City of Orlando Police Officers' Actuarial Valuation and Review as of October 1, 2017 This report has been prepared at the request of the Board of Trustees to assist in administering the Fund. This valuation report may not otherwise be copied or reproduced in any form without the consent of the Board of Trustees and may only be provided to other parties in its entirety. The measurements shown in this actuarial valuation may not be applicable for other purposes. Copyright 2018 by The Segal Group, Inc. All rights reserved.
2018 Powers Ferry Road, Suite 850 Atlanta, GA 30339-7200 T 678.306.3100 www.segalco.com May 7, 2018 Board of Trustees City of Orlando Police Officers' Orlando, FL Dear Board Members: We are pleased to submit this Actuarial Valuation and Review as of October 1, 2017. It summarizes the actuarial data used in the valuation, establishes the funding requirements for fiscal 2019, and analyzes the preceding year s experience. The census information on which our calculations were based was prepared by the City s Employee Benefits Department and the financial information was provided by the City's Office of Business & Financial Services Department. That assistance is gratefully acknowledged. Statement by Enrolled Actuary: This actuarial valuation and/or cost determination was prepared and completed by me, or under my direct supervision, and I acknowledge responsibility for the results. To the best of my knowledge, the results are complete and accurate, and in my opinion, the techniques and assumptions used are reasonable and meet the requirements and intent of part VII, Chapter 112, Florida Statutes. There is no benefit or expense to be provided by the plan and/or paid from the plan s assets for which liabilities or current costs have not been established or otherwise taken into account in the valuation. All known events or trends which may require a material increase in plan costs or required contribution rates have been taken into account in the valuation. The actuarial calculations were directed under the supervision of Jeffrey S. Williams. Mr. Williams is a member of the American Academy of Actuaries and meets the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion herein. We look forward to reviewing this report at your next meeting and to answering any questions. Sincerely, Segal Consulting, a Member of The Segal Group, Inc. By: Jeffrey S. Williams, FCA, ASA, MAAA Leon F. (Rocky) Joyner, Jr. Vice President and Consulting Actuary Enrolled Actuary No. 17-07009 Vice President and Consulting Actuary 8706428v3/01391.001
Table of Contents City of Orlando Police Officers' Actuarial Valuation and Review as of October 1, 2017 Section 1: Actuarial Valuation Summary Purpose and Basis... 4 Significant Issues... 5 Summary of Key Valuation Results... 7 Important Information About Actuarial Valuations... 8 Section 2: Actuarial Valuation Results A. Participant Data... 10 B. Financial Information... 15 C. Actuarial Experience... 18 D. Changes in the Actuarial Accrued Liability... 24 E. Development of Unfunded Actuarial Accrued Liability... 25 F. Actuarially Determined Contribution... 26 G. History of Employer Contributions... 28 H. Risk... 29 I. GFOA Solvency Test... 30 Section 3: Supplemental Information Exhibit A Table of Plan Coverage... 31 Exhibit B Participants in Active Service as of September 30, 2017... 32 Exhibit C Reconciliation of Participant Data... 33 Exhibit D Summary Statement of Income and Expenses on a Market Value Basis... 34 Exhibit E Summary Statement of Plan Assets... 35 Exhibit F Development of the Fund Through September 30, 2017... 36 Exhibit G Table of Amortization Bases... 37 Exhibit H Supplementary State of Florida Information... 38 Exhibit I Definition of Pension Terms... 43 Section 4: Actuarial Valuation Basis Exhibit I Actuarial Assumptions and Actuarial Cost Method... 48 Exhibit II Summary of Plan Provisions... 52
Section 1: Actuarial Valuation Summary Purpose and Basis This report was prepared by Segal Consulting to present a valuation of the City of Orlando Police Officers as of October 1, 2017. The valuation was performed to determine whether the assets and contributions are sufficient to provide the prescribed benefits. The measurements shown in this actuarial valuation may not be applicable for other purposes. In particular, the measures herein are not necessarily appropriate for assessing the sufficiency of Fund assets to cover the estimated cost of settling the Fund s benefit obligations. Future actuarial measurements may differ significantly from the current measurements presented in this report due to such factors as the following: plan experience differing from that anticipated by the economic or demographic assumptions; changes in economic or demographic assumptions; increases or decreases expected as part of the natural operation of the methodology used for these measurements; and changes in plan provisions or applicable law. Certain disclosure information required by GASB Statements No 67 and 68 as of September 30, 2018 for the Fund is provided in a separate report. The contribution requirements presented in this report are based on: The benefit provisions of the Pension Plan, as administered by the Board; The characteristics of covered active participants, inactive vested participants, and retired participants and beneficiaries as of September 30, 2017, provided by the City s Employee Benefits Department; The assets of the Plan as of September 30, 2017, provided by the City's Office of Business & Financial Services; Economic assumptions regarding future salary increases and investment earnings; Other actuarial assumptions regarding employee terminations, retirement, death, etc.; and The funding policy adopted by the Board, subject to the requirements of Part VII, Chapter 112, Florida Statutes. Section 1: Actuarial Valuation Summary as of October 1, 2017 for the City of Orlando Police Officers' 4
