2013 May 2

ED COMMITTEE #1
May 2, 2013
Worksession
MEMORANDUM
April 30, 2013
TO: Education Committee
FROM: Essie McGuire, Senior Legislative
SUBJECT: Worksession - FY14 Operating Budget, Montgomery County Public Schools,
continued, and FY14 Capital Budget and Amendments to the FY13-18
Capital Improvements Program, Montgomery County Public Schools,
continued
Today the Education Committee will continue its review ofthe FY 14 Operating Budget
for the Montgomery County Public Schools (MCPS). The Committee will also continue its
review of the FY14 Capital Budget for MCPS, and amendments to the FY13-18 CIP for MCPS.
The following individuals are expected to attend this worksession:
Christopher Barclay, President, Board of Education
Philip Kaufman, Vice President, Board of Education
Joshua Starr, Superintendent
Larry Bowers, Chief Operating Officer, MCPS
James Song, Director, Department of Facilities Management
Thomas Klausing, Director of Management, Budget, and Planning, MCPS
The Committee has held two worksessions to date to review the FY14 MCPS Operating
Budget, including one focused on follow-up discussion of the Office of Legislative Oversight
(OLO) report on the achievement gap, and a third worksession to review the Board of
Education's requested FY14 capital budget and amendments to the FY 13-18 Capital
Improvements Program (CIP). The Committee also met with the Health and Human Services
Committee to discuss jointly reviewed services.
Today the Committee will conclude its review of both the MCPS FY14 operating
budget and the FY13-18 CIP amendments and finalize its recommendations to the Council.
This packet includes: follow-up information on the FY13-18 CIP amendments; the most recent
estimates of State Aid for the FY 14 operating budget; the most recent MCPS financial report;
and information on Category 12 expenditures.
I. SUMMARY OF COUNCIL STAFF RECOMMENDATIONS
Below is a summary of the Council staff recommendations for the Committee's
consideration for both the FY13-18 CIP and FY14 operating budget. The remainder of the
packet contains more detailed discussion of each element.
FY14 Capital Budget and Amended FY13-18 CIP:
Add $3.82 million in GO Bonds to FY14 for the HVAC project
Assume $20 million in higher school impact tax revenue to meet Executive's
affordability assumptions
FY14 Operating Budget:
Council staff recommends fully funding the Board of Education's FY14 operating
budget request (adjusted for a slight decrease in State Aid).
Appropriate a total tax-supported appropriation of$2,084,337,761 and a grand total
appropriation of $2,225,420,445. These totals include the following elements:
o Local contribution at MOE level: $1,413,738,298
o Required pension contribution: $ 34,511,689
o Fund balance: $ 26,972,451
o State Aid reduction: $ -371,353
II. AMENDMENTS TO THE FY13-18 CIP
On April 15 the Committee reviewed the Board of Education's requested amendments
totaling $14.2 million in additional FY14 funding in three projects: Facility Planning; HVAC
(Mechanical Systems) Replacement; and Planned Lifecycle Asset Replacement (PLAR). The
Committee also reviewed the County Executive's recommendation, which did not include any of
the Board's additional requested FY14 funding, took reductions of$5 million in each of the last
four years of the crp for a total reduction of$20 million in GO Bonds, and did not specify how
these FY15-18 reductions were to be taken.
The Committee unanimously recommended adding $220,000 to FY14 to fund the
Board's requested increase for facility planning, to keep projects moving forward in a timely
manner (PDF on circle 8). The Committee also expressed its interest in increasing funding for
the HVAC project, and its concern about the impact of the Executive's recommendation on the
approved MCPS CIP, particularly the modernization schedule.
For the Committee's reference during this discussion, the tables below show the Board's
request for HVAC and PLAR (PDF's on circles 9-10):
2
The tables below show the different assumptions about school impact tax revenue and the
Executive's recommended affordability reductions (PDF on circle 11):
*Assumes the Council passes the GO Committee recommendation for Bill 39-11, which assumes
an annual reduction in $1.1 million in School Impact Tax revenue starting in FYI7.
At this juncture, Council staff recommends the following:
HV AC: The Committee discussed the critical needs in this important systemic project.
It is important to note that increased FYI4 funding for this project would go above the
Executive's affordability level and will compete with other Council CIP priorities during
reconciliation.
Council staff recommends that the Committee add back one-third ofthe Board's
$11.46 million FY14 request, or $3.82 million. While PLAR is also a high need
systemic project, Council staff recommends that the Committee concur with the
Executive's level funding for FY14 and return to consider this project next year in the
context of the full CIP.
School Impact Tax: The total difference between the Council and the Executive's
revenue assumptions for school impact tax is $20.8 million. Council staff recommends
that the Committee recommend using the higher revenue assumptions to cover the
Executive's reductions.
3
Council staff recommends this approach because it is much less disruptive to the
approved CIP, particularly the modernization schedule, than removing $20 million from
the approved expenditures. It is important to note, however, that using the revenues for
this purpose would remove the Council's option of using them for other competing
priorities elsewhere in the CIP.
III. STATE AID FOR THE MCPS OPER-\TING BUDGET
The Board's budget assumes a total of$605.4 million in State Aid. MCPS recently
received a revised estimate of State Aid that reflects final action in the General Assembly and
enrollment changes statewide. The most recent State Aid figures from the Maryland State
Department of Education (MSDE) show a slight reduction for MCPS of -$371,353.
The reductions occur in two areas of State Aid: the County's allocation of Foundation
Aid is lower by $56,914 and the Transportation Aid is lower by $314,439. Council staff
understands that the Foundation Aid change is primarily due to changes in enrollment in other
jurisdictions that affect the comparative formulas. MCPS staff reports that the State reduced the
Transportation Aid to reflect a lower CPI assumption. MCPS staff will be present to respond to
additional Committee questions on these changes.
Council staff recommends that the Council's FY14 appropriation recognize this
most recent State Aid figure, which will reduce the MCPS tax-supported appropriation by
$371,353. This will not affect the County contribution or the MOE appropriation.
