retirement committee meeting notice · the brp and examination of the mortality assumption in...

M O D E S T O I R R I G A T I O N D I S T R I C T

Retirement Committee M e e t i n g N o t i c e

September 18, 2019

To Retirement Committee: Paul Campbell, Chairman Nick Blom

Scott Furgerson Ed Franciosa Tom Kara Irma Perrone

Brad Stapleton

Scott Van Vuren

From: Valerie Pannabecker

A Retirement Committee meeting is scheduled for Wednesday, September 18, 2019, in the Multipurpose Room.

Closed Session will begin at 9:00 am. Open Session will begin at 9:30 am.

copy: Wes Miliband Erick Tappin Fred Bayles

Angela Cartisano Ana Vigil

Derek Ford Heliane Burns

Colleen Rangel

MEETING AGENDA

MODESTO IRRIGATION DISTRICT RETIREMENT COMMITTEE MEETING

September 18, 2019 Multipurpose Room

Closed Session – 9:00 am Open Session – 9:30 am

Call to Order: Paul Campbell 1. Item: Closed Session - CONFERENCE WITH LEGAL COUNSEL – ANTICIPATED LITIGATION (Significant exposure to Litigation Pursuant to Paragraph (2)

of Subdivision (d) of Govt. Code Section 54956.9) - One potential case.

2. Item: Approve Minutes of the June 27, 2019 Meeting Material: Included in Packet Expected Outcome: Approval

3. Item: 2nd Quarter Performance Report Who: Erik Tappin, Fred Bayles, Graystone Consulting Material: Distributed at Meeting Expected Outcome: Information

4. Item: 2nd Quarter Investment Reports Who: Ana Vigil Material: Included in Packet Expected Outcome: Information

5. Item: 2nd Quarter Unaudited Financial Statements

Who: Linda Scherer Material: Included in Packet Expected Outcome: Information

6. Item: Termination and Replacement of the Invesco Oppenheimer International Growth Portfolio in the Basic Retirement and Retiree Medical Benefits Plans

Who: Ana Vigil Material: Included in Packet Expected Outcome: Committee Action

7. Item: Removal and Replacement of the Invesco Oppenheimer International Growth Portfolio in the Supplemental Retirement and Deferred Compensation Plans

Who: Ana Vigil Material: Included in Packet Expected Outcome: Committee Action

8. Item: Presentation of Actuarial Audit Report Who: Scott Van Vuren, Graham Schmidt, Cheiron Material: Included in Packet Expected Outcome: Information

9. Item: Implementation of Actuarial Audit Report Who: Scott Van Vuren Material: Included in Packet Expected Outcome: Committee Action Public Comments: Paul Campbell Adjourn: Paul Campbell

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Modesto Irrigation District

Retirement Committee Meeting June 27, 2019

Minutes

Committee Members Present: Paul Campbell Ed Franciosa

Tom Kara Irma Perrone Scott Van Vuren Committee Members Not Present: Nick Blom Scott Furgerson Brad Stapleton Committee Staff Present: Derek Ford Valerie Pannabecker Ana Vigil Linda Scherer Others Present: Matthew Burley, Transamerica

Sean Langley, Graystone Consulting Call to Order Paul Campbell The meeting was called to order at 9:02 a.m.

1. Item: Approve Minutes of the March 12, 2019 Meeting Who: Paul Campbell Outcome: Moved by Scott Van Vuren and seconded by Ed Franciosa, the minutes of the

March 12, 2019 meeting were approved unanimously.

2. Item: 1st Quarter Performance Reports Who: Sean Langley Outcome: Mr. Langley presented 1st quarter performance reports for the Basic Retirement

Plan (BRP), the Retiree Medical Benefits Plan (RMBP), the Supplemental Retirement Plan (SRP), and the Deferred Compensation Plan (457).

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BRP – Returns for the 1st quarter were 8.58% trailing the index which returned 9.82%. Mr. Langley told the Committee that a 2018 rolling bear market had materialized. The last quarter 2018 was particularly difficult. Not a single asset class outperformed inflation last year. 2018 marked the beginning of a wide trading range that could last several years. After some rate hikes last year interest rates are currently paused and likely to go lower. We are in a difficult earnings environment with high volatility expected in the near term. Stocks are cheaper outside the US because of economic instability. International and emerging markets are expected to outperform the domestic market going forward. Assets in the BRP were rebalanced and all asset classes were very near their targets at the end of the quarter.

RMBP – Returns for the quarter were 8.81% lagging the index, which returned

9.46% due to a bad 2018. No rebalance is necessary as all asset classes are near their targets.

SRP & 457 – Mr. Langley told the Committee that assets in each plan are looking

better than the 4th quarter of 2018, with Oppenheimer remaining on the watch list in the SRP. Roughly 57% of assets in the SRP are invested in Target Date funds and 53% of assets are invested in Target Date funds in the 457 plan.

3. Item: 1st Quarter Investment Reports Who: Ana Vigil Outcome: Ms. Vigil presented Investment Reports for the BRP and the RMBP for the 1st

quarter 2019.

BRP – The 2019 annual contribution was made in January in the amount of $12.8M. Assets were $287M at the end of the 1st quarter 2019 compared to $256M at the end of the 4th quarter 2018. Assets were 63% invested in equities and 37% invested in fixed-income securities.

RMBP – The annual contribution was made in January in the amount of $2.1

million. Assets were $58M million at the end of the 1st quarter 2019 compared to $51M at the end of the 4th quarter 2018. Assets were 60% invested in equities and 40% invested in fixed-income securities.

4. Item: 1st Quarter Unaudited Financial Statements

Who: Linda Scherer Outcome: Ms. Scherer presented unaudited financial statements for the BRP and the

RMBP for the 1st quarter 2019. Copies are held in the Accounting Department for review.