Significant Issues 1. Segal Consulting ( Segal ) strongly recommends an actuarial funding method that targets 100% funding of the actuarial accrued liability. Generally, this implies payments that are ultimately at least enough to cover normal cost, interest on the unfunded actuarial accrued liability and the principal balance. The funding policy adopted by the Board meets this standard. 2. The funded ratio (the ratio of the actuarial value of assets to actuarial accrued liability) is 80.81%, compared to the prior year funded ratio of 80.12%. This ratio is one measure of funding status, and its history is a measure of funding progress. Using the market value of assets, the funded ratio is 81.35%, compared to 78.88% as of the prior valuation date. These measurements are not necessarily appropriate for assessing the sufficiency of Fund assets to cover the estimated cost of settling the Fund s benefit obligation or the need for or the amount of future contributions. 3. The actuarially determined contribution for the plan year beginning October 1, 2018 is $32,077,049, an increase of $448,275 from the contribution of $31,628,774 being made in the plan year that began October 1, 2017. The contribution as a percentage of payroll increased from 56.04% of projected payroll to 58.40% of projected payroll, based on a level percent-of-payroll amortization of the unfunded actuarial accrued liability. 4. The unfunded actuarial accrued liability is $132,164,479, which is an increase $3,143,091 since the prior valuation. 5. The net actuarial loss from all sources is $1,715,898, or 0.25% of the actuarial accrued liability. This loss is the net result of the following results: The experience gain from demographic experience was $4,723,256, or 0.69% of actuarial accrued liability. This gain is primarily due to gains on lower active salaries than expected and a gain due to the release of a portion of the excess reserve for State contributions. The experience loss from actuarial investment experience was $1,839,102, or 0.27% of actuarial accrued liability. This includes a loss on investment return less than expected and a loss on administrative expenses greater than expected. The rate of return on the market value of assets was 10.74% for the year ending September 30, 2017. The return on the actuarial value of assets was 7.40% for the same period due to the recognition of prior years investment gains and losses. This resulted in an actuarial loss when measured against the assumed rate of return of 7.75%. The experience loss from administrative expenses being greater than expected was $76,491, or 0.01% of actuarial accrued liability. The net effect of deferring the contribution requirement determined based on the October 1, 2016 valuation to the fiscal year beginning October 1, 2017 is a loss of $4,523,561, or 0.66% of actuarial accrued liability. This reflects the portion of the amortization payment as of October 1, 2016 that is not yet satisfied based on contributions received as of September 30, 2017. Section 1: Actuarial Valuation Summary as of October 1, 2017 for the City of Orlando Police Officers' 5
6. The rate of return on the market value of assets was 10.74% for the October 1, 2016 to September 30, 2017 plan year. The return on the actuarial value of assets was 7.40% for the same period due to the recognition of prior years investment gains and losses. This resulted in an actuarial loss when measured against the assumed rate of return of 7.75% that was in place for fiscal 2017. 7. The actuarial value of assets excluding excess reserves for state contributions, is 99.3% of the market value of assets. The investment experience in the past years has only been partially recognized in the actuarial value of assets. There are currently $591,285 in asset gains that have not yet been fully recognized in the actuarial value of assets. 8. The following actuarial assumptions were changed with this valuation: On March 8, 2018, the Board of Trustees voted to lower the discount rate from 7.75% to 7.60%. Per Part VII, Chapter 112.64(5)(a), of Florida Statutes, the payroll growth assumption used for amortization purposes is not allowed to exceed the average annual payroll growth for the preceding ten years. As a result, for amortization purposes only, the payroll growth assumption was lowered from 3.00% (Segal s long-term assumption) to 1.87% for this valuation. The payroll growth assumption used in the prior valuation was 2.76%. As a result of these assumption changes, the employer normal cost increased by $529,797 and the actuarial accrued liability increased by $11,851,074. The total impact was an increase in the actuarially determined contribution of $1,596,571, or 3.38% of payroll. 9. The following Plan changes are included for the first time in this valuation: The normal form of the retirement benefit was changed from a straight life annuity to a 10-year certain and life annuity. Actuarial equivalent survivor benefit options were made available for non-spousal beneficiaries. As a result of these plan changes, the employer normal cost increased by $28,536 and the actuarial accrued liability increased by $514,766. The total impact was an increase in the actuarially determined contribution of $553,462, or 1.01% of payroll. 10. This actuarial report as of October 1, 2017 is based on financial and demographic data as of that date. Changes subsequent to that date are not reflected and will affect future actuarial costs of the plan. 11. Since the actuarial valuation results are dependent on a given set of assumptions, there is a risk that emerging results may differ significantly as actual experience proves to be different from the assumptions. We have included a discussion of various risks that may affect the Fund in Section 2. Section 1: Actuarial Valuation Summary as of October 1, 2017 for the City of Orlando Police Officers' 6