IV. MCPS MONTHLY FINANCIAL REpORT
The most recent MCPS monthly financial report is attached on circles 12-20. It was
presented to the Board on April 23 and reflects financial activity through February. The report
projects a total FY13 year-end surplus of $18.2 million. This projection is $1.0 million
higher than the last month's projection, which the Committee discussed at its overview
worksession on April 8. The projected category balance in Category 3, Instructional Salaries,
has increased by $500,000 (from $10 million to $10.5 million) due to increased personnel
savings. The projected category balance in Category 10, Operation of Plant and Equipment, has
increased by $500,000 (from $1.2 million to $1.7 million) largely due to lower than anticipated
utility expenditures.
The current projection of an FY13 fund balance of $18.2 million combined with the
current unappropriated balance from prioryears of$23.5 million leaves a total of$41.7 million
in fund balance available to be reappropriated to MCPS. MCPS requested that $17.0 million be
appropriated as a resource for the FY14 operating budget, which would leave an unappropriated
balance of$24.7 million going forward. The Executive's recommendation, which would
appropriate $27.0 million of fund balance, would leave an unappropriated balance of$14.7
million going forward.
In Council staff's view, the available fund balance is more than large enough to
support the Executive's recommendation and allow for any unforeseen developments in
4
this fiscal year. Council staff concurs with the Executive's recommendation to appropriate
$27.0 million of unappropriated fund balance for MCPS in FY14. Taking this action
allows the Council to fully fund the FY14 MCPS Operating Budget request while
maintaining the County contribution at the level of MOE.
V. REpORT ON FUNDS BUDGETED IN CATEGORY 12, FIXED CHARGES
As recommended in the November 2011 Office of Legislative Oversight (OLO) report
"A Review of Montgomery County Public Schools' Budget Category 12", the Council requested
that the Board of Education provide a semi-annual report on key revenue and expenditure trends
in Category 12, Fixed Charges, related to the school system's employee benefit trust funds.
Board President Barclay transmitted the most recent report to the Council on March 26 (circles
21-49).
Below Council staff highlights certain key aspects of this report. In sum, MCPS
anticipates a low funded ratio for its pension fund and high fund balances in its group
insurance funds. The Committee will want to understand from Board members and MCPS
staff how these trends will affect budgeted and anticipated Category 12 expenditures in
FY13 and FYI4.
1. Pension Fund
MCPS makes an annual contribution to its pension fund to pay for cost of: (1) the "core"
pension benefit offered employees who do not participate in the State-run pension plan; and (2)
the "supplemental" benefit for all permanent employees. For FYI4, MCPS must contribute
$79.5 million to meet its pension fund obligation, a $9.0 million (or 13%) increase above the
FY13 amount. This amount is projected to increase to $84.3 million in FY15. The cost of
future pension fund contributions will depend on multiple factors, including Board of Education
decisions regarding employee pay increases and workforce size.
The "funded ratio" of a pension plan is a term that describes the percentage ofthe plan's
liabilities covered by the current actuarial value ofthe plan's assets. As of July 1,2012, the
MCPS pension fund had a funded ratio of 69%. In other words, the MCPS pension fund holds
69 cents of assets for every dollar of liability. Among the four County agencies, MCPS currently
has the lowest funded pension ratio, with the County Government the next lowest at 77%.
Rating agencies consider the pension funding status (among other factors) in determining the
bond ratings for local governments.
The MCPS pension funded ratio experienced a significant decline over the past decade.
While many public sector pension plans also experienced large funded ratio declines, the drop in
the MCPS pension funding ratio was particularly steep. At the start ofFY03, the MCPS pension
fund held assets that were greater than its liabilities, that is, the funding ratio exceeded 100%.
By FYI 0, the MCPS pension funding ratio dropped to below 70% and has yet to recover. Two
primary factors contributed to the sharp decline: plan enhancements and investment
performance.
5
Plan Enhancements. In 2006, the Board of Education approved two pension plan
enhancements that significantly raised the plan's unfunded liability with a resulting
decrease in the funding ratio. MCPS changed the core pension multiplier (for
participants in the locally-funded plan) from 1.4% to 1.8% of final earnings for each year
of credited service, retroactive to July 1, 1998. At the same time, the Board increased the
multiplier for the locally-funded pension supplement for all employees (including
participants in the State-run plan) from 0.08% to 0.20 % for each year of credited service,
retroactive to July 1, 1998. These plan enhancements increased MCPS' liability to pay
future pension benefits. As a result, the pension fund's funded ratio declined since
MCPS had not previously contributed assets to cover this additional liability.
Investment Performance. The MCPS pension fund incurred a combined investment loss
of more than $265 million during FY08 and FY09. While investment gains in
subsequent years offset most of the losses, nonetheless, the funded ratio has continued to
decline, in part, because the average annual investment return (over the past five years)
has fallen below the assumed rate of return.
Last year, the Board informed the Council that its Fiscal Management Committee was
evaluating options to improve its pension funding ratio, including amending the method for
calculating the annual contribution and shortening the amortization period for unfunded liability.
The Board has yet to adopt any of these changes.
The memo from Board President Barclay indicates that the Fiscal Management
Committee continues to discuss strategies to improve the funded ratio. Mr. Barclay further notes
that improved investment performance in recent years should improve the funded ratio ofthe
MCPS pension fund. The Committee may want to discuss whether the Board plans to take
any action in the upcoming fiscal year to improve the pension funding ratio.
2. Active and Retiree Group Insurance Funds
MCPS maintains separate fund accounts for active and retired employees.
For active employees:
MCPS ended FY12 with a $22.9 million fund balance in its group insurance fund for
active employees; this amount is 8.7% of expenditures.
MCPS currently projects an FY13 year-end fund balance of $32.2 million or 12.3%, an
increase of$9.3 million from FY12.
MCPS notes that, as occurred in FY12, claims are running below projections and this
improved claims performance is in both the medical and prescription plans.
For FY14, the Board's budget request includes a decrease of $7.3 million, or 3.2%, for
the employer contribution to the active employee group insurance fund. This decrease in
requested funding results from the Board's decision to utilize the existing fund balance to
cover a portion of projected expenditures in FYI4, thus allowing for a smaller
contribution into the fund and drawing down the fund balance. This reduction in FYl4
does not mean that actual health care expenditures are decreasing. The Superintendent's
Operating Budget in Brief document notes that group insurance claims expenses are
projected to increase by 4% during FYl4 (pg. 37).
6
For retired employees:
MCPS ended FY12 with a $13.5 million fund balance in its group insurance fund for
retired employees; this amount is 17.4% of expenditures.
