Comprehensive Financial Plan for Pension Obligation Bonds. Prepared by Raymond Perkins, Director of Finance. July 2013

Transcription

1 Comprehensive Financial Plan for Pension Obligation Bonds Prepared by Raymond Perkins, Director of Finance July 2013

2 Comprehensive Financial Plan 3-8 Exhibit A 2013 Defined Benefit Plan Actuarial Report 9-32 Exhibit B Pension Obligation Bond Analysis January Exhibit C Pension Obligation Bond Analysis May Exhibit D Other Post-Employment Benefits Actuarial Report January 1, Exhibit E Schedule of Anticipated Debt Service Requirement 97-98

3 3 of 98 CHARTER TOWNSHIP OF BLOOMFIELD COMPREHENSIVE FINANCIAL PLAN This plan is being prepared pursuant to Act 329, Public Acts of Michigan, 2012 ( Act 329 ). As a result of the passage of Act 329 in October of 2012, Bloomfield Township has determined to issue bonds to finance the unfunded pension liability of the Township s defined benefit pension plan. The Township does qualify to issue such bonds as the Township has been issued a AAA credit rating from Standard and Poor s as recently as April of 2013, the Township closed the defined benefit pension plan to new hires in 2005 and the Township has implemented a defined contribution plan for all new hires since Act 329 requires the Township to prepare and make public a comprehensive financial plan that includes, among other things, an analysis of each retirement program and each post-employment health care benefit program of the Township. Bloomfield Township has four such plans: a defined benefit pension plan for employees hired prior to 2005, a defined contribution pension plan for employees hired after 2005, a retiree health care plan for employees hired prior to May of 2011 and finally a retiree health care savings plan for employees hired after May of This plan will focus most heavily on the defined benefit pension plan as that plan stands to benefit greatly from the opportunity to shift the unfunded liability to a liability represented by the proposed bond issue. I. Analysis of Retirement Programs and Post-Employment Health Care Benefit Programs A. DEFINED BENEFIT PENSION PLAN The Bloomfield Township defined benefit pension plan was established in 1961 to set aside funds to provide retirement benefits for qualifying full-time employees. The plan has covered as many as 279 active participants and 491 total participants. When the plan was closed to new participants in 2005, there were 275 active and 476 total participants. As of the most recent annual actuarial report dated January 1, 2013, the plan was down to 213 active participants and 473 total participants. The employer s annual recommended contribution over the past ten years has ranged from $3.2 million in 2003 to the present 2013 recommendation of $10.7 million. Chronically low interest rate returns and generally poor equity investment returns were two of the main reasons causing such a steep increase to the annual cost of the plan. Benefit levels were not improved and therefore did not drive the cost increase. In addition to the weakness in the investment markets, the plan actuary determined that it would be prudent to use updated mortality tables indicating longer life expectancies for the plan participants. This change added further to the plan s overall liability. The combination of the plan actuary lowering the projected rate of return on plan assets from 7.0% to 5.25% and updating the mortality table increased the unfunded actuarially accrued liability of the plan from $29.2 million to $80.3 million dollars in 2013 (see the January 1, 2013 actuarial report for the defined benefit plan attached hereto as Exhibit A). Prior to the actuarial changes, the Township had

4 4 of 98 been amortizing the unfunded plan liability over 20 years at a fixed annual payment of approximately $5.2 million dollars if paid at beginning of the calendar year avoiding additional interest expense. As mentioned earlier, the changes have increased that annual payment to approximately $10.2 million in 2013 (interest payment excluded) if no action is taken to mitigate the increase. The average annual cost to amortize the increased liability over 20 years is $9.0 million. A popular change with taxpayers would be to decrease the liability to the plan by decreasing future benefit accruals or even going so far as to put an immediate end to the plan altogether. With about 80% of the plan s total liability already earned and thus protected from reduction and with contracts in place through March 31, 2017, this clearly was not the most viable way to make a significant impact on the annual cost of the plan to the Township. The long-term contracts were given in exchange for several significant concessions made by the unions and bargaining groups over the past several years that included closing the defined benefit pension plan to new hires, lengthy pay freezes, a high deductible consumer driven health care plan, ending longevity pay for new hires and ending the retiree health care benefits promise for new hires. With very limited, if any, opportunity to negotiate the liability away, the Township Board determined that it was necessary to consider other alternatives to finance the plan liability. It was also determined that taking no action, thus allowing the employer s annual required contribution to nearly double, would be a very difficult financial course to take. Therefore, it was imperative that the Township investigate the ramifications of taking advantage of the enactment of Act 329 that allows qualifying municipalities to finance unfunded pension liabilities by selling pension obligation bonds. Toward that end the Township s administration had two reports prepared by the plan s actuary applying various assumptions and comparing plan costs with and without the sale of pension obligation bonds. All assumptions indicate significant cost savings associated with a bond sale. The first report was entitled Bloomfield Township Pension Bond Analysis and was dated January 2013 (The January 2013 Report ), and the second report was entitled Bloomfield Township Pension Bond Analysis II and was dated May 2013 (The May 2013 Report ). The January 2013 Report is attached hereto as Exhibit B and the May 2013 Report is attached hereto as Exhibit C. The report most applicable to the actual present circumstances of the defined benefit plan is the May 2013 Report. The May 2013 Report compares the cost of financing the January 1, 2013 unfunded actuarially accrued liability of $80,300,871 with and without the sale of $80 million in bonds at an assumed interest rate of 3.95% (see the bond debt retirement schedule attached hereto as Exhibit E) over the next 20 years. Also reported is the cost over the next 20 years of amortizing the plan liability over 30 years without a bond sale. By far the most cost effective financing method is the bond sale. The average annual cost over 20 years to finance the liability with pension obligation bonds is approximately $6.0 million as compared to an average annual cost of approximately $9.0 million if the bonds are not sold, presenting a potential total cost savings to the Township of $59,760,000 over that time period. In both of these scenarios there would be no additional cost for the plan after The 30 year amortization cost was presented as an option to reduce annual cost absent a bond sale. However, this option does not reduce overall cost, but rather extends payments further into the future.

