City of Philadelphia Municipal Retirement System Actuarial Valuation Report as of July 1, 2014 Produced by Cheiron March 2015 Table of Contents Section Page Letter of Transmittal Section I – Board Summary .......................................................................................................1 Section II – Assets ...................................................................................................................19 Section III – Liabilities ............................................................................................................28 Section IV – Contributions and Minimum Municipal Obligation ...........................................33 Section V – Accounting Statement Information ......................................................................50 Appendices Appendix A – Membership Information ..................................................................................55 Appendix B – Supporting Tables for City’s Funding Policy ...................................................77 Appendix C – Summary of Actuarial Assumptions and Methods ...........................................86 Appendix D – Summary of Plan Provisions ............................................................................96 Appendix E – Glossary of Terms ..........................................................................................127 LETTER OF TRANSMITTAL March 18, 2015 City of Philadelphia Municipal Retirement System Two Penn Center Plaza – 16th Floor Philadelphia, PA 19102-1721 Dear Board Members: At your request, we have performed the July 1, 2014 Actuarial Valuation of the City of Philadelphia Municipal Retirement System (the System). In preparing our report, we relied on information (some oral and some written) supplied by the System’s staff. This information includes, but is not limited to, plan provisions, employee data, and financial information. We performed an informal examination of the obvious characteristics of the data for reasonableness and consistency in accordance with Actuarial Standard of Practice #23. The results of this report are only applicable to the System’s contribution for Fiscal Year Ending 2016. Future results may differ significantly from the current results presented in this report due to such factors as the following: plan experience differing from that anticipated by the assumptions; changes in assumptions and changes in plan provisions or applicable law. To the best of our knowledge, this report has been prepared in accordance with generally recognized and accepted actuarial principles and practices which are consistent with the Code of Professional Conduct and applicable Actuarial Standards of Practice set out by the Actuarial Standards Board. Furthermore, as credentialed actuaries we meet the Qualification Standards, as defined by the American Academy of Actuaries, to render the opinion contained in this report. This report does not address any contractual or legal issues. We are not attorneys, and our firm does not provide any legal services or advice. This actuarial valuation report was prepared exclusively for the City of Philadelphia Municipal Retirement System for the purposes described herein and for the plan auditor in completing an audit related to the matters herein. Other users of this report are not intended users as defined in the Actuarial Standards of Practice, and Cheiron assumes no duty or liability to such other users. Finally, in preparation of this report we have accepted the assumptions and methodologies as adopted by the Board of Pensions and Retirement for the City of Philadelphia Municipal Retirement System. Sincerely, Cheiron Kenneth A. Kent, FSA, FCA, EA, MAAA Anu Patel, FSA, EA, MAAA Principal Consulting Actuary Consulting Actuary i CITY OF PHILADELPHIA MUNICIPAL RETIREMENT SYSTEM JULY 1, 2014 ACTUARIAL VALUATION SECTION I BOARD SUMMARY The primary purpose of the actuarial valuation and this report is to disclose the following as of the valuation date: • The financial condition of the City of Philadelphia Municipal Retirement System (the System), • Past and expected future trends and risks to the Retirement System’s financial condition, • The City’s