Annual Financial Report 12/31/1994

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32 CITY OF LINO LAKES, MINNESOTA NOTES TO FINANCIAL STATEMENTS December 31, 1994 The pension benefit obligations as of June 30, 1994, are shown below: PERF PEPFF (In thousands) Total pension benefit obligation $5,625,598 $1,020,950 Net assets available for benefits, at cost (Market Values for PERF = $4,762,519; PEPFF = $1,237,484) 4,733,845 1,229,769 Unfunded (assets in excess of) pension benefit obligation $891,753 ($208,819) The measurement of the pension benefit obligation is based on an actuarial valuation as of June 30, 1994. Net assets available to pay pension benefits were valued as of June 30, 1994. For the PERF, significant actuarial assumptions used in the calculation of the pension benefit obligation include (a) a rate of return on the investment of present and future assets of 8.5% per year, compounded annually, prior to retirement, and 5% per year, compounded annually, following retirement; (b) projected salary increases taken from a select and ultimate table; (c) payroll growth at 6% per year, consisting of 5% for inflation and 1% due to growth in group size; (d) post- retirement benefit increases that are accounted for by the 5% rate of return assumption following retirement; and (e) mortality rates based on the 1983 Group Annuity Mortality Table set forward one year for retired members and set back five years for each active member. Actuarial assumptions used in the calculation of the PEPFF include (a) a rate of return on the investment of present and future assets of 8.5% per year, compounded annually, prior to retirement, and 5% per year, compounded annually, following retirement; (b) projected salary increases of 6.5% per year, compounded annually, attributable to the effects of inflation; (c) post- retirement increases that are accounted for by the 5% rate of return assumption following retirement; and (d) mortality rates based on the 1971 Group Annuity Mortality Table projected to 1984 for males and females. Changes in Plan Provisions The 1994 legislative session did not include any benefit improvements which would impact funding costs for the PERF and the PEPFF. Changes in Actuarial Assumptions Prior to fiscal year 1994, the salary increase assumption and the mortality tables used in the calculation of pension benefit obligation for the PERF were the same as those specified for the PEPFF. For the July 1, 1994 actuarial valuation, PERA's board of trustees approved new mortality rates updated to the 1983 Group Annuity Mortality Table, salary increases which were changed to a select and ultimate table and a new payroll growth assumption which was changed from 6.5% to 6 %. These changes were made to reflect actual experience of the plan. With the adoption of the actuarial assumption changes and the new mortality tables for the PERF, the pension benefit obligation increased $56,596,000. The actuarial assumption changes also necessitated a $81,201,000 transfer from the PERF Benefit Reserve to the PERF Minnesota Post Retirement Investment Fund (MPRIF) Reserve to finance the increased obligation for future retirement benefits. The change in the mortality rate assumption increased the PERFs costs because pensioners are living longer than assumed previously. The change in the salary increase assumption, however, offset some of the additional costs because lower salary increases generally translate into lower benefit liabilities in the future.