Summary of Key Valuation Results 2018 2017 2016 Contributions for fiscal Actuarially determined employer contributions (ADEC) 1 $32,077,049 $31,628,774 $27,359,700 year beginning Actual employer contributions -- -- $27,359,700 October 1: Percentage of ADEC contributed -- -- 100% Actuarial accrued Retired participants and beneficiaries $427,456,921 $389,562,357 liability for plan year Inactive vested participants 2 763,385 881,751 beginning October 1: Active participants 260,526,791 258,441,913 Total 688,747,097 648,886,021 Normal cost including administrative expenses for plan year beginning October 1 16,311,533 15,941,087 Assets for plan year Market value of assets (MVA) $560,275,175 $511,863,840 beginning October 1: Actuarial value of assets 3 (AVA) 556,582,618 519,864,633 Actuarial value of assets as a percentage of market value of assets 99.34% 101.56% Funded status for plan Unfunded actuarial accrued liability on market value of assets (MVA) $128,471,922 $137,022,181 year beginning October 1: Funded percentage on MVA basis 81.35% 78.88% Unfunded actuarial accrued liability on actuarial value of assets (AVA) $132,164,479 $129,021,388 Funded percentage on AVA basis 80.81% 80.12% Effective amortization period (years) on an AVA basis 9 8 Key assumptions: Net investment return 7.60% 7.75% Inflation rate 3.00% 3.00% Payroll increase for amortization purposes 1.87% 2.76% Demographic data for Number of retired participants and beneficiaries 735 698 plan year beginning Number of inactive vested participants 5 5 October 1 Number of active participants 721 723 Number of inactive participants entitled to a refund of employee contributions 8 10 Total payroll $53,915,085 $54,920,286 Average payroll 74,778 75,962 Projected covered payroll $56,436,086 $51,591,738 1 Actuarial determined employer contributions are assumed to be paid at the beginning of year. 2 Includes employee contributions remaining in plan 3 Excludes excess reserve for state contributions. Section 1: Actuarial Valuation Summary as of October 1, 2017 for the City of Orlando Police Officers' 7
Important Information About Actuarial Valuations An actuarial valuation is a budgeting tool with respect to the financing of future projected obligations of a pension plan. It is an estimated forecast the actual long-term cost of the plan will be determined by the actual benefits and expenses paid and the actual investment experience of the plan. In order to prepare a valuation, Segal Consulting ( Segal ) relies on a number of input items. These include: Plan of benefits Participant data Assets Actuarial assumptions Plan provisions define the rules that will be used to determine benefit payments, and those rules, or the interpretation of them, may change over time. Even where they appear precise, outside factors may change how they operate. It is important to keep Segal informed with respect to plan provisions and administrative procedures, and to review the plan summary included in our report to confirm that Segal has correctly interpreted the plan of benefits. An actuarial valuation for a plan is based on data provided to the actuary by the Fund. Segal does not audit such data for completeness or accuracy, other than reviewing it for obvious inconsistencies compared to prior data and other information that appears unreasonable. It is important for Segal to receive the best possible data and to be informed about any known incomplete or inaccurate data. The valuation is based on the market value of assets as of the valuation date, as provided by the Fund. The Fund uses an actuarial value of assets that differs from market value to gradually reflect year-to-year changes in the market value of assets in determining the contribution requirements. In preparing an actuarial valuation, Segal projects the benefits to be paid to existing plan participants for the rest of their lives and the lives of their beneficiaries. This projection requires actuarial assumptions as to the probability of death, disability, withdrawal, and retirement of each participant for each year. In addition, the benefits projected to be paid for each of those events in each future year reflect actuarial assumptions as to salary increases and cost-ofliving adjustments. The projected benefits are then discounted to a present value, based on the assumed rate of return that is expected to be achieved on the plan s assets. There is a reasonable range for each assumption used in the projection and the results may vary materially based on which assumptions are selected. It is important for any user of an actuarial valuation to understand this concept. Actuarial assumptions are periodically reviewed to ensure that future valuations reflect emerging plan experience. While future changes in actuarial assumptions may have a significant impact on the reported results, that does not mean that the previous assumptions were unreasonable. Section 1: Actuarial Valuation Summary as of October 1, 2017 for the City of Orlando Police Officers' 8
The user of Segal s actuarial valuation (or other actuarial calculations) should keep the following in mind: The actuarial valuation is prepared at the request of the Board. Segal is not responsible for the use or misuse of its report, particularly by any other party. An actuarial valuation is a measurement of the plan s assets and liabilities at a specific date. Accordingly, except where otherwise noted, Segal did not perform an analysis of the potential range of future financial measures. The actual long-term cost of the plan will be determined by the actual benefits and expenses paid and the actual investment experience of the plan. Actuarial results in this report are not rounded, but that does not imply precision. If the Fund is aware of any event or trend that was not considered in this valuation that may materially change the results of the valuation, Segal should be advised, so that we can evaluate it. Segal does not provide investment, legal, accounting, or tax advice. Segal s valuation is based on our understanding of applicable guidance in these areas and of the plan s provisions, but they may be subject to alternative interpretations. The Board should look to their other advisors for expertise in these areas. As Segal Consulting has no discretionary authority with respect to the management or assets of the Plan, it is not a fiduciary in its capacity as actuaries and consultants with respect to the Plan. Section 1: Actuarial Valuation Summary as of October 1, 2017 for the City of Orlando Police Officers' 9