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5. Item: 2018 Audited Financial Statements Who: Linda Scherer Outcome: Ms. Scherer presented the 2018 audited financial statements for the BRP and

the SRP prepared by Baker Tilly Virchow Krause, LLP. Copies are held in the Accounting Department for review.

6. Item: 2019 Basic Retirement Plan Valuation

Who: Matthew Burley Outcome: Mr. Burley reported that BRP participation was basically unchanged and stable

with very little movement in the number of active employees and retirees. He then reviewed the BRP assumptions reminding the Committee they are examined each year for soundness. Mr. Franciosa asked about the salary increase rate assumption of 4% when the current Cost of Living Adjustment (COLA) increase is 3% for several more years. Mr. Burley replied that this is not a material difference and the assumption isn’t based solely on the employee COLA.

BRP experience was impacted mainly by the recently adopted change to the actuarial cost method, the change in the amortization period of the unfunded liability, and an actuarial asset loss. These three things, along with a slight demographic experience loss, increased both the unfunded liability and the employer contribution. The actuarial cost method changed from the Projected Unit Credit method to the Entry Age Normal method as required by the Governmental Accounting Standards Board (GASB). The period over which the unfunded liability is amortized was changed from an open 30-year period to a closed 20-year period. The change to the actuarial cost method and the amortization period resulted in an increase of $15.9M to the unfunded liability. A 5.78% actuarial asset return in 2018 versus the assumed return of 7.5% accounted for an increase in the liability of $5.2M. He told the Committee these funding policy changes were sound and have put the BRP on a robust path to full funding. The employer contribution was also impacted by these changes. It may increase a bit in the next year or so but will remain relatively stable.

The funded status on a cash basis shows the ratio of market value of assets to the actuarial assumed liability varies greatly from year to year because there is no smoothing of gains or losses, while the ratio of the actuarial value of assets to the actuarial assumed liability with 3-year smoothing results in a more stable funded ratio currently at 73.5%.

Draft

Because of the investment policy changes, the cash funding of the employer contribution should remain stable and move the BRP forward to full funding. He told the Committee the employee contribution rate will increase to 6.25% as of January 1, 2020 because the Normal Cost Rate for Tier 3 participants increased by more than 100 basis points. Mr. Kara asked how there could be an increase if the normal cost for the plan did not increase. Mr. Burley said in aggregate the normal cost was down, however for Tier 3 Participants, the effects of the change to Entry Age Normal as the cost method resulted in a higher Normal Cost requiring an increase in the employee contribution rate next year.

Mr. Burley recommended that staff consider engaging in an experience study of the BRP and examination of the mortality assumption in place. The current assumption for pre and post mortality uses the RP-2000 Blue Collar Generational Mortality Table projected with 75% of Scale AA which was designed for corporate plans. He said the experience has been reasonable. However, there are tables available for public plans which may provide even more reasonable experience. A blend of public plan tables is possible based on job categories. Mr. Van Vuren said he would like to bring an experience study recommendation to the Retirement Committee.

Mr. Burley told the Committee the BRP’s income replacement ratio for Tiers 1 and 2 is approximately 80% with 30 years of service, varying dependent on income level. However, because of the Public Employees’ Pension Reform Act (PEPRA) formula for Tier 3 employees the income replacement ratio is about 50% with 30 years of service. Mr. Kara asked if there was data available showing to what degree the SRP closes the gap on income replacement for Tier 3 employees. Mr. Van Vuren said numbers have not been run to determine the value of the SRP as income replacement. Ms. Perrone said that calculators are available on the Milliman website to assist in this and Milliman provides education campaigns to Tier 3 employees encouraging them to utilize and increase contributions to the 457 Plan. Mr. Kara said continued education for Tier 3 employees would be beneficial.

7. Item: 2019 Retiree Medical Benefits Plan Valuation

Who: Matthew Burley Outcome: Mr. Burley reported that the number of participants in the RMBP increased

slightly since the last valuation in 2017 from 783 to 820 for 2019 with an almost 50/50 split between active employees and retirees.

The valuation assumptions have not changed since 2017. The rates and claims experience weren’t as great as expected resulting in a decrease in the actuarial accrued liability and a 10% increase in the funded ratio to 50%. There was a

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slight increase in the Normal Cost. He told the Committee the RMBP is still in the accumulation phase with the District paying benefit costs directly to health care providers and separately contributing to the RMBP Trust. The District is currently paying more in premiums than in the required contribution. When the RMBP funding reaches 80% the Funding Policy calls for Committee action to initiate payments from the Trust. The amortization of the actuarial accrued liability is expected to continue to decrease as the number of long-term covered employees decreases. A $2M contribution was deposited to the RMBP Trust for 2019.

Mr. Burley recommended that the Committee also consider an experience study for the RMBP to review mortality table options.

Public Comments: There were no public comments.

Adjourn: The meeting was adjourned by Mr. Campbell at 10:10 a.m.

Retirement Committee Meeting

Second Quarter Investment Reports 2019

HIGHLIGHTS

• Rebalanced the Basic and Retiree Medical Benefits Plans in April 2019 to align with the target allocations of each plan, which included a reallocation of a portion of international equity to emerging markets.

INVESTMENT REPORTS

BASIC RETIREMENT

Basic Retirement Plan assets were $292.2 million at the end of the 2nd Quarter 2019 compared to $287.9 million at the end of the 1st Quarter 2019.

Assets were 67% invested in equities and 33% invested in fixed-income securities.

RETIREE MEDICAL BENEFITS PLAN

Retiree Medical Benefits Plan assets were $60.1 million at the end of the 2nd Quarter 2019 compared to $58.2 million at the end of the 1st Quarter 2019.

Assets were 68% invested in equities and 32% invested in fixed-income securities.