Minimum Municipal Obligation (MMO) representing the required contribution in accordance with Act 205 of Pennsylvania Law for Fiscal Year End (FYE) 2016, • The Retirement Board’s Funding Policy recommended City contribution, and • Information required by the Governmental Accounting Standards Board (GASB). In this Section, we present a summary of the principal valuation results. This includes the basis upon which the July 1, 2014 valuation was completed and an examination of the current financial condition of the System. In addition, we present a review of the key historical trends followed by the System’s projected financial outlook. 1 CITY OF PHILADELPHIA MUNICIPAL RETIREMENT SYSTEM JULY 1, 2014 ACTUARIAL VALUATION SECTION I BOARD SUMMARY A. Valuation Basis The June 30, 2014 valuation results are based on the same methods used in the June 30, 2013 valuation as outlined in the report reflecting the amendments made under Act 44 to the Act 205 funding requirements through the addition of Chapter 10. The actuarial assumptions have been updated to reflect the new assumptions approved by the Retirement Board, as presented in the Experience Study Results and Recommendations Report from April 2014 as well as assumption changes adopted in February 2015 upon presentation of preliminary results. The following outlines the basic assumption changes. For a detailed description of these assumption changes, refer to Appendix C of this report. • Interest Rate: The interest rate was decreased from 7.85% to 7.80% as of July 1, 2014. • Salary Increase Rate: There were marginal decreases in salary assumptions by age. • Mortality Rates: Mortality rates were adjusted using Scale AA to reflect projected improvements in mortality over time. • Other Demographic Actuarial Assumptions: Other demographic assumptions such as the retirement rates, termination rates, and disability rates were updated to better reflect actual experience. A detailed list of these assumption changes is located in Appendix C of this report. This report also reflects the impact of recently passed legislation requiring increases in member contribution rates over the current member rate for all municipal employees in Plans 67, 87, 87 Prime and elected officials. This legislation calls for changes in current and future member contribution rates. A detailed summary of the new and future member contribution rates can be found in Appendix D of this report. Legislation passed in November 2014 also introduced a new benefit structure under Plan 10 for Municipal employees and elected officials. Employees who have the option to participate in Plan 87 instead of Plan 10 will pay an additional member contribution of 1.0% of compensation. This report was prepared using census data and financial information as of July 1, 2014 and does not reflect any subsequent changes in the membership or the assets. Below we highlight significant results of this valuation. Table I-1 summarizes these results: • Financial Performance: The return on market value of assets at 15.70% for the year ending June 30, 2014 was favorable when benchmarked against the assumed 7.85% return rate. With the 10-year smoothing of assets applied in the calculation of the actuarial asset value, the 2008 and 2009 investment losses still impact the results for funding purposes. On an actuarial asset value basis the return as of June 30, 2014 was 4.81%. The ratio of actuarial assets to market assets decreased from 108.0% in the prior year to 99.2% for the current year. This means for the first time since 2007 the market asset value is greater than the actuarial 2 CITY OF PHILADELPHIA MUNICIPAL RETIREMENT SYSTEM JULY 1, 2014 ACTUARIAL VALUATION SECTION I BOARD SUMMARY value resulting in a small reserve against future investment experience below the assumed return rate. • Pension Adjustment Fund (PAF): As defined in the Philadelphia Code the PAF provides for additional benefit distributions through the use of excess earnings. The favorable asset returns over the past five years resulted in a transfer of $61.2 million into the PAF as of June 30, 2014. These funds are removed from the assets in determining the City’s funding obligation. • Unfunded Actuarial Liability (UAL): The UAL is the excess of the System’s actuarial liability (AL) over the actuarial value of assets (AVA). The UAL increased from $5.327 billion as of July 1, 2013 to $5.707 billion as of July 1, 2014 reflecting the net of asset losses and liability losses from July 1, 2013 through June 30, 2014 in addition to changes in actuarial assumptions as of July 1, 2014. The experience loss represents $167.4 million increase in the UAL. This is comprised o of a $31.0 million liability loss attributable to losses from new entrants with past service and salary growth higher than expected plus $136.5 million asset loss. There was an increase in UAL of $262.2 million due to changes in actuarial assumptions resulting from the four year experience study conducted in 2014 and the adopted change in the interest rate from 7.85% to 7.80%. • Funding Ratio: This is the ratio of the System’s AVA to AL. The funding ratio decreased from 47.4% as of July 1, 2013 to 45.8% as of July 1, 2014 mainly due to the experience losses and changes in actuarial assumptions. While this ratio may appear to reflect lack of progress in funding, the System’s risk profile is being improved by lowering of the discount rate and utilizing more conservative mortality assumptions to reflect future improvements in life expectancies. The funding ratio on a market assets to liability basis increased from 43.9% to 46.1% reflecting the favorable asset returns. • Minimum Municipal Obligation (MMO): The MMO is the required minimum amount the City must contribute under Pennsylvania State law. The MMO increased from $556.0 million for FYE 2015 to $595.0 million for FYE 2016. • Annual Act 205 Reporting: Under Section 1002 of Act 205, the City is required to provide annual reports to the Pennsylvania Employee Retirement Commission (PERC). Therefore the MMO determination continues to reflect annually determined experience gains and losses as opposed to biennially. • Contribution under the City’s Funding Policy: The beginning-of-year contribution under the City’s Funding Policy increased from $827.3 million for FYE 2015 based upon actual FYE 2014 payroll to an estimated $917.6 million for FYE 2016. 3 CITY OF PHILADELPHIA MUNICIPAL RETIREMENT SYSTEM JULY 1, 2014 ACTUARIAL VALUATION SECTION I BOARD SUMMARY Table I-1 summaries the comparative UAL and fiscal year funding amounts discussed above. Table I-1 Key Results ($ thousands) Valuation Date 7/1/2014 7/1/2013 Unfunded Actuarial Liability $ 5,706,923 $ 5,326,895 Funding Ratio 45.8% 47.4% Fiscal Year 2015 Fiscal Year 2014 Minimum Municipal Obligation $ 594,975 $ 556,030 City's Funding Policy Contribution* $ 917,573 $ 827,328 *The City’s funding policy contribution for FYE 2015 was updated based upon the actual payroll of $1,495.4 million (provided as pay rates in the data) as of July 1, 2014, used to estimate the beginning of year FYE 2015 payroll. In the July 1, 2013 actuarial valuation report, the estimated FYE 2015 payroll was $1,476.9 million based upon July 1, 2013 pay rates and increased with the payroll assumption. 4 CITY OF PHILADELPHIA MUNICIPAL RETIREMENT SYSTEM JULY 1, 2014 ACTUARIAL VALUATION SECTION I BOARD SUMMARY B. Current Financial Condition On the following pages, we summarize the key results of the July 1, 2014 valuation and how they compare to the results from the July 1, 2013 valuation. 1. City Membership: As shown in Table I-2 below, total membership in the Retirement System decreased by 0.2% from 2013 to 2014. Table I-2 Membership Total July 1, 2014 July 1, 2013 % Change Actives 27,065 26,788 1.0% Terminated Vesteds 1 ,224 1 ,281 -4.4% Disabled 3 ,954 4 ,152 -4.8% Retirees 21,768 21,696 0.3% Beneficiaries 8 ,547 8 ,614 -0.8% DROP 2 ,264 2 ,427 -6.7% Total City Members 64,822 64,958 -0.2% Annual Salaries $ 1,495,421,387 $ 1,429,723,436 4.6% Average Salary per Active Member $ 55,253 $ 53,372 3.5% Annual Retirement Allowances $ 6 86,601,608 $ 6 76,634,789 1.5% Average Retirement Allowance $ 20,036 $ 19,634 2.0% The active participant population increased by 1.0% during the 2013-2014 plan year. Deferred Retirement Option Plan (DROP) participants decreased about 6.7% from 2013 to 2014 as members reached the end of their four-year DROP participation period. The average salary per active member increased by 3.5% during the plan year. The result of higher active membership paired with higher salary growth produced a total payroll growth higher than expected of 4.6% versus the expected 3.3% payroll growth assumption from last year. Annual retirement allowances continued to increase, growing by 1.5% this year and reflects a 2.0% increase in the average benefits provided with a decrease in participants in pay status of 0.6%. 