5 5 of 98 A key factor making the pension bond sale so advantageous for the Township is the effect the $80 million in additional plan assets will have on the diversification of the investment portfolio within the defined benefit plan. Our contract with Prudential requires that all assets for retired participants be held in a guaranteed deposit account at Prudential. The balance necessary to fund this account is calculated on a monthly basis and must be funded as such. In the extremely low interest rate environment that has existed for several years now too large a percentage of the plan assets are required in this account. While the intention of the agreement was to take a conservative investment approach once assets need to be allocated for retirement annuities, the agreement presently results in a poor diversification within the plan s investment portfolio. The influx of cash from the bond sale will alleviate this problem compounding the advantage for the Township. The net result is not only significantly lower annual expense for the plan, but also a lower liability to the Township balance sheet. This added benefit is likely unique to Bloomfield Township as compared to other units of government that may be seeking this alternative. The Township has held two public study sessions with the Township Board to discuss this financing option and the board members voted unanimously to authorize the sale of bonds not to exceed $85 million. There have also been two town hall meetings scheduled for members of the public to address any questions or concerns that they might have. There is an acknowledged risk that the investment of the bond proceeds may not provide a return greater than the cost of the borrowing. That risk is considered to be small and not a deterrent to proceeding with the process. Historically, the plan has never experienced a long-term return on assets that was not significantly greater than the projected rate to borrow the funds. In fact, the projected ten year rate of return on the guaranteed deposit account at Prudential is 4.85%. That rate of return alone would present $680,000 in annual arbitrage on the $80 million of additional assets that the plan would receive. The Township s audit team, financial advisory group, plan actuary, bond financial advisors and bond counsel, among others, have had access to all financial information presented in this analysis and they unanimously concur that the best financing option available for this liability is the sale of pension obligation bonds. In summary, in order to reduce our annual expenditures, reduce our overall pension liability and to keep promises made to the Township employees hired into the defined benefit pension plan, it makes significant financial sense to take advantage of the option made available to the Township under Act 329 and satisfy our unfunded actuarial accrued liability with the sale of pension obligation bonds. B. OTHER POST-EMPLOYMENT BENEFITS PROGRAM The Township is obligated to provide medical, dental, vision and life insurance benefits to certain qualifying employees into retirement. The liability for these promised post-employment benefits is quantified every other year using census data as of July first. The last completed actuarial report for this program, as of July 1, 2011, is attached hereto as Exhibit D. The Township long ago decided that these obligations would be paid for as incurred as opposed to pre-funding the cost during the active tenure of

6 6 of 98 the employees. This funding method is sometimes referred to as pay as you go. Consequently, the unfunded accrued liability as reported effective July 1, 2011 was $86.6 million. The Township includes the cost of retiree benefits as a separate line item in the annual budgets for each fund having qualifying retirees. The cost in the fiscal year ending March 31, 2014 for all such funds is projected to be $3.8 million to provide coverage to approximately 205 retired employees plus any eligible dependents. Unlike past years the premium estimates being used to determine the cost to cover the retiree population are not being blended with the active employees. Therefore, the premium estimates should reflect the true cost of medical benefits being provided to the older retiree group. Township employees hired after May of 2011 are not eligible for post-employment medical, dental or vision benefits. These employees could still qualify for a small death benefit. Employees hired prior to May of 2011 have varying vesting schedules to qualify for benefits. The eligibility requirements are discussed in some detail within the attached valuation report from Milliman. The financial risk related to the Township s commitment to the pay as you go method of funding these benefits is mostly the result of unpredictable and potentially volatile increases in health care costs. As previously mentioned, the Township presently covers about 205 retired employees plus eligible dependents. That number is not expected to increase greatly in the future because these benefit programs have matured to the point where the cost of new retirees coming into the plan will likely be offset by the deaths of older retirees. Therefore, future cost increases will be predicated upon increases to premium rather than increases in the number of covered individuals. The Township has set aside over $1.6 million dollars earmarked to be used only to help pay for other post-employment benefits. If needed, this money could be used for premium stabilization in years where the Township might experience higher than normal premium increases mitigating some of the risk exposure. The Township also has a significant amount set aside in a premium stabilization account with Cigna to reduce the risk exposure to potential future large premium increases for either active or retiree health care. Debt service payments on a bond sale to completely satisfy this obligation would approach $7.0 million per year, much greater than the $3.8 million projected to pay the premium for this fiscal year. Even if the Township makes no adjustments to these benefits, it will be almost a decade before our projected annual premium cost would approach the debt service. Consequently, unlike the pension liability there is no near term financial advantage to a bond issue. However, as a part of the July, 2013 actuarial evaluation of the liability, the Township will analyze any advantage that might be gained long-term or by bonding a much lesser amount than the entire liability. Furthermore, with the health care delivery system currently in a state of flux with the new federal regulations, the Township feels that it would be best at this time to be patient and wait for more certainty as to what its future required obligations might be. There is a much better chance that this liability could reduce in the future than the possibility of reducing the defined pension plan liability. Therefore, at this time, the Township is not seeking a bond issue related to its other post-employment benefits liability.