MCPS currently projects an FYI3 year-end fund balance of$15.8 million or 18.9%, an
increase of$2.3 million from FYI2.
MCPS reports that retiree claims continue to come in below projections. MCPS notes
that a primary factor in this is that the proportion of under-65 retirees continue to decline
(due to later retirements) even while the overall number of retirees continues to increase.
When retirees reach age 65, Medicare becomes their primary health plan and the MCPS
plan becomes a supplement, reducing costs for MCPS.
For FY14, the Board's budget request includes a decrease of$2.0 million, or 4.1 %, in its
employer contribution to the retired employee group insurance fund.
This report shows that both group insurance funds are anticipated to end FY13 with
healthy and increased fund balances. County Government is also experiencing this trend, and
in its FY14-19 Fiscal Projection for the group insurance fund anticipates that it will draw down
the fund reserves to 5 % at the end of FY 15.
As noted above, the FY14 contribution in the Board's budget request is a decrease from
the FY13 contribution, by a total of$9.3 million across both funds. The Board's budget also
adjusted this contribution from what was originally budgeted by the Superintendent in his
December submission, in which he anticipated a relatively small increase in the contribution for
active employees and level funding for the retiree contribution.
The Board's March budget request is $14.4 million lower than the Superintendent's
December budget assumptions. The Board's budget action reallocated this budget amount from
the benefits funds to fund the negotiated agreements for employee compensation. This
reallocation allowed the Board to increase compensation within the same overall budget level
that the Superintendent had recommended. Alternatively, the Board could have used that budget
amount to fund other program enhancements or restorations, or it could have reduced its overall
budget request to a County contribution at the MOE level, rather than $10 million above.
Council staff notes that a similar reallocation occurred in FY12 when the Board
decreased the amount it contributed to the employee benefit funds in order to meet the Council's
reduced Category 12 appropriation without changing required employee cost-sharing for health
care benefits. The recent health benefit cost trends and resulting growth in the fund balance have
allowed the Board flexibility to make budget adjustments within its appropriation request
relatively late in the budget season.
f:imcguire\2013\mcps op cip 14 cont comm pckt 413.doc
7
MONTGOMERY COUNTY BOARD OF EDUCATION
850 Hungerford Drive + Rockville, Maryland 20850
December 3, 2012
The Honorable lsiah Leggett
Montgomery County Executive
Executive Office Building
101 Monroe Street
Rockville, Maryland 20850
The Honorable Roger Berliner, President
and Members of the Montgomery County Council
Stella B. Werner Council Office Building
100 Maryland Avenue
Dear Mr. Leggett, Mr. Berliner, and Members of the Montgomery County Council:
At its November 19, 2012, meeting, the Board of Education adopted the Requested Fiscal Year
(FY) 2014 Capital Budget and Amendments to the FY 2013-2018 Capital Improvements
Program (CIP) for Montgomery County Public Schools (MCPS). Enclosed is a copy of the
Board of Education resolution requesting a FY 2014 Capital Budget appropriation of
$264,697,000 and an amended FY 2013-2018 ClP totaling $1,367,026,000 (Discussion/Action
5.0). The Board of Education is requesting $149,310,000 from the state as its share of the
FY 2014 Capital Budget. FY 2014 is the second year of the biennial ClP review process. In
accordance with the Montgomery County charter, only projects with expenditure or
appropriation changes needed in the second year of the adopted six-year ClP were considered by
the Board of Education for FY 2014 amendments.
Requested Amendments
The Board of Education, in keeping with the spirit of the biennial process, as well as
consideration of the significant six-year expenditure plan approved by the County Council in
May 2012, approved only three essential amendments to the adopted FY 2013-2018 ClP. The
amendments increase the approved ClP by $14.17 million. Three of the amendments are for the
following countywide projects: $220,000 for Facility Planning; $11.46 million for Heating,
Ventilation, and Air Conditioning (HVAC) Replacement; and $2.49 million for Planned Life
cycle Asset Replacement (PLAR). The first amendment will provide additional funding to
conduct feasibility studies to address overutilization at various schools throughout the county and
the last two amendments will reinstate funds that were removed by the County Council in the
adopted CIP.
The requested amendment for the HV AC Project will provide additional funds for upgrades
and/or replacements of HV AC systems that are beyond their expected service life. This
amendment will begin to address the significant backlog of approximately $160 million. To
Phone 301-279-36174> Fax 301-279-3860. boe@mcpsmd.org +www.montgomeryschoolsmd.org
The Honorable Isiah Leggett
The Honorable Roger Berliner
Members of the County Council 2
December 3, 2012
eliminate the backlog, MCPS would require $28 million per year for the next 10-year period.
Additional funding, beyond the approved levels, will be considered as part of the FY 2015-2020
CIP. The requested amendment for PLAR will provide additional funds to address other aging
building components such as fire alarm systems, public generators,
water and sewer systems, floors, ceilings, lights, windows, and doors. This project is critical to
keep our school buildings safe and structurally sound.
Enrollment
For the 2012-2013 school year, MCPS continues to experience its fifth straight year of
enrollment growth. The official September 30, 2012, enrollment is 148,779. Since 2007, MCPS
has experienced a significant surge in enrollment. This growth has resulted from the usual cause
of enrollment increases-rising births-as well as from the unusual impact of the recent Great
Recession. This recession resulted in fewer families migrating out of the county and more
families migrating into the county, in some cases to share housing with parents or other family
members. In addition, more students have entered MCPS from nonpublic schools during this
period. Between 2007 and 2012, enrollment increased by more than 11,000 students and
projections for the 2018-2019 school year indicate an increase of approximately 2,100 more
elementary students, 5,600 more middle school students, and 2,400 more high school students.
Total enrollment is projected to reach 159,433 in 2018, an increase of 10,654 students from this
year's official enrollment of 148,779. At the elementary school level, capacity shortages are the
most severe, with 90 percent of our 385 relocatable classrooms located at these schools. As the
wave of elementary school enrollment ages up to middle school, MCPS will begin to face more
capacity deficits at these levels. The following chart shows the official September 30 enrollment
for this year and the previous five years, as well as the enrollment projection for 2018-2019
school year:
FY2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2019
137,745 139,276 141,777 144,064 146,497 148,779 159,433
State Aid
With the need to provide permanent seats for our student population and address the aging
inventory of older school facilities, funding for the CIP continues to be a complex issue. Local
funding sources such as County General Obligation bonds, current revenue, the county
Recordation Tax, and the School Impact Tax are utilized in conjunction with state aid to fund the
CIP.