5 CITY OF PHILADELPHIA MUNICIPAL RETIREMENT SYSTEM JULY 1, 2014 ACTUARIAL VALUATION SECTION I BOARD SUMMARY 2. City Assets and Liabilities: Table I-3 presents a comparison between the July 1, 2014 and July 1, 2013 system assets, liabilities, UAL, and funding ratios. The Funding Ratio decreased from 47.4% as of July 1, 2013 to 45.8% as of July 1, 2014 due to the asset losses, liability losses, and changes in actuarial assumptions. Prior to the assumption changes the funded ratio would have been 46.9%. Table I-3 Assets and Liabilities ($ thousands) July 1, 2014 July 1, 2013 % Change Actuarial Liabilities by Membership: Actives $ 3,389,554 $ 3,171,233 6.9% Terminated Vesteds 111,873 117,083 -4.5% Disabled 686,641 720,597 -4.7% Retirees 4,656,035 4,441,281 4.8% Beneficiaries 604,661 571,413 5.8% DROP 1,067,134 1,098,426 -2.8% Non-Vested Refunds 5,937 6,123 -3.0% Total Actuarial Liability $ 10,521,835 $ 10,126,156 3.9% Market Value of Assets (net of PAF)* $ 4,854,266 $ 4,444,127 9.2% Actuarial Value of Assets (net of PAF)* $ 4,814,912 $ 4,799,261 0.3% Actuarial Assets minus Market Assets $ ( 39,354) $ 355,134 -111.1% Unfunded Actuarial Liability $ 5,706,923 $ 5,326,895 7.1% Funding Ratio 45.8% 47.4% -1.6% *The PAF is available for distribution under title §22-311 of the Philadelphia Code. In general, the PAF provides for enhanced benefit distribution to retirees and beneficiaries through the use of excess earnings. For more details on the PAF, see Section II – E The market asset value average return was 15.70% compared to the 7.85% assumption for the previous year. For the actuarial value of assets, the experience gains and losses are smoothed over future years, which yielded a rate of return of 4.81%. 6 CITY OF PHILADELPHIA MUNICIPAL RETIREMENT SYSTEM JULY 1, 2014 ACTUARIAL VALUATION SECTION I BOARD SUMMARY 3. Components of UAL Change between July 1, 2013 and July 1, 2014: The Retirement System’s unfunded actuarial liability increased by $380.0 million, from $5,326.9 million as of July 1, 2013 to $5,706.9 million as of July 1, 2014. Table I-4 presents the specific components of this change in the UAL. The System experienced a $136.5 million asset loss based upon the actuarial value of assets and a $31.0 million liability loss which is attributable to demographic experience. There was also an additional liability of $262.2 million recognized due to the changes in assumptions (decrease in interest rate from 7.85% to 7.80% and changes in other demographic assumptions based on the 2014 experience study). Actual FYE 2014 contributions when compared to the expected MMO created a $12.6 million loss due to the timing of contributions. There was a $20.0 million loss due to the one year deferral of gains and losses under the MMO funding requirements. When these changes are compared to the expected pay down of the UAL as part of the MMO there is a net increase in the UAL of $380.0 million over what is expected as of July 1, 2014. Table I-4 Change in Unfunded Actuarial Liability (UAL) ($ thousands) Experience 1. UAL change due to asset (gain)/loss* $ 136,453.1 2. UAL change due to overall liability (gain)/loss $ 3 0,964.5 Contributions 3. UAL change due to difference in benefit accruals, actual contributions and timing $ 1 2,554.4 4. UAL change due to one-year delay in MMO contributions $ 1 9,939.4 Total (Gain)/Loss Amortization Base 5. Total UAL change due to gains and losses: sum 1 through 4 $ 199,911.4 Assumption Changes 6. UAL change due to assumption changes $ 262,151.8 Total 7. Total net overall change: 5 + 6 $ 462,063.2 8. UAL change due to benefit accruals and payments, contributions, and interest (82,034.9) 9. Net increase/(decrease) in UAL: 7 + 8 $ 380,028.3 * Includes loss due to PAF transfer 7