HomeMy WebLinkAboutPacket - 10/10/2024 - Police Pension Board
POLICE PENSION BOARD OF TRUSTEES
Thursday, October 10, 2024, 8:30 AM
Municipal Center - 333 South Green Street
Public Conference Room
AGENDA
1. Call to Order
2. Roll Call
3. Public Input
4. Presentation of the Actuarial Valuation Report
a) Review and approve the actuarial results, and recommendation to forward levy
request to McHenry City Council
5. Action Items:
a) Motion to approve the Minutes from June 26, 2024
b) Motion to approve the Minutes from the Public Hearing on August 23, 2024
c) Motion to approve the payment of bills
d) Presentation and motion to approve the Treasurer’s Report
e) Approve the 2025 Police Pension Board Schedule
f) Authorize City Treasurer Carolyn Lynch to transfer funds as needed
g) Approve the pension application of Thomas Jager and Jeremy Hollander
h) Approve the pension retirement applications for Adriana Birk and Robert Roske
i) Approve the portability transfer for Daniel Lincicum
j) Approve the disability pension application of Peter Mader
k) Discuss 2024 Annual Affidavits of Continued Eligibility
6. Motion to Adjourn
1
MCHENRY POLICE PENSION FUND
2023 AFFIDAVIT OF CONTINUED ELIGIBILITY
The following affidavit must be fully completed, notarized and returned by first class mail
in the enclosed envelope (and if possible, sent by electronic mail to
mpdpension@cityofmchenry.org) on or before December 1st, 2023 to ensure that your next
direct deposit pension payment will be issued in a timely fashion. The form must be signed
in the presence of a Notary Public and notarized, or it will NOT be accepted upon return.
Name: Phone:
Address: Date of Birth:
Your Last 4 SSN Digits:
E-mail Address (optional to expedite communication):
Your Current Employer: Employer’s Phone No.:
Address: Job Title:
* * *
(Spousal information/verification is a newly issued requirement by the
Illinois Department of Insurance, Public Pension Division, as of 2019)
Spouse’s Name: Spouse’s Date of Birth:
Date of Marriage: Spouse’s Last 4 SSN Digits:
* * *
The undersigned, being first duly sworn on oath, deposes and states I am a member of the
McHenry Police Pension Fund and:
1. I am now receiving a:
☐ Line of Duty Disability Pension
☐ Not on Duty Disability Pension
☐ Heart Attack / Stroke Disability Pension
☐ Occupational Disease Disability Pension
☐ Survivor’s Pension
☐ Retirement Pension
2
2. I am currently:
☐ Married
☐ Widowed
☐ Divorced
☐ Single/never married
3. If you have remarried, what was the date of your remarriage?
4. Do you have dependent children or dependent parents?
5. If yes, please give names, dates of birth, and Social Security Numbers:
***
Please return this form to the following:
City of McHenry Police Pension Board
ATTN: Board President Jeff Foerster
333 South Green Street
McHenry, Illinois 60050
A COPY of this form can be returned via e-mail at [mpdpension@cityofmchenry.org]
The original signed & notarized affidavit MUST be returned by mail
Print Name:
Signature:
Date:
Subscribed and sworn before me this _____ day of ___________________, 20____, by the
above-named person, who is (check one)
__________ personally known to me
__________ Presented the following identification to verify his/her identity:
Identity Type: ______________________ Number: ______________________
(Notary Signature) (Notary Seal)
NOTICE
TO: CITY OF MCHENRY POLICE PENSION FUND
BENEFICIARIES
FROM: CITY OF MCHENRY POLICE PENSION BOARD
RE: 2023 ANNUAL AFFIDAVITS OF CONTINUED ELIGIBILITY
Please be advised the City of McHenry Police Pension Board has implemented a
policy to send out affidavits of continued eligibility to its pension beneficiaries. This
policy was created to ensure the Pension Fund is paying out benefits to the proper
parties, maintaining up to date records as to its beneficiaries and treating all
pensioners with the same regard concerning its record keeping policies and
procedures. This is also a requirement under the Illinois Pension Code & an
Illinois Department of Insurance (the entity responsible for overseeing all
Illinois public pension funds) advisory opinion.
Enclosed please find an annual affidavit for 2023. Please note that due to new
Department of Insurance Regulations additional spousal information is now
required.
As in prior years, please fully fill out, execute and notarize the enclosed document.
The affidavit WILL NOT be accepted if it is missing information or is not notarized.
We are asking all pensioners to have this document returned to the address listed on
the affidavit December 1st, 2023. If possible, please also submit a copy of your
executed affidavit by electronic mail to the e-mail address listed on the affidavit. If
we do not receive an affidavit from you on or before December 8th, 2023 a second
notice will be sent to you by certified mail with a two week return deadline. Your
timely return of the enclosed annual affidavit will ensure the continuance of your
monthly direct deposits.
Your continued patience and consideration are greatly appreciated. Should you have
any questions or need to update the Pension Board as to your mailing address/contact
info, please contact Board President Jeff Foerster
(mpdpension@cityofmchenry.org).
McHenry Police Pension Fund Reporting
For the Contribution Year Ending April 30, 2025 for Funding Purposes
For the Fiscal Year Ending April 30, 2024 for Financial Statement Reporting
Presented by:
Noelle Jacobs, Actuarial Consultant
Recommended Contribution & Funded Status
Page 8 in Report
2
Prior Valuation Current Valuation Difference
$41,619
(6.41% Increase)
$1,536,600
$3,834,800
Recommended Contribution $649,745 $691,364
Actuarial Accrued Liability $59,502,600 $63,337,400
Percent Funded (AVA)102.84%99.04%
Fair Value of Assets (FVA)$55,718,500 $59,660,400
Actuarial Value of Assets (AVA)$61,192,300 $62,728,900
$3,941,900
(3.80%)
Percent Funded (FVA)93.64%94.19%
EAN Unfunded Actuarial
Accrued Liability/(Surplus)($1,689,600)$608,500 $2,298,100
0.55%
Current Funding
Policy is level % pay contributions to
a 100% funding
target over a
layered
amortization period
of 15 years.
Recommended Contribution Reconciliation
Page 15 in Report
3
Actuarial
Liability
Recommended
Contribution
Expected Changes $2,902,800 $19,500
Salary Increases Greater than
Expected $190,800 $28,100
Actuarial Experience $741,200 $25,300
$0
Funding Policy Changes $0 ($166,100)
($2,200)
Net Increase/(Decrease)$3,834,800 $41,600
Investment Return Less than
Expected $137,100
Assumption Changes $0 $0
Contributions Greater than
Expected $0
Recommended Contribution Breakdown
Page 25 in Report
4
Prior Valuation Current Valuation Difference
Recommended Contribution $649,745 $691,364
$0 $55,913
($14,294)
$55,913
$41,619
Employer Normal Cost
(with interest)$649,745 $635,451
Amortization of Unfunded
Accrued Liability/(Surplus)
The Recommended
Contribution has Increased by 6.41%
from the Prior
Valuation.
Demographic Changes
Page 13-14 in Report
•There were 5 Members who were hired during the year. This increased the
Recommended Contribution by approximately $30,700.
•There were 2 Members who retired during the year. This increased the
Recommended Contribution by approximately $6,700.
•There were 3 Members who terminated employment during the year. This
decreased the Recommended Contribution by approximately $33,700.
•There were 31 inactive Members who continued to collect benefits. This
increased the Recommended Contribution by approximately $25,900.
•Other demographic changes experienced during the year were minimal.
5
Age and Service Distribution
Page 35 in Report
6
Service Under 1 1 to 4 5 to 9 10 to 14 15 to 19 20 to 24 25 to 29 30 to 34 35 to 39 40 & up Total
Age
Under 25 0|1 0|2 0|3
25 to 29 0|3 0|5 0|8
30 to 34 0|1 0|3 0|3 0|7
35 to 39 0|1 0|3 2|1 2|0 4|5
40 to 44 0|2 2|0 3|0 2|0 7|2
45 to 49 1|0 7|0 8|0
50 to 54 2|0 3|0 5|0
55 to 59 1|0 1|0 2|0
60 to 64
65 to 69
70 & up
Total 0|5 0|11 0|8 4|1 7|0 12|0 3|0 26|25
5/1/2024 Age and Service Distribution - Tier 1|Tier 2 Active Members
Expected Benefit Payments
Page 9 & 34 in Report
7
Expected Benefit Payments
in 10 Years $4,848,500
Current Valuation
Total Active Members
Total Inactive Members
Current Benefit Payments
Expected Benefit Payments
in 5 Years
51
47
$2,399,200
$3,600,500
Benefit Payments are
Anticipated to Increase 50% in the
Next 5 Years and
102% in the Next 10
Years.
Assumption Changes
Page 14 in Report
•The year over year step increases dictated by the wage schedule did
not change from the prior wage schedule; therefore, we have not
updated the individual pay increases assumption.
8
Change in Fair Value of Assets
Page 17 in Report
9
Return on Investments
Employer Contributions
$55,718,500 Beginning Fair Value of Assets
Member Contributions $522,300
$5,172,600
Change in Fair Value $3,941,900
Current Valuation
$669,200
Benefits and Refunds ($2,399,200)
Other Expenses ($23,000)
Ending Fair Value of Assets $59,660,400
The Rate of Return
on Investments on a
Fair Value of Assets
Basis for the Fund
was Approximately
9.34% Net of
Administrative
Expense. The
Expected Rate of
Return on
Investments is
7.00%.
Risk Management
Page 11-13 & 22 in Report
•The ratio of benefit payments to the Fair Value of Assets is 4.02%,
compared to an Expected Rate of Return on Investments of 7.00%.
•Based on the number of active Members in the Plan, there is a low
demographic risk.
10
0.25%Current Expected Rate 0.25%
Decrease of Return on Investments Increase
(6.75%)(7.00%)(7.25%)
(18.85%)
$276,150 ($130,339)
Recommended Contribution $967,514 $691,364 $561,025
Dollar Impact
Percentage Impact 39.94%
Alternative Contribution
Page 30 in Report
11
Prior Valuation Current Valuation Difference
Alternative Contribution $710,366
Alternative Contribution Funded
Percentage (AVA)102.03%
PUC Unfunded Actuarial
Accrued Liability/(Surplus)($1,217,400)
$675,426
$1,372,800
97.86%
($34,940)
$2,590,200
(4.17%)
Alternative
Contribution Funding Policy is Level % Pay
Contributions to a
90% Funding Target
Over the Remaining
16 Years.
Five-Year Employer Contribution History
Page 33 in GASB 67/68 Report
12
Fiscal Year End Employer Contribution Actuarially Determined
Contribution (ADC)% of ADC
4/30/2024 $669,181 $671,455 99.66%
4/30/2023 $621,970 $625,600 99.42%
4/30/2022 $655,318 $2,576,006 25.44%
4/30/2021 $2,220,747 $2,231,742 99.51%
4/30/2020 $2,077,704 $2,082,421 99.77%
5 - Year Average 84.76%
The Actuarially Determined Contribution for the Current Year is the
Recommended Contribution from the May 1, 2022 Actuarial Valuation
Completed by Lauterbach & Amen, LLP.
GASB Solvency Test
Page 42 in GASB 67/68 Report
13
The Plan’s Projected
Fiduciary Net
Position is
Anticipated to Cover
Projected Benefit
Payments in Full for
the Current
Employees.
Actuarial Certification
•The valuation results summarized in this presentation are from the
May 1, 2024 Actuarial Funding Report & May 1, 2023 GASB 67/68
Report, which have been reviewed by Actuarial Consultants that meet
the Qualification Standards of the American Academy of Actuaries.
•This report is not intended for purposes other than determining the
Recommended Contribution, under the selected Funding Policy, and the
Alternative Contribution.
•This report contains the full description of the data, assumptions, methods, and
provisions used to produce these actuarial results.
•For any rounded figures shown in this presentation, please refer to the
Actuarial Funding Report for more exact figures.