7 7 of 98 C. 401(a) DEFINED CONTRIBUTION PENSION PLAN The Township closed the defined benefit pension plan to new hires effective upon ratification of the 2005 labor contracts for all employees except the library. The library division was closed to new hires in Consequently, since January 1, 2006 only six library employees have been added to the defined benefit plan while over 50 employees have been enrolled in the 401(a) plan. To date, approximately 20% of the Township s active employees who qualify for pension benefits are now enrolled in the 401(a) plan. In fiscal year ended March 31, 2013, approximately $293,000 was contributed by the Township into 401(a) participant s accounts. It is projected that 20 years from now, when the debt service payments have ended for the proposed bonds for the defined benefit plan, that over 90% of active employees qualifying for pension benefits will be in the 401(a) plan. Assuming 3% annual increases in covered payroll and the same employer contribution rates as today, 14% for public safety participants and 10% for all others, the Township s projected contributions to this plan will be approximately $3.4 million per year in Twenty-five years from now, when potentially all active employees will be in the 401(a) plan, the projected annual plan cost would be $4.3 million, which is over $2.0 million less than the anticipated pension cost for the current fiscal year. Clearly, this pension plan will offer significant budget relief in pension benefit expenditures over the long-term. D. RETIREE HEALTH SAVINGS PLAN With the labor agreements negotiated and ratified in May of 2011, the Township ended the promise to provide post-employment health insurance benefits to any employees hired after that date. In place of the old promise the Township now contributes $2,500 per year into a retiree health savings account for qualifying full-time employees. Participating employees make an additional contribution of 2% of their base pay. Township contributions vest after three years of service. The employee may use the assets accumulated in their account post-employment tax free if used for qualifying medical expenses. To date 28 employees are already participants in this plan at a cost of $70,000 per year. Thirty years from now when potentially all 260 full-time employees are in this plan, the annual cost would be $650,000. This amount assumes the same contribution amount and no increase in the number of fulltime employees qualifying for the benefit. However, should those amounts increase over time, the cost of this plan will still be considerably less than the multi-million dollar annual contribution that would be required to perpetuate the employer provided post-employment health insurance. II. Elimination of Unfunded Pension Liability for Defined Benefit Plan Page 12 of Exhibit C, the May 2013 Report, demonstrates that the unfunded pension liability of the defined benefit plan will be eliminated by the issuance of the proposed pension obligation bonds.

8 8 of 98 III. Bond Debt Service Schedule Attached as Exhibit E is a debt service schedule for the proposed pension obligation bonds. The schedule uses an assumed interest rate of 3.95% for the bonds. The Township intends to use general fund moneys to satisfy its obligations to pay the debt service amortization schedule for the bonds. I certify that I have prepared the foregoing Comprehensive Financial Plan and that the Plan is complete and accurate. Raymond Perkins Raymond Perkins Director of Finance Charter Township of Bloomfield

9 2013 Defined Benefit Plan Actuarial Report 9 of 98

10 10 of 98 Township of Bloomfield Retirement Income Plan Group Annuity Contract Number: IN Recommended Employer Contribution, based on the Actuarial Valuation Report for the plan year from January 1, 2013 to December 31, 2013: Normal Cost $3,814,978 Amortization Payment 6,391,923 Interest to the end of the Plan Year 535,862 Recommended Contribution $10,742,763 Payment Instructions: Our preferred method of payment is PATS, an automated clearinghouse that allows for the fast, cost efficient transfer of funds through Mellon Bank (approximately $0.23 for each transmission). Since each transaction in PATS is directly tied to a specific contract, our system will automatically recognize the payment you are submitting. Once your payment has been applied, a written confirmation of the transaction will be sent to you for verification purposes. Defined Benefit PATS: To set up your DB Plan for PATS, call the PATS coordinator at Prudential Retirement: Once your plan has been set up, you may also call the Mellon Bank help line for assistance at: Defined Benefit Wire Instructions: Bank: JP Morgan Chase NY, NY A.B.A. #: Credit: DB PRIAC Client Wire Contribution (GDA/SEP) Account #: Reference: Client Name / Contract # / Investment Defined Benefit Lockbox Address: DB PRIAC CLIENT CONTRIBUTION LOCKBOX P.O. Box 6037 Church Street Station New York, NY Acct. Name: DB PRIAC Client Wire Contribution (GDA/SEP) Checks must be made payable to PRIAC GR/IN number should be noted on the check (IN-17109)

11 11 of 98 Table of Contents Executive Summary of the Actuarial Valuation Report Principal Results of the Valuation... 1 Changes Since Last Year s Valuation... 2 Enrolled Actuary Certification... 3 Additional Disclosures Statement of Net Assets Available for Benefits... 4 Prior Year Contributions... 5 Participant Data... 6 Pension Benefit Liabilities... 7 Pension Contribution Summary... 8 Determination of Actuarial and Assumption Change(Gain)/Loss... Unfunded Actuarial Accrued Liability... Divisional Allocation of Contributions... Actuarial Cost Method Actuarial Assumptions Plan Provisions

12 12 of 98 PRINCIPAL RESULTS OF THE VALUATION This report summarizes valuation results for the Township of Bloomfield Retirement Income Plan based upon actuarial valuations as of January 1, 2012 and January 1, Contributions January 1, 2012 January 1, 2013 Recommended Employer Contribution Expressed as a percentage of payroll $5,542, % $10,742, % Estimated Employee Contribution $371,498 $363,360 Pension Plan Asset Information Market Value of Assets $122,504,951 $128,978,134 Actuarial Value of Assets $123,454,716 $127,620,304 Liability Information Present Value of Projected Benefits $181,082,022 $251,374,095 Present Value of Accrued Benefits $143,716,585 $194,070,380 Projected Unit Credit Liability $152,669,192 $207,921,175 Participant Information Active Participant Lifecount Total Participant Lifecount Total Covered Payroll $15,338,979 $14,862,788 1