Section 2: Actuarial Valuation Results A. Participant Data The Actuarial Valuation and Review considers the number and demographic characteristics of covered participants, including active participants, inactive vested participants, retired participants and beneficiaries. This section presents a summary of significant statistical data on these participant groups. More detailed information for this valuation year and the preceding valuation can be found in Section 3, Exhibits A, B, and C. Year Ended September 30 PARTICIPANT POPULATION: 2008 2017 Active Participants 1 Inactive Vested Participants 1 Retired Participants and Beneficiaries 2 Total Non- Actives Ratio of Non-Actives to Actives 2008 741 10 490 500 0.67 2009 731 11 516 527 0.72 2010 718 9 542 551 0.77 2011 696 9 569 578 0.83 2012 721 14 600 614 0.85 2013 710 10 630 640 0.90 2014 698 9 659 668 0.96 2015 694 13 680 693 1.00 2016 723 15 698 713 0.99 2017 721 13 735 748 1.04 1 Includes terminated participants with employee contributions remaining in the Plan. 2 Includes suspended pensioners, if applicable. Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 10
Active Participants Plan costs are affected by the age, years of service and payroll of active participants. In this year s valuation, there were 721 active participants with an average age of 40.2, average years of service of 11.4 years and average payroll of $74,778. The 723 active participants in the prior valuation had an average age of 40.4, average service of 11.6 years and average payroll of $75,962. Distribution of Active Participants as of September 30, 2017 ACTIVES BY AGE ACTIVES BY YEARS OF SERVICE 160 140 120 100 80 60 40 20 0 200 180 160 140 120 100 80 60 40 20 0 Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 11
Inactive Participants In this year s valuation, there were five participants with a vested right to a deferred or immediate vested benefit. In addition, there were eight participants entitled to a return of their employee contributions. Retired Participants and Beneficiaries As of September 30, 2017, 683 retired participants and 52 beneficiaries were receiving total monthly benefits of $2,843,142. For comparison, in the previous valuation, there were 649 retired participants and 49 beneficiaries receiving monthly benefits of $2,627,337. As of September 30, 2017, the average monthly benefit for retired participants is $3,868, compared to $3,764 in the previous valuation. The average age for retired participants is 62.1 in the current valuation, compared with 61.8 in the prior valuation. 160 140 120 100 Distribution of Pensioners as of September 30, 2017 PENSIONERS BY TYPE AND MONTHLY AMOUNT 140 120 100 80 PENSIONERS BY TYPE AND BY AGE 80 60 40 20 0 60 40 20 0 Normal Early Disability DROPs Normal Early Disability DROPs Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 12
Schedule of Retirees and Beneficiaries The chart below details the schedule of retirees and beneficiaries added to and removed from the rolls for the past six valuations. Valuation Date October 1 SCHEDULE OF RETIREES AND BENEFICIARIES Added to Rolls Removed from Rolls Rolls- End of Year Number Annual Allowance Number Annual Allowance Number Annual Allowance % Increase in Annual Allowances Average Annual Allowance 2012 34 $1,842,300 3 $80,500 599 $24,112,200 9.19 $40,300 2013 37 2,047,400 6 113,300 630 26,293,000 9.04 41,700 2014 37 2,103,200 8 185,200 659 28,455,100 8.22 43,200 2015 27 1,336,600 6 135,000 680 29,972,400 5.33 44,100 2016 24 1,321,100 6 107,300 698 31,528,000 5.19 45,200 2017 45 2,482,700 8 271,200 735 34,117,700 8.21 46,400 Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 13
Historical Plan Population The chart below demonstrates the progression of the active population over the last ten years. The chart also shows the changes among the retired population over the same time period. Year Ended September 30 PARTICIPANT DATA STATISTICS: 2008 2017 Count Active Participants Average Age Average Service Retired Participants and Beneficiaries Count Average Age Average Monthly Amount 2008 741 39.2 11.1 490 59.0 $2,873 2009 731 39.5 11.3 516 59.3 2,991 2010 718 39.9 11.7 542 59.5 3,099 2011 696 40.2 11.9 569 59.4 3,237 2012 721 39.8 11.4 600 59.8 3,351 2013 710 39.9 11.4 630 60.4 3,478 2014 698 40.1 11.5 659 60.6 3,598 2015 694 40.5 11.8 680 61.3 3,673 2016 723 40.4 11.6 698 61.8 3,764 2017 721 40.2 11.4 735 62.1 3,868 Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 14
$ Millions B. Financial Information Retirement plan funding anticipates that, over the long term, both contributions (less administrative expenses) and investment earnings (less investment fees) will be needed to cover benefit payments. Retirement plan assets change as a result of the net impact of these income and expense components. Additional financial information, including a summary of transactions for the valuation year, is presented in Section 3, Exhibits D, E and F. COMPARISON OF CONTRIBUTIONS WITH BENEFITS AND EXPENSES FOR YEARS ENDED SEPTEMBER 30, 2008 2017 45 40 35 30 25 20 15 10 5 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Employer Contributions Employee Contributions Chapter 185 Premium Taxes Benefits Paid Administrative Expenses Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 15
It is desirable to have level and predictable plan costs from one year to the next. For this reason, the Board has approved an asset valuation method that gradually adjusts to market value. Under this valuation method, the full value of market fluctuations is not recognized in a single year and, as a result, the asset value and the plan costs are more stable. The amount of the adjustment to recognize market value is treated as income, which may be positive or negative. Realized and unrealized gains and losses are treated equally and, therefore, the sale of assets has no immediate effect on the actuarial value. DETERMINATION OF ACTUARIAL VALUE OF ASSETS FOR YEAR ENDED SEPTEMBER 30, 2017 1. Market value of assets, September 30, 2017 $560,275,175 Original Percent Unrecognized 2. Calculation of unrecognized return Amount* Deferred Amount** (a) Year ended September 30, 2017 $15,234,143 80% $12,187,314 (b) Year ended September 30, 2016 2,691,175 60 1,614,705 (c) Year ended September 30, 2015-38,706,539 40-15,482,616 (d) Year ended September 30, 2014 5,446,562 20 1,089,312 (e) Year ended September 30, 2013 12,491,815 0 0 (f ) Total unrecognized return -591,285 3. Preliminary actuarial value: (1) - (2f) $560,866,460 4. Adjustment to be within 20% corridor 0 5. Reserve for excess state contributions 4,283,842 6. Final actuarial value of assets as of September 30, 2017: (3) + (4) - (5) $556,582,618 7. Actuarial value as a percentage of market value: (6) (1) 99.3% 8. Amount deferred for future recognition: (1) - (3)*** *Total return minus expected return on a market value basis **Recognition at 20% per year over five years ***Deferred return as of September 30, 2017 recognized in each of the next five years: (a) Amount recognized on September 30, 2018 -$3,066,933 (b) Amount recognized on September 30, 2019-4,156,245 (c) Amount recognized on September 30, 2020 3,585,064 (d) Amount recognized on September 30, 2021 3,046,829 (e) Amount recognized on September 30, 2022 0 -$591,285 Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 16
