2018-096 Pension Plan UpdateDate: July 27, 2018 Report No. 2018-096
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INFORMAL STAFF REPORT
TO MAYOR AND CITY COUNCIL
SUBJECT:
Update regarding the funded status and funding progress of the Texas Municipal Retirement
System (TMRS) and the Denton Firemen’s Relief and Retirement Fund (DFRRF).
EXECUTIVE SUMMARY:
As part of our annual budget discussions, staff provides the City Council with information on the
status of our pension plans and the most recent actuarial evaluations. This report is intended to
provide a high level overview of the history and structure of each plan, investment performance,
and overall funded status. The DFRRF is currently in the process of completing a new actuarial
evaluation, and we expect this to be presented to Council for review in the fall of 2018.
BACKGROUND:
The City of Denton participates in two separate pension plans. The DFRRF covers firefighters in
the Denton Fire Department. The TMRS plan covers all other City of Denton employees with the
exception of temporary positions.
TMRS Overview:
TMRS was created in 1948 by the Texas Legislature. TMRS is a hybrid of a defined benefit and
defined contribution plan. Under this approach, contributions are defined until the date of
retirement. Upon retirement, the value of these contributions and investment earnings define the
benefits for the retiree (also known as a cash balance plan). In this way, the unfunded liabilities
associated with many defined benefit plans are minimized.
While TMRS is a state-wide retirement system, the plan does not receive any state funding.
Rather, all funding associated with TMRS is provided by employers, employees, and investment
earnings of the system. Further, individual cities determine the level of benefits that will be
provided to their retirees.
As of December 31, 2017, the TMRS system had 883 cities that participate in the plan.
Collectively, these cities have 167,577 employee accounts and 62,776 retirement accounts. The
market value of the assets in TMRS is approximately $28.6 billion. Specific information for the
City of Denton’s TMRS plan is provided in the attached excerpt from the City’s Comprehensive
Annual Financial Report (CAFR).
Investment Performance
The TMRS plan assumes an annual investment return equal to 6.75% of plan assets. However,
the actuarial valuation process utilizes asset smoothing techniques to “smooth out” the natural
Date: July 27, 2018 Report No. 2018-096
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year-to-year fluctuations that are inherent in the investment markets. Below is a history of the
TMRS investment rate of returns achieved compared to the stated goal of 6.75% (shown as a red
line in the below graph). Over this period, TMRS has achieved an average investment return
equivalent to 7.42% (arithmetic average).
Note: TMRS began measuring investment returns on a “Total Return” basis in 2008, Prior to this
time, investment performance reflected yields on the bond portfolio.
While TMRS has had strong investment returns in the past, there is no guarantee that the system
will be able to achieve these rates in the future. However, by continuing to diversify the portfolio,
TMRS investment managers believe they will be able to achieve an average 6.75% return over
time. It is also important to note that any one year, or even a series of years, of below average
investment returns is not a cause for alarm. The TMRS plan is designed to provide benefits for
employees and retirees over decades, and as such, a long-term view of investment performance
assumptions is the proper way to evaluate the health of the plan.
Actuarial Information and Funding Progress:
As of December 31, 2017, the City of Denton had an Actuarial Value of Assets (AVA) of $389.9
million and a Total Actuarial Accrued Liability (AAL) of $467.8 million for the TMRS plan. This
equates to an Unfunded Actuarial Accrued Liability (UAAL) of $77.9 million and a funded ratio
of 83.3%, compared to 81.1% in 2015 and 82.1% in 2016. The UAAL is being amortized over a
period of 17 years in our existing contribution rate, so assuming all assumptions are met, the TMRS
plan for Denton will be 100% funded by 2034. However, if investment returns or other economic
assumptions are not realized, the fund will amortize these actuarial differences over a longer period
of time, and the full funding of the plan may be extended.
Note: These figures are provided on an actuarial basis and will be different from the funding levels
identified in the CAFR which are prepared on an accounting basis.
-5%
0%
5%
10%
15%
20%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
TMRS Investment Rate of Returns
Net of Fees
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DFRRF Overview:
The Denton Firemen’s Relief and Retirement Fund (DFRRF) covers firefighters in the Denton Fire
Department, and the Board of Trustees is the administrator of pension plan. The plan provides
service, death, and disability benefits to members, and these benefits fully vest after 20 years of
service. The normal service retirement benefit is equal to 2.59% of the highest 36-month average
salary for each year of service under the plan.
As of December 31, 2015, the most recent biennial valuation, the plan served 176 active
firefighters and 84 retirees or beneficiaries. Additionally, 2 inactive employees are entitled to
benefits, but they are currently not yet receiving them. Specific information for the City of
Denton’s DFRRF is provided in the attached excerpt from the City’s Comprehensive Annual
Financial Report (CAFR).
As we have discussed with Council in the past, the TMRS plan experienced actuarial issues in
2008, and as a result, the City increased its contribution rate to the plan over time. There was,
however, no increase in benefits provided in the plan. Instead, the increase in contributions was
intended to reduce liabilities and improve the overall financial health of the plan. Due to the
increases in the TMRS contribution rate, the Firefighters Association requested that the same
contribution rate given to TMRS be provided to the DFRRF. In 2010, the City agreed to this
arrangement.