For FY 2014, the state aid request is $149.3 million. This figure is based on current eligibility of
projects approved by the County Council in May 2012. Of the $149.3 million request,
Members ofthe County Council 3
December 3, 2012
$26.96 million is for three projects that have received partial state funding in a prior year;
$27.62 million is for four construction projects; $9.77 million is for systemic roofing and HVAC
projects, as well as energy efficient systemic projects; and the remaining $82.99 million is for 11
projects that will require state planning approval in addition to construction funding.
It is crucial that MCPS receives a minimum of $40 million, which is the amount assumed by the
County Council in the adopted eIP. We need to continue to make a compelling case to our state
leaders to provide Montgomery County with its fair share of state construction funds. If
sufficient state aid is not allocated to MCPS for our capital projects, it will be the county's
responsibility to provide the additional funds, or project schedules will have to be delayed.
Items
As noted above, capacity shortages are most severe at the elementary school level. In the
Downcounty Consortium, several elementary schools are projected to exceed capacity over the
six-year period. Therefore, the superintendent recommended, and the Board of Education
approved, a comprehensive capacity study that will include 12 elementary schools in the
Downcounty Consortium to develop and evaluate options to address the projected space
shortages. This study will assess the option of building additions at several elementary schools
in the area compared to the option of opening a new elementary school in the area. The scope of
the study is broad and includes schools that do not exceed capacity but may be identified for
additions or there may be potential school sites in the school service area that could be used for a
new elementary school.
The superintendent of schools recommended, and the Board of Education approved, one new
boundary study and one roundtable advisory committee. The boundary study will determine the
service area for the Clarksburg Cluster Elementary School (Clarksburg Village Site #1). The
new school will address overutilization of Cedar Grove and Little Bennett elementary schools
and representatives from those two schools will participate in the boundary advisory study. The
boundary advisory study will be conducted in spring 2013 v.ith Board of Education action in
November 2013. Participants in the roundtable advisory committee will review the impact of
unpairing New Hampshire Estates and Oak View elementary schools. The roundtable discussion
process will be conducted in spring 2013, and representatives from the New Hampshire Estates
and Oak View elementary schools ParentTeacher Associations will be included in the discussion
group.
Finally, enrollment at Northwest High School is projected to exceed 2,400 students by the 2018
2019 school year, approximately 300 students more than the school's capacity. Enrollment at
Seneca Valley High School is projected to remain at approximately 1,300 students through the
2018-2019 school year. A modernization is scheduled for Seneca Valley High School, with
completion in August 2018 for the building and August 2019 for the restoration of the site. The
Members of the County Council 4 December 3, 2012
Board of Education concurs with the superintendent's recommendation that during the design of
the modernization for Seneca Valley High School, the capacity of the school should be expanded
to 1,995 students, which will provide space to relieve the overutilization at Northwest High
School through boundary changes when the modernization is complete.
The Board of Education looks forward to meeting with you to discuss its request. If additional
information is needed, please do not hesitate to contact me.
Sincerely,
stK:1J21
President
SB:ak
Enclosure
Copy to:
Members of the Board of Education
Dr. Starr

Attachment A
Superintendent's Recommended FY 2014 CapitaJ Budget
and Amendments to the FY 2013-2018 Capital Improvements Program
(figures in thousands)
ES Addition
ES Addition
Chase HS Cluster Solution
Chase MS #2
Bradley Hills ES Addition
Clarksburg Cluster ES (Clarksburg Village Site #1)
Clarksburg HS Addition
. .
.. ....
ES Addition
'
HVAC (Mechanical Systems) Replacement
Improved (Safe) Access to Schools
3.970
2.698 1
4.398
46.485
17.449
951 \ 28.218
10.539\ 11 .823

t
.808
L
15,400
!
I
10.620
i
10.551
6.101 i 6.820
i
28.157
\--

. ..
11.177
I
4001 8.827
817 j . 12.311
I 11.805
6.853
10.230
3.200 i 18.393
1.145, 13.230
i 2.300
1
19.222 12,622 1
__
. 4.900 , 55.575 21.775 1
I
2.057; 25.636 11.2371
600 , 8,667 . 5,097j 1,1

1.200 : 8,428 4.528 j 1
1,497 : 23.767 12.697 j
4.200
i
1.500'
I
3.000
! 7.2291 73.292 31,008 \
I' 4.0001- -. ..
I 1.000 : 13.085 6.735:
I 6, 468 1 62.929 17.653\
L J..5Q9 i
616 i 3.835 ;
22.088 1 98.182:
1.057
1.168 1.082'
157 ;
250 : 1,099
1.5471
,
1.577i
1,302,
18,0541
6.705
8.613: 12,411 !
3.229 : 3.269 4.948[
1.199 ;
15,798 ;
., .1,1g7 !._ 15.400 , 1?,f25L 10.876
4.543 \ i
3,546:
3.265
2.051
j
3.447:
1.8741
I
5.190
2.696:
4.
359
1 346: 2,8061 2.955'
1.921 ! 1.880 2.789
1
; 738: . 10.967! 8.597
i
_},68 '... J ..__ _
I
I
3,035i 3.200: 1.200 , 1.200
1
1.1451 1.145; 1.145' 1,145
j
2.300 i 2.300: , 1
1.200 i
1.145
Ql 76.627 :
4.900\ 4.900 1 4.800: 4.8001 -4.800'j"
2.057: 2.057 ' 2.05T 2.057 , 2.057 ;
610\ 600 ! 420: 440 i 200:
1.503, 1:503! 817 817i 817 : 81
. I 893
1
.- . . - -.l-..... . _I.. . .. __
18,000; 6,540 i 6,540 6,540
1.206
1
j ,
; I
1,497 t . 1.497: 1,497;
!
,
,
1.500 ;
7.2291 7,229 ! 4,741 4.741 i
5.0021 175: 4.106 '
-- - ,- r-- ...- ..- .'- -."
4.0001 4.000 ' 2.000 i !
1.000t 1.000 ; 1.000 ' 1.000
1
6.468
.....