$ Millions Both the actuarial value and market value of assets are representations of the Plan s financial status. As investment gains and losses are gradually taken into account, the actuarial value of assets tracks the market value of assets. The actuarial asset value is significant because the Fund s liabilities are compared to these assets to determine what portion, if any, remains unfunded. Amortization of the unfunded actuarial accrued liability is an important element in determining the contribution requirement. ACTUARIAL VALUE OF ASSETS VS. MARKET VALUE OF ASSETS AS OF SEPTEMBER 30, 2008 2017 600 550 500 450 400 350 300 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Actuarial Value Market Value Note: The actuarial value of assets includes reserve for excess state contributions. Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 17
C. Actuarial Experience To calculate any actuarially determined contribution, assumptions are made about future events that affect the amount and timing of benefits to be paid and assets to be accumulated. Each year actual experience is measured against the assumptions. If overall experience is more favorable than anticipated (an actuarial gain), any contribution requirement will decrease from the previous year. On the other hand, any contribution requirement will increase if overall actuarial experience is less favorable than expected (an actuarial loss). Taking account of experience gains or losses in one year without making a change in assumptions reflects the belief that the single year s experience was a short-term development and that, over the long term, experience will return to the original assumptions. For contribution requirements to remain stable, assumptions should approximate experience. If assumptions are changed, the contribution requirement is adjusted to take into account a change in experience anticipated for all future years. The total loss is $1,715,898, which includes $1,839,102 from investment losses and $123,204 in gains from all other sources. The net experience variation from individual sources other than investments was less than 0.1% of the actuarial accrued liability. A discussion of the major components of the actuarial experience is on the following pages. ACTUARIAL EXPERIENCE FOR YEAR ENDED SEPTEMBER 30, 2017 1 Net loss from investments* -$1,839,102 2 Net loss from administrative expenses -76,491 3 Net loss from contribution timing** -4,523,561 4 Net gain from other experience 4,723,256 5 Net experience loss: 1 + 2 + 3 + 4 -$1,715,898 *Details on next page. **Reflects effect of contribution deferral to following fiscal year. Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 18
Investment Experience A major component of projected asset growth is the assumed rate of return. The assumed return should represent the expected long-term rate of return, based on the Fund s investment policy. The rate of return on the market value of assets was 10.74% for the year ended September 30, 2017. For valuation purposes, the assumed rate of return on the actuarial value of assets is 7.60%, effective with this valuation. However, the experience is measured against the 7.75% assumption that was in place for fiscal 2017. The actual rate of return on an actuarial basis for the 2017 plan year was 7.40%. Since the actual return for the year was less than the assumed return, the Fund experienced an actuarial loss during the year ended September 30, 2017 with regard to its investments. INVESTMENT EXPERIENCE Year Ended September 30, 2017 Year Ended September 30, 2016 Market Value Actuarial Value Market Value Actuarial Value 1 Net investment income $54,661,401 $38,858,690 $39,481,720 $38,656,960 2 Average value of assets 508,738,807 525,132,803 474,716,714 491,935,469 3 Rate of return: 1 2 10.74% 7.40% 8.32% 7.86% 4 Assumed rate of return 7.75% 7.75% 7.75% 7.75% 5 Expected investment income: 2 x 4 39,427,258 40,697,792 36,790,545 38,124,998 6 Actuarial gain/(loss): 1 5 $15,234,143 -$1,839,102 $2,691,175 $531,962 Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 19
Because actuarial planning is long term, it is useful to see how the assumed investment rate of return has followed actual experience over time. The chart below shows the rate of return on an actuarial basis compared to the actual market value investment return for the last 20 years, including averages over select time periods. On March 8, 2018, the Board of Trustees voted to lower the assumed net investment return for the Fund from 7.75% to 7.60%. INVESTMENT RETURN ACTUARIAL VALUE VS. MARKET VALUE: 1998-2017 Actuarial Value Investment Return Market Value Investment Return Year Ended September 30 Amount Percent Amount Percent Actuarial Value Investment Return Market Value Investment Return Year Ended September 30 Amount Percent Amount Percent 1998 $22,037,078 14.50% $13,948,600 7.70% 2008 $11,324,717 3.28% -$67,375,145-17.23% 1999 23,422,345 13.40 29,375,412 15.00 2009 1,955,613 0.55 1,455,272 0.45 2000 28,832,074 14.58 34,041,114 15.14 2010 43,615,841 12.33 33,046,935 10.33 2001 15,072,232 6.70-19,487,882-7.58 2011 4,909,156 1.25 10,038,461 2.88 2002 5,857,383 2.46-17,502,232-7.43 2012 7,128,432 1.81 55,721,246 15.74 2003 7,017,568 2.89 38,288,951 17.63 2013 33,332,022 8.45 44,778,363 11.10 2004 5,251,853 2.09 24,166,540 9.42 2014 42,399,338 10.05 40,857,125 9.23 2005 19,672,506 7.59 32,035,204 11.29 2015 36,097,090 7.85-366,265-0.08 2006 31,442,272 11.16 27,954,552 8.77 2016 38,656,960 7.86 39,481,720 8.32 2007 34,095,192 10.88 46,136,886 13.31 2017 38,858,690 7.40 54,661,401 10.74 Note: Each year s yield is weighted by the average asset value in that year. Most recent five-year average return 8.26% 7.77% Most recent ten-year average return 6.25% 5.25% Most recent 15-year average return 6.49% 6.97% Most recent 20-year average return 6.97% 6.42% Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 20