While this funding methodology worked well over the past few years, this arrangement needed to
be modified due to changing demographics and the current investment climate. The primary
reason for this change is that the City’s TMRS contribution is declining as a percentage of payroll
due to growth in the municipal workforce. Additionally, the DFRRF needs a contribution from
the City which is decoupled and independent of TMRS.
To address this, the City, the Firefighters Association, and the DFRRF entered into an agreement
in 2017 to revise the funding formula and require that the City Council formally approve the
actuarial study every two years among other items. The actuarial study is currently in the process
of being completed, and staff anticipates that this will be presented to the Council for consideration
this fall.
Additionally, staff has been working to address turnover and retention issues with our public safety
dispatch employees. Currently, these employees are required to participate in the DFRRF, but due
to the vesting requirements, relatively high employee contribution rate, and lack of portability
between different cities, this can create challenges to attract and retain employees. As a result,
staff has been working with the Fire Association and DFRRF Board to consider a potential
agreement which would allow dispatch employees to choose between being a member of the
DFRRF or TMRS plan. The actuarial impact of these changes is currently being studied, and we
plan to present this information to the Council in either August or September once the results are
known. For planning purposes, we have included an additional $200,000 in the proposed FY 2018-
19 budget should such a decision be made by the City Council to allow these benefit revisions.
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Investment Performance
The annual investment return assumption is 6.75% of plan assets. Like TMRS, the actuarial
valuation process utilizes asset smoothing techniques to “smooth out” the natural year-to-year
fluctuations that are inherent in the investment markets. Below is a 17 year history of the DFRRF
investment rate of returns achieved compared to the stated goal of 6.75% (shown as a red line in
the below graph). Over this period, DFRRF has achieved an average investment return equivalent
to 6.16% (arithmetic average).
While the plan has trailed its investment return assumption, the DFRRF Board of Trustees, and
their actuarial consultants, believe they will be able to achieve an average 6.75% return over time.
However, there is no guarantee that the DFRRF will be able to achieve these rates in the future. If
they are not able to do so, the plan will need to alter the level of benefits or request a higher
contribution rate from its members or the City. Similar to the TMRS plan, it is also important to
note that any one year, or even a series of years, of below average investment returns is not a cause
for alarm. The DFRRF is designed to provide benefits for employees and retirees over decades,
and as such, a long-term view of investment performance assumptions is the proper way to evaluate
the health of the plan.
Actuarial Information and Funding Progress
As of December 31, 2015, the most recent actuarial valuation, the City of Denton had an Actuarial
Value of Assets (AVA) of $72.7 million and a Total Actuarial Accrued Liability (AAL) of $89.9
million for the DFRRF plan. This equates to an Unfunded Actuarial Accrued Liability (UAAL)
of $17.2 million and a funded ratio of 80.8%, compared to 77.1% in 2013. The UAAL is being
amortized over a period of 31 years in our existing contribution rate, so assuming all assumptions
are met, the DFRRF plan for Denton will be 100% funded by 2046. However, if investment returns
or other economic assumptions are not realized, the fund will amortize these actuarial differences
over a longer period of time, and the full funding of the plan may be extended. As stated
previously, the 2017 actuarial valuation is in process, and we expect to be able to present updated
-15%
-10%
-5%
0%
5%
10%
15%
20%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
DFRRF Investment Rate of Returns
Net of Fees
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figures to the Council with the impact of the above mentioned contribution change in the fall of
2018.
Note: These figures are provided on an actuarial basis and will be different from the funding levels
identified in the CAFR which are prepared on an accounting basis.
CONCLUSION:
While public pensions continue to receive a great deal of media scrutiny, most public pension plans
in Texas continue to be appropriately funded. In Denton’s case, both the TMRS and DFRRF plans
are well funded and managed responsibly. Going forward, the funding ratios for these plans are
expected to improve, and a financially sustainable funding mechanism is in place.
As mentioned previously, the purpose of this report is to provide the City Council with additional
information regarding the funding status of the TMRS and DFRRF pension plans. Since this report
only provides an overview of the pension plans, please let me know if you would like any
additional information.
EXHIBITS:
Exhibit 1: Excerpt from 2017 Comprehensive Annual Financial Report (CAFR)
STAFF CONTACT:
Bryan Langley, Deputy City Manager
(940) 349-8224
bryan.langley@cityofdenton.com
CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 2017
The solid waste fund has provided for a reservation and designation of cash and investments of $8,654,114
at September 30, 2017, and anticipates increasing the reserve in future periods as the closure and post-closure activities are carried out.
V. OTHER INFORMATION
A. Pension plans
Texas Municipal Retirement Plan
Plan description
The City of Denton participates as one of 872 plans in the nontraditional, joint contributory, hybrid defined benefit pension plan administered by the Texas Municipal Retirement System (TMRS). TMRS is an agency
created by the State of Texas and administered in accordance with the TMRS Act, Subtitle G, Title 8, Texas Government Code (the TMRS Act) as an agent multiple-employer retirement system for municipal employees in the State of Texas. The TMRS Act places the general administration and management of the System with
a six-member board of Trustees. Although the Governor, with the advice and consent of the Senate, appoints the Board, TMRS is not fiscally dependent on the State of Texas. TMRS’s defined benefit pension plan is a tax-qualified plan under Section 401(a) of the Internal Revenue Code. TMRS issues a publicly-available
comprehensive annual financial report (CAFR) obtainable at www.tmrs.com.
All eligible employees of the city are required to participate in TMRS.