14
MCHENRY POLICE
PENSION FUND
FUNDING ACTUARIAL VALUATION
AS OF MAY 1, 2024
FOR THE CONTRIBUTION YEAR
MAY 1, 2024 TO APRIL 30, 2025
668 N. River Road
Naperville, IL 60563 Phone: 630.393.1483
Fax: 630.393.2516
lauterbachamen.com
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Actuarial Funding Report
MCHENRY POLICE PENSION FUND
Contribution Year Ending: April 30, 2025
Actuarial Valuation Date: May 1, 2024
Data Date: April 30, 2024
Contact:
Todd A. Schroeder
Partner
August 30, 2024
LAUTERBACH & AMEN, LLP DR
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TABLE OF CONTENTS
McHenry Police Pension Fund
Table of Contents
ACTUARIAL CERTIFICATION .............................................................................................................. 5
MANAGEMENT SUMMARY .................................................................................................................. 7
Recommended Contribution ................................................................................................................................................ 8
Funded Status ...................................................................................................................................................................... 8
Management Summary – Comments and Analysis ............................................................................................................. 9
Actuarial Recommended Contribution – Reconciliation ................................................................................................... 15
VALUATION OF FUND ASSETS.......................................................................................................... 16
Fair Value of Assets ........................................................................................................................................................... 17
Fair Value of Assets (Gain)/Loss ....................................................................................................................................... 18
Development of the Actuarial Value of Assets .................................................................................................................. 19
Actuarial Value of Assets (Gain)/Loss .............................................................................................................................. 19
Historical Asset Performance ............................................................................................................................................ 20
RECOMMENDED CONTRIBUTION DETAIL ..................................................................................... 23
Actuarial Accrued Liability ............................................................................................................................................... 24
Funded Status .................................................................................................................................................................... 24
Development of the Employer Normal Cost ...................................................................................................................... 25
Normal Cost as a Percentage of Expected Payroll ............................................................................................................. 25
Recommended Contribution Breakdown ........................................................................................................................... 25
Schedule of Amortization – New Unfunded Actuarial Accrued Liability ......................................................................... 26
Schedule of Amortization – Total Unfunded Actuarial Accrued Liability ........................................................................ 27
Actuarial Methods – Recommended Contribution ............................................................................................................ 28
ALTERNATIVE CONTRIBUTION ........................................................................................................ 29
Alternative Contribution .................................................................................................................................................... 30
Funded Status – Alternative Contribution ......................................................................................................................... 30
Actuarial Methods – Alternative Contribution .................................................................................................................. 32
ACTUARIAL VALUATION DATA ....................................................................................................... 33
Active Members................................................................................................................................................................. 34
Inactive Members .............................................................................................................................................................. 34
Summary Of Monthly Benefit Payments ........................................................................................................................... 34
Age and Service Distribution ............................................................................................................................................. 35
ACTUARIAL FUNDING POLICIES ...................................................................................................... 36
Actuarial Cost Method ....................................................................................................................................................... 37
Financing Unfunded Actuarial Accrued Liability.............................................................................................................. 37
Actuarial Value of Assets .................................................................................................................................................. 39
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Table of Contents
ACTUARIAL ASSUMPTIONS ............................................................................................................... 40
Nature of Actuarial Calculations ....................................................................................................................................... 41
Selection of Actuarial Assumptions................................................................................................................................... 41
Actuarial Assumptions in the Valuation Process ............................................................................................................... 42
Assessment of Risk Exposures .......................................................................................................................................... 43
Limitations of Risk Analysis ............................................................................................................................................. 43
Assessment and Use of Actuarial Models.......................................................................................................................... 44
Actuarial Assumptions Utilized ......................................................................................................................................... 45
LOW-DEFAULT-RISK OBLIGATION MEASURE .............................................................................. 48
Low-Default-Risk Obligation Measure - Purpose ............................................................................................................. 49
Low-Default-Risk Obligation Measure ............................................................................................................................. 49
Low Default Risk Obligation Measure vs Actuarial Liability ........................................................................................... 51
SUMMARY OF PRINCIPAL PLAN PROVISIONS .............................................................................. 52
Establishment of the Fund ................................................................................................................................................. 53
Administration ................................................................................................................................................................... 53
Member Contributions ....................................................................................................................................................... 53
Regular Retirement Pension Benefit .................................................................................................................................. 53
Regular Retirement Pension Benefit - Continued .............................................................................................................. 54
Early Retirement Pension Benefit ...................................................................................................................................... 54
Surviving Spouse Benefit .................................................................................................................................................. 55
Surviving Spouse Benefit - Continued .............................................................................................................................. 56
Termination Benefit – Vested ............................................................................................................................................ 56
Disability Benefit ............................................................................................................................................................... 57
GLOSSARY OF TERMS ......................................................................................................................... 58
Glossary of Terms .............................................................................................................................................................. 59
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ACTUARIAL CERTIFICATION
This report documents the results of the Actuarial Valuation for the McHenry Police Pension Fund. The
information was prepared for use by the McHenry Police Pension Fund and the City of McHenry, Illinois
for determining the Recommended Contribution, under the selected Funding Policy, and the Alternative
Contribution for the Contribution Year May 1, 2024 to April 30, 2025. It is not intended or suitable for
other purposes. Determinations for purposes other than the Employer’s Actuarial Recommended
Contribution may be significantly different from the results herein.
The results in this report are based on the demographic data and financial information submitted by the
McHenry Police Pension Fund, and may include results from the prior Actuary. We did not prepare the
Actuarial Valuations for the years prior to May 1, 2017. Those valuations were prepared by the prior
Actuary whose reports have been furnished to us, and our disclosures are based on those reports. An audit
of the prior Actuary’s results was not performed, but high-level reviews were completed for general
reasonableness, as appropriate, based on the purpose of this valuation. The accuracy of the results is
dependent on the precision and completeness of the underlying information.
In addition, the results of the Actuarial Valuation involve certain risks and uncertainty as they are based
on future assumptions, market conditions, and events that may never materialize as assumed. For this
reason, certain assumptions and future results may be materially different than those presented in this
report. See the Management Summary section of this report for a more detailed discussion of the Defined
Benefit Plan Risks, as well as the limitations of this Actuarial Valuation on assessing those risks. We are
not aware of any known events subsequent to the Actuarial Valuation Date, which are not reflected in this
report but should be valued, that may materially impact the results.
The valuation results summarized in this report involve actuarial calculations that require assumptions
about future events. The McHenry Police Pension Fund selected certain assumptions, while others were
the result of guidance and/or judgment from the Plan’s Actuary or Advisors. We believe that the
assumptions used in this valuation are reasonable and appropriate for the purposes for which they have
been used. The selected assumptions represent our best estimate of the anticipated long-term experience
of the Plan, and meet the guidelines set forth in the Actuarial Standards of Practice.
In preparing the results, our Actuaries used commercially available software (ProVal) developed by
Winklevoss Technologies, LLC. This software is widely used for the purpose of performing Actuarial
Valuations. Our Actuaries coded the plan provisions, assumptions, methods, and demographic data
summarized in this report, and reviewed the liability and cost outputs for reasonableness. We are not aware
of any material weaknesses or limitations in the software, and have determined it is appropriate for
performing this valuation.
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McHenry Police Pension Fund
Page 6
To the best of our knowledge, all calculations are in accordance with the applicable funding requirements,
and the procedures followed and presentation of results conform to generally accepted actuarial principles
and practices as prescribed by the Actuarial Standards Board. The undersigned consultants of Lauterbach
& Amen, LLP, with actuarial credentials, meet the Qualification Standards of the American Academy of
Actuaries to render this Actuarial Certification. There is no relationship between the McHenry Police
Pension Fund and Lauterbach & Amen, LLP that impairs our objectivity.
Respectfully Submitted,
LAUTERBACH & AMEN, LLP
Todd A. Schroeder, ASA, FCA, EA, MAAA
Robert L. Rietz, Jr., FCA, EA, MAAA
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MANAGEMENT SUMMARY
Recommended Contribution
Funded Status
Management Summary – Comments and Analysis
Actuarial Recommended Contribution – Reconciliation
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MANAGEMENT SUMMARY
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RECOMMENDED CONTRIBUTION
FUNDED STATUS
Prior Current
Valuation Valuation
Recommended Contribution $649,745 $691,364
Expected Payroll $5,299,975 $5,428,011
Recommended Contribution as a
Percent of Expected Payroll 12.26%12.74%
The Recommended
Contribution has Increased by
$41,619 from the
Prior Valuation.
Prior Current
Valuation Valuation
Normal Cost $1,124,703 $1,123,845
Fair Value of Assets $55,718,518 $59,660,419
Actuarial Value of Assets $61,192,288 $62,728,920
Actuarial Accrued Liability $59,502,644 $63,337,418
Unfunded Actuarial
Accrued Liability/(Surplus)($1,689,644) $608,498
Percent Funded
Actuarial Value of Assets 102.84%99.04%
Fair Value of Assets 93.64%94.19%
The Percent
Funded has
Decreased by
3.80% on an
Actuarial Value of
Assets Basis.
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MANAGEMENT SUMMARY
McHenry Police Pension Fund
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MANAGEMENT SUMMARY – COMMENTS AND ANALYSIS
Contribution Results
The Recommended Contribution is based on the selected Funding Policy and methods that are outlined in
the Actuarial Funding Policies section of this report.
“Contribution Risk” is defined by the Actuarial Standards of Practice as the potential for actual future
contributions to deviate from expected future contributions. For example, when actual contributions are
not made in accordance to the Plan’s Funding Policy, or when future experience deviates materially from
assumed. While it is essential for the Actuary and Plan Sponsor to collaborate on implementing a sound
and financially feasible Funding Policy, it is important to note that the Actuary is not required, and is not
in the position to, evaluate the ability or willingness of the Plan Sponsor to make the Recommended
Contribution under the selected Funding Policy.
As a result, while Contribution Risk may be a significant source of risk for the Plan, this Actuarial
Valuation makes no attempt to assess the impact of future contributions falling short of those
recommended under the selected Funding Policy. Notwithstanding the above, see the Actuarial
Recommended Contribution – Reconciliation section of this report for the impact on the current
Recommended Contribution of any contribution shortfalls or excesses from the prior year.
Defined Benefit Plan Risks
Asset Growth:
Pension funding involves preparing Fund assets to pay for benefits when Members retire. During their
working careers, assets grow with contributions and investment earnings; and then, the Pension Fund
distributes assets in retirement. Based on the Plan’s current mix of Members and Funded Status, the Plan
should experience positive asset growth, on average, if the Recommended Contributions are made and
expected investment earnings come in. In the current year, the Fund asset growth was positive by
approximately $3,941,900.
Asset growth is important in the long-term. Long-term cash flow out of the Pension Fund is primarily
benefit payments, and expenses are a smaller portion. The Plan should monitor the impact of expected
benefit payments on future asset growth. We assess and project all future benefit payments as part of the
determination of liability. The assessment is made on all current Members of the Fund, both active and
inactive. For active Members, the assessment includes the probability that Members terminate or retire
and begin receiving benefits. In the next 5 years, benefit payments are anticipated to increase 50-55%, or
approximately $1,201,300. In the next 10 years, the expected increase in benefit payments is 100-105%,
or approximately $2,449,400. The estimated increase in benefit payments is being compared against the
benefits paid to inactive Members during the fiscal year, excluding any refunds of Member Contributions.
Furthermore, plans with a large number of inactive Members have an increased “Longevity Risk”.
Longevity Risk is the possibility that inactive Members may live longer than projected by the Plan’s
mortality assumption. As shown in the previous paragraph, benefit payments are expected to increase over
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MANAGEMENT SUMMARY
McHenry Police Pension Fund
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the next 5-year and 10-year horizons. The projected increases assume that current inactive Members pass
away according to the Plan’s mortality assumption. To the extent that current inactive Members live longer
than expected, the future 5-year and 10-year benefit projections may be larger than the amounts disclosed
in the previous paragraph. Higher levels of benefit payments, payable for a longer period of time, may
cause a significant strain on the Plan’s cash flow, future Recommended Contributions, and may lead to
Plan insolvency.
