required by the City of Chicago.
The statutory funding schedule under Public Act 96-1495 required the City beginning in 2015 to annually levy a tax upon all the taxable property in an amount when extended that will produce an annual amount equal to: (1) the normal cost of the Fund, plus (2) an amount sufficient to bring the total assets of the pension fund up to 90% of the total actuarial liabilities of the pension fund by the end of fiscal year 2040. This actuarially required contribution is often referred to as ARC Funding. Senate Bill 777: The Ramp to ARC Funding Before the ARC Funding obligation under Public Act 96-1495 was required by the City, the Senate introduced Senate Bill 777 which was was signed into law on May 31, 2016. Senate Bill 777 defers certain City of Chicago pension obligations and puts the City on a longer funding plan with a five-year schedule of steadily increasing static payments (often referred to as the Ramp). The Five Year Ramp period includes static amounts the City must contribute to the Fund between FY2016 and FY2020. FY 2016: $199,000,000 FY 2017: $208,000,000 FY 2018: $227,000,000 FY 2019: $235,000,000 FY2020: $245,000,000
Senate Bill 777 Cont. In FY2021, the City must contribute an amount that is actuarially calculated in order to have the Fund be 90% funded by 2055 (pushing back the requirement to be 90% funded from 2040). SB 777 also provides that any proceeds received from a new casino in Chicago would go toward the Citys payment of its Police and Fire pension fund obligations. Other provisions clarified that the Fund can bring a mandamus action in Cook County Circuit Court to compel the Citys payment of its pension obligations. Because the Citys contributions in FY2016-FY2020 are laid out in statute, the contributions from the City will NOT adjust should the funding needs of the Fund change due to lower than expected investment returns, changes in actuarial assumptions or other deviations from actuarial expectations (such as any additional, unfunded benefits). Comparing the Revisions to Section 6164 of the Illinois Pension Code Public Act 96-1495 Beginning in 2015, the city council shall levy a tax annually at a rate on the dollar of the assessed valuation of all taxable property that will produce when extended an annual amount that is equal to (1) the normal cost to the
Fund, plus (2) an annual amount sufficient to bring the total assets of the Fund up to 90% of the total actuarial liabilities of the Fund by the end of fiscal year 2040, as annually updated and determined by an enrolled actuary employed by the Illinois Department of Insurance or by an enrolled actuary retained by the Fund or the city. Senate Bill 777 Beginning in tax levy year 2015, the city council shall levy a tax annually at a rate on the dollar of the assessed valuation of all taxable property that will produce when extended an annual amount that is equal to no less than the amount of the citys contribution in each of the following payment years: for 2016, $199,000,000; for 2017, $208,000,000; for 2018, $227,000,000; for 2019, $235,000,000; for 2020, $245,000,000. Beginning in tax levy year 2020, the city council shall levy a tax annually at a rate on the dollar of the assessed valuation of all taxable property that will produce when extended an amount that is equal to no less than (1) the normal cost of the Fund, plus (2) an annual amount sufficient to bring the total assets
of the Fund up to 90% of the total actuarial liabilities of the Fund by the end of fiscal year 2055, as annually updated and determined by an enrolled actuary employed by the Illinois Department of Insurance or by an enrolled actuary retained by the Fund or the city. The Funds Funding Level Fiscal Year Percent Funded 2011 28.26% 2012 24.43% 2013 24.24% 2014
23.01% 2015 23.43% 2016 21.30% People ex rel. Sklowodski v. State, 182 Ill. 2d 220 (1998) Plaintiffs from the State pension systems sued the State and the General Assembly arguing that the State failed to comply with the funding requirements of the Illinois Pension Code. The Illinois Supreme Court confirmed that the pension protection clause of the Illinois Constitution served to eliminate any uncertainty as to whether state and local governments were obligated to pay pension benefits to the employees, and it demands that the benefits of that relationship shall not be diminished or impaired. Sklowodski further stated, however, that annuitants are NOT entitled to a particular funding mechanism and found that the Plaintiffs failed to prove that the Funds were on the verge of default or imminent bankruptcy such that benefits