13 13 of 98 CHANGES SINCE LAST YEAR S VALUATION Pension Plan Effective January 1, 2013, Division 001 is closed to new entrants. Due to this change, the entire plan is now closed to new entrants. Actuarial Assumptions Effective January 1, 2013, the assumed investment return was changed from 7.00% to 5.25%. Also effective January 1, 2013, the applicable mortality table was changed from the RP-2000 Mortality Table projected to 2010 to the RP-2000 Generational Mortality Table projected with Scale BB. Gain/Loss Actuarial gains and losses are recognized with each valuation by routine application of the Actuarial Cost Method. Under your cost method, actuarial gains and losses are recognized with each valuation and amortized over 20 years. Funding Method There are no changes to the funding method with this valuation. Demographics Total participant lifecount decreased.2% when compared with last year. Within the total group, active lifecount decreased 3.6%. 2

14 14 of 98 ENROLLED ACTUARY CERTIFICATION This report relies on the census data submitted to us by the plan sponsor, as summarized in Participant Data, and the retirement plan as outlined in Plan Provisions. It also relies on the plan asset information as described in Statement of Net Assets Available for Benefits. Appropriate tests for consistency and reasonableness have been completed on the information relied on. The liabilities and costs were determined using the method summarized in Actuarial Cost Method and the actuarial assumptions described in Plan Assumptions. In our opinion, the actuarial assumptions used in this report are reasonable and reflect our best estimate of the anticipated future experience under the plan. I am the Enrolled Actuary for this plan, and have no other relationship with the plan or the plan sponsor, which may impair or appear to impair the objectivity of my work. This report was completed in accordance with generally accepted actuarial standards and procedures, and conforms to the Guidelines for Professional Conduct of the American Academy of Actuaries. The undersigned credentialed actuary meets the qualification standards of the American Academy of Actuaries necessary to render the actuarial opinion contained herein. David V. Pappalardo, F.S.A., E.A., F.C.A., M.A.A.A. Assistant Vice President & Consulting Actuary Phone: (860) David.Pappalardo@Prudential.com Assisted by: Edward Lin Senior Actuarial Specialist Phone: (860) Edward.Lin@Prudential.com David Lisevick Actuarial Specialist Phone: (860) David.Lisevick@Prudential.com 3

15 15 of 98 STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS 1. Market Value of Assets: Description January 1, 2012 January 1, 2013 George J. Schwartz & Co., Inc. 7,499,869 13,158,784 Total Market Value $ 7,499,869 $ 13,158, Guaranteed Account (GA) January 1, 2012 January 1, 2013 a. Value as of Valuation Date $115,005,082 $115,819,350 b. Receivables i. Investment Income ii. Employer Contributions c. Payables 0 0 d. Total Guaranteed Account 3(a) + 3(b) + 3(c) $115,005,082 $115,819, Total Market Value of Assets $122,504,951 $128,978, Total Actuarial Value of Assets $123,454,716 $127,620, Rate of Return on Market Value of Assets during the preceding twelve month period 5.77% 7.68% 4

16 16 of 98 PRIOR YEAR CONTRIBUTIONS Contributions for the Preceding Plan Year Date Employee Contributions Employer Contributions June, 2010 November, 2010 $ $124, , June, ,000, December, , January, , February, , March, , April, , , June, , July, , August, , September, , November, , December, , Totals $395, $5,179,

17 17 of 98 PARTICIPANT DATA Lifecount and Data Reconciliation: Description Actives Vested Terms Inactives Disableds Retireds Total Participants on January 1, New Beneficiaries Transfers in Status Vested Term (1) N/A 0 Non-vested Term N/A 0 Inactive Disabled Retired (7) (1) Cash Out Death (3) (3) Expired Payments N/A N/A N/A Data Correction Participants on January 1, AVERAGE AGES for active eligible lives January 1, 2012 January 1, 2013 Average attained age Average service PAYROLL for active eligible lives $15,338,979 $14,862,788 Average annual earnings $69,407 $69,778 RETIRED PARTICIPANTS Average attained age Average annual benefit $33,415 $34,170 6

18 18 of 98 PENSION BENEFIT LIABILITIES Present Value of Projected Plan Benefits: (at 7.0% for the prior year and 5.25% for the current year) Actives January 1, 2012 January 1, 2013 Retirement Benefits 81,847, ,281,033 Withdrawal 933,614 1,524,766 Pre-retirement Spouse 1,323,723 2,041,075 Disability 3,097,086 4,358,605 Other 24,616 0 Subtotal for Actives $87,226,962 $130,205,479 Inactives Retired Lives $92,567,220 $119,784,309 Vested Terminated Participants 1,287,840 1,384,307 Disabled 0 0 Inactive Lives 0 0 Subtotal for Inactives $93,855,060 $121,168,616 Total Present Value of Benefits $181,082,022 $251,374,095 Present Value of Actuarial Accrued Liabilities: (at 7.0% for the prior year and 5.25% for the current year) Actives January 1, 2012 January 1, 2013 Retirement Benefits 54,387,962 80,254,419 Withdrawal 644,291 1,079,390 Pre-retirement Spouse 882,404 1,373,866 Disability 2,879,913 4,044,883 Other 19,562 0 Subtotal for Actives $58,814,132 $86,752,558 Inactives Retired Lives $92,567,220 $119,784,309 Vested Terminated Participants 1,287,840 1,384,308 Disabled 0 0 Inactive Lives 0 0 Subtotal for Inactives $93,855,060 $121,168,617 Total Present Value of Benefits $152,669,192 $207,921,175 7