Unfunded Liability:
Unfunded Liability represents the financial shortfall of the Actuarial Value of Assets compared to the
Actuarial Accrued Liability. To the extent that Unfunded Liability exists, the Plan is losing potential
investment earnings due to the financial shortfall. Contributions towards Unfunded Liability pay for the
lost investment earnings, as well as the outstanding unfunded amount. If payments towards Unfunded
Liability are not made, the Unfunded Liability will grow.
In the early 1990s, many Pension Funds in Illinois adopted an increasing payment towards Unfunded
Liability due to a change in legislation. The initial payment decreased, and future payments are anticipated
to increase annually after that. In many situations, payments early on were less than the interest on
Unfunded Liability, which means that Unfunded Liability increased even though contributions were made
at the recommended level.
The current Recommended Contribution includes a payment towards Unfunded Liability that is
approximately $13,300 greater than the interest on Unfunded Liability. All else being equal, and
contributions being made, Unfunded Liability is expected to decrease. The Employer and Fund should
anticipate improvement in the current Percent Funded in the short-term. The Employer and Fund should
understand this impact as we progress forward to manage expectations.
Actuarial Value of Assets:
The Pension Fund smooths investment returns that vary from expectations over a 5-year period. The
intention over time is that investment returns for purposes of funding recommendations are a combination
of several years. The impact is intended to smooth out the volatility of Recommended Contributions over
time, but not necessarily increase or decrease the level of contributions over the long-term.
When investment returns are smoothed, there are always gains or losses on the Fair Value of Assets that
are going to be deferred for current funding purposes, and recognized in future years. Currently, the
Pension Fund is deferring approximately $3,068,500 in losses on the Fair Value of Assets. These are asset
losses that will be recognized in upcoming periods, independent of the future performance of the Fair
Value of Assets.
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MANAGEMENT SUMMARY
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Cash Flow Risk:
Assets, liabilities, and Funded Status are good metrics to monitor over time to assess the progress of the
Funding Policy. However, these metrics may provide limited forward-looking insights. Specifically, the
maturity of a Pension Fund can pose certain risks that often cannot be assessed with a point-in-time metric
such as Percent Funded.
For example, two different Pension Funds could have the same Percent Funded, but have completely
different risk profiles. One Fund might mostly cover active Members with little to no Members in pay
status, whereas a second Fund might mostly cover inactive Members with a significant level of annual
benefit payments. The latter Fund has a greater “Cash Flow Risk”, i.e. a more significant chance that
negative cash flows could lead to a deteriorating, rather than improving, Percent Funded over time.
It is important to note that, in general, positive net cash flows are good, but also need to be sufficient to
cover the growth in the liabilities (i.e. the Normal Cost as well as interest on the Actuarial Accrued
Liability). Typically, when cash flows are assumed to be insufficient to cover the growth in liabilities, the
Percent Funded will decline, while future Recommended Contributions will increase.
Benefit Payment Risk:
Ideally, plans in a sound financial position will have the ratio of annual benefits payments to the Fair
Value of Assets to be less than the Expected Rate of Return on Investments assumption (i.e., 7.00%).
Theoretically, in this case it can be considered that investment returns will fully cover the annual benefit
payments, and therefore, all Employer and Member Contributions made to the Fund will be used to pay
for future benefit accruals and pay down the existing Unfunded Liability. To the extent that the ratio of
the annual benefit payments to the Fair Value of Assets increases to above the Expected Rate of Return
on Investments assumption, the Plan may experience some additional risks, such as the need to keep assets
in more liquid investments, inability to pay down Unfunded Liability, and may lead to Plan insolvency.
As of the Valuation Date, the McHenry Police Pension Fund has a ratio of benefit payments to the Fair
Value of Assets of 4.02%. In this case, the Plan is currently in a sound financial position and has a reduced
amount of Benefit Payment Risk and Cash Flow Risk. It would be expected that adherence to the current
Funding Policy would lead to an increasing Percent Funded.
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MANAGEMENT SUMMARY
McHenry Police Pension Fund
Page 12
Fund Assets
The results in this report are based on the assets held in the Pension Fund. Assets consist of funds held for
investment and for benefit payments as of the Actuarial Valuation Date. In addition, assets may be adjusted
for other events representing dollars that are reasonably expected to be paid out from the Pension Fund or
deposited into the Pension Fund after the Actuarial Valuation Date as well.
The current Fund assets are unaudited. As of the date of this report, the audit of
the Fund assets is not complete, not available, or has not been provided.
The current Fund assets are based on the year-end financials as prepared by the
Pension Fund Accountant. The year-end financials represent a full accrual
version of the fiduciary fund as of the end of the Fiscal Year, prepared in
preparation for the audit. The changes to the fund cash balance as of the Fiscal
Year End are non-cash items that can include accrued interest, due/unpaid
expenses, prepaids, and other adjustments.
The Actuarial Value of Assets under the Funding Policy is equal to the Fair Value of Assets, with
unexpected gains and losses smoothed over 5 years. More detail on the Actuarial Value of Assets can be
found in the Actuarial Funding Policies section of this report.
The Fund
Assets Used in
this Report
are
Unaudited.
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MANAGEMENT SUMMARY
McHenry Police Pension Fund
Page 13
Demographic Data
Demographic factors can change from year to year within the Pension Fund. Changes in this category
include hiring new Members, Members retiring or becoming disabled, inactive Members passing away,
and other changes. Demographic changes can cause an actuarial gain (contribution that is less than
expected compared to the prior year) or an actuarial loss (contribution that is greater than expected
compared to the prior year).
Demographic gains and losses occur when the assumptions over the one-year period for Member changes
do not meet our long-term expectation. For example, if no Members become disabled during the year, we
would expect a liability gain. If more Members become disabled than anticipated during the year, we
would expect a liability loss. Generally, we expect short-term fluctuations in demographic experience to
create gains or losses of 1%-3% of the Actuarial Accrued Liability in any given year, but to balance out
in the long-term.
“Demographic Risk” occurs when Plan demographic experience differs significantly from expected.
Similar to Longevity Risk discussed previously, additional risk is created when demographic experience
differs from the assumed rates of disability, retirement, or termination. Under the chosen assumptions,
actuarial gains and/or losses will always occur, as the assumptions will never be exactly realized.
However, the magnitude of the gain and/or loss and its influence on the Recommended Contribution
largely depends on the size of the Plan.
A key Demographic Risk is mortality improvement differing from expected. While the actuarial
assumptions reflect small, continuous improvements in mortality experience and these assumptions are
refined upon the completion of each actuarial experience study, the risk arises because there is a possibility
of a sudden shift in mortality experience. This report reflects the impact of COVID-19 experience that has
been accounted for in the underlying demographic data. This report does not reflect the ongoing impact
of COVID-19, which is likely to influence demographic and economic experience, at least in the short-
term. We will continue to monitor these developments and their impact on the Plan. Actual future
experience will be reflected in each subsequent Actuarial Valuation, as experience emerges.
Based on the number of active Members in the Plan, the Recommended Contribution has a low risk of
having a significant increase due to demographic experience. For example, 1 new disabled Member would
typically generate a substantial increase to the Actuarial Accrued Liability. However, due to the size of
the Plan, there is an appropriate means to absorb demographic losses without causing a significant increase
to the Recommended Contribution.
In the current report, the key demographic changes were as follows:
New Hires: There were 5 Members of the Fund who were hired during the year. When a Member is
admitted to the Pension Fund, the Employer Contribution will increase to reflect the new Member. The
increase in the Recommended Contribution in the current year due to the new Member experience is
approximately $30,700.
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MANAGEMENT SUMMARY
McHenry Police Pension Fund
Page 14
Retirement: There were 2 Members of the Fund who retired during the year. When a Member retires, the
Normal Cost will decrease. Any change in the Actuarial Accrued Liability will be considered when
determining the amount to pay towards Unfunded Liability each year. The increase in the Recommended
Contribution in the current year due to the retirement experience is approximately $6,700.
Termination: There were 3 Members of the Fund who terminated employment during the year. The Fund
may be obligated to pay a benefit or a refund of Member Contributions to the Members in the future. The
decrease in the Recommended Contribution in the current year due to the termination experience is
approximately $33,700.
Mortality: As inactive Members age and continue to collect benefits, the Fund liability will increase. In
the current year, there were 31 inactive Members who maintained their benefit collection status throughout
the year. The increase in the Recommended Contribution in the current year due to the mortality
experience is approximately $25,900.
Salary Increases: Salary increases were greater than anticipated in the current year. This caused an
increase in the Recommended Contribution in the current year of approximately $28,100.
Assumption Changes
In the current valuation, we have reviewed the individual pay increases assumption to reflect the wage
schedule between the City of McHenry, Illinois and the Illinois Fraternal Order of Police Labor Council
for the period May 1, 2023 through April 30, 2027. The year over year step increases dictated by the wage
schedule did not change significantly from the prior wage schedule; therefore, we have not updated the
individual pay increases assumption.
Funding Policy Changes
The Funding Policy was changed from the prior valuation. Due to the Percent Funded falling below 100%
in the current valuation, we have recognized an amortization credit on the negative Unfunded Liability
that was ignored previously. The decrease in the Recommended Contribution in the current year due to
the Funding Policy Change is approximately $166,100.
Output Smoothing
Contributions are determined annually by allocating dollars over a specified period of time. Procedures
that are used to allocate contributions over a period of time may include asset smoothing, amortization
period, and output smoothing. Each procedure becomes part of the Actuarial Methodology. Output
smoothing involves measuring the impact of a specific result on a contribution and recognizing the result.
The final contribution should maintain a reasonable relationship to the full Actuarially Determined
Contribution.
The current results shown throughout the report reflect the full Actuarially Determined Contribution.
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MANAGEMENT SUMMARY
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ACTUARIAL RECOMMENDED CONTRIBUTION – RECONCILIATION
Actuarial Accrued Liability is expected to increase each year for both interest for the year and as active
Members earn additional service years towards retirement. Similarly, Actuarial Accrued Liability is
expected to decrease when the Fund pays benefits to inactive Members.
Contributions are expected to increase as expected pay increases under the Funding Policy for the Fund.
Other increases or decreases in Actuarial Accrued Liability (key changes noted below) will increase or
decrease the amount of Unfunded Liability in the Plan. To the extent that Unfunded Liability increases or
decreases unexpectedly, the contribution towards Unfunded Liability will also change unexpectedly.
*Impact on the Recommended Contribution due to investment return is on an Actuarial Value of Assets
basis.
The Actuarial Experience can be attributable to several factors including, but not limited to, demographic
changes and benefit payment experience compared to expectation. Key demographic changes were
discussed in the Demographic Data section of this report.
Actuarial
Liability
Recommended
Contribution
Prior Valuation 59,502,644$ 649,745$
Expected Changes 2,902,779 19,492
Initial Expected Current Valuation 62,405,423$ 669,237$
Actuarial
Liability
Recommended
Contribution
Salary Increases Greater than Expected 190,776$ 28,097$
Actuarial Experience 741,219 25,291
Assumption Changes - -
Funding Policy Changes - (166,123)
Investment Return Less than Expected*- 137,091
Contributions Greater than Expected - (2,229)
Total Increase/(Decrease)931,995$ 22,127$
Current Valuation 63,337,418$ 691,364$ DR
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VALUATION OF FUND ASSETS
Fair Value of Assets
Fair Value of Assets (Gain)/Loss
Development of the Actuarial Value of Assets
Actuarial Value of Assets (Gain)/Loss
Historical Asset Performance
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VALUATION OF FUND ASSETS
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FAIR VALUE OF ASSETS
Statement of Assets
Statement of Changes in Assets
The Rate of Return on Investments shown above has been determined as a percent of the average of the
prior and current Fair Value of Assets on the Statement of Changes in Assets. The Return on Investments
is net of Other Expenses, and has been excluded from the Total Fair Value of Assets at the end of the
Fiscal Year for this calculation.