Benefits provided
TMRS provides retirement, disability, and death benefits. Benefit provisions are adopted by the governing body of the City, within the options available in the state statutes governing TMRS.
At retirement, the benefit is calculated as if the sum of the employee’s contributions, with interest, and the
city-financed monetary credits with interest were used to purchase an annuity. Members may choose to receive their retirement benefit in one of seven payments options. Members may also choose to receive a
portion of their benefit as a Partial Lump Sum Distribution in an amount equal to 12, 24, or 36 monthly
payments, which cannot exceed 75% of the member’s deposits and interest.
Upon retirement, benefits depend on the sum of the employee’s contributions, with interest, and the city-
financed monetary credits, with interest. City-financed monetary credits are composed of three sources: prior
service credits, current service credits, and updated service credits. Prior service credit, granted by each city joining TMRS, is a monetary credit equal to the accumulated value of the percentage of prior service credit
adopted times and employee’s deposits that would have been made, based on the average salary prior to participation, for the number of months the employee has been employed, accruing 3% annual interest, and including the matching ratio adopted by the City. Monetary credits for service since the plan began (or current
service credits) are a percent (200%) of the employee's accumulated contributions. In addition, the City grants on an annually repeating basis, another type of monetary credit referred to as an updated service credit. This monetary credit is determined by hypothetically recomputing the member’s account balance by assuming the
current member deposit rate of the City (7%) has always been in effect. The computation also assumes the member’s salary has always been the member’s average salary – using a salary calculation based on the 36-
month period ending a year before the effective date of calculation. This hypothetical account balance is
increased by 3% each year, and increased by the city match currently in effect (200%). The resulting sum is then compared to the member’s actual account balance increased by the actual city match and actual interest credited. If the hypothetical calculation exceeds the actual calculation, the member is granted a monetary
credit (or Updated Service Credit) equal to the difference between the hypothetical calculation and the actual calculation times the percentage adopted. The plan provisions also include an annually repeating basis cost
of living adjustments for retires equal to 70% of the change in the consumer price index.
Members can retire at ages 60 and above with 5 or more years of service or with 20 years of service regardless of age. A member is vested after five years.
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CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 2017
Employees covered by benefit terms
At the December 31, 2016 valuation and measurement date, the following employees were covered by the benefit terms:
Contributions
The contribution rates for employees in TMRS are either 5%, 6%, or 7% of employee gross earnings, and the city matching percentages are either 100%, 150%, or 200%, both as adopted by the City Council. Under the
state law governing TMRS, the contribution rate for each city is determined annually by the actuary, using the Entry Age Normal (EAN) actuarial cost method. The actuarially determined rate is the estimated amount
necessary to finance the cost of benefits earned by employees during the year, with an additional amount to
finance any unfunded accrued liability.
Employees for the City were required to contribute 7% of their annual gross earnings during the fiscal year.
The contribution rates for the City were 17.23% and 17.30% in calendar years 2016 and 2017, respectively.
The City’s contributions to TMRS for the year ended September 30, 2017 were $14,648,606 and were equal to the required contributions.
Net pension liability
The City’s Net Pension Liability (NPL) was measured as of December 31, 2016, and the Total Pension Liability (TPL) used to calculate the Net Pension Liability was determined by an actuarial valuation as of that
date.
Actuarial assumptions The Total Pension Liability in the December 31, 2016 actuarial valuation was determined using the following actuarial assumptions:
Inflation 2.5% per year Overall payroll growth 3.0% per year Investment Rate of Return 6.75%, net of pension plan investment expense, including inflation
Salary increases were based on a service-related table. Mortality rates for active members, retirees, and
beneficiaries were based on the gender-distinct RP2000 Combined Healthy Mortality Tables with Blue Collar
Adjustment, with male rates multiplied by 109% and female rates multiplied by 103%. The rates are projected on a fully generational basis by scale BB to account for future mortality improvements. For disabled
annuitants, the gender-distinct RP2000 Combined Healthy Mortality Tables with Blue Collar Adjustment are
used with male rates multiplied by 109% and female rates multiplied by 103% with a 3-year set-forward for both males and females. In addition, a 3% minimum mortality rate is applied to reflect the impairment for
younger members who become disabled. The rates are projected on a fully generational basis by scale BB to
account for future mortality improvements subject to the 3% floor.
Actuarial assumptions used in the December 31, 2016, valuation were based on the results of actuarial experience studies. The experience study in TMRS was for the period December 31, 2010 through December 31, 2014. Healthy post-retirement mortality rates and annuity purchase rates were updated based on a
Mortality Experience Investigation Study covering 2009 through 2011, and dated December 31, 2013. These assumptions were first used in the December 31, 2013 valuation, along with a change to the Entry Age Normal
Inactive employees or beneficiaries currently receiving benefits 520
Inactive employees entitled to but not yet receiving benefits 478
Active employees 1,245
Total 2,243
59
CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 2017
(EAN) actuarial cost method. Assumptions are reviewed annually. No additional changes were made for the
2014 valuation. After the Asset Allocation Study analysis and experience investigation study, the Board amended the long-term expected rate of return on pension plan investments from 7% to 6.75%. Plan assets
are managed on a total return basis with an emphasis on both capital appreciation as well as the production
of income, in order to satisfy the short-term and long-term funding needs of TMRS.