19 19 of 98 PENSION CONTRIBUTION SUMMARY Pension Contribution January 1, 2012 January 1, Employer Normal Cost Net of Employee Contributions 2. Amortization of Unfunded Actuarially Accrued Liability $2,505,838 $3,784,978 2,643,840 6,391,923 3 Expenses 30,000 30, Recommended Employer Contribution at beginning of year (1+2+3) $5,179,678 $10,206, Interest to the end of Plan Year 362, , Total Recommended Employer $5,542,255 $10,742,763 Contribution at end of year (4 + 5) 8

20 DETERMINATION OF ACTUARIAL (GAIN)/LOSS Determination of Actuarial (Gain)/Loss for the plan year beginning January 1, of Projected Unit Credit Liability as of January 1, 2012 $152,669, Actuarial Value of Pension Fund Assets as of January 1, Projected Unit Credit Liability minus Actuarial Value of Assets (1-2) 4. Employer Normal Cost with Expenses As of January 1, ,454,716 29,214,476 2,535, Interest at 7% (on 3 + 4) 2,222, Employer Contribution for the 2012 Plan Year with interest 7. Expected Unfunded Actuarial Accrued Liability as of January 1, 2013 ( ) 8. Projected Unit Credit Liability as of January 1, 2013 Before Assumption Changes 9. Actuarial Value of Pension Fund Assets as of January 1, Actual Unfunded Actuarial Accrued Liability as of January 1, ,538,263 $28,434,573 $157,732, ,620,304 $30,111, Actuarial (Gain)/Loss as of January 1, 2013 (10-7) $1,677,349 UNFUNDED ACTUARIALLY ACCRUED LIABILITY 9

21 21 of 98 Description Effective Date Initial Amount Remaining Years Annual Balance Remaining Payment Initial Amount 1/1/2011 $28,709,989 $27,260, $2,259,178 Actuarial Loss /1/2012 1,259,512 1,174, ,207 Actuarial Loss /1/2013 1,677,349 1,677, ,606 Asmp. Change /1/ ,188,949 50,188, ,907,932 Total $81,835,799 $80,300,871 $6,391,923 DIVISIONAL ALLOCATION OF CONTRIBUTIONS 10

22 22 of 98 The following percentages may be used to allocate contributions to each division. These percentages are based on the ratio of the liabilities for employees of each division to the liabilities for all divisions. Division Percentage 000 Administration & Miscellaneous 33.57% 001 Library 3.04% 002 Fire Department Bargaining Unit Members 14.69% 003 Police Department Civilian 7.88% 004 Police Department Command Officer 11.23% 005 Police Department Bargaining Unit 17.00% 006 Village Police 0.18% 007 Fire Department Command Officers 12.41% 11

23 23 of 98 ACTUARIAL COST METHOD I. ACTUARIAL COST METHOD Costs have been computed in accordance with the Projected Unit Credit Level Dollar Funding Method using a 20-year amortization period and reflect the actuarial assumptions described in Plan Assumptions of this report. NORMAL COST The Normal Cost is the cost of benefits expected to accrue during the coming year for all Participants who are eligible for funding as of the valuation date. ACTUARIAL ACCRUED LIABILITY As of January 1, 2011, an Actuarial Accrued Liability is established which represents the value of accrued benefits. This Actuarial Accrued Liability is offset by assets, if any, and the remainder, the Unfunded Actuarial Accrued Liability, is amortized over a fixed number of years from the effective date. Subsequent changes due to plan amendment or revised actuarial assumptions create increments of Actuarial Accrued Liability which will be amortized over a similar fixed period of years from their effective dates. Actuarial gains and losses will be recognized with each valuation and amortized over a 20-year period. II. ASSET VALUATION METHOD Assets have been valued in accordance with generally accepted procedures as described below. 12

24 All funds invested are valued in the following manner: 24 of 98 Definitions i C(t) W(t) AV(t) MV(t) EV(t) G/L(t) assumed growth rate, set equal to the expected return on assets sum of contributions and other additions to the fund from all sources other than investment transactions in Plan Year t sum of all withdrawals and other decreases to the fund from all sources other than investment transactions in Plan Year t Actuarial Value of Assets as of Plan Year t Market Value of Assets as of Plan Year t Expected Value of Assets as of Plan Year t Gain or Loss for Plan Year t Method Corridor Limits Deferred Recognition Method, with no gain or loss recognition prior to January 1, On January 1, 2002, let AV(t) = MV(t). For subsequent years, AV(t) is determined as follows: EV(t) = MV(t-1) * (1+i) + [ C(t-1) W(t-1) ] * (1+i*m) where m represents a proportionate yield consistent with the portion of the year for which C and W are invested. G/L(t-1) = EV(t) MV(t) AV(t) = MV(t) + 4/5 * G/L(t-1) + 3/5 * G/L(t-2) + 2/5 * G/L(t-3) + 1/5 * G/L(t-4) The resulting Actuarial Value of Assets may not be less than 80% or more than 120% of the current market value of plan assets as of the applicable valuation date [ as required by IRC Section 1.412(c)(2)(1) ]. Determination of Actuarial Value Market Value of Assets on 01/01/2013: $ 128,978,134 Plan Year (Gain)/Loss % Deferred Deferred Recognition 2012 $ (670,812) 80.00% $ (536,650) 2011 $ 1,591, % $ 954, $ (3,934,275) 40.00% $ (1,573,710) 2009 $ (1,011,631) 20.00% $ (202,326) $ (1,357,830) Market Value plus Deferred Recognition: $ 127,620,304 Corridor for Actuarial Value 80% of Market Value: $ 103,182, % of Market Value: $ 154,773,761 Actuarial Value after Corridor: $ 127,620,304 13