Portfolio Summary - 2nd Qtr 2019

Book Market Percent ofValue Value Portfolio

Equities

State Street Asset Management (Growth) 23,648,084 32,803,099 Dodge & Cox Large Growth & Income (Value) 23,898,319 30,805,754 AMG GW&K Small Cap Core 17,065,214 14,989,817 Goldman Sachs Small Cap Core 16,618,621 14,501,684 Brandes Intl Equity Trust (Int'l) 23,144,369 20,551,354 Oppenheimer (Int'l) 16,247,019 22,597,007 Goldman Sachs Emerging Mkt (Int'l) 7,000,211 7,000,211 Hartford Schroders Emergins Mkt (Int'l) 7,000,211 7,018,103 Vanguard 500 Index 28,108,376 38,374,935 Voya Global REIT 8,026,266 7,353,058 Total Equities 170,756,690 195,995,022 67%

Fixed Income / Cash

Prudential 33,548,611 35,617,140 PIMCO Total Return 7,101,915 7,180,192 BlackRock Core Bond 33,086,154 34,760,461 MetWest Total Return 16,515,018 17,381,887 Cash 1,307,391 1,307,391 Total Fixed Income 91,559,089 96,247,070 33%

Total 262,315,778 292,242,093 100%

Equities

State Street Asset Management (Growth) 23,822,291 31,154,655 Dodge & Cox Large Growth & Income (Value) 21,345,422 28,389,578 AMG GW&K Small Cap Core 15,565,213 12,695,226 Goldman Sachs Small Cap Core 15,118,620 12,747,309 Brandes Intl Equity Trust (Int'l) 28,590,940 26,462,134 Oppenheimer (Int'l) 19,781,181 25,948,350 Vanguard 500 Index 27,612,918 36,499,509 Voya Global REIT 7,949,557 7,585,858 Total Equities 159,786,141 181,482,619 63%

Fixed Income / Cash

Prudential 34,728,689 35,881,926 PIMCO Total Return 7,269,133 7,217,503 BlackRock Core Bond 34,621,508 35,493,301 MetWest Total Return 17,316,908 17,796,446 Cash 10,017,713 10,017,713 Total Fixed Income 103,953,952 106,406,889 37%

Total 263,740,093 287,889,508 100%

BASIC RETIREMENTPortfolio Summary

Prior Quarter Inventory - First Quarter 2019

Second Quarter 2019

Portfolio Summary - 2nd Qtr 2019

Book Market Percent ofValue Value Portfolio

Equities

Dodge & Cox Stock Fund 6,958,678 6,565,458 State Street Premier Growth Equity 6,694,963 6,770,002 Vanguard 500 Index 5,906,718 7,914,472 Brandes Intl Equity Trust 4,233,437 4,252,232 Oppenheimer (Int'l) 3,689,961 4,658,859 Goldman Sachs Emerging Mkt (Int'l) 1,445,044 1,453,192 Hartford Schroders Emergins Mkt (Int'l) 1,445,044 1,456,180 AMG GW&K Small Cap Core 3,501,646 3,100,140 Goldman Sachs Small Cap Core 3,396,560 2,987,876 Voya Global REIT 1,528,167 1,511,926 Total Equities 38,800,217 40,670,336 68%

Fixed Income / Cash

Prudential 8,991,351 9,019,421 PIMCO Total Return 1,465,404 1,483,402 MetWest Total Return Bond 8,561,727 8,961,701 Cash 4,411 4,411 Total Fixed Income 19,022,893 19,468,936 32%

Total 57,823,109 60,139,272 100%

Equities

Dodge & Cox Stock Fund 6,194,591 5,685,641 State Street Premier Growth Equity 6,314,950 6,006,382 Vanguard 500 Index 5,286,394 7,016,175 Brandes Intl Equity Trust 4,985,827 5,100,670 Oppenheimer (Int'l) 4,232,533 5,040,064 AMG GW&K Small Cap Core 3,001,631 2,436,673 Goldman Sachs Small Cap Core 2,916,545 2,454,981 Voya Global REIT 1,370,613 1,418,594 60% Total Equities 34,303,084 35,159,179

Fixed Income / Cash

Prudential 8,799,515 8,583,709 PIMCO Total Return 1,397,962 1,389,254 MetWest Total Return Bond 8,346,865 8,533,288 Cash 4,533,050 4,533,050 Total Fixed Income 23,077,391 23,039,301 40%

Total 57,380,475 58,198,479 100%

RETIREE MEDICAL BENEFITS PLANPortfolio Summary

Second Quarter 2019

Prior Quarter Inventory - First Quarter 2019

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Modesto Irrigation DistrictBasic Employees' Retirement Plan

(UNAUDITED) Statements of Plan Net AssetsJune 30, 2019 and December 31, 2018

June 30, 2019 December 31, 2018

AssetsCash and cash equivalents 1,307,391$ 1,936,979$ Receivables - -

Accrued interest 935 4,370 Dividends and other 36,837 34,528

Total receivables 37,772 38,898

Investments at fair valueCorporate bonds - - Fixed income investments 124,431,179 115,631,127 Publicly traded domestic equities 101,983,789 84,718,424 Publicly traded international equitites 57,166,675 48,139,101 Real estate investment trust 7,353,058 6,587,952 Hedge funds - - Index Funds - - Other - -

Total investments 290,934,701 255,076,604

Total assets 292,279,864 257,052,481

Less - accrued liabilities 515,993 924,100

Net assets held in trust for pension benefits 291,763,871$ 256,128,381$

Unaudited Financials 06-30-19 BRP: Financial II B 1, 29/16/201911:04 AM

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Modesto Irrigation DistrictBasic Employees' Retirement Plan

(UNAUDITED) Statements of Changes in Plan Net AssetsJune 30, 2019 and December 31, 2018

June 30, 2019 December 31, 2018

Additions to net assetsNet appreciation of investments 30,572,124$ (18,025,118)$ Dividend income 2,095,129 3,699,872Interest income 101,502 659,583Investment expenses (238,026) (1,209,224)