Cash and Cash Equivalents $1,162,973 $664,240
Pooled Investment Accounts 54,550,697 58,995,551
Receivables (Net of Payables)4,848 628
Total Fair Value of Assets $55,718,518 $59,660,419
Prior
Valuation
Current
Valuation The Total Fair Value
of Assets has Increased by
Approximately
$3,941,900 from the Prior Valuation.
Total Fair Value of Assets - Prior Valuation $55,718,518
Plus - Employer Contributions 669,181
Plus - Member Contributions 522,287
Plus - Return on Investments 5,172,564
Less - Benefit Payments and Refunds (2,399,170)
Less - Other Expenses (22,961)
Total Fair Value of Assets - Current Valuation $59,660,419
The Rate of Return on
Investments on a Fair
Value of Assets Basis
for the Fund was
Approximately 9.34%
Net of Administrative
Expense.
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VALUATION OF FUND ASSETS
McHenry Police Pension Fund
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FAIR VALUE OF ASSETS (GAIN)/LOSS
Current Year (Gain)/Loss on Fair Value of Assets
The (Gain)/Loss on the current Fair Value of Assets has been determined based on the Expected Rate of
Return on Investments as shown in the Actuarial Assumptions section of this report.
Total Fair Value of Assets - Prior Valuation $55,718,518
Employer and Member Contributions 1,191,468
Benefit Payments and Refunds (2,399,170)
Expected Return on Investments 3,858,026
Expected Total Fair Value of Assets - Current Valuation 58,368,842
Actual Total Fair Value of Assets - Current Valuation 59,660,419
Current Fair Value of Assets (Gain)/Loss $(1,291,577)
Expected Return on Investments $3,858,026
Actual Return on Investments (Net of Expenses)5,149,603
Current Fair Value of Assets (Gain)/Loss $(1,291,577)
The Actual Return
on Investments on a
Fair Value of
Assets Basis was
Greater than Expected for the
Current Year.
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VALUATION OF FUND ASSETS
McHenry Police Pension Fund
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DEVELOPMENT OF THE ACTUARIAL VALUE OF ASSETS
ACTUARIAL VALUE OF ASSETS (GAIN)/LOSS
The Actuarial Value of Assets incorporates portions of gains and losses over multiple years.
Total Fair Value of Assets - Current Valuation $59,660,419
Adjustment for Prior (Gains)/Losses
FYE 4/30/2024 $(1,291,577) (1,033,262)
FYE 4/30/2023 3,671,301 2,202,781
FYE 4/30/2022 8,069,483 3,227,793
FYE 4/30/2021 (6,644,051) (1,328,811)
Total Deferred (Gain)/Loss 3,068,501
Initial Actuarial Value of Assets - Current Valuation $62,728,920
Less Contributions for the Current Year and Interest -
Adjustment for the Corridor -
Total Actuarial Value of Assets - Current Valuation $62,728,920
DeferralFull Amount
The Actuarial Value of
Assets is Equal to the Fair Value of Assets
with Unanticipated
(Gains)/Losses Recognized Over 5
Years. The Actuarial
Value of Assets is 105.14% of the Fair
Value of Assets.
Total Actuarial Value of Assets - Prior Valuation $61,192,288
Plus - Employer Contributions 669,181
Plus - Member Contributions 522,287
Plus - Return on Investments 2,767,295
Less - Benefit Payments and Refund (2,399,170)
Less - Other Expenses (22,961)
Total Actuarial Value of Assets - Current Valuation $62,728,920
The Rate of Return on
Investments on an Actuarial Value of
Assets Basis for the
Fund was Approximately 4.53%
Net of Administrative
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VALUATION OF FUND ASSETS
McHenry Police Pension Fund
Page 20
HISTORICAL ASSET PERFORMANCE
The chart below shows the historical Rates of Return on Investments for both Fair Value of Assets and
Actuarial Value of Assets.
The historical Rates of Return on Investments shown above were calculated based on the annual Return
on Investments, as a percentage of the average value of the assets for the year. The historical Rates of
Return on Investments shown above may not reflect the current investment allocation of the Pension Fund.
For purposes of determining the average value of assets for the year, the ending Fair Value of Assets has
been adjusted to net out to the portion related to the Return on Investments themselves. All other cash
flows are included.
For purposes of determining the annual Return on Investments we have adjusted the figures shown on the
preceding pages. The figures shown on the preceding pages are net of Investment Expenses. We have
made an additional adjustment to net out Administrative Expenses. Netting out Administrative Expenses
allows us to capture returns for the year that can be used to make benefit payments as part of the ongoing
actuarial process.
The adjustments we made are for actuarial reporting purposes only. By netting out Administrative
Expenses and capturing Return on Investments that are available to pay benefits, it provides us a
comparison to the Expected Rate of Return on Investments, but does not provide a figure that would be
consistent with the rates of return that are determined by other parties. Therefore, this calculated Return
on Investments should not be used to analyze investment performance of the Fund or the performance of
the investment professionals.
Fair Value
of Assets
Actuarial Value
of Assets
FYE 4/30/2024 9.34%4.53%
FYE 4/30/2023 0.45%4.18%
FYE 4/30/2022 (6.21%)6.49%
FYE 4/30/2021 23.63%9.54%
FYE 4/30/2020 0.55%4.96%
FYE 4/30/2019 5.63%5.89%
FYE 4/30/2018 9.61%6.19%
FYE 4/30/2017 9.64%5.60%
0.00%0.00%
8-Year Arithmetic Average 6.58%5.92%
8-Year Geometric Average 6.26%5.91%
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VALUATION OF FUND ASSETS
McHenry Police Pension Fund
Page 21
Expected Rate of Return on Investments Assumption
The Expected Rate of Return on Investments for this valuation is 7.00%. Lauterbach & Amen, LLP does
not provide investment advice. We look at a variety of factors when reviewing the Expected Rate of Return
on Investments assumption selected by the client. These factors include: historical Rates of Return on
Investments, capital market projections performed by the Consolidated Board’s investment advisors, the
Consolidated Board’s investment policy, capital market forward-looking benchmark expected returns by
independent investment companies, rates used by comparable pension systems, and other factors
identified in the Actuarial Standards of Practice.
Generally speaking, the ideal assumption for Expected Rate of Return on Investments is one that has a
50% chance of being met over the long-term. Recently, we have observed the following factors that impact
Expected Rate of Return on Investments:
• Volatility in the market has been high which drags down long-term geometric returns.
• Similar pension systems are looking to reduce future expectations. We generally see about 95% of
similar pension systems using an Expected Rate of Return on Investments that is between 6.00%
and 7.25%.
• We have reviewed studies conducted by Firms who gather information from multiple investment
advisors who provide models and opinions on capital market returns. Those studies help guide us
to see if the assumption is expected to have a 50% chance of being met over the long-term. Plans
are generally aiming towards 40th to 60th percentile returns, which can help define a range of
reasonableness.
• We have reviewed an index of high-quality fixed income rates that takes into consideration the
pattern of your benefit payments. The purpose of the review is to provide additional disclosure in
Funding Actuarial Valuations for the Low-Default-Risk Obligation Measure. The rates in this
measure are low-risk and are being used as an approximate for risk-free rates. Investment funds
that incorporate diversified investments which build in more risk would be expected to earn a
positive risk premium, over and above the risk-free rates.
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VALUATION OF FUND ASSETS
McHenry Police Pension Fund
Page 22
If actual returns going forward come in less than expected, the pension system risks deferring contributions
to the future that should be made today and creating additional contribution volatility. Below is a chart
detailing the impact on the Recommended Contribution by decreasing or increasing the Expected Rate of
Return on Investments by 25 basis points:
Currently, the client has selected an Expected Rate of Return assumption that falls within a reasonable
range. We recommend the client review the Expected Rate of Return on Investments annually to ensure
the selected rate remains within a reasonable range as market conditions change year-to-year.
“Investment Risk” is the potential that the actual Return on Investments will be different from what is
expected. The selected Expected Rate of Return on Investments assumption is chosen to be a long-term
assumption, producing a return that, on average, would produce a stable rate of return over a long-term
horizon. Actual investment returns in the short-term may deviate from this long-term assumption due to
current market conditions. Furthermore, establishing the Expected Rate of Return on Investments
assumption may be dependent on the Illinois State Statutes pertaining to the limitations on types of
investments Plan Sponsors may use. If the actual annual rates of return are less than the Expected Rate of
Return on Investments, actuarial losses will be produced, thus increasing the Plan’s Unfunded Liability
and, subsequently, future Recommended Contributions.
“Asset/Liability Mismatch” risk is a similar concept as Investment Risk, as it relates to setting the
Expected Rate of Return on Investments assumption compared to the actual Return on Investments
achieved. The Interest Rate used to discount future Plan liabilities is set equal to the Expected Rate of
Return on Investments. It is expected that the selected Interest Rate be a rate that is reasonably expected
to be achieved over the long-term. To the extent that the selected Interest Rate to value Plan liabilities is
unreasonable, or significantly different than the actual Return on Investments earned over an extended
period of time, additional Interest Rate risk is created. For example, determining Plan liabilities at an
Interest Rate higher than what is expected to be achieved through investment returns results in Unfunded
Liability that is not a true representation of the Plan’s condition and Percent Funded. As a result, the
Actuarial Accrued Liability determined is an amount smaller than the liability that would be produced
with an Interest Rate more indicative of future Expected Rate of Return on Investments. Therefore, the
Recommended Contributions under the established Funding Policy may not be sufficient to appropriately
meet the true pension obligations.
0.25%Current Expected Rate 0.25%
Decrease of Return on Investments Increase
(6.75%)(7.00%)(7.25%)
Recommended Contribution $967,514 $691,364 $561,025
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RECOMMENDED CONTRIBUTION DETAIL
Actuarial Accrued Liability
Funded Status
Development of the Employer Normal Cost
Normal Cost as a Percentage of Expected Payroll
Recommended Contribution Breakdown
Schedule of Amortization – New Unfunded Actuarial Accrued Liability
Schedule of Amortization – Total Unfunded Actuarial Accrued Liability
Actuarial Methods – Recommended Contribution
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RECOMMENDED CONTRIBUTION DETAIL
McHenry Police Pension Fund
Page 24
ACTUARIAL ACCRUED LIABILITY
FUNDED STATUS
Active Members $23,418,020 $23,492,715
Inactive Members
Terminated Members 4,022,336 5,108,220
Retired Members 25,161,705 27,839,308
Disabled Members 5,880,173 5,901,920
Other Beneficiaries 1,020,410 995,255
Total Inactive Members 36,084,624 39,844,703
Total Actuarial Accrued Liability $59,502,644 $63,337,418
Prior
Valuation
Current
Valuation
The Total Actuarial
Accrued Liability
has Increased by
Approximately
$3,834,800 from the Prior Valuation.
Total Actuarial Accrued Liability $59,502,644 $63,337,418
Total Actuarial Value of Assets 61,192,288 62,728,920
Unfunded Actuarial Accrued Liability $(1,689,644)$608,498
Total Fair Value of Assets $55,718,518 $59,660,419
Percent Funded
Actuarial Value of Assets
Fair Value of Assets 93.64%94.19%
Prior
Valuation
Current
Valuation
102.84%99.04%
The Percent Funded
as of the Actuarial
Valuation Date is
Subject to Volatility
on Assets and Liability in the
Short-Term.DR
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RECOMMENDED CONTRIBUTION DETAIL
McHenry Police Pension Fund
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DEVELOPMENT OF THE EMPLOYER NORMAL COST
NORMAL COST AS A PERCENTAGE OF EXPECTED PAYROLL
RECOMMENDED CONTRIBUTION BREAKDOWN
*Employer Normal Cost Contribution includes interest through the end of the Fiscal Year.
Total Normal Cost $ 1,124,703 $ 1,123,845
Estimated Member Contributions (517,465) (529,966)
Employer Normal Cost $ 607,238 $ 593,879
Prior
Valuation
Current
Valuation At a 100% Funding Level, the Normal Cost
Contribution is Still Required.