616
6,468 : 6.468!
. I
_ 5Q9 , _ .!lOO i
616 616:
I
22.758 22.538
1
1.497
4,741
1.000
6,468
_ 5g0._.
616
21.358
Forest ES Addition
ES Addition
Design. Engineering & Construction
Energy Conservation: MCPS
Facility Planning: MCPS
Fire Safety Upgrades
_ _ ... ...... ,
IModific<ltions to Holding. Special Education & Altemative Centers
Life-Cycle Asset Replaceme nt (PLAR)
IRe,haIJilitatio,n/Ften,ova,tion Q!C!2sesl 5qloQ!s (!3RQC?)
1Reloc,ltable Classrooms
I Renovations
BOld indicates amendment to the FY 2013- 201 8 CIP.
Board of Education's Requested FY 2014 Capital Budget
and Amendments to the FY 2013-2018 Capital Improvements Program
. 1
Summary Table
~ ~
Approved FY .2013 appropriation to
continue this project.
Asbestos Abatement and . Approved FY 2013 appropriation to
Hazardous Materials Remediation continue this project.
Modifications and
Improvements
Current Replacements!
Modernizations .
Design, Engineering, &
Construction
Energy Conservaiion
Facility Planning
Fire Safety Code Upgrades
Future
Replacements/Modernization
HVAC Replacement
Improved (SAFE) Access to
Schools
Indoor Air Quality Improvements
Land Acquisition
Approved FY 2013 appropriation to
Request FY 2013 appropriation to
continue this project. ..
nnrnn""!I"n to
Approved an FY 2013 appropriation for
land purchases.
Modifications to Holding, Special Approved FY 2013 appropriation for
Education, and Alternative
Centers . planning funds.
Planned Life Cycle Asset .
Replacement (PLAR)
Rehab.lReno. of Closed Schools
(RROCS)
Approved an FY 2015 expenditure for
planning funds to reopen an elementary
school and approved expenditures in the
Request FY 2014 appropriation to continue Ongoing
project.
this project.
Request FY 2014 appropriation for one
planning and three construction Ongoing
modernization projects.
Requ
this
2014 appropriation to continue
Request FY 2014 appropriation to continue
this project.
Request amendment to the
FY2013-2018 CIP to increase level of
ng for FY 2014.
Ongoing
Ongoing
Ongoing
2014 appropriation to continue Ongoing
funding for FY 2014.
Ongoing
Ongoing I
this project.
2014 appropriation to continue
funding for FY 2014,
Ongoing
Ongoing
Ongoing
Ongoing
Ongoing
'Bold indicates amendment to the FY 2 0 1 3 ~ 2 0 1 8 CIP. Blank indicates no change to the approved project.
to reopen one closed school as a
facility and to renovate an existing
Relocatable Classrooms Ongoing
Restroom Renovations Ongoing
Roof Replacement Ongoing
School Gymnasiums 8/13
School Security Systems
Technology Modemization
Transportation Depots
WSSC Compliance
Anr,rn,",'n reduction in FY 2013
appropriation and expenditures in the
out years for this project.
Approved removal of all expenditures for
this project
address compliance requirements.
this project.
this project.
this project.
Ongoing
Ongoing
Ongoing
TBD
Ongoing
'Bold indicates amendment to the FY 2013-2018 CIP. Blank indicates no change to the approved project.
FacilityPlanning: MCPS (P966553)
Category Montgomery County Public Schools Date Last Modified 11/12/12
Sub Category Countywide Required Adequate Public Facility No
Administering Agency Public Schools (AAGE18)
Relocation Impact None
Planning Area Countywide
Status Ongoing
Total
Thru
FY12
I
Rem
FY12
Total
6 Years FY 13 FY14 FY 15 FY16 FY 17 I FY 18
) Beyond 6 i
Yrs
EXPENDITURE SCHEDULE ($OOOs)
Plannino, DesiQn and Supervision 8,667 5.097 1100 2470 610 600l 420 440 200' 200 0
1
Land 0 0 0 0 0 o! 0 0 0 0 01
Site Improvements and Utilities 0 01 0 0 0 0 0 0 0 0 01
1Construction 0 0 0 0 0 0 0 0 0 01 0
1Other 0 0 0 0 0 0 0 0 0' 01 01
Total 8667 5097
,
1100 2470 610 600 420 440 200 200
1
0
1
FUNDING SCHEDULE I$OOOs
: Current Revenue: General
1 3,nB
i
2432 445 901 183 1801 126l 132 140 140 0
ICurren! Revenue: Recordation Tax I 885 885 0 0 0 0 01 0 0 0 0
iG.O.Bonds 4.004 1780 655 1569 427 4201 294: 308 60 60 0
I Totali 8667 5097 1,100 2470 610 6001 4201 440 200 200 oj
APPROPRIATION AND EXPENDITURE DATA (OOOs)
iApprooriation Request FY 14 600
ISUDolemental Aooropriation Request o
iTransfer o
ICumulative Appropriation 6.807
! Expenditure 1Encumbrances 5.097
IUnencumbered Balance 1.710
'Date First Appropriation FY 96
First Cost Estimate
I Current Scope FY96 1,736
1 Last FY's Cost Estimate 8,037
Partial Closeout Thru 4,891
New Partial Closeout 0
Total Partial Closeout 4,891
Description
The facility planning process provides preliminary programs of requirements (PaRs), cost estimates, and budget documentation for
selected projects. This project serves as the transition stage from the master plan or conceptual stage to inclusion of a stand-alone project
in the CIP. There is a continuing need for the development of accurate cost estimates and an exploration of alternatives for proposed
. projects. Implementation of the facility planning process results in realistic cost estimates, fewer and less significant cost overruns, fewer
project delays, and improved l i f e ~ c y c l e costing of projects.
An FY 2009 appropriation was approved to provide funding for the pre-planning for five modernizations, a new middle school and seven
school capacity additions, an assessment to determine the next set ofschoo Is to be proposed in the restroom renovation project, and a
feasibility study for the auditorium at Sligo Creek ES/Silver Spring International MS (Cross reference with Old Blair Auditorium in Cost
Sharing: MCG Project #720601).