are in immediate danger of being diminished. Litigation Brought by Fund Members to Compel Funding The Illinois Supreme Court most recently affirmed in In re Pension Reform Litig., 2015 IL 118585, 32 N.E. 3d 1,9, that although the specific mechanisms of funding are left to the other branches of government to work out, a direct action could be brought by pension system members to compel funding if a pension fund were on the verge of default or imminent bankruptcy. In order to prove that a pension fund is on the verge of default, the allegations must demonstrate more than only an opinion that present funding levels are insufficientto meet the accrued future obligations of the funds. The Supreme Court in In Re Pension Reform Litigation also rejected the Citys contention that funding provisions in the Pension Code are a benefit because participants only had a right to the money available in the Fund upon retirement. The Supreme Court confirmed that the Illinois Constitution mandates that members of the Fund have a legally enforceable right to receive the benefits they have been promisednot merely to receive whatever happens to remain in the Funds. Bd. of Trustees of the Harvey Firefighters Pension Fund v. City of Harvey, 2017 IL App (1st) 153074 (2017) Most recently, the City of Harveys Fire Pension Fund filed a
lawsuit against the City and its City Council stating that the City failed to comply with Section 4-118 of the Illinois Pension Code. Specifically, the Board argued that the City of Harvey must be required to adequately contribute to the Fund because the Fund is on the verge of default or imminent bankruptcy and will become insolvent without judicial intervention. Pension Fund was NOT declaring bankruptcy and participants continued to receive monthly annuities. This is the first real world case involving whether a fund is on the verge of default or imminent bankruptcy. City of Harvey Contribution Rates Source: Bd. of Trustees of City of Harvey Firefighters' Pension Fund v. City of Harvey, 2017 IL App (1st) 153074, 191 City of Harvey Contribution Rates vs. FABF Payment Year Annual Actuarial Requirement (if P.A. 1495
was law)* Actual Contribution by the City (pursuant to SB 777) Percent of Annual Actuarial Requirement Contributed* 2016 $246,132,000 $199,000,000 80.85% 2017 $284,086,000 $208,000,000
*Estimates provided by the Funds actuary that may be subject to revision Harvey cont. According to the most recent actuarial valuation, the Pension Fund was only 27.18% funded as of May 1, 2014 and the Pension Funds unfunded accrued liability has increased to nearly $30 million. The City of Harvey contributed less than 10% of the annual actuarial requirement six out of the last nine years. Expert testimony during trial stated that the Pension Fund had approximately 5 years before it would be completely insolvent. Court found that the Pension Fund was on the verge of default, which establishes a valid constitutional right to funding, based on: Precarious financial position of the Pension Fund based on multiple experts in relevant fields; The constant declarations by the City of Harvey that it has not contributed to the Pension Funds poor financial condition; and The continued lack of financial responsibility shown by the City over a significant period of time. Harvey cont. The Appellate Court affirmed the trial courts ruling that the City of Harvey violated Article 4 of the Pension Code and assessed damages against the City for $15,071,089.15. The Appellate Court also affirmed the trial courts issuance of an injunction requiring the City to approve a line-item
property tax levy specifically for the Pension Fund, which would be sufficient to meet the annual actuarial requirements set forth in Article 4 of the Pension Code. The Appellate Court found that the Pension Fund was on the verge of default and imminent bankruptcy. Harvey has set up a collision course over a period of many years where the beneficiaries of their firefighters Pension Fund are being paid substantially out of money that the firefighters have themselves contributed to the Pension Fund and the money the Pension Fund earns from investments, causing an ever increasing dissipation of the Pension Funds assets, which will result in the fund having no assets to pay its beneficiaries or fulfill its obligations under the fund. In essence, Harvey is robbing Peter to pay Paul, but what happens when Peter retires? Questions/Concluding Remarks What can you do? Monitor pending legislation.