Subsection B described the actuarial asset valuation method that gradually recognizes fluctuations in the market value rate of return. The goal of this is to stabilize the actuarial rate of return and to produce more level pension plan costs. MARKET AND ACTUARIAL RATES OF RETURN FOR YEARS ENDED SEPTEMBER 30, 1998-2017 20% 15% 10% 5% 0% -5% -10% -15% -20% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Actuarial Value Market Value Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 21
Administrative Expenses Administrative expenses for the year ended September 30, 2017 totaled $261,309 compared to the assumption of $190,320. This resulted in a loss of $76,491 for the year. Contribution Timing The effect of contribution deferral to the following fiscal year resulting in a loss of $4,523,561. Other Experience There are other differences between the expected and the actual experience that appear when the new valuation is compared with the projections from the previous valuation. These include: the extent of turnover among participants, retirement experience (earlier or later than projected), mortality (more or fewer deaths than projected), the number of disability retirements (more or fewer than projected), and salary increases (greater or smaller than projected). The net gain from this other experience for the year ended September 30, 2017 amounted to $4,723,256, which is 0.7% of the actuarial accrued liability. Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 22
Analysis of Financial Experience The chart below details the gain/(loss) experience of the Fund over the last four valuations. ANALYSIS OF FINANCIAL EXPERIENCE Gain/(Loss) for Year Ended September 30, 2017 2016 2015 2014 Demographic Retirement experience -$2,131,059 $4,580,910 $125,523 -$1,737,643 Disability retirements -400,340 170,396 1,509,275 1,647,306 Pre-retirement mortality 1,484,330 451,883 10,145 3,858 Turnover experience -413,952 90,775-489,416-320,881 Salary experience 4,397,390-7,010,639 1,614,902 570,337 Post-retirement mortality -2,636,651-2,359,700-2,188,316 480,452 New active participants 481,316 187,312 550,017 324,481 Miscellaneous experience* 3,942,222-4,447,293 122,828-1,139,659 Total demographic experience $4,723,256 -$8,336,356 $1,254,958 -$171,749 Economic Investment income -$1,839,102 $531,962 -$703,616 $8,651,720 Administrative expenses -76,491-31,319 19,482-7,239 Total economic experience -$1,915,593 $500,643 -$684,134 $8,644,481 Contribution timing** -4,523,561-2,807,760 255,549-2,379,327 Composite Gain/(Loss) During Year -$1,715,898 -$10,643,473 $315,275 $6,093,405 *Includes changes in excess reserve for state contributions **Reflects effect of contribution deferral to following fiscal year Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 23
D. Changes in the Actuarial Accrued Liability The actuarial accrued liability as of October 1, 2017 is $688,747,097, an increase of $39,861,076, or 6.1%, from the actuarial accrued liability as of the prior valuation date. The change in liability is due to expected accruals of $32,218,492, actuarial experience (as discussed in the previous subsection), and changes in the assumptions or plan provisions. Actuarial Assumptions The assumption changes reflected in this report are: On March 8, 2018, the Board of Trustees voted to lower the assumed net investment return for the Fund from 7.75% to 7.60%. The payroll growth assumption change from 2.76% to 1.87%, per Part VII, Chapter 112.64(5)(a) of Florida Statutes. The Fund s longterm growth assumption is 3.00%. These changes increased the actuarial accrued liability by $11,851,074 and increased the normal cost by $529,797. Details on actuarial assumptions and methods are in Section 4, Exhibit I. Plan Provisions The following changes in plan provisions were reflected for the first time in this valuation: The normal form of the retirement benefit was changed from a straight life annuity to a 10-year certain and life annuity. Actuarial equivalent survivor benefit options were made available for non-spousal beneficiaries. These changes increased the actuarial accrued liability by $514,766 and increased the normal cost by $28,536. A summary of plan provisions is in Section 4, Exhibit II. Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 24
E. Development of Unfunded Actuarial Accrued Liability DEVELOPMENT OF UNFUNDED ACTUARIAL ACCRUED LIABILITY FOR YEAR ENDED SEPTEMBER 30, 2017 1 Unfunded actuarial accrued liability at beginning of year $129,021,388 2 Employer normal cost at beginning of year 11,347,429 3 Actuarially determined employer contribution at beginning of year -30,779,266 4 Interest for whole year on 1 + 2 + 3 8,493,190 5 Expected unfunded actuarial accrued liability $118,082,741 6 Changes due to: Experience gains and losses (including impact of contribution deferral to following fiscal year) 1,715,898 Assumptions 11,851,074 Plan provisions 514,766 Total changes $14,081,738 7 Unfunded actuarial accrued liability at end of year $132,164,479 Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 25