An FY 2010 appropriation was approved to provide funding for the pre-planning for one modernization, eight addition projects, and to
update feasibility studies previously completed, but then shelved due to the delay In modernization projects. An FY 2011 appropriation
was approved for the pre-planning of four modernizations. eight addition projects, an assessment to determine the next set of schools to be
proposed for the modernization schedule, and an assessment of the current holding facilities. In the past, this project was funded solely by
current revenue; however, as a result of new environmental regulation changes, design of site development concept plans must be done
during the facility planning phase in order to obtain necessary site permits in time for the ccinstruction phase. Therefore. the funding
sources shown on this PDF reflect the appropriate portions for both current revenue and GO bonds.
Due to fiscal constraints, the County Council, in the adopted FY 2011-2016 CIP, reduced the expenditures in FYs 2013-2016 for this
project. An FY2012 appropriation was approved to continue this project. An FY 2013 appropriation was approved for the pre-planning of
three elementary school modernizations, one middle school modernization, six elementary school additions. and one middle school
addition. An FY 2014 apppropriation and amendment to the FY 2013-2018 CIP is requested to provide an additional $220,000 for this
project to conduct feasibility studies to address overutilization at various school throughout the county.
Disclosures
Expenditures will continue indefinitely.
HVAC (Mechanical Systems) Replacement: MCPS (P816633)
Category Montgomery County Public Schools Date Last Modified 11112112
Sub Category Countywide Required Adequate Public Facility No
Status Ongoing
I
Thru Rem Total Beyond 61
Total J FY12 FY12 6Years FY13 FY14 I FY 15 FY16 FY 17 FY18 Yrs
EXPENDITURE SCHEDUL.E ($0005)
Planning, Desian and Supervision 15900l 0 1500 14.400 4,400 3,600 1600 1,600 1,600 1,600 01
:
'Land 01 0 0 0 0 0 0 a 0 0 0
Site Improvements and Utilities Oi
0 0 0 0 0 0 o . 0 0
1
01
Constru ction 91 311
1
26415 13136 51760 17600 14400 4940 4940 4,940 4940 Oi
Other 01 0, 0 0 0 0 0 0 0 0 01
Total 1072111 26,415 14636 66160 22000 18000 6540 6540 6540 6540 01
:G.O. Bonds 93,650 25662i 15466 18,000 6,540 6,540 6,540 6,540 a
iStateAld 13561 733 6532 0 a 0 0 0 a
Total 107211 26,415 22,000 18,000 6540 6,540 6540 6,540 0
APPROPRIATION AND EXPENDITURE DATA (OOOs)
i Appropriation Request FY 14 18.000
Supplemental Appropriation Reauest 0
Transfer
.'
0
Cumulative Appropriation 63,051
Exoenditure f Encumbrances 26,415
Unencumbered Balance 36636
,Date First ApproQl'iation FY 81
IFirst Cost Estimate
I Current Scope FY 96 16388
Last FY's Cost Estimate 72.707
: Partial Closeout Thru 61.163
LNew Partial Closeout 5132
ITotal Partial Closeout 66,295
Description
This project provides for the systematic replacement of heating, ventilating, air conditioning, automated temperature controls, and plumbing
systems for MCPS facilities. This replacement approach is based on indoor environmental quality (IEQ), energy performance, maintenance
data, and the modernization schedule. Qualifying systems and/or components are selected based on the above 'criteria and are prioritized
within the CIP through a rating system formula. MCPS is participating in interagency planning and review to share successful and cost
effective approaches. .
An FY 2009 appropriation is requested to continue this level of effort project. An FY 2009 special appropriation of $252,000 and an FY 2009
transfer of $523,000 was approved by the County Council on January 27,2009 for emergency repair work at five schools. An FY 2010
appropriation and amendment to theFY 2009-2014 'CIP was approved to provide an additional $4,4 million beyond the $5.6 million in the
adopted CIP for this systemic project. The additional funding will begin to address the assessed backlog of HVAC projects that are vital to
the successful operation of our schoolfacilities.
An FY 2011 appropriation was requested for mechanical systems upgrades and/or replacements at the following schools: Belmont, Cedar
Grove, Clopper Mill, Dufief, Gaithersburg, Maryvale, and Wyngate elementary schools; Eastern, Banneker, and Silver Spring International
middle schools; Montgomery Blair, Col. Zadok Magruder, Poolesville, and Wheaton/Edison high schools; and Northlake holding facility.
However, due to fiscal constraints, the County Council's adopted FY 2011-2016 CIP reduced the expenditures, as requested in the Board of
Education's FY 2011-2016 CIP in FYs 2012-2016 by approximately $45 million, The title ofthis PDF has been changed to more accurately
reflect the work accomplished through this project. An FY 2012 appropriation and amendment to the FY 2011-2016 CIP was approved to
provide an additional$6.52 million above the adopted CIP to reinstate funds that were removed by toe County Council during reconciliation
in May 2010.
An FY 2013 appropriation was approved for mechanical systems upgrades and/or replacements at Damascus and Col. Zadok Magruder
high schools, Neelesville Middle School, and Takoma Park, Waters Landing, Cold Spring, Rosemary Hills, Rachel Carson, Washington
Grove, Bannockburn, Westbrook, East Silver Spring, and Piney Branch elementary schools. The County Council, in the adopted FY 2013
2018 GIP, Significantly reduced the expenditures requested by the Board of Education for this project for FY 2014 and beyond. An FY 2014
appropriation and.amendment to the FY 2013-2018 CIP is requested to provide an additional $11.46 million above the adopted CIP to
reinstate funds that were removed by the County Council during reconciliation in May 2012.
Disclosures
Public Schools (A 18) asserts that this project conforms to the requirements of relevant local plans, as required by the Maryland Economic
Growth. Resource Protection and Planning Act.
Coordination
CIP Master Plan for School Facilities
Planned Life Cycle Asset Repl: MCPS (P896586)
Category Montgomery County Public Schools Date Last Modified 11/20/12
Sub Category Countywide
Required Adequate Public Facility No
Status Ongoing
l Total
Thru ,
FV12
Rem I Total
FV12 6Vears FV 13 FV14 FV15 FV16 I FY17 FV18
Beyond 61
Vrs
EXPENDITURE SCHEDULE /$OOOs\
!Planning, Desion and Suoervision 8,008 618!