The long-term expected rate of return on pension plan investments was determined using a building-block
method in which best estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the
target asset allocation percentage and by adding expected inflation. In determining their best estimate of a recommended investment return assumption under the various alternative asset allocation portfolios, TMRS’s actuary focused on the area between (1) arithmetic mean (aggressive) without an adjustment for time
(conservative) and (2) the geometric mean (conservative) with an adjustment for time (aggressive). The target allocation and best estimates of real rates of return for each major asset class in fiscal year 2017 are summarized in the following table:
Discount rate
The discount rate used to measure the Total Pension Liability was 6.75%. The projection of cash flows used
to determine the discount rate assumed that employee and employer contributions will be made at the rates specified in statute. Based on that assumption, the pension plan’s Fiduciary Net Position was projected to be
available to make all projected future benefit payments of current active and inactive employees. Therefore,
the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the Total Pension Liability.
Asset Class
Target
Allocation
Long-Term
Expected Real
Rate of Return
(Arithmetic)
Domestic Equity 17.5%4.55%
International Equity 17.5%6.35%
Core Fixed Income 10.0%1.00%
Non-Core Fixed Income 20.0%4.15%
Real Return 10.0%4.15%
Real Estate 10.0%4.75%
Absolute Return 10.0%4.00%
Private Equity 5.0%7.75%
Total 100.0%
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CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 2017
Changes in the net pension liability
Sensitivity of the net pension liability to changes in the discount rate
The following presents the net pension liability of the City, calculated using the discount rate of 6.75%, as
well as what the City’s net pension liability would be if it were calculated using a discount rate that is 1-
percentage-point lower (5.75%) or 1-percentage-point higher (7.75%) than the current rate:
Pension plan fiduciary net position
Detailed information about the pension plan’s Fiduciary Net Position is available in a separately-issued
TMRS financial report. That report may be obtained on the Internet at www.tmrs.com.
Pension expense and deferred outflows of resources and deferred inflows of resources related to pensions
For the year ended September 30, 2017, the City recognized pension expense of $19,051,014. This amount is included as part of personal services expenses.
Total Pension Plan Fiduciary Net Pension
Liability Net Position Liability
(a)(b) (a) - (b)
Balance at 12/31/2015 409,277,260$ 324,618,549$ 84,658,711$
Changes for the year:
Service cost 13,925,238 - 13,925,238
Interest 27,656,654 - 27,656,654
Difference between expected
and actual experience 763,589 - 763,589
Contributions - employer - 14,046,860 (14,046,860)
Contributions - employee - 5,712,464 (5,712,464)
Net investment income - 21,947,635 (21,947,635)
Benefit payments, including refunds
of employee contributions (13,023,330) (13,023,330) -
Administrative expense - (247,766) 247,766
Other changes - (13,349) 13,349
Net changes 29,322,151 28,422,514 899,637
Balance at 12/31/2016 438,599,411$ 353,041,063$ 85,558,348$
Increase (Decrease)
1% Decrease in Current 1% Increase in
Discount Rate Discount Rate Discount Rate
(5.75%)(6.75%)(7.75%)
City's net pension liability 151,647,722$ 85,558,348$ 31,623,977$
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CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 2017
At September 30, 2017, the City reported deferred outflows of resources and deferred inflows of resources
related to TMRS pension from the following sources:
$11,269,409 reported as deferred outflows of resources related to pensions resulting from contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability for the City’s fiscal year ending September 30, 2017. Other amounts reported as deferred outflows and inflows of resources
related to pensions will be recognized in pension expense as follows:
Supplemental death benefit fund
The City of Denton also participates in the cost-sharing multiple-employer defined benefit group-term life
insurance plan known as the Supplemental Death Benefits Fund (SDBF). This is a separate trust administered by the TMRS Board of Trustees and is a voluntary program in which the City elected, by ordinance, to provide
group term life insurance coverage to active and retired members. The City may terminate coverage under
and discontinue participation in the SDBF by adopting an ordinance before November 1st of any year to be effective the following January 1st.
Payments from this fund are similar to group term life insurance benefits, and are paid to the designated
beneficiaries upon the receipt of an approved application for payment. The death benefit for active employees provides a lump-sum payment approximately equal to the employee’s annual salary (calculated based on the
employee’s actual earnings, for the 12-month period preceding the month of death). The death benefit for
retirees is considered an “other postemployment benefit” (OPEB) and is a fixed amount of $7,500. The obligations of this plan are payable only from the SDBF and are not an obligation of, or claim against, the
TMRS Pension Trust Fund.
Contributions are made monthly based on the covered payroll of employee members of the City. The contractually required contribution rate is determined by an annual actuarial valuation and is based on the
mortality and service experience of all employees covered by the SDBF and the demographics specific to the
workforce of the City. There is a one-year delay between the actuarial valuation that serves as the basis for the employer contribution rate and the calendar year when the rate goes into effect. The contributions to the
Deferred Outflows Deferred Inflows
of Resources of Resources
Differences between projected and
actual investment earnings 14,589,173$ (28,706)$
Contributions subsequent to the
measurement date 11,269,409 -
Differences between expected and
actual economic experience 613,276 (984,869)
Difference in assumption changes - (256,929)
Total 26,471,858$ (1,270,504)$
Measurement
Year Ended
December 31st
2017 4,832,223$
2018 4,832,224
2019 4,112,336
2020 143,138
2021 12,024
Total 13,931,945$
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CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 2017
SDBF are pooled for investment purposes with those of the Pension Trust Fund described above. The TMRS
Act requires the Pension Trust Fund to allocate investment income to the SDBF on an annual basis. The funding policy of the plan is to assure adequate resources are available to meet all death benefit payments for
the upcoming year; the intent is not to prefund retiree term life insurance during employees’ entire careers.
