Download C. Declare expected annual rate of investment return for assets of

Excerpt from June 11, 2015 special meeting minutes relating to declaration of expected
annual rate of investment return for assets of Port Orange Police Pension Plan
Mr. Little went on to present the new reporting disclosures required by Governmental
Accounting Standards Board (GASB) 67 which was effective as of the fiscal year ended
September 30, 2014. The total pension liability, net pension liability and discount rate
sensitivity information were based on asset information as of the end of the fiscal year.
The plan’s net pension liability was $14,758,614. These disclosures would be sent to
the State and would also need to be posted on the City’s web site.
Based on information provided by Graystone Consulting/Morgan Stanley, the expected
long-term rate of return net of expenses but gross of inflation was 7.1 percent. Yet the
plan’s assumed rate of investment return was 7.75 percent. Mr. Little stated that he had
no other plan where the expected rate of return was less than the assumed rate of
return. He recommended that the Pension Board review the above expectation (i.e. 7.1
percent) which was communicated by the investment manager and discuss whether or
not the 7.75 percent assumed rate of return should be revised.
Along this line, Attorney Harrison stated that action to declare the next agenda item (i.e.
declaration of expected annual rate of return) be deferred to the next quarterly meeting
when it could be discussed with representatives of Graystone Consulting.
Member Traster moved to accept the GASB 67 Supplement as presented. Member
Bastian seconded the motion and it carried unanimously.
CITY OF PORT ORANGE POLICE PENSION FUND
PAGE 5
Calculation of the Discount Rate
The long-term expected net rate of return on investments was determined using a building-block
method. Best-estimate ranges of expected future real rates of return (expected returns net of
investment expense and inflation) are developed for each major asset class. The long-term expected
net rate of return on investments is the best-estimate ranges weighted by the asset allocation plus
expected inflation. Best estimates of arithmetic real rates of return for each major asset class as
provided by the investment monitor are shown in the following table as of September 30, 2014:
Asset Class
Large Cap Value Equity
Large Cap Growth Equity
Large Cap Core Equity
Small Cap Value Equity
Small Cap Growth Equity
International Value Equity
International Growth Equity
Hedge Fund of Funds
Core Private Real Estate
Core Fixed Income
Target Allocation
%
Expected LongTerm Real
Return
Weighted
Average
Expected LongTerm Real
Return
11.25%
11.25%
10.00%
6.25%
6.25%
5.00%
5.00%
10.00%
7.50%
27.50%
6.60%
7.00%
6.74%
8.12%
9.12%
6.76%
6.76%
3.42%
5.07%
1.51%
0.74%
0.79%
0.67%
0.51%
0.57%
0.34%
0.34%
0.34%
0.38%
0.42%
100.00%
5.10%
Based on the above target allocation and expected long-term real returns for each asset class, the
weighted average expected long-term real return net of inflation is 5.10%. The investment monitor also
indicated that the inflation estimate was 2.0% producing an expected long-term rate of return net of
expenses but gross of inflation of 7.10%.
In comparison, the discount rate used to measure the total pension liability was 7.75%. The board of
trustees should review the above expectation communicated by the investment manager and discuss if
the 7.75% discount rate should be revised.
The discount rate of 7.75% is the single rate that reflects the long-term expected net rate of return on
pension plan investments expected to be used to finance the payment of benefits, including inflation.
We have found that that the fiduciary net position is projected to be sufficient to make projected benefit
payments using this assumption. For purposes of this determination we understand the board of
trustees finds the 7.75% assumption to be reasonable and that they expect pension plan assets to be
invested using a strategy to achieve the 7.75% net discount rate.
A projection of contributions has been included as Table 1. The projection of cash flows used to
determine the discount rate assumed member contributions are made at 8.0% of pay for members
hired after January 31, 2011 and at 7.5% of pay for members hired on or before January 31, 2011, and
that City contributions will be made in an amount equal to the difference between actuarially
determined contributions and member contributions.
A projection of the fiduciary net position has been included as Table 2. This table includes a projection
of benefit payments, administrative expenses and investment earnings.