9901 6400 1400 1400 900 900' 900 900' a
ILand 0 a 01 0 a 0 0 a 0 0 01
and Utilities 10395 4,2971 2,O98! 4000 1,000 1,000 500 500 500 500 0'
Construction 54 889 26,0931 5,7741 23022, 4829 4829 3,341 3,341, 3341 3,341 0
'Other 0
0:
ol 0 0 o! 0 0 0 0 0
I Total' 73292 31 88621 33422 7229 7,229 4741 4741 ' 4741 0
A in Scliools Pr ram 0' 0 0 0 0
G.O. Bonds 7229 4741 4741 4741 4741 0
, Qualified Zeme Academ Funds 0 0 0 0 0 0
7,229 4,741 4741 4,741: 4,741 0
APPROPRIATION AND EXPENDITURE DATA (ODDs)

:Appropriation Request FY 14 7,229
ISupplemental Appropriation Request 0'
ITransfer ' 0
: Cumulative Appropriation 47,099
,Expenditure / Encumbrances 31.008
! Unencumbere"'d"-'B""a""la::.!nc:::::e=--________
r--=-----__
FY 89
FY96 24.802
58,657
48.681
522
49,203
Description ,
This project funds a comprehensive and ongoing plan to replace key facility and site components based on an inventory of their age and
conditions. A comprehensive inventory of all such components has been assembled so that replacements can be anticipated and
accomplished in a planned and orderly manner. Facility components included in this project are code corrections, physical education
facility/field improvements, school facility exterior resurfacing, partitions, doors, lighting, media center security gates, bleachers,
communication systems, and flooring.
On July 28, 2009 an FY 2010 special appropriation of $603,000 was approved to provide funding through the state's ASP program. An FY
2010 special appropriation in the amount of $151,000 was approved as a result of state funding through the QZAB program. An FY 2011
appropriation was approved to continue this project and fund one additional position to manage the playgound renovation project, as well as
to centralize the asphalt and concrete project development and management duties. Due to fiscal constraints, the County Council's
adopted FY 20112016 CIP reduced the expenditures in FYs 20122016 by approximately $6.6 million. Two FY 2011 supplemental
appropriations were approved - one for $603,000 through the state's ASP program and the other for $480,000 through the state's QZAB
program. An FY 2012 appropriation and amendment to the FY 20112016 CIP was approved to provide an additional $948,000 above the
adopted CIP to reinstate funds that were removed by the County Council during reconciliation in May 2010. An FY 2012 supplemental
appropriation was approved for $1.85 million through the state's QZAB program. An FY 2012 supplemental appropriatin was approved for
$849,000 through the state's ASP program.
An FY 2013 appropriation was approved to fund capital projects that will address MCPS infrastructure .. Projects include: exterior
resurfacing, repair/replacement of partitions and doors, lighting upgrades/replacement, replacement of media center security gates,
repair/replacement of bleachers, communication systems upgrades, and repair/replacement of various flooring. This project also funds
playground eqUipment replacement, tennis court and running track renovations, and cafeteria eqUipment replacement. The County Council,
in the adopted FY 20132018 C1P significantly reduced the expenditures requested by the Board of Education for this project for FY 2014
and beyond. An FY 2014 appropriation and amendment to the FY 2013-2018 CIP is requested to provide an additional $2,49 million above
the adopted CIP to reinstate funds that were removed by the County Council during reconciliation in May 2012. See Appendix F of the
Superintendent's Recommended FY 2014 Capital Budget and the Amended FY 2013-2018 Capital Improvements Program.
Disclosures
Public Schools (A18) asserts that this project conforms to the requirements of relevant local plans, as required by the Maryland Economic
Growth, Resource Protection and Planning Act.
Coordination
CIP Master Plan for School Facilities,
FY 13 FY1418
Salaries and Wages
361 1805
Fringe Benefits
161 805
Workyears
5 25
. MCPS Affordability Reconciliation (P056516)
Category
Montgomery County Public Schools Date Last Modified 3113/13
Sub Category Miscelianeous Projects Required Adequate Public Facility No
Status Ongoing
I
Total
Thru
I FY12
Rem
FYi2
: Total I
6 Years FY 13 FY14 I FY 15 FY 16 FY17 FY18
IBeyond 6\
1 Yrs
EXPENDITURE SCHEDULE ($OOOs)
r--
IPlannina. Desiqn and Suoervision 01 0 0
1
0 0 0 0 0 0 0 0
iLand
ISite ImQ.rovements and Utilities
1
oi
0
1
0
0
0'
,
0
01
01
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1Construction
IOther
0,
-34.1681
0
0
0
0
01
-34168
1
0
0
0
-14.168
0
-5.000
0
-5.000
0
-5000
0
-5.000
0
0
1
Total -34,1681 0 0, _34168
1
0 -14168 ' -5 000 5000 .5,000 -5000 0
FUNDING SCHEDULE ($OOOsl
,
-5356 o! 0' -53561 -4143
1
-1,213
1
0 0 0 ICurrent Revenue: General 0' 0
5.410 0 0' 01 5.410I 2,289 661
1
1168 400 113 779 ICurrent Revenue: Recordation Tax
1
-38,487 0 0
1
-38,4871 -1,692 0 -5,147 -4853 -5.511 IG.O. Bonds 15,361 -5.923
4265 01 01 4.265! 3,546 -260' -268 0 1745 245 253 : Schools Impact Tax
l
Totad -34,168 oi . 0' -34168' 0 -14,168 -5,000 -5,000 -5,0001 0 5000
APPROPRIATION AND EXPENDITURE DATA (ODDs)

_____:-FY.:...:.14'--___-5"'.;:;;:35:.:::1 6 iDate First Appropriation FY 14
t:=1 S:;:uJ::jP!p::!;le;:!m:::e;:!:f1!:ta::,;1 _______-::-t0 LFirs! Cost Estimate
_______________-"-1 0 1 Current Scqpe FY01
o
ICumulative Appropriation 0 I Last FY's Cost Estimate
o

'Unencumbered Balance 0
Description
This project reconciles the Board of Education's request with the County Executive's recommendation. Fiscal constraints lead the County
Executive to adjust the annual amounts to be affordable within the CIP. The County Executive's recommendation maintains all funding at
the approved FY13 and FY141eveis and makes reductions in FY15 through FY18. The County Executive reached the FY14 funding level by
recommending maintaining the Facility Planning, Planned Life Cycle Asset Replacement, and Heating, Ventilation, Air Conditioning projects
FY14 funding at the level previously approved by the County Council. By beginning the reductions in FY15, the Board of Education will have
more time to determine how to revise the school construction schedule to conform to the recommended funding levels. This recommended
reduction reflects 2.38% of the total Montgomery County Public School Capital funding for these four years.