As such, contributions are utilized to fund active member deaths on a pay-as-you-go basis; any excess contributions and investment income over payments then become net position available for OPEB.
The City’s contributions to the TMRS SDBF for the fiscal years ended September 30, 2015, 2016, and 2017, were $133,686, $149,630, and $152,556, respectively, which equaled the required contributions each year.
Denton Firemen's Relief and Retirement Plan
Plan description
The City contributes to the retirement plan for firefighters in the Denton Fire Department known as the Denton Firemen’s Relief and Retirement Fund (the Fund). The Fund is a single employer, contributory,
defined benefit plan. The benefit provisions of the Fund are authorized by the Texas Local Fire Fighters’ Retirement Act (TLFFRA). TLFFRA provides the authority and procedure to amend benefit provisions. The plan is administered by the Board of Trustees of the Denton Firemen’s Relief and Retirement Fund. The City
does not have access to nor can it utilize assets within the retirement plan trust. The Fund issues a stand-alone report pursuant to GASB Statement No. 67, which may be obtained by writing the Denton Firemen’s Relief
and Retirement Fund at P.O. Box 2375, Denton, Texas 76202. See that report for all information about the
plan fiduciary net position.
Benefits provided
Firefighters in the Denton Fire Department are covered by the Denton Firemen’s Relief and Retirement Fund
which provides service retirement, death, disability, and withdrawal benefits. These benefits fully vest after 20 years of credited service. Firefighters may retire at age 50 with 20 years of service. A partially-vested
benefit is provided for firefighters who terminate employment with at least 10 but less than 20 years of
service. If a terminated firefighter has a partially vested benefit, the firefighter may retire starting on the date they would have both completed 20 years of service if they had remained a Denton firefighter and attained
age 50. As of the December 31, 2015 actuarial valuation date, the plan effective January 1, 2011 provides a
monthly normal service retirement benefit, payable in a Joint and Two-Thirds to Spouse form of annuity, equal to 2.59% of Highest 36-Month Average Salary for each year of service.
A retiring firefighter who is at least age 52 with at least 22 years of service has the option to elect the Retroactive Deferred Retirement Option Plan (RETRO DROP) which will provide a lump sum benefit and a reduced monthly benefit. The reduced monthly benefit is based on the service and Highest 36-Month Average
Salary as if the firefighter had terminated employment on their selected RETRO DROP benefit calculation date, which is no earlier than the later of the date the firefighter meets the age 52 and 22 years of service requirements and the date four years prior to the date the firefighter actually retires. Upon retirement, the
member will receive, in addition to the monthly retirement benefit, a lump sum equal to the sum of (1) the amount of monthly contributions the member has made to the Fund after the RETRO DROP benefit
calculation date plus (2) the total of the monthly retirement benefits the member would have received between
the RETRO DROP benefit calculation date and the date retired under the plan. There are no account balances. The lump sum is calculated at the time of retirement and distributed as soon as administratively possible.
There is no provision for automatic postretirement benefit increases. The Fund has the authority to provide,
and has periodically in the past provided, ad hoc postretirement benefit increases.
63
CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 2017
Employees covered by benefit terms
In the December 31, 2015 actuarial valuation, the following numbers of members were covered by the Fund:
Contributions
The contribution provisions of the Fund are authorized by TLFFRA. TLFFRA provides the authority and
procedure to change the amount of contributions determined as a percentage of pay by each firefighter and a
percentage of payroll by the City.
The funding policy of the Denton Firemen’s Relief and Retirement Fund requires contributions equal to 12.6% of pay by the firefighters, the rate elected by the firefighters according to TLFFRA. The City currently
contributes according to a City ordinance the same percentage of payroll the City contributes to the Texas Municipal Retirement System for other employees each calendar year. The City contribution rate was 17.41%
in calendar year 2016 and 17.48% in calendar year 2017 until mid-December when the rate changed to 18.5%.
The December 31, 2015 actuarial valuation includes the assumption that the city contribution rate will average 15.5% over the UAAL amortization period. The costs of administering the plan are paid from the Fund assets.
The City’s contributions to the Fund for the year ended September 30, 2017 were $2,814,029.
Ultimately, the funding policy also depends upon the total return of the Fund’s assets, which varies from year to year. Investment policy decisions are established and maintained by the board of trustees. The board selects
investments and employs investment managers with the advice of their investment consultant who is
completely independent of the investment managers. For the calendar year ending December 31, 2016, the money-weighted rate of return on pension plan investments was 10.17%. This measurement of the investment
performance is net of investment-related expenses, reflecting the effect of the timing of the contributions received and the benefits paid during the year.
While the contribution requirements are not actuarially determined, state law requires that each change in
plan benefits adopted by the Fund must first be approved by an eligible actuary, certifying the contribution commitment by the firefighters and the assumed city contribution rate together provide an adequate contribution arrangement. Using the entry age actuarial cost method, the plan’s normal cost contribution rate
is determined as a percentage of payroll. The excess of the total contribution rate over the normal cost contribution rate is used to amortize the plan’s unfunded actuarial accrued liability (UAAL). The number of years needed to amortize the plan’s UAAL is actuarially determined using an open, level percentage of payroll
method.