Net investment income 32,530,729 (14,874,887)

Employer contributions 12,835,002 12,882,571Employee contributions 316,996 572,172

Total additions 45,682,727 (1,420,144)

Deductions from net assetsDistributions to plan members and beneficia 9,576,217 18,340,533Distributions to non vested plan members 0 50,969Administrative & operating expenses 471,020 189,516Consultant and professional services expens - 34,500

Total deductions 10,047,237 18,615,518

Net increase 35,635,490 (20,035,662)

Net Assets held in trust for pension benefits

Balance at beginning of year 256,128,381 276,164,043

Balance at end of year 291,763,871$ 256,128,381$

-$ -$

Unaudited Financials 06-30-19 BRP: Financial II B 1, 29/16/201911:04 AM

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Modesto Irrigation DistrictRetiree Medical Plan

(UNAUDITED) Statements of Plan Net AssetsJune 30, 2019 and December 31, 2018

June 30, 2019 December 31, 2018

AssetsCash and cash equivalents 4,411$ 2,430,479$

Investments at fair valueFixed income investments 19,464,525 17,862,572 Publicly traded domestic equity 27,337,946 20,911,122 Publicly traded international equity 11,820,464 9,313,588 Real estate investment trust 1,511,926 1,231,983 Index funds - -

Total investments 60,134,861 49,319,265

Total assets 60,139,272 51,749,744

Less - accrued liabilities - 72,931

Net assets held in trust for pension benefits 60,139,272$ 51,676,813$

Unaudited Financials 06-30-19 Retiree Medical Final: Financial II B 1, 29/16/201911:06 AM

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Modesto Irrigation DistrictRetiree Medical Plan

(UNAUDITED) Statements of Changes in Plan Net AssetsJune 30, 2019 and December 31, 2018

June 30, 2019 December 31, 2018

Additions to net assetsNet appreciation of investments 5,823,522$ (3,917,475)$ Dividend income 535,181 1,062,310Interest income 17,270 9,472Investment expenses (5,142) (9,345)

Net investment income 6,370,831 (2,855,038)

Employer contributions 2,092,700 9,869,535 Employee contributions - 25,832

2,092,700 9,895,367

Total additions 8,463,531 7,040,329

Deductions from net assetsBenefit Payments 0 7,468,896Administrative expenses 1,072 75,075

Total deductions 1,072 7,543,971

Net increase 8,462,459 (503,642)

Net Assets held in trust for pension benefits

Balance at beginning of year 51,676,813 52,180,455

Balance at end of year 60,139,272$ 51,676,813$

-$ -$

Unaudited Financials 06-30-19 Retiree Medical Final: Financial II B 1, 29/16/201911:06 AM

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Memo

To: Retirement Committee

From: Scott Van Vuren

Date: September 18, 2019

Re: Implementation of Actuarial Audit Items

Action Item: Consider authorizing and directing staff to retain an actuary to conduct an experience study to review and potentially update mortality and other key assumptions for the Basic Retirement Plan and the Retiree Medical Benefits Plan; consider amending the Funding Policies of the Basic Retirement Plan and the Retiree Medical Benefits Plan to reduce the discount rate assumption from 7.5% to 6.9%; consider whether the Basic Retirement Plan’s Tier 3 participants over-contributed to the Plan from 2013 through 2016 and whether the over-contributed amounts should be returned to affected employees with interest.

Background:

At its March 12, 2019 meeting, the Retirement Committee authorized an actuarial audit be performed by Cheiron, Inc. The audit was performed on two years’ valuations: 2013 and 2018. In support of the recommendation to perform the audit, the March 12 staff report discussed a loss of stakeholder confidence in the valuations produced by the District’s actuary, Transamerica, resulting from a wide swing in employee contribution rates for Tier 3 participants. The years 2013 and 2018 were chosen such that the 9.5% Tier 3 contribution rate that prevailed from 2013-2016 could be tested, along with the 4.5% rate that has prevailed since 2017. On July 25, 2019, Cheiron delivered the audit report to staff. Among the findings and recommendations:

• The liabilities computed by Transamerica are reasonably accurate. This is an important finding because, if these figures were incorrect, many of the metrics watched by the Committee, such as the Plan’s funding ratio, would also be wrong. Although the liability figures were found to be accurate, the valuation reports should be enhanced to conform to Actuarial Standards of Practice.

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• Cheiron endorsed the actions taken by the Committee in August 2018 to adopt the Entry Age Normal method and the 20-year closed amortization method. However, Cheiron found that the assumptions for mortality may be out-of-date and recommended that the discount rate be lowered.

• Cheiron would have used different methodologies to implement Tier 3 employee contributions under the California Public Employees’ Pension Reform Act (PEPRA).

At the time PEPRA was implemented, the District consulted with legal counsel and its actuaries who obtained input from other actuaries regarding the method for calculating employee contribution rates. The PEPRA statute does not contain detailed guidance on how to calculate the normal cost for Tier 3 members and there are no regulations. As a result, there is little or no guidance on the method for these calculations and much is left to the discretion of plan actuaries. Initially, the District’s pool of Tier 3 members was very small, and the actuary concluded that using a small number of members would not produce an accurate or stable value for the normal cost (and the required amount of employee contributions). Based on advice from Transamerica, the Retirement Committee concluded it was appropriate to calculate the normal cost taking into account all plan members, not just the Tier 3 members. The Cheiron report points out that the methodology used includes all Tier 1 and Tier 2 members, but with their Tier 1 and Tier 2 benefits. Cheiron recommends using data for all members in the plan (age, dates of hire, etc.), but treating all individuals as Tier 3 members for purposes of calculating the normal cost (and the required amount of employee contributions). This approach would have produced employee contribution rates approximately 50% lower than the rates used for 2013-2016. In hindsight, after discussion, staff has concluded that Cheiron’s methodology makes sense and, with perfect hindsight, it would have been prudent to use that methodology for the years from 2013-2016. Recommendations: Staff recommends the Committee find that the work by Cheiron is credible as a basis for decision making. Staff believes that Cheiron’s recommendations make sense and that Cheiron may have more extensive experience in this area. Staff has also had discussions with retirement staff and actuaries of other agencies, including StanCERA and East Bay MUD. The findings by Cheiron are consistent with these discussions. Staff further recommends that the Committee find that employee contribution rates should have been calculated using the methodology recommended by Cheiron for the years 2013-2016. Based on these findings, and the Cheiron audit, staff recommends the following actions:

1. Engage an actuary to conduct an experience study to determine whether demographic assumptions (including mortality) should be updated.