F. Actuarially Determined Contribution The actuarially determined contribution is equal to the employer normal cost payment and a payment on the unfunded actuarial accrued liability. As of October 1, 2017, the actuarially determined contribution is $32,077,049, or 58.40% of payroll. The City and Pension Board have adopted financing periods of 15 years for experience gains and losses and 25 years for benefit, assumption and method changes. Actuarially determined required contribution amounts have been determined using those periods. The actuarially determined contribution as of October 1, 2017 is based on the data previously described, the actuarial assumptions and Plan provisions described in Section 4, including all changes affecting future costs adopted at the time of the actuarial valuation, actuarial gains and losses, and changes in the actuarial assumptions. ACTUARIALLY DETERMINED CONTRIBUTION FOR YEAR BEGINNING OCTOBER 1 2017 2016 % of Projected Payroll % of Projected Payroll Amount Amount 1. Total normal cost $16,050,224 29.97% $15,750,767 28.68% 2. Administrative expenses 261,309 0.48% 190,320 0.34% 3. Expected employee contributions -4,508,562-8.36% -4,593,658-8.36% 4. Employer normal cost: (1) + (2) - (3) 11,802,971 21.89% 11,347,429 20.66% 5. Actuarial accrued liability 688,747,097 648,886,021 6. Actuarial value of assets 556,582,618 519,864,633 7. Unfunded actuarial accrued liability: (5) - (6) 132,164,479 129,021,388 8. Payment on projected unfunded actuarial accrued liability 19,685,248 36.51% 19,431,837 35.38% 9. Actuarially determined contribution: (4) + (8)* $31,488,219 58.40% $30,779,266 56.04% 10. Total Payroll 53,915,085 54,920,286 11. Actuarially determined contribution projected to October 1, 2018 and 2017 $32,077,049 58.40% $31,628,774 56.04% 12. Projected payroll $54,923,297 $56,436,086 *Excludes reserve for excess state contributions. Contributions shown as of the beginning of the plan year, and must be adjusted with interest to the date actually paid. Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 26
Reconciliation of Actuarially Determined Contribution The chart below details the changes in the actuarially determined contribution from the prior valuation to the current year s valuation. RECONCILIATION OF ACTUARIALLY DETERMINED CONTRIBUTION FROM OCTOBER 1, 2017 TO OCTOBER 1, 2018 Amount % of Projected Payroll Actuarially Determined Contribution as of October 1, 2017 $31,628,774 56.04% Effect of plan change 553,462 1.01% Effect of lowering payroll inflation assumption for amortization purposes due to Florida Statutes 283,108 0.52% Effect of change in administrative expense assumption 72,948 0.13% Effect of change in discount rate 1,314,569 2.39% Effect of completion of amortization schedule for prior bases -2,246,784-4.09% Effect of investment loss 171,956 0.31% Effect of contribution deferral 422,951 0.77% Effect of other gains and losses on accrued liability and net other changes -123,935-0.22% Total change $448,275 0.82% Actuarially Determined Contribution as of October 1, 2018 $32,077,049 58.40% Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 27
G. History of Employer Contributions A history of the most recent years of contributions is shown below. Fiscal Year Ended September 30 HISTORY OF EMPLOYER CONTRIBUTIONS: 2009 2019 Valuation Date September 30 Contribution Rate as Percent of Valuation Payroll Valuation Payroll Actuarially Determined Contribution Actual Contribution 2008 2007 25.37% $44,813,194 $11,671,593 $11,671,593 2009 2008 28.84% 46,067,545 13,584,411 13,584,411 2010 2008 28.84% 47,910,247 13,816,829 13,816,829 2011 2009 31.06% 49,238,078 15,295,353 15,295,353 2012 2010 34.04% 50,238,633 17,101,951 17,101,952 2013 2011 37.52% 49,377,704 18,528,794 18,528,794 2014 2012 42.73% 50,399,786 21,535,554 21,535,554 2015 2013 47.62% 50,312,379 23,956,346 23,956,346 2016 2014 48.28% 50,282,038 24,274,548 24,274,548 2017 2015 53.03% 51,591,738 27,359,700 27,359,700 2018 2016 56.04% 56,436,086 31,628,774 -- 2019 2017 58.40% 54,923,297 32,077,049 -- Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 28
H. Risk Since the actuarial valuation results are dependent on a given set of assumptions and data as of a specific date, there is a risk that emerging results may differ significantly as actual experience differs from the assumptions. This report does not contain a detailed analysis of the potential range of future measurements, but does include a brief discussion of some risks that may affect the Plan. Upon request, a more detailed assessment of the risks can be provided to enable a better understanding of the risks specific to your Plan. Investment Risk (the risk that returns will be different than expected) The market value rate of return over the last 20 years has ranged from a low of -17.23% to a high of 17.63%. Longevity Risk (the risk that mortality experience will be different than expected) The actuarial valuation includes an expectation of future improvement in life expectancy. Emerging plan experience that does not match these expectations will result in either an increase or decrease in the actuarially determined contribution. Contribution Risk (the risk that actual contributions will be different from actuarially determined contribution) The Plan s funding policy requires payment of the actuarially determined contribution. As long as this policy is adhered to, contribution risk is negligible. Demographic Risk (the risk that participant experience will be different than assumed) Examples of this risk include: Actual retirements occurring earlier or later than assumed. The value of retirement plan benefits is sensitive to the rate of benefit accruals and any early retirement subsidies that apply. More or less active participant turnover than assumed. Maturity Measures As pension plans mature, the cash need to fulfill benefit obligations will increase over time. Therefore, cash flow projections and analysis should be performed to assure that the Fund s asset allocation is aligned to meet emerging pension liabilities. Currently the Fund has a non-active to active participant ratio of 1.04. For the prior year, benefits paid were $5,988,757 more than total contributions received. As the Fund matures, more cash will be needed from the investment portfolio to meet benefit payments. Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 29