Net pension liability
The City of Denton’s net pension liability was measured as of December 31, 2016, and the total pension
liability used to calculate the net pension liability was determined by an actuarial valuation as of December 31, 2015 and rolled forward to December 31, 2016.
Actuarial assumptions
The total pension liability in the December 31, 2015 actuarial valuation was determined using the following
actuarial assumptions, applied to all periods included in the measurement:
Inflation 2.50% per year Overall payroll growth 3.00% per year, plus promotion, step and longevity increases that vary by
service Investment Rate of Return 6.75%, net of pension plan investment expense, including inflation
Inactive employees or beneficiaries currently receiving benefits 84
Inactive employees entitled to but not yet receiving benefits 2
Active employees 176
Total 262
64
CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 2017
Mortality rates were based on the RP-2000 Combined Healthy Mortality Tables for males and for females
(sex distinct) projected to 2024 by scale AA.
The long-term expected rate of return on pension plan investments is reviewed for each biennial actuarial
valuation and was determined using a building-block method in which expected future net real rates of return
(expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These components are combined to produce the long-term expected rate of return by weighting the
expected future net real rates of return by the target asset allocation percentage (currently resulting in 5.00%) and by adding expected inflation (2.50%). In addition, the final 6.75% assumption was selected by “rounding down” and thereby reflects a reduction of 0.75% for adverse deviation. The target allocation and expected
arithmetic net real rates of return for each major asset class are summarized in the following table:
Discount rate
The discount rate used to measure the total pension liability was 6.75%. No projection of cash flows was
used to determine the discount rate because the December 31, 2015 actuarial valuation showed expected
contributions would pay the normal cost and amortize the unfunded actuarial accrued liability (UAAL) in 32 years. Because of the 32-year amortization period of the UAAL, the pension plan’s fiduciary net position is expected to be available to make all projected future benefit payments of current active and
inactive members. Therefore, the long-term expected rate of return on pension plan investments of 6.75%
was applied to all periods of projected benefit payments as the discount rate to determine the total pension liability.
Asset Class
Target
Allocation
Long-Term
Expected Real
Rate of Return
(Arithmetic)
Equities
Large Cap Domestic 40.0%5.90%
Small/Mid Cap Domestic 10.0%6.40%
International Developed 10.0%6.40%
Alternatives
Master Limited Partnerships 8.0%7.90%
Real Estate 15.0%4.40%
Fixed Income 10.0%0.90%
Cash 7.0%0.00%
Total 100.0%
65
CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 2017
Changes in the net pension liability
Sensitivity of the net pension liability to changes in the discount rate
The following presents the net pension liability of the City of Denton, calculated using the discount rate of 6.75%, as well as what the city’s net pension liability would be if it were calculated using a discount
rate that is 1-percentage-point lower (5.75%) or 1-percentage-point higher (7.75%) than the current rate:
Pension plan fiduciary net position
The plan fiduciary net position reported above is the same as reported by the Fund. Detailed information about the plan fiduciary net position is available in the Fund’s separately issued audited financial statements, which are reported using the economic resources measurement focus and the accrual basis of accounting in
conformity with accounting principles generally accepted in the United States of America. Revenues are recorded when earned, and expenses are recorded when a liability is incurred, regardless of the timing of the related cash flows. Investments are reported at fair value, the price that would be recognized to sell an asset
in an orderly transaction between market participants at the measurement date.
Pension expense and deferred outflows of resources and deferred inflows of resources related to pensions
For the year ended September 30, 2017, the City recognized pension expense of $3,983,918. Amounts recognized in the fiscal year represent changes between the current and prior year measurement dates. This amount is included as part of personnel services expenses.
Total Pension Plan Fiduciary Net Pension
Liability Net Position Liability
(a)(b) (a) - (b)
Balance at 12/31/2015 89,942,685$ 67,976,717$ 21,965,968$
Changes for the year:
Service cost 3,089,911 - 3,089,911
Interest 6,135,588 - 6,135,588
Contributions - employer - 2,759,844 (2,759,844)
Contributions - employee - 1,997,155 (1,997,155)
Net investment income - 6,935,215 (6,935,215)
Benefit payments, including refunds
of employee contributions (4,270,006) (4,270,006) -
Administrative expense - (94,175) 94,175
Other changes - - -
Net changes 4,955,493 7,328,033 (2,372,540)
Balance at 12/31/2016 94,898,178$ 75,304,750$ 19,593,428$
Increase (Decrease)
1% Decrease in Current 1% Increase in
Discount Rate Discount Rate Discount Rate
(5.75%)(6.75%)(7.75%)
City's net pension liability 31,679,502$ 19,593,428$ 9,414,393$
66
CITY OF DENTON, TEXAS NOTES TO BASIC FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 2017
At September 30, 2017, the City reported deferred outflows of resources and deferred inflows of resources
related to the Fund from the following sources:
Deferred outflows of resources related to pensions resulting from contributions subsequent to the measurement date of $2,152,993 will be recognized as a reduction of the net pension liability for the measurement year ending December 31, 2017 and the City’s fiscal year ending September 30, 2018. Other
amounts reported as deferred outflows and inflows of resources related to pensions will be recognized in pension expense as follows:
B. Post-employment benefits other than pensions (OPEB)
The cost of post-employment healthcare benefits, from an accrual accounting perspective, similar to the cost of pension benefits, should be associated with the periods in which the cost occurs, rather than in the future
year when it will be paid. According to the requirements of GASB Statement No. 45 for the fiscal year ended
September 30, 2017, the City recognizes the cost of post-employment healthcare in the year the employee services are received, reports the accumulated liability from prior years, and provides information useful in
assessing potential demands on the City’s future cash flows. Recognition of the liability accumulated from
prior years will be amortized over 30 years, the first period commencing with the fiscal year ending September 30, 2008.