2. Reduce the discount rate. 3. Recalculate employee contributions for the years from 2013-2016. Treat excess

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contributions deposited to the Plan as employer contributions for those years, and have the District repay excess amounts to the affected Tier 3 participants.

The first recommendation, regarding demographic assumptions, would authorize an experience study to be performed to determine whether assumptions such as mortality tables should be updated. The Committee would then later consider whether to approve changes based on the results of that study. If the Committee approves the draft resolution, staff will work with the actuary to perform an experience study; however, it is unlikely that a study can be completed, and a recommendation developed during calendar year 2019. The likely implementation timing, if the Committee determines that any demographic assumptions (such as mortality) need to change, is that the updates would be part of a future valuation. If changes to the assumptions impact the Plan’s normal cost and contribution rates, the contribution rate changes would become effective based on the timing of that valuation. The second recommendation, reducing the discount rate, can be approved immediately and potentially implemented in 2020. If approved by the Committee, staff will implement the reduced discount rate as soon as practicable. The same assumption should be used for both Basic Retirement Plan and the Retiree Medical Benefits Plan because both Plans have similar risk/reward objectives, time horizons, and investment portfolios. Staff recommends 6.9%, which as Cheiron observes, is the expectation of MID’s investment consultant. This is toward the optimistic end of the range calculated by Cheiron (6.12%-7.15%), so the Committee should watch this going forward as it may be prudent to make further changes in the future. Factors that could indicate further lowering the discount rate include a persistence of the low interest rate environment (low interest rates reduce projected returns from the fixed income portion of the investment portfolio), or if market returns otherwise struggle going forward. Attached to this report are redlined Funding Policy Statements for both plans showing the revision to 6.9%. The third recommendation is to treat excess employee contributions deposited to the Plan for the years 2013-2016 as employer contributions and have the District repay the excess amounts to the affected Tier 3 participants. Cheiron calculated the PEPRA member (Tier 3) contribution rate at 4.25% (instead of the 9.5% rate actually used). Transamerica changed methodologies in 2017, upon the Tier 3 population reaching a threshold for statistical significance, and the Tier 3 contribution rate dropped to 4.5%, and the District implemented the 4.5% rate retroactive to January 1, 2017. The Cheiron audit supports this contribution rate. At valuation date January 1, 2018, Transamerica and Cheiron both put the rate at 4.5% using the Projected Unit Credit method that prevailed at the time. Staff recommends that the difference between the 9.5% rate and the 4.25% rate for the period from January 1, 2013 (when PEPRA was first implemented) through December 31, 2016 (when Transamerica changed its methodology) be treated as employer contributions and that the District repay the excess amounts to affected Tier 3 members. Staff has also explored with pension counsel whether interest should be added to the repaid over-deductions. Staff has been advised that when the IRS reviews corrections to pension

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plan contributions, it will generally require that interest be added to any repayments or corrective contributions to be made, at a rate equal to the plan’s actual return on investments. Staff recommends following the same approach: adding interest to the amounts the District will pay Tier 3 members, based on the Plan’s actual investment earnings. If approved by the Committee, staff will make the payments, with interest, as soon as practicable, subject to any required MID Board actions. For accounting and tax purposes, the District will report the amounts paid to employees to the IRS as additional wages subject to income tax withholding. The excess amounts in the Basic Retirement Plan that were designated as employee contributions will be recharacterized as employer contributions.

DRAFT

RETIREMENT COMMITTEE RESOLUTION 2019-___

Implementing Actuarial Audit Items

WHEREAS, the Modesto Irrigation District (District) maintains retirement plans, including a Basic Retirement Plan and a Retiree Medical Benefits Plan, for the benefit of its employees; and

WHEREAS, the Retirement Committee of the District is responsible for administration of the retirement plans, including the engagement of actuaries; and

WHEREAS, the Retirement Committee caused to be performed an actuarial audit that was presented to the Committee by Cheiron Inc. at its September 18, 2019 meeting; and

WHEREAS, the Cheiron audit findings and recommendations included that the Basic Retirement Plan mortality table may be out of date, the discount rate should be lowered, and Cheiron would have used a different methodology to implement Tier 3 employee contributions under the California Public Employees’ Pension Reform Act (PEPRA).

NOW, therefore, BE IT RESOLVED, that the Retirement Committee of the Modesto Irrigation District does hereby:

1. Find that the Cheiron audit is credible and that Cheiron’s recommendations and PEPRA implementation methodology are sensible and prudent; and

2. Direct staff to recalculate employee contributions for the years 2013-2016, to treat the difference between the 9.5% past contribution rate and Cheiron’s calculated 4.25% rate as excess contributions deposited to the Plan, to recharacterize these as employer contributions for those years, to take necessary and appropriate actions to repay excess amounts to the affected Tier 3 participants, and to add interest to the repayment amounts based on the actual earnings rate of the Plan during those years; and

3. Adopt the attached Funding Policy Statements for the Modesto Irrigation District Retirement System Basic Retirement Plan and Retiree Medical Benefits Plan, to reduce the discount rate from 7.5% to 6.9%, which Funding Policy Statements shall supersede the existing Funding Policy Statements, effective immediately; and

4. Direct staff to cause an experience study be performed by an actuary as soon as practicable for the purpose of informing the Committee in regard to the demographic assumptions of the plans.