25 25 of 98 PLAN ASSUMPTIONS Assumptions have been chosen to anticipate the long-range experience of the Plan. Consistency among assumptions is important as each interacts with the others; equally important is the recognition of inflationary trends in the economy. The actuarial assumptions used to compute Plan costs are: Mortality: RP-2000 Generational Mortality Table projected with Scale BB Termination: 50% of Prudential Scale 1/2A The probabilities that Participants at the ages indicated will terminate before reaching the assumed retirement age are: Age Male Female % 35.8% % 29.7% % 20.9% % 13.2% % 6.5% % 1.9% 50 & Over 0.0% 0.0% Retirement Age: Investment Return: Estimated Expenses: Age 55 with 25 years of Service or Age 62. Participants at or beyond this age are assumed to retire immediately. Non-active, non-retired participants are assumed to retire at Normal Retirement Age. 5.25% per annum. $30,000 per annum. Annual Cost of Living Adjustment: All retirees and participants eligible to retire immediately receive a 1% annual cost of living adjustment for life. 14

26 26 of 98 Salary Scale: Salaries are assumed to increase at an annual rate of 3.0%. The salary at age 55 bears the following relationship to the current earnings of a Participant at the indicated age, except that for Participants with a later normal or assumed retirement date, salaries are assumed to increase to that date. Age Ratio 20 & under Spouse s Benefit: It is assumed that husbands are 3 years older than wives and that 80% of Participants who are or will become eligible for coverage under the Spouse s Benefit will be survived by an eligible spouse. Disability: Table C-4 of the Society of Actuaries Transactions Volume XXXIX, 100% of the 6-month rates. The probabilities the Participants at the ages indicated will terminate within the next year are: Age Male Female % 0.100% % 0.110% % 0.140% % 0.201% % 0.276% % 0.400% % 0.622% % 0.932% % 1.179% % 1.253% Maximum Benefit and Maximum Compensation Limits: Assumed to increase 3% per year. 15

27 27 of 98 PLAN PROVISIONS Rate of Earnings: Basic compensation including longevity adjustments but excluding overtime, commissions, bonuses and any other additional compensation. Final Earnings: Divisions 000, 003 and 004: Average Rate of Earnings as of the highest three consecutive May 1 s during the last 10 years before Retirement Date. If Service ceases more than three years before Retirement Date, Final Earnings is average Rate of Earnings as of the last three May 1 s before Service ceases. Divisions 002, 005 and 007: Average Rate of Earnings as of the highest three May 1 s. Divisions 001 and 006: Average Rate of Earnings as of the highest five consecutive May 1 s during the last 10 years before Retirement Date. If Service ceases more than five years before Retirement Date, Final Earnings is the average Rate of Earnings as of the last five May 1 s before Service ceases. Service: Credited Service: Form of Annuity: All years of Service with the Employer from date of employment to the earlier of retirement, termination of employment or death (without regard to hours worked). All years of Service with the Employer from date of employment to the earlier of retirement, termination of employment or death, counted in whole years and full months. Service prior to August 1, 1961 is excluded if the Employee was not a plan Participant at that time. Service while the Participant was eligible to make contributions but did not is also excluded. Service while the Participant is disabled is excluded. Modified Cash Refund with a 50% Spouse Continuation. Participants who are not married receive an actuarially increased benefit. Normal Retirement Date: Divisions 000 and 003: The first day of the month coinciding with or next following the Participant s 52 nd birthday and the completion of 8 years of Service, or the completion of 30 years of Service. Division 001: The first day of the month coinciding with or next following the Participant s 55 th birthday and the completion of 8 Years of Service. 16

28 28 of 98 Division 002 and 007: The first day of the month coinciding with or next following the Participant s 52 nd birthday and the completion of 8 Years of Service. Division 004 and 005: The first day of the month coinciding with or next following the Participant s 50 th birthday and the completion of 25 years of service or the Participant s 52 nd birthday and the completion of 10 years of Service, if later. Division 006: The first day of the month coinciding with or next following the earlier of (a) the Participant s 55 th birthday and the completion of 10 years of Service or (b) the Participant s 60 th birthday and the completion of 8 years of Service. A Participant who continues in employment after reaching Normal Retirement is considered to be in postponed Retirement status. 17

29 PENSION BENEFIT: 29 of 98 Normal Retirement: Benefit Formula: Divisions 001 and 006: 2.1% of Final Earnings multiplied by years of Credited Service. Divisions 002 and 007: 2.75% of Final Earnings multiplied by years of Credited Service. Divisions 000, 003: 2.85% of Final Earnings multiplied by years of Credited Service. Divisions 004, 005: 3.00% of Final Earnings multiplied by years of Credited Service. Divisions 000 and 003: On and after June 1, 2005, the maximum benefit at retirement shall not exceed 90% of Final Earnings for any Participant with 36 or fewer Years of Credited Service on April 1, Division 002: On and after July 8, 1996, the maximum benefit at retirement shall not exceed 80% of Final Earnings. Division 004: On and after April 27, 2000, the maximum benefit at retirement shall not exceed 90% of Final Earnings. Division 005: On and after April 1, 1999, the maximum benefit at retirement shall not exceed 85% of Final Earnings. Division 007: On and after December 18, 1996, the maximum benefit at retirement shall not exceed 80% of Final Earnings. 18