Expected Payroll $ 5,299,975 $ 5,428,011
Member Normal Cost Rate
Employer Normal Cost Rate
Total Normal Cost Rate
Prior
Valuation
Current
Valuation
9.910%9.910%
11.31%10.79%
21.22%20.70%
Ideally, the Employer Normal Cost
Rate will Remain Stable.
Employer Normal Cost*$649,745 $635,451
Amortization of Unfunded Accrued
Liability/(Surplus)- 55,913
Recommended Contribution $649,745 $691,364
Prior
Valuation
Current
Valuation The
Recommended
Contribution has
Increased by
6.41% from the
Prior Valuation.DR
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RECOMMENDED CONTRIBUTION DETAIL
McHenry Police Pension Fund
Page 26
SCHEDULE OF AMORTIZATION – NEW UNFUNDED ACTUARIAL ACCRUED LIABILITY
Below is the schedule of remaining amortization balances for the new Unfunded Liability incurred in the
current year.
The Actuarial (Gain)/Loss can be attributable to several factors including, but not limited to, demographic
changes, Employer Contribution timing, Member Contribution experience, benefit payment experience,
and salary increase experience compared to expectation.
Unfunded Liability Base
Initial
Balance
Date
Established
Current
Balance
Years
Remaining Payment
Investment (Gain)/Loss 1,491,963$ 4/30/2024 1,491,963$ 15 137,091$
Actuarial (Gain)/Loss (885,739) 4/30/2024 (885,739) 15 (81,387)
Contribution Experience 2,274$ 4/30/2024 2,274$ 15 209$
Total 608,498$ 608,498$ 55,913$
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RECOMMENDED CONTRIBUTION DETAIL
McHenry Police Pension Fund
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SCHEDULE OF AMORTIZATION – TOTAL UNFUNDED ACTUARIAL ACCRUED LIABILITY
Below is the schedule of remaining amortization balances for the Unfunded Liability incurred in the
current and prior years.
The equivalent single amortization period based on the layered amortization of Unfunded Liability is 15
years for the current valuation.
Unfunded Liability Base
Initial
Balance
Date
Established
Current
Balance
Years
Remaining Payment
FYE 4/30/2024 608,498$ 4/30/2024 608,498$ 15 55,913$
Total 608,498$ 608,498$ 55,913$
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RECOMMENDED CONTRIBUTION DETAIL
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ACTUARIAL METHODS – RECOMMENDED CONTRIBUTION
The above methods constitute a sound Actuarially Determined Contribution under the parameters of
Actuarial Standards of Practice.
The contributions and benefit values of the Pension Fund are calculated by applying actuarial assumptions
to the benefit provisions and demographic data furnished, using the Actuarial Cost Method described. The
Actuarial Cost and Amortization Methods allocate the projected obligations of the Plan over the working
lifetimes of the Plan Members.
The Recommended Contribution amount shown in this report is based on the methods summarized above.
The Actuarial Funding Policies section of this report includes a more detailed description of the Actuarial
Funding Methods being used.
The Actuarial Funding Methods are meant to provide a systematic process for determining contributions
on an annual basis. The methods do not impact the expectation of future benefit payments. The methods
only impact the way contributions are made towards future benefit payments.
Different Actuarial Funding Methods may achieve funding goals with differing levels of success. Certain
methods are more efficient and more stable on an annual basis.
In the current valuation, the Plan Sponsor has elected to use a 10% corridor in the determination of the
Actuarial Value of Assets for both the Recommended and Alternative Contributions. In the event that the
Actuarial Value of Assets exceeds 110% of the Fair Value of Assets or falls below 90% of the Fair Value
of Assets, the excess gains or losses will be recognized immediately.
Actuarial Valuation Date May 1, 2024
Data Collection Date April 30, 2024
Actuarial Cost Method Entry Age Normal (Level % Pay)
Amortization Method Level % Pay (Closed)
Amortization Target Layered Targeting 100% Funded - See Previous Page
Asset Valuation Method 5-Year Smoothed Fair Value
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ALTERNATIVE CONTRIBUTION
Alternative Contribution
Funded Status – Alternative Contribution
Actuarial Methods – Alternative Contribution
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ALTERNATIVE CONTRIBUTION
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ALTERNATIVE CONTRIBUTION
FUNDED STATUS – ALTERNATIVE CONTRIBUTION
Prior
Valuation
Current
Valuation
Alternative Contribution $710,366 $675,426
Expected Payroll $5,299,975 $5,428,011
Alternative Contribution as a
Percent of Expected Payroll 13.40% 12.44%
Prior
Valuation
Current
Valuation
Normal Cost $1,181,358 $1,161,205
Fair Value of Assets $55,718,518 $59,660,419
Actuarial Value of Assets $61,192,288 $62,728,920
Actuarial Accrued Liability $59,974,840 $64,101,672
Unfunded Actuarial
Accrued Liability/(Surplus)($1,217,448) $1,372,752
P ercent Funded
Actuarial Value of Assets 102.03% 97.86%
Fair Value of Assets 92.90% 93.07%DR
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ALTERNATIVE CONTRIBUTION
McHenry Police Pension Fund
Page 31
The Alternative Contribution is based on Actuarial Funding Methods and funding parameters outlined in
the Illinois State Statutes for pension funding. The resulting contribution is lower than the Recommended
Contribution for the current year. The Alternative Contribution amount is not recommended because it
represents only a deferral of contributions when compared to the Recommended Contribution method.
Actuarial Funding Methods for pensions are best applied to provide a balance between the long-term goals
of a variety of stakeholders:
1. Members – the Members are interested in benefit security and having the funds available to pay
benefits when retired
2. Employers – cost control and cost stability over the long-term
3. Taxpayers – paying for the services they are receiving from active Members
The Alternative Contribution methods are not intended to provide a better system in any of the above
categories long-term. The parameters are not recommended for a long-term funding strategy.
The funding methods and parameters put into place in the Illinois State Statutes in 2011 were intended to
provide short-term budget relief for Employer Contributions. An Employer using the parameters outlined
in the Illinois State Statutes for current funding should view the contributions as short-term relief. Our
recommendation in this situation is for a Pension Fund and an Employer to work towards a long-term
funding strategy that better achieves the long-term funding goals, over a period that does not exceed 3-5
years.
The Securities and Exchange Commission in 2013 used the phrase “Statutory Underfunding” to describe
situations where contributions appear to be more manageable in the short-term, but set up future
Recommended Contributions that are less likely to be manageable.
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ALTERNATIVE CONTRIBUTION
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ACTUARIAL METHODS – ALTERNATIVE CONTRIBUTION
The contribution and benefit values of the Pension Fund are calculated by applying actuarial assumptions
to the benefit provisions and demographic data furnished, using the Actuarial Cost Method described. The
Actuarial Cost and Amortization methods allocate the projected obligations of the Plan over the working
lifetimes of the Plan Members.
The Actuarial Funding Methods are meant to provide a systematic process for determining contributions
on an annual basis. The methods do not impact the expectation of future benefit payments. The methods
only impact the way contributions are made towards future benefit payments.
Different Actuarial Funding Methods may achieve funding goals with differing levels of success. Certain
methods are more efficient and more stable on an annual basis.
The guidelines in the Illinois State Statutes for pension funding are silent on the use of a corridor on the
Fair Value of Assets in determination of the Actuarial Value of Assets. In the current valuation, the Plan
Sponsor has elected to use a 10% corridor in the determination of the Actuarial Value of Assets for both
the Alternative Contribution and the Recommended Contribution. In the event that the Actuarial Value of
Assets exceeds 110% of the Fair Value of Assets or falls below 90% of the Fair Value of Assets, the
excess gains or losses will be recognized immediately.
Actuarial Valuation Date May 1, 2024
Data Collection Date April 30, 2024
Actuarial Cost Method Projected Unit Credit
Amortization Method Level % Pay (Closed)
Amortization Target 90% Funded Over 16 Years
Asset Valuation Method 5-Year Smoothed Fair Value
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ACTUARIAL VALUATION DATA
Active Members
Inactive Members
Summary of Monthly Benefit Payments
Age and Service Distribution
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ACTUARIAL VALUATION DATA
McHenry Police Pension Fund
Page 34
ACTIVE MEMBERS
INACTIVE MEMBERS
SUMMARY OF MONTHLY BENEFIT PAYMENTS
Prior
Valuation
Current
Valuation
Tier I 29 26
Tier II 22 25
Total Active Members 51 51
Total Payroll $5,221,650 $5,347,794
Prior
Valuation
Current
Valuation
Terminated Members 11 14
Retired Members 21 23
Disabled Members 8 8
Other Beneficiaries 2 2
Total Inactive Members 42 47
Prior
Valuation
Current
Valuation
Retired Members $150,611 $166,409
Disabled Members 33,657 34,001
Other Beneficiaries 9,015 9,015
Total Inactive Members $193,283 $209,425DR
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ACTUARIAL VALUATION DATA
McHenry Police Pension Fund
Page 35
AGE AND SERVICE DISTRIBUTION
Service Under 1 1 to 4 5 to 9 10 to 14 15 to 19 20 to 24 25 to 29 30 to 34 35 to 39 40 & up Total
Age
Under 25 0|1 0|2 0|3
25 to 29 0|3 0|5 0|8
30 to 34 0|1 0|3 0|3 0|7
35 to 39 0|1 0|3 2|1 2|0 4|5
40 to 44 0|2 2|0 3|0 2|0 7|2
45 to 49 1|0 7|0 8|0
50 to 54 2|0 3|0 5|0
55 to 59 1|0 1|0 2|0
60 to 64
65 to 69
70 & up
Total 0|5 0|11 0|8 4|1 7|0 12|0 3|0 26|25
5/1/2024 Age and Service Distribution - Tier 1|Tier 2 Active Members
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ACTUARIAL FUNDING POLICIES
Actuarial Cost Method
Financing Unfunded Actuarial Accrued Liability
Actuarial Value of Assets
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ACTUARIAL FUNDING POLICIES
McHenry Police Pension Fund
Page 37
ACTUARIAL COST METHOD
The Actuarial Cost Method allocates the projected obligations of the Plan over the working lifetimes of
the Plan Members.
In accordance with the Pension Fund’s Funding Policy, the Actuarial Cost Method for the Recommended
Contribution basis is Entry Age Normal (Level Percent of Pay). The Entry Age Normal Cost Method is a
method under which the Actuarial Present Value of the projected benefits of each individual included in
an Actuarial Valuation is allocated on a level basis over the earnings or service of the individual between
entry age and assumed exit age. The portion of this Actuarial Present Value allocated to a valuation year
is called Normal Cost. The portion of the Actuarial Present Value not provided at an Actuarial Valuation
Date by the Actuarial Present Value of future Normal Costs is called the Actuarial Accrued Liability.
The Entry Age Normal method attempts to create a level cost pattern. In contrast to other Actuarial Cost
Methods which inherently lead to uneven or less predictable cost patterns, the Entry Age Normal method
is generally understood to be less risky in terms of contribution stability from year to year.
The Conference of Consulting Actuaries Public Plans Community produced a “white paper” detailing
Funding Policy model practices for public sector pension plans. Under the Level Cost Actuarial
Methodology (“LCAM”), one of the principal elements to a Funding Policy is the Actuarial Cost Method.
When deciding which Actuarial Cost Method to use, several objectives may be considered, such as the
following:
• Each Member’s benefit should be funded under a reasonable allocation method by the expected
retirement date
• Pay-related benefit costs should reflect anticipated pay at retirement
• The expected cost of each year of service (i.e. Normal Cost) for each active Member should be
reasonably related to the expected cost of that Member’s benefit
• The Member’s Normal Cost should emerge as a level percent of Member compensation
• No gains or losses should occur if all assumptions are met.
Following these criteria, the use of the Entry Age Normal Cost Method (Level Percent of Pay) is a model
practice.