BASIC RETIREMENT

Funding Policy Statement Modesto Irrigation District Basic Retirement Plan

Adopted August 2018September 2019

Supersedes the July 2006August 2018 Funding Policy Statement

Funding Policy Statement Modesto Irrigation District Retirement System Basic Retirement Plan

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Purpose The purpose of this Funding Policy Statement (Policy) is to establish a clear understanding of how the Modesto Irrigation District (the District) will determine and meet the funding requirements of the Modesto Irrigation District Retirement System Basic Retirement Plan (the Plan). This Policy supersedes the prior Funding Policy Statement, which was dated July 2006August 2018. Statement of Responsibilities The administration of the Plan is vested in the Board of Directors (the Board). The Board has in turn delegated the general administration of the Plan to the Retirement Committee (the Committee). The delegations of authority from the Board to the Committee are contained in the Plan, and are subject to the limitations expressed in the Plan. The Committee is not authorized to appoint Committee members, nor does the Committee possess contracting authority or the ability to amend the Plan. The Board, via the Plan, has directed the Committee to arrange the funding of the Plan and authorized the Committee to establish a funding policy. These parts of the Plan are shown in the Appendix. Objective The objective of this Policy is to guide the District in meeting the requirement set forth in the Plan to contribute, each year, the amounts necessary to maintain the Plan on a sound actuarial basis. Target Funding Level and Amortization of Unfunded Liabilities To achieve the objective, a credentialed actuary will be engaged to calculate the Actuarially Determined Employer Contribution (ADEC), which is the annual Normal Cost plus assumed administrative expenses and amortization payment of the unfunded liability, using the elements defined below and other reasonable assumptions such that a Target Funding Level of 100% is reached by the year 2039 and then maintained. The Funding Level is calculated as the actuarial value of Plan assets divided by the actuarial accrued liability, expressed as a percentage. By setting this Target Funding Level, the Committee is adopting a closed 20-year amortization period for the Plan’s unfunded liability, starting in 2019. As the end of the 20-year period approaches, the volatility of contribution levels may increase. It is expected that in the future the Committee may adopt a smoothing


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mechanism that appropriately addresses the end-of-period issues consistent with conditions prevailing at the time. Actuarial Elements Certain key assumptions and methods – actuarial elements - are part of this Policy. Other actuarial assumptions not listed here may be reasonably adopted and revised in conjunction with the actuary, from time to time.

a. Discount rate and investment return assumption

The discount rate and investment return assumption will be 7.506.9%. (This is unchanged from the previous version of the Policy).

b. Actuarial cost method

Effective in 2019, the Entry Age Normal (EAN) method will be used to determine the costs and liabilities of the Plan. Under the EAN method, the rate at which benefits are considered to be earned throughout a participant’s career increases in a stable manner, by the assumed annual salary scale. The Governmental Accounting Standards Board (GASB) requires the EAN cost method to be used in the preparation of the District’s audited financial statements. By adopting the EAN method, the Committee is changing the previous practice of using the Project Unit Credit (PUC) method. The PUC method resulted in a more back-loaded rate at which benefits were considered to be earned throughout a participant’s career. Continued use of the PUC method in funding valuations would produce results inconsistent with figures reported in the District’s GASB financial statements.

c. Asset smoothing method

Asset smoothing will be used in order to help focus the decision making process on the long term, and to make the funding and reporting more consistent. Asset smoothing does not impact long term costs or funded positions, but does impact the recognition of changes in the funding level, which in turn impacts the timing of contributions. The method used will be 3-year smoothing with no corridor. This means that the actuarial value of assets is equal to the market value of assets on the valuation date reduced by the sum of i) 66.67% of gains and losses of the prior year and ii) 33.33% of gains and losses of the second prior year.


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Accuracy, Transparency, and Timeliness Actuarial studies (valuations) will be conducted every year. This Policy will be reviewed every year, in conjunction with the actuarial study, to determine whether any changes are needed to ensure adequate resources are being accumulated. The Committee will conduct experience studies and actuarial audits as needed. This is typically done every 5 years; however, the Committee may decide to perform these studies more or less frequently. To be transparent, the results of actuary studies, funding reviews, experience studies, and actuarial audits will be included in the Committee meeting agenda packages. Staff Guidelines District staff will coordinate the actuarial analyses and arrange the contributions to the Plan. An actuary will perform an analysis each year to value the Plan’s liabilities, assets, and funding requirement. This annual analysis will be based on reasonable assumptions and methods, taking into account reasonable expectations and the past experience of the Plan, and will include the actuarial elements defined in this Policy. Staff will arrange for the actuarial report to be presented to the Committee. One result of the analysis will be the actuary’s calculation of the ADEC for the year. Under the Plan documents and this Policy, the actuary’s recommended contribution – the ADEC - is the amount that the District will contribute to the Plan. However, the District still reserves the right to suspend or reduce contributions at any time, upon appropriate action by the Board. Alternatively, the District could elect to make extra contributions. If an amount other than the amount the actuary recommends is contributed to the Plan, staff should coordinate with the actuary to project future funding and contribution requirements. Staff should then arrange a presentation to the Committee of how the difference between the actuary’s recommendation and the actual contribution will affect future funding levels and contribution requirements. Because of the assumed investment returns, the actuary’s recommended contribution amount will be tied to a specific date. Staff is authorized to make the District’s annual contribution any time during the applicable year, taking into account the District’s cash position and sound financial practices. It may be advantageous to make the contribution early in the year, before the annual actuarial analysis is complete. Staff is authorized to contribute a reasonable percentage, based on an estimate of the required contribution amount, at the start of the year, and then contribute the balance, determined by the actuary based on the annual analysis, later in the year.