I. GFOA Solvency Test The Actuarial Accrued Liability represents the present value of benefits earned, calculated using the plan s actuarial cost method. The Actuarial Value of Assets reflects the financial resources available to liquidate the liability. The portion of the liability covered by assets reflects the extent to which accumulated plan assets are sufficient to pay future benefits, and is shown for liabilities associated with employee contributions, pensioner liabilities, and other liabilities. The Government Finance Officers Association (GFOA) recommends that the funding policy aim to achieve a funded ratio of 100 percent. Actuarial accrued liability (AAL) GFOA SOLVENCY TEST AS OF SEPTEMBER 30 2017 2016 Active member contributions $40,417,704 $40,079,439 Retirees and beneficiaries 427,456,921 389,562,357 Active and inactive members (employer-financed) 220,872,472 219,244,225 Total $688,747,097 $648,886,021 Actuarial value of assets* $556,582,618 $519,864,633 Cumulative portion of AAL covered Active member contributions 100.00% 100.00% Retirees and beneficiaries 100.00% 100.00% Active and inactive members (employer-financed) 40.16% 41.15% *Excludes reserve for excess state contributions Section 2: Actuarial Valuation Results as of October 1, 2017 for the City of Orlando Police Officers' 30
Section 3: Supplemental Information EXHIBIT A TABLE OF PLAN COVERAGE Year Ended September 30 Category 2017 2016 Change From Prior Year Active participants in valuation: Number 721 723-0.3% Average age 40.2 40.4-0.2 Average years of service 11.4 11.6-0.2 Total payroll* $53,915,085 $54,920,286-1.8% Average payroll 74,778 75,962-1.6% Account balances 40,417,704 40,079,439 0.8% Total active vested participants 404 390 3.6% Inactive Vested participants 5 5 0.0% Inactive non-vested participants due a refund 8 10-20.0% Retired participants: Number in pay status 545 513 6.2% Average age 62.3 62.2 0.1 Average monthly benefit $4,252 $4,150 2.5% Disabled participants: Number in pay status 138 136 1.5% Average age 58.6 58.0 0.6 Average monthly benefit $3,160 $3,114 1.5% Beneficiaries: Number in pay status 52 49 6.1% Average age 69.1 68.2 0.9 Average monthly benefit $1,723 $1,529 12.7% *Reflects an extra pay period for the year ended September 30, 2016. Section 3: Supplemental Information as of October 1, 2017 for the City of Orlando Police Officers' 31
EXHIBIT B PARTICIPANTS IN ACTIVE SERVICE AS OF SEPTEMBER 30, 2017 BY AGE, YEARS OF SERVICE, AND AVERAGE PAYROLL Years of Service Age Total 0-4 5-9 10-14 15-19 20-24 25-29 Under 25 11 11 - - - - - - - - - - $51,465 $51,465 - - - - - - - - - - 25-29 90 71 19 - - - - - - - - 54,337 51,888 $63,488 - - - - - - - - 30-34 131 51 67 13 - - - - - - 63,494 53,997 67,727 $78,940 - - - - - - 35-39 124 21 36 62 5 - - - - 72,374 55,394 66,138 80,276 $90,597 - - - - 40-44 136 12 18 35 69 2 - - 80,786 54,272 68,091 82,066 87,445 $101,976 - - 45-49 135 3 5 26 64 31 6 87,581 60,578 74,966 80,752 86,327 96,773 $107,077 50-54 67 1 2 8 20 23 13 89,347 121,642 63,979 81,785 85,959 93,471 93,338 55-59 24 - - - - 1 12 6 5 88,260 - - - - 81,714 81,731 85,617 108,410 60-64 3 - - - - - - 2 1 - - 83,889 - - - - - - 82,887 85,893 - - - - - - - - - - - - - - - - Total 721 170 147 145 172 63 24 $74,778 $53,658 $67,030 $80,767 $86,496 $94,497 $99,912 Section 3: Supplemental Information as of October 1, 2017 for the City of Orlando Police Officers' 32
EXHIBIT C RECONCILIATION OF PARTICIPANT DATA Active Participants Inactive Vested Participants Inactives Due Refund Disableds Retired Participants Beneficiaries Total Number as of October 1, 2016 723 5 10 136 513 49 1,436 New participants 47 N/A 1* N/A N/A N/A 48 Terminations with vested rights -1 1 0 0 0 0 0 Terminations without vested rights -5 N/A 5 N/A N/A N/A 0 Retirements -37-1 0 N/A 38 N/A 0 New disabilities -2 0 0 2 N/A N/A 0 Return to work 2 0-2 0 0 N/A 0 Deceased -3 0 0 0-6 -1-10 New beneficiaries 0 0 0 0 0 5 5 Lump sum cash-outs -3 0-6 0 0 0-9 Rehire 0 0 0 N/A 0 N/A 0 Certain period expired N/A N/A 0 0 0-1 -1 Data adjustments 0 0 0 0 0 0 0 Number as of October 1, 2017 721 5 8 138 545 52 1,469 1 Hired, terminated within the past valuation cycle and left employee contributions in the plan. Section 3: Supplemental Information as of October 1, 2017 for the City of Orlando Police Officers' 33
EXHIBIT D SUMMARY STATEMENT OF INCOME AND EXPENSES ON A MARKET VALUE BASIS Year Ended September 30, 2017 Year Ended September 30, 2016 Net assets at market value at the beginning of the year $511,863,840 $477,051,308 Contribution income: Employer contributions $24,532,910 $22,119,219 Employee contributions 4,632,008 4,423,731 Chapter 185 Taxes contributions 2,458,293 2,155,329 Excess premium taxes 736,994 721,088 Less administrative expenses -261,309-190,320 Net contribution income $32,098,896 $29,229,047 Investment income: Interest, dividends and other income $5,273,277 $6,542,394 Net securities findings -458,688 106,715 Asset appreciation 51,583,336 34,246,178 Less investment fees -1,736,524-1,413,567 Net investment income $54,661,401 $39,481,720 Total income available for benefits $86,760,297 $68,710,767 Less benefit payments: Pension Payments -$38,264,253 -$33,755,832 Refunds -84,709-142,403 Net benefit payments -$38,348,962 -$33,898,235 Change in market value of assets $48,411,335 $34,812,532 Net assets at market value at the end of the year $560,275,175 $511,863,840 Total realized investment gains (losses) $12,786,391 $8,724,252 Total unrealized investment gains (losses) 38,796,945 25,521,178 Total $51,583,336 $34,246,178 Section 3: Supplemental Information as of October 1, 2017 for the City of Orlando Police Officers' 34
EXHIBIT E SUMMARY STATEMENT OF PLAN ASSETS September 30, 2017 September 30, 2016 Cash equivalents $3,839,109 $2,313 Investments: Equities $236,896,757 $201,421,241 Fixed income investments 167,278,380 169,803,303 Alternative investments 60,140,310 51,524,783 Global assets 57,317,964 51,659,436 Real estate 34,383,497 32,563,265 Short-term investments 617,921 5,789,854 Total investments at market value $556,634,829 $512,761,882 Total assets $560,473,938 $512,764,195 Total accounts payable -198,763-900,355 Net assets at market value $560,275,175 $511,863,840 Net assets at actuarial value $556,582,618 $519,864,633 Fixed income investments Equities Real estate 0% 11% 10% 30% 1% 10% 10% 33% Global assets 6% 7% Alternative investments Short-term investments 43% 39% Section 3: Supplemental Information as of October 1, 2017 for the City of Orlando Police Officers' 35