Plan description
The City provides post-employment medical care (OPEB) for retired employees through a single-employer defined benefit medical plan. The plan provides medical benefits for eligible retirees, their spouses and
dependents though the City’s group health insurance plans, which covers both active and retired members. The benefits, benefit levels, and contribution rates are recommended annually by the City management as part of the budget process. Any changes in rate subsidies for retirees are approved by the City Council. Since
Deferred Outflows Deferred Inflows
of Resources of Resources
Differences between projected and
actual investment earnings 5,058,092$ (1,866,823)$
Contributions subsequent to the
measurement date 2,152,993 -
Differences between expected and
actual economic experience - (1,641,453)
Difference in assumption changes 1,855,036 -
Total 9,066,121$ (3,508,276)$
Measurement
Year Ended
December 31st
2017 1,263,085$
2018 1,263,085
2019 1,214,160
2020 (439,253)
2021 27,452
Thereafter 76,323
Total 3,404,852$
67
CITY OF DENTON, TEXAS Exhibit XII
REQUIRED SUPPLEMENTARY INFORMATION
TEXAS MUNICIPAL RETIREMENT SYSTEM
SCHEDULE OF CHANGES IN NET PENSION LIABILITY AND RELATED RATIOS
LAST THREE FISCAL YEARS (PREVIOUS YEARS ARE NOT AVAILABLE)1
Measurement Measurement Measurement
Year Year Year
2014 2015 2016
Total pension liability:
Service Cost 10,667,694$ 12,615,957$ 13,925,238$
Interest (on the total pension liability)25,182,941 26,905,700 27,656,654
Difference between expected and actual experience (171,241) (1,525,911) 763,589
Change of assumptions - (428,789) -
Benefit payments, including refunds of employee contributions (11,387,617) (12,697,735) (13,023,330)
Net change in total pension liability 24,291,777 24,869,222 29,322,151
Total pension liability - beginning 360,116,261 384,408,038 409,277,260
Total pension liability - ending (a)384,408,038$ 409,277,260$ 438,599,411$
Plan fiduciary net position:
Contributions - employer 13,065,763$ 13,615,410$ 14,046,860$
Contributions - employee 4,991,415 5,365,231 5,712,464
Net investment income 16,867,596 469,530 21,947,635
Benefit payments, including refunds of employee contributions (11,387,617) (12,697,735) (13,023,330)
Administrative expense (176,083) (285,957) (247,766)
Other (14,477) (14,123) (13,349)
Net change in plan fiduciary net position 23,346,597 6,452,356 28,422,514
Plan fiduciary net position - beginning 294,819,596 318,166,193 324,618,549
Plan fiduciary net position - ending (b)318,166,193$ 324,618,549$ 353,041,063$
Net pension liability - ending (a) - (b)66,241,845$ 84,658,711$ 85,558,348$
Plan fiduciary net position as a percentage of total pension liability 82.77%79.32%80.49%
Covered employee payroll 71,025,494$ 76,646,157$ 81,481,789$
Net pension liability as a percentage of covered employee payroll 93.26%110.45%105.00%
1Schedule is intended to present information for ten years. Additional years of information will be presented
as they become available.
79
CITY OF DENTON, TEXAS Exhibit XIII
REQUIRED SUPPLEMENTARY INFORMATION
DENTON FIREMEN'S RELIEF AND RETIREMENT FUND
SCHEDULE OF CHANGES IN NET PENSION LIABILITY AND RELATED RATIOS
LAST THREE FISCAL YEARS (PREVIOUS YEARS ARE NOT AVAILABLE)1
Measurement Measurement Measurement
Year Year Year
2014 2015 2016
Total pension liability:
Service Cost 2,747,253$ 2,836,263$ 3,089,911$
Interest (on the total pension liability)5,685,396 5,998,959 6,135,588
Difference between expected and actual experience - (2,063,421) -
Change of assumptions - 2,331,908 -
Benefit payments, including refunds of employee contributions (4,036,009) (4,048,358) (4,270,006)
Net change in total pension liability 4,396,640 5,055,351 4,955,493
Total pension liability - beginning 80,490,694 84,887,334 89,942,685
Total pension liability - ending (a)84,887,334$ 89,942,685$ 94,898,178$
Plan fiduciary net position:
Contributions - employer 2,566,875$ 2,567,219$ 2,759,844$
Contributions - employee 1,745,419 1,803,064 1,997,155
Net investment income 4,411,066 (3,287,188) 6,935,215
Benefit payments, including refunds of employee contributions (4,036,009) (4,048,358) (4,270,006)
Administrative expense (81,005) (76,538) (94,175)
Net change in plan fiduciary net position 4,606,346 (3,041,801) 7,328,033
Plan fiduciary net position - beginning 66,412,172 71,018,518 67,976,717
Plan fiduciary net position - ending (b)71,018,518$ 67,976,717$ 75,304,750$
Net pension liability - ending (a) - (b)13,868,816$ 21,965,968$ 19,593,428$
Plan fiduciary net position as a percentage of total pension liability 83.66%75.58%79.35%
Covered employee payroll 14,238,486$ 14,310,032$ 15,850,437$
Net pension liability as a percentage of covered employee payroll 97.40%153.50%123.61%
1Schedule is intended to present information for ten years. Additional years of information will be presented
as they become available.