30 Cost of Living: 1% increase each January of 98 Division Retirement Date on or before March 31, 2009 Division Retirement Date on or before March 31, 2009 Division Retirement Date on or before December 31, 2007 Division Retirement Date on or before March 31, 2009 Division Retirement Date on or before March 31, 2009 Division Retirement Date on or before March 31, 2009 Division Retirement Date on or before March 31, 2009 Division Retirement Date on or before December 31, 2007 Early Retirement : Eligibility: Benefit Formula: Age 50 with a Vesting Percentage of 100% Normal retirement benefit accrued to early retirement, reduced by.5% for each month Annuity Commencement Date precedes Normal Retirement Date. Vesting: Eligibility: Divisions 000, 001, 002, 003, 006 and 007 Eight years of Service or attainment of Normal Retirement Date equals 100% vesting. Divisions 004 and 005: Ten years of Service or attainment of Normal Retirement Age equals 100% vesting. Benefit Formula: Benefit accrued to date of termination adjusted by the appropriate vesting percentage. 19

31 31 of 98 SUPPLEMENTAL BENEFITS: Preretirement Death Divisions 000, 002, 003, 004, 005 and 007: Benefit: Eligibility: Benefit Formula: Active Employee who is eligible for vesting 50% of the pension benefit accrued to date of death. If eligible for early retirement at time of death, 100% of the pension benefit accrued to date of death. Preretirement Spouse Benefit: Divisions 001 and 006 Eligibility: Benefit Formula: Disability Benefit: Active employee eligible for early retirement and married 50% of the pension benefit accrued to date of death. If eligible for early retirement at time of death, 100% of the pension benefit accrued to date of death. Only applies to Divisions 002, 004, 005 and 007. Eligibility: Participants are eligible immediately. Benefit Formula: Duty Disability 2.75% (3.0% for Divisions 004 & 005) of Final Earnings equal to the rate of earnings immediately prior to disablement adjusted by increases negotiated for job classification between date of disablement and the earlier of the date the Participant is no longer disabled, or the Normal Retirement Date, multiplied by years of Credited Service. Credited Service is defined from employment date to the earlier of the date the Participant is no longer considered disabled or Normal Retirement Date. Final Earnings equals the Rate of Earnings immediately prior to disablement adjusted by increases negotiated for that job classification between the date of disablement and the earlier of the date the Participant is no longer disabled or Normal Retirement Date. Non-Duty Disability 2.75% (3.0% for Divisions 004 & 005) of Final Earnings multiplied by years of Credited Service. Final Earnings and Credited Service are as of date of disablement. 20

32 32 of 98 EMPLOYEE CONTRIBUTIONS Amount: Interest Credits: Divisions 002 and 007: 1% of earnings Divisions 004 and 005: 3.5% of earnings Divisions 000 and 003: 2% of earnings Divisions 001 and 006: 5% of earnings 5% per annum Death or Termination Refund: Preretirement: Postretirement: Refund of Employee Contributions with interest to date of termination or date of death Refund of Employee Contributions with interest over annuity payments made, unless the form of annuity elected is other than the normal form of annuity. 21

33 Pension Obligation Bond Analysis January 2013 PowerPoint Presentation prepared by Defined Benefit Plan Actuary 33 of 98

34 34 of 98 BLOOMFIELD TOWNSHIP PENSION OBLIGATION BOND ANALYSIS David V. Pappalardo, FSA, EA January 2013 For Institutional Plan Sponsor use Only. Not to be distributed to plan participants or the general public For Institutional Plan Sponsor use Only. Not to be distributed to plan participants or the general public 1

35 Pension Obligation Bond Analysis 35 of 98 Forecast Parameters and Scenarios Assumptions Forecast Period With and Without Issuing POBs Forecast Results Contribution Projections Potential Cost Reduction Funded Status and Unfunded Liability For Institutional Plan Sponsor use Only. Not to be distributed to plan participants or the general public 2

36 Pension Obligation Bond Analysis 36 of 98 Scenario 1 Funding Assumptions Investment return 6% Mortality RP-2000 generational mortality with Scale BB Annual COLA 1% for all participants Debt Service estimates as provided by Bendzinski & Co. All other assumptions as detailed in 2012 actuarial valuation report Forecast Period 20 years For Institutional Plan Sponsor use Only. Not to be distributed to plan participants or the general public 3

37 Scenario 1 Cost Comparison 37 of % Investment Return - Cost Comparison Millions Contribution (No Bond) Contribution (With Bond) Debt Cost 4.5% Contribution (With Bond) Debt Cost 3.0% For Institutional Plan Sponsor use Only. Not to be distributed to plan participants or the general public 4

38 Scenario 1 Potential Cost Reduction 38 of 98 Potential Cost Reduction - 6.0% Return Millions Debt 3% Debt 4.5% For Institutional Plan Sponsor use Only. Not to be distributed to plan participants or the general public 5