Contact your legislative leaders to remind them of the importance of ARC Funding. Be wary of increased benefits, especially during the Ramp period, that fail to be simultaneously funded. Utilize Pension Fund educational and newsletter materials that discuss funding levels. Firemens Annuity and Benefit Fund of Chicago December 31, 2016 Actuarial Valuation Results September 16, 2017 Copyright 2017 GRS All rights reserved. Speaker: Alex Rivera, FSA, EA, MAA Alex Rivera is a Senior Consultant in GRS Chicago, Illinois office. He has more than 25 years of actuarial and employee benefits consulting experience with public sector and corporate retirement programs. Alexs clients are located in California, Illinois, Iowa, Maryland, Minnesota, Missouri, West Virginia, and Wisconsin.
Alexs experience focuses on the design and financing of defined benefit and defined contribution retirement programs. He has particular expertise working for financially distressed public pension plans which involves plan redesign, funding policy strategies, asset/liability and projection studies, and compliance with state statutes. In addition, Alex has many years of experience with the valuation and operation of supplemental pension plans. He also advises on the pre-funding and accounting impact of retiree health care benefits and provides actuarial services to 529 pre-paid tuition plans. Professional Designations: Presentations Fellow, Society of Actuaries Enrolled Actuary Fellow, Conference of Consulting Actuaries Member, American Academy of Actuaries Alex has spoken at various conferences held by professional organizations, including the Society of Actuaries, Conference of Consulting Actuaries, and Enrolled Actuaries meetings.
Education Bachelor of Science, Mathematics, University of Illinois, Chicago 22 Actuarial Valuation An actuarial valuation generally provides: A comparison of Actuarial Liabilities to Plan Assets Statutory contributions requirements, if based on actuarial formulas Information for Plan accounting History of the Plans funding progress Projection of Plans funded status and contribution requirements 23 Sound Funding Policy An actuarially sound funding policy generally finances Plan benefits based on: An amortization of the unfunded actuarial liability over a reasonable
period, such as the expected working period of a typical new member For example, a member enters the Plan at age 27 and retires at age 57 The value of benefits earned during the year, also known as the normal cost A sound funding policy also considers how benefit improvements are financed: Are benefit improvements provided to active members and retired members? If benefit improvements are provided to retired members, it is preferable to finance improvements over the life expectancy of the retired member Match contributions with pattern of benefits 24 Sound Funding Policy (contd) A sound funding policy also includes a provision for positive and negative Plan experience: If Plan assets earn less than expected, contributions are increased If members retire sooner than expected, contributions are increased If retirees live longer than expected, contributions are increased Finally, a sound funding policy finances a greater proportion of benefits with investment income. 25
Recent Plan Changes Key provisions of PA 99-0506 and PA 99-0905 include: Changed the Citys contribution policy to: Fixed contributions of $199 million for payment year 2016 increasing to $245 million for payment year 2020 After 2020, level percent of pay contributions that produce 90% funding of Plan liabilities at 2055 After 2020, level percent equals contribution rate of 64.6% or $340 million for payment year 2021 Extended 3.00% COLA increased to members born after 1954 and before 1966 Increased the minimum benefit for certain annuitants and widows to 125% of the Federal Poverty Level 26 Key Valuation Results Key actuarial valuation results as of December 31, 2016: Actuarial accrued liability of $5.046 billion
Actuarial value of assets of $1.075 billion Unfunded actuarial liability of $3.971 billion Funded ratio of 21% City contribution for 2017 of $227 million Actuarially determined contribution for 2017 of $337 million 27 Projection Results 1,400 Contributions and Benefit Payments 1,200 Investment Income Member Contribution 1,000 City Contribution Benefits $ in Millions 800 600
2031 2034 2037 2040 2043 2046 2049 2052 2055 Actuarial Valuation Year 30 Disclaimers This presentation is intended to be used in conjunction with the funding actuarial valuation report issued on June 9, 2017. This presentation
