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IV-34CITY OF ELK RIVER NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2019 NOTE 9 DEFINED BENEFIT PENSION PLANS -STATE-WIDE (CONTINUED) D. Pension Costs (Continued) 3. Total Pension Expense For year ended December 31, 2019, the City and HRA recognized total pension expenses of $2,641,823 and $6,510, respectively, for their proportionate shares of the pension expense for all of the plans in which they participate. E. Actuarial Assumptions The total pension liability in the June 30, 2019, actuarial valuation was determined using an individual entry-age normal actuarial cost method and the following actuarial assumptions: Inflation Active Member Payroll Growth Investment Rate of Return 2.50% per year 3.25% per year 7.50% Salary increases were based on a service-related table. Mortality rates for active members, retirees, survivors, and disabilitants were based on RP 2014 tables for all plans for males or females, as appropriate, with slight adjustments to fit PERA's experience. Cost of living benefit increases after retirement for retirees are assumed to be 1.25% per year for the General Employees Plan and 1.0% per year for the Police and Fire Plan. Actuarial assumptions used in the June 30, 2019 valuation were based on the results of actuarial experience studies. The most recent six-year experience study in the General Employees Plan was completed in 2019. The most recent four-year experience study for Police and Fire Plan was completed in 2016. The following changes in actuarial assumptions and plan provisions occurred in 2019: General Employees Fund Changes in Actuarial Assumptions: • The mortality projection scale was changed from MP-2017 to MP-2018. Changes in Plan Provisions: • The employer supplemental contribution was changed prospectively, decreasing from $31.0 million to $21.0 million per year. The state's special funding contribution was changed prospectively, requiring $16.0 million due per year through 2031. Police and Fire Fund Changes in Actuarial Assumptions: • The mortality projection scale was changed from MP-2017 to MP-2018. Changes in Plan Provisions: • There have been no changes since the prior valuation. CITY OF ELK RIVER NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2019 NOTE 9 DEFINED BENEFIT PENSION PLANS -STATE-WIDE (CONTINUED) E. Actuarial Assumptions (Continued) The State Board of Investment, which manages the investments of PERA, prepares an analysis of the reasonableness on a regular basis of the long-term expected rate of return using a building-block method in which best estimate ranges of expected future rates of return are developed for each major asset class. These ranges are combined to produce an expected long-term rate of return by weighting the expected future rates of return by the target asset allocation percentages. The target allocation and best estimates of geometric real rates of return for each major asset class are summarized in the following table: Domestic Equity International Equity Fixed Income Private Markets Cash Equivalents Total F. Discount Rate Asset Class Target Allocation 35.5% 17.5 20.0 25.0 2.0 100% Long-Term Expected Real Rate of Return 5.10% 5.90 0.75 5.90 The discount rate used to measure the total pension liability in 2019 was 7.50%. The projection of cash flows used to determine the discount rate assumed that contributions from plan members and employers will be made at rates set in Minnesota Statutes. Based on these assumptions, the fiduciary net positions of the General Employees Fund and the Police and Fire Fund was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. G. Pension Llablllty Sensitivity The following presents the City's proportionate share of the net pension liability for all plans it participates in, calculated using the discount rate disclosed in the preceding paragraph, as well as what the City's proportionate share of the net pension liability would be if it were calculated using a discount rate one percentage point lower or one percentage point higher than the current discount rate: One Percent One Percent GERF PENSION LIABILITY Decrease in Current Increase in Discount Rate Discount Rate Discount Rate Description (6.50%! !7.50%! (8.50%! City's Proportionate Share of the GERF Net Pension Liability $ 13,115,086 $ 7,977,792 $ 3,735,963 HRA's Proportionate Share of the GERF Net Pension Liability $ 91,245 $ 55,520 ~992 182