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Appendix – Contribution Requirements The following is excerpted from the Modesto Irrigation District Retirement System Basic Retirement Plan: §3.01 District Contributions Subject to the last sentence of this section and subject to section 3.04, “District PEPRA Contributions,” the District shall contribute to the Trust, not less frequently than once a year, the amounts necessary to maintain the Plan on a sound actuarial basis consistent with section 10.03, “Power of the Committee.” The Committee shall arrange for the establishment and maintenance by the Actuary, or in accordance with his recommendations, of such funding accounts as are required by generally accepted actuarial principles. Notwithstanding the foregoing provisions of this section, but subject to section 3.04, “District PEPRA Contributions,” the District reserves the right to suspend or reduce contributions to the Plan at any time upon appropriate action by the Board of Directors. §10.03 Powers of the Committee Subject to the limitations of the terms of the Plan, the Committee may from time to time establish rules for the performance of its functions and the administration of the Plan. The Committee shall have all powers necessary to supervise the administration of the Plan and control its operations in accordance with its terms, including, but not by way of limitation, the following powers: (a) To construe and interpret the terms and provisions of the Plan, and to resolve any questions arising

under the Plan or in connection with the administration or operation thereof; (b) To determine whether any Employee is, or is eligible to become, a Participant in the Plan; (c) To determine the Years of Service and Years of Credited Service of any Participant, and to compute

the amount of any Retirement Benefit or other sum payable to any person under the Plan; (d) To authorize and direct all disbursements of Retirement Benefits and other sums under the Plan; (e) To make, at reasonable intervals, an analysis of the funding requirements of the Plan for the

payment of Retirement Benefits and expenses, based on reasonable actuarial assumptions and methods which take into account the experience of the Plan and reasonable expectations, and on the basis of this analysis, to establish a funding policy for the Plan;

(f) To adopt, from time to time with the advice of the Actuary, such mortality and other tables as it may deem necessary or appropriate in connection with the operation and administration of the Plan;

(g) To determine, with the advice of the Actuary, the liabilities of the Plan; (h) To assure that the Plan complies with any reporting and disclosure requirements imposed under

federal law or by any State or local government; (i) To establish appropriate procedures to prevent the Plan from engaging in any “prohibited

transaction” described in Code section 503(b) or 4975, or similar prohibited transactions as set forth under State or local law;

(j) To assure that any bonding requirements imposed under federal law, or by any state or local government, are satisfied;

(k) To employ such counsel and agents, and to obtain such clerical, medical, legal and actuarial services, as it may deem necessary or appropriate in carrying out the provisions of the Plan.

The Committee shall have full discretion in making its decisions and determinations, and they shall be conclusive and binding on all interested parties, except as otherwise provided by law.

RETIREE MEDICAL

Funding Policy Statement MID Retiree Medical Benefits Plan

Adopted August 2018Adopted September 2019

Supersedes the December 2006 Funding Policy StatementSupersedes the August 2018 Funding Policy Statement

Funding Policy Statement Modesto Irrigation District Retirement System Retiree Medical Benefits Plan

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Purpose The purpose of this Funding Policy Statement (Policy) is to establish a clear understanding of how the Modesto Irrigation District (the District) will determine and meet the funding requirements of the Modesto Irrigation District Retirement System Retiree Medical Benefits Plan (the Plan). This Policy supersedes the prior Funding Policy Statement, which was dated December 2006August 2018. Statement of Responsibilities The administration of the Plan is vested in the Board of Directors (the Board). The Board has in turn delegated the general administration of the Plan to the Retirement Committee (the Committee). The delegations of authority from the Board to the Committee are contained in the Plan, and are subject to the limitations expressed in the Plan. The Committee is not authorized to appoint Committee members, nor does the Committee possess contracting authority or the ability to amend the Plan. The Board, via the Plan, has directed the Committee to arrange the funding of the Plan. Excerpts from the Plan pertaining to contributions by the District and powers of the Committee are shown in the Appendix. Objective The objective of this Policy is to guide the District in meeting the requirement set forth in the Plan to contribute, each year, the amounts necessary to maintain the Plan on a sound actuarial basis. Target Funding Level and Amortization of Unfunded Liabilities To achieve the objective, a credentialed actuary will be engaged to calculate the Actuarially Determined Employer Contribution (ADEC), which is the annual Normal Cost plus the amortization of the unfunded liability, using the elements defined below and other reasonable assumptions such that a Target Funding Level of 100% is reached by the year 2037 and then maintained. The Funding Level is calculated as the actuarial value of Plan assets divided by the actuarial accrued liability, expressed as a percentage. By setting this Target Funding Level, the Committee is maintaining the previous earlier policy, which set a closed 30-year period starting in 2007 to amortize the Plan’s unfunded liability. As the end of the amortization period approaches, the volatility of contribution levels may increase. It is expected that in the future


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the Committee may adopt a smoothing mechanism that appropriately addresses the end-of-period issues consistent with conditions prevailing at the time. The Retiree Medical Trust The District established the Retiree Medical Trust (Trust) so that Plan benefits could eventually be paid out of the Trust. Before the Trust can be used to make payments (e.g., to health care coverage providers), sufficient assets must be accumulated so that there is enough liquidity to cover the payments. The Trust was started and, as of the date of this Policy, remains in the Accumulation Phase: building assets in anticipation of eventually becoming operational. Funding of the Trust During the Accumulation Phase, the District will pay benefit costs directly to health care providers and separately contribute to the Trust. The annual Trust contribution will be the excess, if any, of the ADEC over the amount of the directly paid benefit costs, and will be no less than the Normal Cost, which is the value of benefits earned in the year. During the Operational Phase, each year the District will contribute the amount of the ADEC to the Trust; the Trust will then pay the health care coverage providers, and retain the Trust contribution amount. This Policy sets a target for moving into the Operational Phase: when the Funding Level reaches 80%, staff shall prepare for the Committee’s consideration actions that would initiate the Operational Phase of the Trust, and the Operational Phase would remain effective thereafter, regardless of the Funding Level of the Plan. Actuarial Elements Certain key assumptions and methods – actuarial elements - are part of this Policy. Other actuarial assumptions not listed here may be reasonably adopted and revised in conjunction with the actuary, from time to time.