80
CITY OF DENTON, TEXAS Exhibit XIV
REQUIRED SUPPLEMENTARY INFORMATION
TEXAS MUNICIPAL RETIREMENT SYSTEM
SCHEDULE OF CONTRIBUTIONS
LAST TEN FISCAL YEARS (Unaudited)
(a)(b)(c)(d)
Contributions
Contributions as a Percentage
in Relation to Contribution of Covered
Actuarially the Actuarially Excess Covered Employee
Fiscal Determined Determined (Deficiency)Employee Payroll
Year Contributions Contributions (b) - (a)Payroll (b)/(d)
2008 7,082,769$ 7,082,769$ -$ 53,908,360$ 13.14%
2009 9,709,279 7,952,938 (1,756,341) 57,250,108 13.89%
2010 11,194,086 8,849,577 (2,344,509) 59,457,345 14.88%
2011 11,580,085 9,579,358 (2,000,727) 58,139,688 16.48%
2012 11,475,702 10,435,001 (1,040,701) 60,340,212 17.29%
2013 12,174,640 12,171,482 (3,158) 64,940,234 18.74%
2014 12,912,746 12,911,461 (1,285) 69,872,024 18.48%
2015 13,507,272 13,507,272 - 75,379,632 17.92%
2016 14,435,638 14,435,638 - 83,127,601 17.37%
2017 14,648,606 14,648,606 - 84,753,377 17.28%
Notes to Schedule:
Methods and assumptions used to determine contribution rate for 2017:
Actuarial Cost Method Entry Age Normal
Amortization Method Level Percentage of Payroll, Closed
Remaining Amortization Period 29 Years (Equivalent Single Amortization Period of 18.1 years)
Asset Valuation Method 10 Year Smoothed Market; 15% Soft Corridor
Inflation 2.50%
Salary Increases 3.50% to 10.50% including inflation
Investment Rate of Return 6.75%
Retirement Age
Mortality
Actuarial determined contribution rates are calculated as of December 31st and become effective in January, 13 months
later. Contributions above do not include contributions into the supplemental death benefit fund.
Experience-based table of rates that are specific to the City's plan of benefits.
Last updated for the 2015 valuation pursuant to an experience study of the
period 2010 - 2014.
RP2000 Combined Mortality Table with Blue Collar Adjustment with male rates
multiplied by 109% and female rates multiplied by 103% and projected on a fully
generational basis with scale BB.
81
CITY OF DENTON, TEXAS Exhibit XV
REQUIRED SUPPLEMENTARY INFORMATION
FIREMEN'S RELIEF AND RETIREMENT FUND
SCHEDULE OF CONTRIBUTIONS
LAST TEN FISCAL YEARS (Unaudited)
(a)(b)(c)(d)
Contributions
Contributions as a Percentage
in Relation to Contribution of Covered
Annual the Annual Excess Covered Employee
Fiscal Required Required (Deficiency)Employee Payroll
Year Contributions Contributions (b) - (a)Payroll (b)/(d)
2008 1,426,906$ 1,426,906$ -$ 11,890,880$ 12.00%
2009 1,747,908 1,747,908 - 12,485,061 14.00%
2010 1,976,419 1,976,419 - 13,070,041 15.12%
2011 2,141,662 2,141,662 - 12,828,446 16.69%
2012 2,253,667 2,253,667 - 12,899,800 17.47%
2013 2,579,453 2,579,453 - 13,629,825 18.93%
2014 2,576,652 2,576,652 - 13,828,070 18.63%
2015 2,535,719 2,535,719 - 14,029,051 18.07%
2016 2,819,046 2,819,046 - 15,540,826 18.14%
2017 2,814,029 2,814,029 - 16,113,770 17.46%
Notes to Schedule:
Actuarial Cost Method Entry Age
Amortization Method Level Percentage of Payroll, Open
Remaining Amortization Period 31 Years
Asset Valuation Method 5-year smoothing
Inflation 2.50%
Salary Increases 3.00% annual general compensation increase plus promotion, step, and longevity
increases which average 1.98% per year over a 30-year career
Investment Rate of Return 6.75%, net of pension plan investment expense, including inflation
Retirement Age
Mortality
Annual required contributions are not actuarially determined. According to a City ordinance, since January 2010 the City
contributes to the Firemen's Relief and Retirement Fund at the same percentage of payroll that the City contributes to the
Texas Municipal Retirement System for other employees. The rates are calculated as of December 31st and become effective in
January, 13 months later.
Average expected age at retirement of 57
RP-2000 Combined Healthy Mortality Tables projected to 2024 by scale AA
While the contribution requirements are not actuarially determined, state law requires an actuary certify the assumed City
contribution rate is adequate. Methods and assumptions used to contribution adequacy for 2017:
82