FINANCING UNFUNDED ACTUARIAL ACCRUED LIABILITY
The Unfunded Actuarial Accrued Liability may be amortized over a period either in level dollar amounts
or as a level percentage of payroll.
When amortizing the Unfunded Actuarial Accrued Liability as a level percentage of payroll, additional
risk is incurred since the amortization payments in the early years of the payment period may not be large
enough to cover the interest accrued on the existing Unfunded Liability. As a result, the Unfunded Liability
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ACTUARIAL FUNDING POLICIES
McHenry Police Pension Fund
Page 38
may increase initially, before the amortization payments grow large enough to cover all interest accruals.
Generally speaking, the Plan Sponsor will be required to contribute a larger total contribution amount over
the course of the funding period under a level percentage of payroll basis as compared to a level dollar
payroll schedule.
The Government Finance Officers Association notes that best practices in public pension finance include
utilizing amortization periods that do not exceed 20 years. Longer amortization periods elevate the risk of
failing to reduce any Unfunded Liability. For example, when the amortization payment in full only covers
interest on the Unfunded Liability, but does not reduce the existing Unfunded Liability, the required
contribution will increase in future years.
A second principal element under the Level Cost Actuarial Methodology described above is to establish
an Amortization Policy that determines the length of time and the structure of the increase or decrease in
contributions required to systematically fund the Unfunded Actuarial Accrued Liability. When deciding
on the Amortization Policy, several objectives may be considered, such as the following:
• Variations in the source of liability changes (i.e. gains or losses, Plan changes, assumption
changes) should be funded over periods consistent with an appropriate balance between the policy
objectives of demographic matching and volatility management
• The cost changes in Unfunded Actuarial Accrued Liability should emerge as a level percentage of
Member compensation
The LCAM model practices for the Amortization Policy include the following:
• Layered fixed period amortization by source
• Level percent of pay amortization
• An amortization period ranging from 15-20 years for experience gains or losses
• An amortization period of 15-25 years for assumption changes
In accordance with the Pension Fund’s Funding Policy for the Recommended Contribution, the Unfunded
Actuarial Accrued Liability is amortized by level percent of payroll contributions to a 100% funding target
over a layered amortization period of 15 years. See the Actuarial Methods – Recommended Contribution
section of this report for more detail.
The equivalent single amortization period based on the layered amortization of Unfunded Liability is 15
years for the current valuation.
We believe that the amortization period is appropriate for the purpose of this valuation.
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ACTUARIAL FUNDING POLICIES
McHenry Police Pension Fund
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ACTUARIAL VALUE OF ASSETS
The Pension Fund is an ongoing plan. The Employer wishes to smooth the effect of volatility in the Fair
Value of Assets on the annual contribution. Therefore, the Actuarial Value of Assets is equal to the Fair
Value of Assets with unanticipated gains/losses recognized over a five-year period.
The Asset Valuation Method is intended to create an Actuarial Value of Assets that remains reasonable in
relation to the Fair Value of Assets over time. The method produces results that can fall either above or
below the Fair Value of Assets. The period of recognition is short.
It is intended that the period of recognition is short enough to keep the Actuarial Value of Assets within a
decent range of the Fair Value of Assets. In the event that the Actuarial Value of Assets exceeds or falls
below a 10% corridor of the Fair Value of Assets, the additional gain or loss will be recognized
immediately.
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ACTUARIAL ASSUMPTIONS
Nature of Actuarial Calculations
Selection of Actuarial Assumptions
Actuarial Assumptions in the Valuation Process
Assessment of Risk Exposures
Limitations of Risk Analysis
Assessment and Use of Actuarial Models
Actuarial Assumptions Utilized
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ACTUARIAL ASSUMPTIONS
McHenry Police Pension Fund
Page 41
NATURE OF ACTUARIAL CALCULATIONS
The results documented in this report are estimates based on data that may be imperfect and on
assumptions about future events. Certain Plan Provisions may be approximated or deemed immaterial,
and, therefore, are not valued. Assumptions may be made about demographic data or other factors.
Reasonable efforts were made in this valuation to ensure that significant items in the context of the
Actuarial Accrued Liability or costs are treated appropriately, and not excluded or included
inappropriately.
Actual future experience will differ from the assumptions used in the calculations. As these differences
arise, the expense for accounting purposes will be adjusted in future valuations to reflect such actual
experience.
A range of results different from those presented in this report could be considered reasonable. The
numbers are not rounded, but this is for convenience only and should not imply precision which is not
inherent in actuarial calculations.
SELECTION OF ACTUARIAL ASSUMPTIONS
Actuaries and other service providers provide guidance to their clients in the selection of assumptions
used in the Actuarial Valuation based on their industry-specific training and experience. The Actuaries’
expertise is used in the determination of demographic assumptions as it relates to future expectations of
Plan demographic activity, such as mortality, termination, and retirement rates. The selection of economic
assumptions, such as Expected Rate of Return on Investments or the assumed inflation rate, is more
subjective. Investment advisors and other services providers utilize their expertise and knowledge of
capital markets to model future expectations. Some assumptions may have an influence on other
assumptions. The role of the Actuary in the selection of the economic assumptions is to review available
market information including historical economic information and forward-looking capital market
projections from investment professionals and to assess whether or not sufficient backup exists to deem
the assumption reasonable. The selection of economic assumptions is the responsibility of the client. For
example, the inflation rate (an economic assumption) may directly correlate to the active member salary
increase assumption (a demographic assumption). Once all demographic and economic assumptions have
been determined, the Actuary will create various sets of assumptions which take into account the proposed
assumptions individually and in the aggregate. The client will then make the final decision of which
assumption set to use.
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ACTUARIAL ASSUMPTIONS
McHenry Police Pension Fund
Page 42
ACTUARIAL ASSUMPTIONS IN THE VALUATION PROCESS
The contributions and benefit values of the Pension Fund are calculated by applying actuarial assumptions
to the benefit provisions and demographic data furnished, using the Actuarial Cost Method described in
the Actuarial Funding Policies section of this report.
The principal areas of financial risk which require assumptions about future experience are:
Expected Rate of Return on Investments
Patterns of Pay Increases for Members
Rates of Mortality Among Active and Inactive Members
Rates of Termination Among Active Members
Rates of Disability Among Active Members
Age Patterns of Actual Retirements
Actual experience of the Pension Fund will not coincide exactly with assumed experience. Each valuation
provides a complete recalculation of assumed future experience and takes into account all past differences
between assumed and actual experience. The result is a continual series of adjustments to the computed
Recommended Contribution.
Details behind the selection of the actuarial assumptions can be found in the Actuarial Assumption
Summary document provided to the client upon request. The client has reviewed and approved the
assumptions as a reasonable expectation of the future anticipated experience under the Plan.
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ACTUARIAL ASSUMPTIONS
McHenry Police Pension Fund
Page 43
ASSESSMENT OF RISK EXPOSURES
From time to time it becomes appropriate to modify one or more of the assumptions, to reflect experience
trends (but not random year-to-year fluctuations). In addition, Actuarial Standards of Practice require that
the Actuary minimally perform a qualitative assessment of key financial and demographic risks as part of
the risk assessment process with each annual Actuarial Valuation. The risk assessments we perform
include, but are not limited to, the following:
• Periodic demographic experience studies every 3 to 5 years to confirm the ongoing appropriateness
of actuarial assumptions
• Highlight the impact of demographic experience over the past year, as well as other sources of
change and volatility in the Actuarial Recommended Contribution – Reconciliation section of this
report
• Detail year-over-year changes in contribution levels, assets, liabilities, and Funded Status in the
Recommended Contribution and Funded Status sections in the Management Summary section of
this report
• Review any material changes in the demographic data as summarized in the Actuarial Valuation
Data section of this report
• Provide and discuss the Actuarial Assumption Summary document highlighting the rationale for
each key assumption chosen by the client
• Identify potential Cash Flow Risk by highlighting expected benefit payments over the next 5-year
and 10-year periods in the Asset Growth section in the Management Summary section of this report
• Describe the impact of any assumption, method, or policy change in the Management Summary
section of this report
• Utilize supplemental information, such as the GASB Discount Rate sensitivity disclosures to
understand, for example, what impact an alternative Expected Rate of Return on Investments
assumption might have on the estimation of Actuarial Accrued Liability and Funded Status
• Utilize supplemental information, such as the GASB solvency test, to better understand the Cash
Flow Risk and long-term sustainability of the Plan
LIMITATIONS OF RISK ANALYSIS
Since future experience may never be precisely as assumed, the process of selecting funding methods and
actuarial assumptions may inherently create risk and volatility of results. A more detailed evaluation of
the above risk exposures is beyond the scope and nature of the annual Actuarial Valuation process. For
example, scenario tests, sensitivity tests, stress tests, and/or stochastic modeling for multi-year projections
to assess the impact of alternative assumptions and methods, or modeling future experience different from
the assumptions in these results, are not included in this Actuarial Valuation.
The McHenry Police Pension Fund and/or the City of McHenry, Illinois should contact the Actuary if
they desire a more detailed assessment of any of these forward-looking risk exposures.
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ACTUARIAL ASSUMPTIONS
McHenry Police Pension Fund
Page 44
ASSESSMENT AND USE OF ACTUARIAL MODELS
Actuarial Valuations rely upon the use of actuarial modeling software to predict the occurrence of future
events, which include specific demographic and financial potential outcomes. Actuarial assumptions are
established to provide a guideline to use for such modeling.
• The model used in this Actuarial Valuation is intended to determine the Recommended
Contribution, under the selected Funding Policy. The actuarial assumptions used were developed
with this goal in mind.
• There are no known material limitations or inconsistencies among the actuarial assumptions or
methods.
• The output from the model is reasonable based on the individual actuarial assumptions and based
on the actuarial assumptions in the aggregate.
• The actuarial software used to calculate plan liabilities has been purchased from an outside vendor.
We have performed thorough testing of the software, including review of sample participants, to
ensure the intended purpose of the model, the operation of the model, sensitivities and
dependencies, and strengths and limitations of the model are sufficient for this purpose.
• Demographic data and financial information have been provided by client professionals, financial
advisors, and/or auditors, who are known to be experts in their respective fields. We rely on the
fact that the information provided by these experts has been given for the intended purpose of this
Actuarial Valuation.
• Where applicable, certain actuarial assumptions and Funding Policy may be required as prescribed
by law. In such instances, we have followed legal guidance to ensure conformity.
• The Expected Rate of Return on Investments assumption has been chosen using input from several
sources; including, but not limited to: client professionals, financial advisors, auditors, and other
capital market outlooks. We have relied on the information provided, in the aggregate, to settle
on the selected Expected Rate of Return on Investments assumption.
As stated in the Limitations of Risk Analysis section, future experience may never be precisely as assumed.
As a result, the funding methods and actuarial assumptions used in the model may create volatility in the
results when compared year after year. A more detailed evaluation of this volatility is beyond the scope
and nature of the annual Actuarial Valuation process. In such cases, additional scenario tests, sensitivity
tests, stress tests, and/or stochastic modeling for multi-year projections to assess the impact of alternative
assumptions and methods, or modeling future experience different from the assumptions in these results,
may be performed to determine a range of reasonable results.
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ACTUARIAL ASSUMPTIONS
McHenry Police Pension Fund
Page 45
ACTUARIAL ASSUMPTIONS UTILIZED
Individual pay increases include a long-term average increase for
inflation, average annual increases for promotions, and any
additional increases for a step program. Sample rates are as follows:
*Individual pay increases for active Members hired at age 40 or
older are assumed annual increases at the ultimate rate reduced by
50 basis points, without adjustments in early service years.
Expected Rate of Return on Investments 7.00% Net of Administrative Expense
CPI-U 2.25%
Total Payroll Increases 3.00%
Individual Pay Increases*3.75% - 10.02%
Service Rate Service Rate
0 10.02%8 3.75%
1 9.46%9 3.75%
2 8.98%10 3.75%
3 8.55%15 3.75%
4 8.18%20 3.75%
5 7.85%25 3.75%
6 7.55%30 3.75%
7 3.75%35 3.75%
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ACTUARIAL ASSUMPTIONS
McHenry Police Pension Fund
Page 46
Retirement Rates 100% of the L&A Assumption Study for Police 2020 Cap Age 65.