should not be relied on for any purpose other than the purpose described in the valuation reports. This presentation shall not be construed to provide tax advice, legal advice or investment advice. The actuary submitting this presentation, Alex Rivera, is a Member of the American Academy of Actuaries and meets the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein. 31 September 16, 2017 Firemens Annuity and Benefit Fund of Chicago Callan Presentation to the Pension Funding Seminar Brady OConnell, CFA, CAIA Senior Vice President, Callan
Speaker: Brady OConnell, Senior Vice President Brady O'Connell, CFA, CAIA, is a Senior Vice President in Callan's Chicago Fund Sponsor Consulting office. Brady has consulted with a variety of fund sponsor clients including corporate and public defined benefit plans, defined contribution plans, and endowments and foundations. He is a member of Callan's Client Policy Review and Alternatives Review Committees. Brady has 20 years of investment consulting experience. Prior to joining Callan, Brady was a partner with Aon Hewitt where he worked with a broad range of institutional investors. During his 18 years at Ennis, Knupp + Associates and subsequently, Aon Hewitt, Brady held a number of different roles, including leading public market manager research as well as managing a team of consulting professionals. Brady received his MBA in Finance and Marketing from Northwestern University's Kellogg School of Management. He earned a BBA in Finance from the University of Michigan in Ann Arbor. He has earned the right to use the Chartered Financial Analyst and CAIA designations. He is also a member of the CFA Society of Chicago and CFA Institute. Knowledge. Experience. Integrity. Firemens Annuity and Benefit Fund of Chicago Pension Funding Seminar 33 Who is Callan? FABF Investment Consultant Independent &
Focused Established in 1973 100% employee owned; 82 current owner-employees Experienced 394 Fund Sponsor clients representing over $2 trillion in assets Over 140 public sector clients Fully Resourced Over 180 employees; 65 advanced degrees Credentialed: 47 CFA/CAIA Charterholders Knowledge. Experience. Integrity. Firemens Annuity and Benefit Fund of Chicago Pension Funding Seminar 34 What Does Callan Do? Investment Advice to Board of Trustees Callan recently conducted a detailed review of investment strategy, which concluded:
1. 2. The long-term success of the Fund is highly dependent on the employer making the agreed upon contributions. Investment returns, while important, do not have as significant an impact on funded status since liabilities are five times larger than assets. Target Asset Allocation Domestic Equity 40% Cash Equivalents 4% Alternative Investments 8% International Equity 25% Real Estate 2%
Fixed Income 21% Knowledge. Experience. Integrity. Firemens Annuity and Benefit Fund of Chicago Pension Funding Seminar 35 FABF Results Investment Returns Measured Against Target and Peers Returns have been strong during past five years. CAI Public Fund Sponsor - Mid (100M-1B) 18% 16% (9) 14% (29) 12% (14) 10% (46)
10th Percentile 25th Percentile Median 75th Percentile 90th Percentile Knowledge. Experience. Integrity. Firemens Annuity and Benefit Fund of Chicago Pension Funding Seminar 36 Importance of Employer Contributions Expected Employer Contributions as a % of Pay 65% 60% 55% 50% 45%
40% 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Expected employer contributions rise from 43% of pay in 2017 to 63% in 2021 when fixed employer contributions under PA 99-0506 expire. Knowledge. Experience. Integrity. Firemens Annuity and Benefit Fund of Chicago
Pension Funding Seminar 37 Investment Summary The path to sound long-term funding for the FABF is through steady and increasing employer contributions over a long period of time. Investment strategy alone is unlikely to solve the underfunding. Recent investment results have been strong. Investment performance will be critical in providing time for the higher employer contribution rates to kick in. Cash outflows, while presenting near-term challenges, do not preclude illiquid investments over the long term (which produce higher investment returns). The Funds ability to make certain investments has not yet been compromised by funded status. Knowledge. Experience. Integrity. Firemens Annuity and Benefit Fund of Chicago Pension Funding Seminar 38
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