39 Scenario 1 Cost Analysis Data 39 of % Investment Return - Cost Analysis Contribution Contribution Debt Cost Total Cost Debt Cost Total Cost Potential Potential No Bond With Bond 3.00% 3.00% 4.50% 4.50% Cost Reduction - 3% Cost Reduction - 4.5% ,660,000 3,850,000 1,050,000 4,900,000 1,580,000 5,430,000 4,760,000 4,230, ,680,000 3,930,000 3,770,000 7,700,000 4,660,000 8,590,000 1,980,000 1,090, ,760,000 4,040,000 3,710,000 7,750,000 4,570,000 8,610,000 2,010,000 1,150, ,700,000 3,940,000 3,650,000 7,590,000 4,480,000 8,420,000 2,110,000 1,280, ,630,000 3,870,000 3,590,000 7,460,000 4,390,000 8,260,000 2,170,000 1,370, ,610,000 3,850,000 3,530,000 7,380,000 4,300,000 8,150,000 2,230,000 1,460, ,590,000 3,830,000 3,960,000 7,790,000 4,690,000 8,520,000 1,800,000 1,070, ,420,000 3,660,000 3,890,000 7,550,000 4,580,000 8,240,000 1,870,000 1,180, ,420,000 3,670,000 3,810,000 7,480,000 4,470,000 8,140,000 1,940,000 1,280, ,180,000 3,430,000 4,230,000 7,660,000 4,850,000 8,280,000 1,520, , ,880,000 3,140,000 4,140,000 7,280,000 4,710,000 7,850,000 1,600,000 1,030, ,840,000 3,100,000 4,050,000 7,150,000 4,580,000 7,680,000 1,690,000 1,160, ,600,000 2,870,000 4,450,000 7,320,000 4,930,000 7,800,000 1,280, , ,300,000 2,570,000 4,350,000 6,920,000 4,770,000 7,340,000 1,380, , ,010,000 2,290,000 4,240,000 6,530,000 4,610,000 6,900,000 1,480,000 1,110, ,720,000 2,000,000 4,630,000 6,630,000 4,950,000 6,950,000 1,090, , ,550,000 1,830,000 4,510,000 6,340,000 4,760,000 6,590,000 1,210, , ,370,000 1,660,000 5,380,000 7,040,000 5,560,000 7,220, , , ,560,000 1,380,000 5,230,000 6,610,000 5,340,000 6,720,000 (2,050,000) (2,160,000) ,200,000 1,140,000 5,070,000 6,210,000 5,110,000 6,250,000 (2,010,000) (2,050,000) Total 28,390,000 17,740,000 For Institutional Plan Sponsor use Only. Not to be distributed to plan participants or the general public 6

40 Pension Obligation Bond Analysis 40 of 98 Scenario 2 Funding Assumptions Investment return 5.5% Mortality RP-2000 generational mortality with Scale BB Annual COLA 1% for all participants Debt Service estimates as provided by Bendzinski & Co. All other assumptions as detailed in 2012 actuarial valuation report Forecast Period 20 years For Institutional Plan Sponsor use Only. Not to be distributed to plan participants or the general public 7

41 Scenario 2 Cost Comparison 41 of % Investment Return - Cost Comparison 10 8 Millions Contribution (No Bond) Contribution (With Bond) Debt Cost 4.5% Contribution (With Bond) Debt Cost 3.0% For Institutional Plan Sponsor use Only. Not to be distributed to plan participants or the general public 8

42 Scenario 2 Potential Cost Reduction 42 of 98 6 Potential Cost Reduction - 5.5% Return Millions Debt 3% Debt 4.5% For Institutional Plan Sponsor use Only. Not to be distributed to plan participants or the general public 9

43 Scenario 2 Cost Analysis Data 43 of % Investment Return - Cost Analysis Contribution Contribution Debt Cost Total Cost Debt Cost Total Cost Potential Potential No Bond With Bond 3.00% 3.00% 4.50% 4.50% Cost Reduction - 3% Cost Reduction - 4.5% ,100,000 4,340,000 1,050,000 5,390,000 1,580,000 5,920,000 5,710,000 5,180, ,130,000 4,410,000 3,770,000 8,180,000 4,660,000 9,070,000 2,950,000 2,060, ,200,000 4,520,000 3,710,000 8,230,000 4,570,000 9,090,000 2,970,000 2,110, ,120,000 4,400,000 3,650,000 8,050,000 4,480,000 8,880,000 3,070,000 2,240, ,040,000 4,310,000 3,590,000 7,900,000 4,390,000 8,700,000 3,140,000 2,340, ,000,000 4,270,000 3,530,000 7,800,000 4,300,000 8,570,000 3,200,000 2,430, ,960,000 4,240,000 3,960,000 8,200,000 4,690,000 8,930,000 2,760,000 2,030, ,770,000 4,050,000 3,890,000 7,940,000 4,580,000 8,630,000 2,830,000 2,140, ,770,000 4,050,000 3,810,000 7,860,000 4,470,000 8,520,000 2,910,000 2,250, ,490,000 3,780,000 4,230,000 8,010,000 4,850,000 8,630,000 2,480,000 1,860, ,170,000 3,460,000 4,140,000 7,600,000 4,710,000 8,170,000 2,570,000 2,000, ,110,000 3,400,000 4,050,000 7,450,000 4,580,000 7,980,000 2,660,000 2,130, ,850,000 3,140,000 4,450,000 7,590,000 4,930,000 8,070,000 2,260,000 1,780, ,510,000 2,810,000 4,350,000 7,160,000 4,770,000 7,580,000 2,350,000 1,930, ,200,000 2,500,000 4,240,000 6,740,000 4,610,000 7,110,000 2,460,000 2,090, ,880,000 2,190,000 4,630,000 6,820,000 4,950,000 7,140,000 2,060,000 1,740, ,690,000 2,000,000 4,510,000 6,510,000 4,760,000 6,760,000 2,180,000 1,930, ,490,000 1,800,000 5,380,000 7,180,000 5,560,000 7,360,000 1,310,000 1,130, ,750,000 1,500,000 5,230,000 6,730,000 5,340,000 6,840,000 (980,000) (1,090,000) ,370,000 1,240,000 5,070,000 6,310,000 5,110,000 6,350,000 (940,000) (980,000) Total 47,950,000 37,300,000 For Institutional Plan Sponsor use Only. Not to be distributed to plan participants or the general public 10

44 Unfunded Liability Comparison 44 of Unfunded Liability Millions % Investment Return 6.0% Investment Return For Institutional Plan Sponsor use Only. Not to be distributed to plan participants or the general public 11

45 Funded Status Comparison 45 of % Funded Status 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% % Investment Return 6.0% Investment Return For Institutional Plan Sponsor use Only. Not to be distributed to plan participants or the general public 12