Sample rates are as follows:
Termination Rates 100% of the L&A Assumption Study for Police 2020. Sample rates
are as follows:
Disability Rates 100% of the L&A Assumption Study for Police 2020. Sample rates
are as follows:
65% of active Members who become disabled are assumed to be in
the Line of Duty.
Age Rate A ge Rate
50 11.00%58 16.25%
51 11.55%59 16.25%
52 12.13%60 16.25%
53 12.73%61 16.25%
54 13.37%62 18.00%
55 14.04%63 20.00%
56 14.74%64 20.00%
57 15.48%65 100.00%
Age Rate A ge Rate
25 8.00%40 2.17%
30 3.40%45 1.56%
35 2.79%50 0.46%
Age Rate A ge Rate
25 0.00%40 0.38%
30 0.06%45 0.53%
35 0.18%50 0.48%DR
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ACTUARIAL ASSUMPTIONS
McHenry Police Pension Fund
Page 47
Mortality Rates Active Mortality follows the Sex Distinct Raw Rates as developed
in the PubS-2010(A) Study. Mortality improvement uses MP-2019
Improvement Rates applied on a fully generational basis.
50% of active Member deaths are assumed to be in the Line of Duty.
Retiree Mortality follows the L&A Assumption Study for Police
2020. These rates are experience weighted with the Sex Distinct
Raw Rates as developed in the PubS-2010(A) Study improved to
2017 using MP-2019 Improvement Rates. These rates are then
improved fully generationally using MP-2019 Improvement Rates.
Disabled Mortality follows the Sex Distinct Raw Rates as developed
in the PubS-2010 Study for disabled participants. Mortality
improvement uses MP-2019 Improvement Rates applied on a fully
generational basis.
Spouse Mortality follows the Sex Distinct Raw Rates as developed
in the PubS-2010(A) Study for contingent survivors. For all rates
not provided there (ages 45 and younger) the PubG-2010 Study for
general employees was used. Mortality improvement uses MP-2019
Improvement Rates applied on a fully generational basis.
Marital Assumptions Active Members: 80% of active Members are assumed to be
married. Female spouses are assumed to be 3 years younger than
male spouses.
Retiree and Disabled Members: Actual spousal data was utilized for
retiree and disabled Members.
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LOW-DEFAULT-RISK OBLIGATION MEASURE
Low-Default-Risk Obligation Measure – Purpose
Low-Default-Risk Obligation Measure
Low-Default-Risk Obligation Measure vs Actuarial Liability
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LOW-DEFAULT-RISK OBLIGATION MEASURE
McHenry Police Pension Fund
Page 49
LOW-DEFAULT-RISK OBLIGATION MEASURE - PURPOSE
The Pension Committee of the Actuarial Standards Board adopted changes to Actuarial Standards of
Practice No. 4 (“ASOP 4”). ASOP 4 is titled “Measuring Pension Obligations and Determining Pension
Plan Costs or Contributions”. The changes were adopted by the Actuarial Standards Board in December
2021 and are effective for reporting and Measurement Dates on or after February 15, 2023.
One change is the requirement for all Funding Actuarial Valuations to include a Low-Default-Risk
Obligation Measure (“LDROM”). In its simplest form, the LDROM is a measure of Actuarial Liability
determined using a low-risk Expected Rate of Return on Investments. The LDROM is not intended to
replace the Actuarial Liability used to determine the Recommended Contribution amount calculated in
this report. The intention is to provide additional information on the Funded Status of the Plan and benefit
security.
The Low-Default-Risk Obligation Measure is shown below as of the Measurement Date. The discussion
that follows provides more information on the assumptions and methods used to determine the LDROM
and some interpretation of the results.
LOW-DEFAULT-RISK OBLIGATION MEASURE
The Obligation not Covered by Current Assets shown above is for illustration of the Low-Default-Risk
Obligation Measure only and is not intended for any other purposes. The amount of Obligation not
Covered by Current Assets should not be used for pension funding or financial statement reporting
purposes. In addition, the Obligation not Covered by Current Assets amount should not be used for any
other assessments related to pension funding, such as assessing Unfunded Liability for the purpose of
issuing Pension Obligation Bonds. Discussion of any of these items should be handled separately.
Low-Default-Risk Obligation Measure $ 77,775,772
Fair Value of Assets 59,660,419
Obligation not Covered by Current Assets $ 18,115,353
Current
Valuation The Low-Default-Risk Obligation Measure is Not Intended to Replace the
Actuarial Liability Used to Determine the Recommended Contribution.
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LOW-DEFAULT-RISK OBLIGATION MEASURE
McHenry Police Pension Fund
Page 50
Selection of the Discount Rate
Under Actuarial Standards, a Discount Rate should be selected from a source that develops the rate using
low-default-risk fixed income securities. In addition, the fixed income securities should be reasonably
consistent with the pattern of expected benefit payments from the Fund.
The Low-Default-Risk Obligation Measure has been valued using the FTSE Pension Discount Curve. The
FTSE Pension Discount Curve is determined using rates from corporate bonds that are rated AA (from
the FTSE U.S. Broad Investment Grade Bond Index) and yields from the FTSE Russell’s Treasury model
curve. The result is a set of investment grade zero coupon bond rates with maturities from 6 months to 30
years.
The equivalent single discount rate that would produce the same liability as the FTSE Pension Discount
Curve is 5.55%.
There are other indices constructed that are appropriate for this disclosure as well. They could produce
Discount Rates that are higher or lower than the LDROM shown here. An increase/decrease in the discount
rate of 50 basis points (0.50%) would decrease/increase the LDROM by (7.07%)/7.91%, respectively. In
our opinion, the FTSE Pension Discount Curve meets the requirements of the disclosure of the LDROM.
The curve is constructed using investment grade corporate bonds. In addition, the rates are updated
monthly and the current rates used (as of the Measurement Date of this report) are reflective of current
market conditions. Finally, the use of a yield curve as opposed to a single rate allows the flexibility for
the LDROM to be determined in a manner consistent with the pattern of expected benefit payments.
The Discount Rate is intended for the current Measurement Date only. In order to stay consistent with the
prevailing market conditions, the Discount Rate will be assessed and updated each year at each new
Measurement Date.
Selection of the Actuarial Cost Method
The Standard requires the use of an immediate-gain Actuarial Cost Method. We have elected to use the
Entry Age Normal cost method for measurement of the LDROM. Entry Age Normal is being applied on
a percent of pay basis. The Cost Method is the same method used for the determination of the
Recommended Contribution in this report.
Other immediate-gain Actuarial Cost Methods are available and acceptable for use in the determination
of the LDROM. Other acceptable methods include benefits-based methods and accrued benefit methods.
We selected the Entry Age Normal method due to the fact that benefit liability in this Fund is not typically
settled with one-time payments. For example, the Plan does not pay lump sums (except refunds of Member
Contributions) and is not anticipated to settle liability through the purchase of annuity contracts.
Therefore, the usefulness of a benefits-based method is much more limited in interpretation of this measure
as it relates to benefit security.
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LOW-DEFAULT-RISK OBLIGATION MEASURE
McHenry Police Pension Fund
Page 51
Interpretation of the LDROM
The Low-Default-Risk Obligation Measure is higher than the liability used for the Recommended
Contribution determination by $14,438,354.
Actuarial Liability is determined in different ways based on the purpose of the measurement. The Actuarial
Liability for Recommended Contribution purposes is used to develop a contribution amount that, when
combined with other sources of funding (including Member Contributions and expected investment
returns), would pay all future expected benefits. The expected investment returns under this scenario are
based on the current asset allocation and capital market expectations of the Fund. Assets are invested in a
way that involves risk. Actual returns can vary significantly year-to-year above and below expectations.
The trade-off is a risk-premium over the long-term and above low-risk market rates.
The LDROM, by contrast, is developed using low-risk returns available in the market. These returns could
be obtained theoretically with low-risk of deviation from expectation, and lower expectation (i.e. there is
no risk-premium). The LDROM, then, can be thought of as the amount of money that should be set aside
today to appropriately fund and prepare for all future benefit payments, if the assets were invested in
relatively low volatility assets available in the market today.
The expected decrease in the liability for funding purposes as compared to the LDROM can be thought of
as cost savings from investing in riskier assets, with higher long-term return expectations. At the same
time, this difference also represents a risk factor for the Pension Fund as the Fund is reliant on receiving
the expected return on investments, including a risk premium. Contributions, combined with these
investment returns, are required in order to fund future benefit payments.
LOW DEFAULT RISK OBLIGATION MEASURE VS ACTUARIAL LIABILITY
Low-Default-Risk Obligation Measure $ 77,775,772
Actuarial Accrued Liability (Entry Age Normal)63,337,418
Difference $ 14,438,354
Current
Valuation The Low-Default-Risk Obligation Measure is Not Intended to Replace the
Actuarial Liability Used to Determine the Recommended Contribution.DR
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SUMMARY OF PRINCIPAL PLAN PROVISIONS
Establishment of the Fund
Administration
Member Contributions
Regular Retirement Pension Benefit
Early Retirement Pension Benefit
Surviving Spouse Benefit
Termination Benefit – Vested
Disability Benefit
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SUMMARY OF PRINCIPAL PLAN PROVISIONS
McHenry Police Pension Fund
Page 53
ESTABLISHMENT OF THE FUND
The Police Pension Fund is established and administered as prescribed by “Article 3 – Police Pension
Fund – Municipalities 500,000 and Under” of the Illinois Pension Code.
ADMINISTRATION
The Police Pension Fund is administered by a Board of Trustees whose duties are to manage the Pension
Fund, determine applications for pensions, authorize payment of pensions, establish rules, pay expenses,
and keep records.
MEMBER CONTRIBUTIONS
Members contribute 9.910% of their pensionable salary.
REGULAR RETIREMENT PENSION BENEFIT
Tier I
Eligibility: Age 50 with at least 20 years of creditable service.
Benefit: 50% of final salary for the first 20 years of service, plus an additional 2.5% of final salary for
each year of service beyond 20 years of service, and not to exceed 75% of final salary. “Final salary”
is based on the police officer’s pensionable salary attached to rank held on the last day of service,
unless the pensionable salary was greater at some point within the year prior to the last day of service.
If so, the pensionable salary is averaged over the last 12 months.
Annual Increase in Benefit: A police officer is entitled to receive an initial increase equal to 1/12 of
3% of the original monthly benefit for each full month that has passed since the pension began. The
initial increase date will be the later of the first day of the month after the pensioner turns age 55 or the
first day of the month after the benefit date anniversary. Subsequent increases of 3% of the current
monthly benefit will be granted every January 1st thereafter. DR
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SUMMARY OF PRINCIPAL PLAN PROVISIONS
McHenry Police Pension Fund
Page 54
REGULAR RETIREMENT PENSION BENEFIT - CONTINUED
Tier II
Eligibility: Age 55 with at least 10 years of creditable service.
Benefit: 2.5% of final average salary for each year of service, and not to exceed 75% of final average
salary. “Final average salary” is determined by dividing the total pensionable salary during 48
consecutive months of service within the last 60 months of service in which total pensionable salary
was the highest, by the number of months of service in that period (or by dividing the total pensionable
salary during 96 consecutive months of service within the last 120 months of service in which total
pensionable salary was the highest, by the number of months of service in that period, if greater).
Annual salary for this purpose will not exceed the salary cap, indexed by the lesser of 3% or the CPI-
U for the 12 months ending with the September preceding each November 1st. The salary cap will not
decrease.
Annual Increase in Benefit: The initial increase date will be the later of the January 1st after the
pensioner turns age 60 or the January 1st after the benefit date anniversary. Subsequent increases will
be granted every January 1st thereafter. The initial increase and subsequent increases will be the lesser
of 3% of the original benefit or ½ of the CPI-U for the 12 months ending with the September preceding
each November 1st.