a. Discount rate and investment return assumption

The discount rate and investment return assumption will be 7.506.9%. (This is unchanged from the previous version of the Policy).

b. Actuarial cost method

The costs and liabilities of the Plan will be determined as follows, and in accordance with the promulgations of the Government Accounting Standards Board. For each active


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participant, the discounted present value of all future postretirement benefits will be calculated using the actuarial elements and other assumptions, which shall be stated in the valuation report. This present value amount is divided into “n” equal parts, where “n” is the number of years between an employee’s hire date and the date he or she is fully eligible for retirement; the amount of each of the equal parts is the Normal Cost portion of the ADEC. The accumulated postretirement benefit obligation (APBO) is the summation of the Normal Costs for years prior to the valuation. The actuarial accrued liability for all Plan participants less the actuarial value of Plan assets is the unfunded actuarial accrued liability. Deviations in actual experience from the experience anticipated by the actuarial assumptions result in actuarial gains and losses, which reduce or increase, respectively, the unfunded actuarial accrued liability.

c. Asset smoothing method

Asset smoothing will be used in order to help focus the decision making process on the long term, and to make the funding and reporting more consistent. Asset smoothing does not impact long term costs or funded positions, but does impact the recognition of changes in the funding level, which in turn impacts the timing of contributions. The method used will be 3-year smoothing with no corridor. This means that the actuarial value of assets is equal to the market value of assets on the valuation date reduced by the sum of i) 66.67% of gains and losses of the prior year and ii) 33.33% of gains and losses of the second prior year.

Accuracy, Transparency, and Timeliness Actuarial studies (valuations) will be conducted every year. Updated participant census data and new claims cost analysis will be performed no less often than once every two years. This Policy will be reviewed every year, in conjunction with the actuarial study, to determine whether any changes are needed to ensure adequate resources are being accumulated. The Committee will conduct experience studies and actuarial audits as needed. This is typically done every 5 years; however, the Committee may decide to perform these studies more or less frequently. To be transparent, the results of actuary studies, funding reviews, experience studies, and actuarial audits will be included in the Committee meeting agenda packages. Staff Guidelines District staff will coordinate the actuarial analyses and arrange the contributions to the Plan. An actuary will perform an analysis each year to value the Plan’s liabilities, assets, and funding requirement. This annual analysis will be based on reasonable assumptions and methods,


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taking into account reasonable expectations and the past experience of the Plan, and will include the actuarial elements defined in this Policy. Staff will arrange for the actuarial report to be presented to the Committee. Results of the analysis will include the actuary’s calculation of the ADEC and the Normal Cost for the year. Staff will make the contribution in the specified amount, in accordance with the Policy funding amount defined for the Accumulation and Operational Phases of the Trust. However, the District still reserves the right to suspend or reduce contributions at any time, upon appropriate action by the Board. Alternatively, the District could elect to make extra contributions. If an amount other than the Policy amount is contributed to the Plan, staff should coordinate with the actuary to project future funding and contribution requirements. Staff should then arrange a presentation to the Committee of how the difference between the Policy amount and the actual contribution will affect future funding levels and contribution requirements. Because of the assumed investment returns, the Policy amount will be tied to a specific date. Staff is authorized to make the contribution any time during the applicable year, taking into account the District’s cash position and sound financial practices. It may be advantageous to make the contribution early in the year, before the annual actuarial analysis is complete. Staff is authorized to contribute a reasonable percentage, based on an estimate of the required contribution amount, at the start of the year, and then contribute the balance, determined by the actuary based on the annual analysis, later in the year.


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Appendix – Contribution Requirements The following is excerpted from the Modesto Irrigation District Retirement System Retiree Medical Benefits Plan: §4.01 Contributions by the District Subject to the last sentence of this Section 4.01, the District shall contribute to the Trust, not less frequently than once a year, the amounts necessary to maintain the Plan. Notwithstanding the foregoing, the District reserves the right to suspend or reduce contributions to the Plan at any time, upon appropriate action by the Board of Directors, provided, however, that in the event that there are insufficient funds in the Trust to provide benefits due under the Plan, the District shall pay for such benefits directly. §5.03 Powers of the Committee It shall be a principal duty of the Committee to see that the Plan is carried out, in accordance with its terms, for the exclusive benefit of persons entitled to participate in the Plan without discrimination among them. The Committee will have the full power to administer the plan in all of its details, subject to any applicable requirements of law including, without limitation, the lawful order of any Court of competent jurisdiction. For this purpose, the Committee’s powers will include, but will not be limited to the following authority, in addition to all other powers provided by this Plan:

a) To make and enforce such rules and regulations as it deems necessary or proper for the efficient administration of the Plan, including the establishment of any claims procedure that may be required by applicable provisions of law;

b) To interpret the Plan, its interpretation thereof in good faith to be final and conclusive on all persons claiming benefits under the Plan;

c) To decide all questions concerning the Plan and the eligibility of any person to participate in the Plan or to receive a benefit from the Plan;

d) To appoint such agents, counsel, consultants and other persons as may be required by the Committee to assist in the administration of the Plan; and

e) To allocate and delegate its responsibilities under the Plan and to designate other persons to carry out any of its responsibilities under the Plan, any such allocation, delegation or designation to be by written instrument and in accordance with applicable provisions of the law.

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