EARLY RETIREMENT PENSION BENEFIT
Tier I
None.
Tier II
Eligibility: Age 50 with at least 10 years of creditable service.
Benefit: The regular retirement pension benefit reduced by ½ of 1% for each month that the police
officer’s age is between 50 and 55.
Annual Increase in Benefit: The initial increase date will be the later of the January 1st after the
pensioner turns age 60 or the January 1st after the benefit date anniversary. Subsequent increases will
be granted every January 1st thereafter. The initial increase and subsequent increases will be the lesser
of 3% of the original benefit or ½ of the CPI-U for the 12 months ending with the September preceding
each November 1st.
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SUMMARY OF PRINCIPAL PLAN PROVISIONS
McHenry Police Pension Fund
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SURVIVING SPOUSE BENEFIT
Tier I
Eligibility: Married to an active police officer with at least 8 years of creditable service, a disabled
pensioner at the time of death, or a retired pensioner on the last day of service.
Active Line of Duty Death Benefit: An eligible surviving spouse is entitled to receive 100% of the
police officer’s final pensionable salary attached to rank held on the last day of service.
Non-Duty Death Benefit:
Disabled or Retired Pensioner: An eligible surviving spouse is entitled to receive the pensioner’s
benefit at the time of death.
Active Member with 20+ Years of Service: An eligible surviving spouse is entitled to the police
officer’s eligible benefit at the time of death.
Active Member with 10-20 Years of Service: An eligible surviving spouse is entitled to receive
50% of the police officer’s pensionable salary attached to rank held on the last day of service,
unless the pensionable salary was greater at some point within the year prior to the last day of
service. If so, the pensionable salary is averaged over the last 12 months.
Annual Increase in Benefit: None.
Tier II
Eligibility: Married to an active police officer with at least 8 years of creditable service, a disabled
pensioner at the time of death, or a retired pensioner on the last day of service.
Active Line of Duty Death Benefit: An eligible surviving spouse is entitled to receive 100% of the
police officer’s final pensionable salary attached to rank held on the last day of service.
Non-Duty Death Benefit:
Disabled or Retired Pensioner, Active Member with 20+ Years of Service, and Active Member
with 10-20 Years of service: An eligible surviving spouse is entitled to receive the greater of 66⅔%
of the police officer’s earned pension benefit at the time of death or 54% of the police officer’s
monthly salary at the time of death.
Annual Increase in Benefit: The initial increase date will be the January 1st after the surviving spouse
turns age 60. Subsequent increases will be granted every January 1st thereafter. The initial increase
and subsequent increases will be the lesser of 3% of the original benefit or ½ of the CPI-U for the 12
months ending with the September preceding each November 1st.
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SUMMARY OF PRINCIPAL PLAN PROVISIONS
McHenry Police Pension Fund
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SURVIVING SPOUSE BENEFIT - CONTINUED
Public Act 102-0811 passed on May 13, 2022 and is effective as of January 1, 2023 for Article 3 Pension
Funds. The Act establishes that a surviving spouse of a deceased police retiree may be eligible for a
survivor’s pension of up to 15 years of benefit payments if (a) the surviving spouse has attained age 62
and (b) if the police officer was married to the surviving spouse after retirement, and for at least 5 years
prior to the officer’s death. Previously, there was no survivor’s pension for spouses married after
retirement. In our opinion, under a prudent interpretation of the provisions, we believe the impact to be de
minimis. The legal community has suggested some uncertainty about multiple provisions contained in the
Act, and the IDOI Public Pension Division has not provided an interpretation. The client has not made an
administrative interpretation as to how the provisions of the Act will impact future surviving spouses. Due
to the uncertainty around the interpretation and the expected de minimis impact, we have not valued this
contingency separately for active Members. However, for any current retirees who were married after
retirement and have been married for at least 5 years, as well as any surviving spouses currently in receipt
of benefits under this provision, we have valued the liability of the benefit granted.
TERMINATION BENEFIT – VESTED
Tier I
Eligibility: Age 60 with at least 8 but less than 20 years of creditable service.
Benefit: 2.5% of final salary for each year of service. “Final salary” is based on the police officer’s
pensionable salary attached to rank held on the last day of service, unless the pensionable salary was
greater at some point within the year prior to the last day of service. If so, the pensionable salary is
averaged over the last 12 months.
Annual Increase in Benefit: A police officer is entitled to receive an initial increase equal to 1/12 of
3% of the original monthly benefit for each full month that has passed since the pension began. The
initial increase date will be the first day of the month after the benefit date anniversary. Subsequent
increases of 3% of the current monthly benefit will be granted every January 1st thereafter.
Tier II
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SUMMARY OF PRINCIPAL PLAN PROVISIONS
McHenry Police Pension Fund
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DISABILITY BENEFIT
Tier I
Eligibility: Duty or Non-Duty Disability or Occupational Disease Disability with at least 1 day of
creditable service.
Benefit: For a duty disability or an occupational disease disability with at least 5 years of creditable
service, a police officer is entitled to receive the greater of 65% of final salary or the regular retirement
pension benefit at the time of disability. For a non-duty disability, a police officer is entitled to receive
50% of their final salary. “Final salary” is based on the police officer’s pensionable salary attached to
rank held on the last day of service.
Annual Increase in Benefit: A police officer is entitled to receive an initial increase equal to 3% of the
original monthly benefit for each full year that has passed since the pension began. The initial increase
date will be the later of the January 1st after following pensioner turns age 60 or the January 1st after
the benefit date anniversary. Subsequent increases of 3% of the original monthly benefit will be granted
every January 1st thereafter.
Tier II
Eligibility: Duty or Non-Duty Disability or Occupational Disease Disability with at least 1 day of
creditable service.
Benefit: For a duty disability or an occupational disease disability with at least 5 years of creditable
service, a police officer is entitled to receive the greater of 65% of final salary or the regular retirement
pension benefit at the time of disability. For a non-duty disability, a police officer is entitled to receive
50% of their final salary. “Final salary” is based on the police officer’s pensionable salary attached to
rank held on the last day of service.
Annual Increase in Benefit: The initial increase date will be the later of the January 1st after the
pensioner turns age 60 or the January 1st after the benefit date anniversary. Subsequent increases will
be granted every January 1st thereafter. The initial increase and subsequent increases will be the lesser
of 3% of the original benefit or ½ of the CPI-U for the 12 months ending with the September preceding
each November 1st.
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GLOSSARY OF TERMS
Glossary of Terms
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GLOSSARY OF TERMS
McHenry Police Pension Fund
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GLOSSARY OF TERMS
Actuarial Accrued Liability – The Actuarial Present Value of future benefits based on Members’ service
rendered to the Measurement Date using the selected Actuarial Cost Method. It is that portion of the
Actuarial Present Value of Plan benefits and expenses allocated to prior years of employment. It is not
provided for by future Normal Costs.
Actuarial Cost Method – The method used to allocate the projected obligations of the Plan over the
working lifetimes of the Plan Members.
Actuarial Value of Assets – The value of the assets used in the determination of the Unfunded Actuarial
Accrued Liability. The Actuarial Value of Assets is related to the Fair Value of Assets, with adjustments
made to spread unanticipated gains and losses for a given year over a period of several years. Actuarial
Value of Assets is generally equally likely to fall above or below the Fair Value of Assets, and generally
does not experience as much volatility over time as the Fair Value of Assets.
Asset Valuation Method – A valuation method designed to smooth random fluctuations in asset values.
The objective underlying the use of an Asset Valuation Method is to provide for the long-term stability of
Employer Contributions.
Funding Policy – A set of procedures for a Pension Fund that outlines the “best practices” for funding the
pension benefits based on the goals of the Plan Sponsor. A Funding Policy discusses items such as
assumptions, Actuarial Cost Method, assets, and other parameters that will best help the Plan Sponsor
meet their goal of working in the best interest of the Plan Members.
Fair Value of Assets – The value of the cash, bonds, securities, and other assets held in the pension trust
as of the Measurement Date.
Normal Cost – The present value of future benefits earned by Members during the current Fiscal Year. It
is that portion of the Actuarial Present Value of benefits and expenses which is allocated to a valuation
year by the Actuarial Cost Method.
Unfunded Actuarial Accrued Liability – The excess of the Actuarial Accrued Liability over the Actuarial
Value of Assets. The Unfunded Actuarial Accrued Liability is amortized over a period either in level
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Police Pension Board of Trustees
Meeting Minutes
June 26, 2024
Call to Order
The regular meeting of the City of McHenry Police Pension Board of Trustees was called to order at 8:30
a.m. on Wednesday, June 26, 2024, at McHenry City Hall, 333 S Green St, McHenry, IL.
Roll call:
Members present: President Jeffery Foerster, Commander Nick Clesen, Jim Schmidt, Thomas Settles.
Absent: Officer Robert Beaudoin. Others present: Monte Johnson.
Public Input:
No members of the public were present to offer comments.
Approve the April 24, 2024 Regular Meeting Minutes
A motion was made by Jim Schmidt and seconded by Tom Settles to approve the meeting minutes of
April 24, 2024. Voice Vote: 4-ayes: Foerster, Clesen, Schmidt, Settles. Absent: Beaudoin. Motion
carried.
Approve the Payment of Bills
The claims report only contains one payment needed for a $60 for a medical reimbursement. A motion
was made by Jim Schmidt and seconded by Thomas Settles to approve the payment of bills as
presented. Voice Vote: 4-ayes: Foerster, Clesen, Schmidt, Settles. Absent: Beaudoin. Motion carried.
Treasurer’s Report
Jim Schmidt requests that Carolyn Lynch check interest rates as it seems we should be making more
from the Illinois Funds account. A motion was made by Commander Clesen and seconded by Jim
Schmidt to approve the Treasurer’s Report as presented. Voice Vote: 4-ayes: Foerster, Clesen, Schmidt,
Settles. Absent: Beaudoin. Motion carried. Motion carried.
Authorize City Treasurer Carolyn Lynch to Transfer Funds as Needed
With Treasurer Carolyn Lynch absent, it was assumed that no funds need to be transferred at this
moment.
Extend the disability for Justin Debolt and Sean Klechak
The proper paperwork was received from the medical exams for Justin Debolt and Sean Klechak. A
motion was made by Jim Schmidt and seconded by Commander Clesen to extend the disability for Justin
Debolt and Sean Klechak. Voice Vote: 4-ayes: Foerster, Clesen, Schmidt, Settles. Absent: Beaudoin.
Motion carried.
Approve the pension retirement application for John Adams.
John Adams retired on June 21, 2024. A motion was made by Tom Settles and seconded by Jim Schmidt
to approve the pension retirement application for John Adams. Voice Vote: 4-ayes: Foerster, Clesen,
Schmidt, Settles. Absent: Beaudoin. Motion carried.
Approve the renewal of Fiduciary Liability from Alliant.
A motion was made by Commander Clesen and seconded by Jim Schmidt to approve the Fiduciary
Liability from Alliant. Voice Vote: 4-ayes: Foerster, Clesen, Schmidt, Settles. Absent: Beaudoin. Motion
carried.
Approve an updated engagement letter for non-actuarial calculations for Lauterbach & Amen, LLP.
Lauterbach & Amen have updated their pricing for non-actuarial calculations, with the fee set to
increase by 3% annually. A motion was made by Jim Schmidt and seconded by Commander Clesen to
approve an updated engagement letter for non-actuarial calculations for Lauterbach & Amen, LLP. Voice
Vote: 4-ayes: Foerster, Clesen, Schmidt, Settles. Absent: Beaudoin. Motion carried.
Semi-Annual Review of Executive Session Minutes.
There are no executive session minutes to review or release.
Motion to Adjourn
A motion was made by Commander Clesen and seconded by Jim Schmidt to adjourn at 8:42 a.m. Voice
Vote: 4-ayes: Foerster, Clesen, Schmidt, Settles. Absent: Beaudoin. Motion carried.
______________________________
Monte Johnson, Recording Secretary