Fiscal Note
Reflects funding switches between the following: Schools Impact Tax, Current Revenue: Recordation Tax, Current Revenue: General, and
GO Bonds funding sources. .
DISCUSSION
9.0
Office of the Superintendent of Schools
MONTGOMERY COUNTY PUBLIC SCHOOLS
Rockville, Maryland
April 23, 2013
MEMORANDUM
To: Members of the Board of Education
From: Joshua P. Starr, Superintendent of Schools
Subject: Monthly Financial Report
This financial report reflects the actual financial condition of Montgomery County Public
Schools (MCPS) as of February 28, 2013, and projections through June 30, 2013, based on
program requirements and estimates made by primary and secondary account managers. At this
time, revenues have a projected surplus of$2.7 million, and expenses have a projected surplus of
$15.5 million.
Due to Fiscal Year (FY) 2011 comprehensive expenditure restrictions, MCPS ended the year
with an expenditure surplus. The FY 2012 Operating Budget included a fund balance of
$17.0 million of the total savings as a source of appropriation, leaving a fund balance of
$11.9 million. This balance, together with the FY 2012 expenditure and revenue surplus of
$28.6 million, equals $40.5 million that will be available to fund future operating budgets. The
County Council used $17.0 million of the fund balance as a source of revenue for the FY 2013
Operating Budget, leaving an available balance of $23.5 million. Based on the revenue and
expenditure projections as of February 28, 2013, the FY 2013 fund balance will be $41.7 million
at year end. My expectation is that the available fund balance will be used for appropriation over
several years to avoid any sudden increase in the need for local contribution to replace fund
balance as a revenue source.
Staffwill continue to closely monitor both revenues and expenditures. A discussion of the actual
financial condition of MCPS as of February 28, 2013, and projected revenues and expenditures
through June 30, 2013, follows. In addition, the attachments provide detailed financial
information.
Attachment 1 presents a chart displaying budgeted and projected revenues as reflected in this
report. Attachment 2 is a chart detailing expenditure information by state category. The chart
displays authorized (budgeted) expenditures, actual expenditures and encumbrances,
projected expenditures for the remainder of the fiscal year, and the projected year-end balance as
reflected in this report.
@
Members of the Board of Education 2 April 23, 2013
REVENUE
Total revenue is projected to be $2,187,610,210, which is $2.7 million more than the revised
budget. The amount projected is the same as last month.
County
The projected revenue from the county is $1,419,513,701.
State
The projected revenue from the state is $590,494,275, which is $2.2 million more than the
revised amount budgeted for state aid.
Federal
The projected revenue from Impact Aid is $450,000, which is $150,000 more than the amount
estimated in the FY 2013 Operating Budget.
Other
The projected revenue from other sources is $4,075,708, which is $350,000 more than the
revised budget.
Appropriated Fund Balance
The projected revenue from appropriated fund balance is $24,069,165. This amount includes
$7,069,165 for prior-year encumbrances.
Enterprise Funds
The projected revenue from enterprise funds is $58,818,378. This represents a $1.0 million
increase over last month. The increase is due to approval of a $1.0 million supplemental
appropriation by the County Council for the Food Services Fund. This increase does not change
the overall revenue projection because the revised FY 2013 budget includes an increase of
$1.0 million for expenditures.
Supported Projects
The anticipated revenue for supported projects is $90,188,893. This estimate includes $9,230,705
for funds carried forward from FY 2012. Projects approved this month have been assigned
$85,604,159.
EXPENDITURES
There is a projected surplus of $15,500,000. This is an increase of $1,000,000 over the amount
projected last month. There are projected surpluses in Category 1, Administration; Category 2,
Mid-level Administration; Category 3, Instructional Salaries; and Category 10, Operation of
Plant and Equipment. Expenditures for all other categories are projected to be on budget by the
end of the fiscal year. The following provides an explanation of the projections for each
category, including changes from the prior month.
Category l-Administration
The overall projected end-of-year surplus of $500,000 in Category 1, Administration, remains
the same from last month. As of February 28, 2013, 93 percent of the funds budgeted in the
category have been spent or encumbered. It is projected that an additional $2.2 million or
6 percent of budgeted funds will be spent during the remainder of the year. Currently, there are
10 vacant Full-time Equivalent (FTE) positions. The balances associated with these vacancies
are offset by the estimated amount that will be needed to fill the vacancies. There is a projected
position salary surplus of $900,000, which is $90,000 higher than the $810,000 reported last
month. Partially offsetting the increase in salary surplus is additional spending for temporary
part-time salaries. The surplus of $286,000 in temporary part-time salaries projected last month
is reduced by $40,000 to $246,000. The deficit of $94,000 projected last month in the other
expenditure category remains the same. The amount projected for supplies and materials is
projected to be on budget as reported last month. The $502,000 deficit projected last month in
contractual services has increased by $50,000 to $552,000. The deficit is due to higher than
budgeted costs for legal services and the hiring of outside contractors for technology services as
a result of vacant positions.
Category 2-Mid-level Administration
The projected end-of-year surplus of $2.8 million in Category 2, Mid-level Administration,
remains the same as reported last month. As of February 28, 2013, 97 percent of the funds
budgeted in this category have been spent or encumbered, and it is anticipated that an additional
$1.3 million or 1 percent of budgeted funds will be expended during the remaining months of the
year. Most of the surplus ($2.5 million) is related to position salary balances. Currently, there
are 17 vacant FTE positions. While there is one less vacancy than last month, the projected
surplus in position salaries remains the same. The projection for temporary part-time salaries is
projected to be on budget as reported last month. Also, the overall surplus of $300,000 in
contractual services, supplies and materials, and other expenditures is the same as reported last
month. This surplus consists of many small amounts in many Category 2 accounts spread among
several MCPS units.

Category 3-Instructional Salaries
The projected end-of-year surplus in Category 3, Instructional Salaries, of $10.0 million reported
last month has increased by $500,000 to $10.5 million. As of February 28, 2013, approximately
97 percent of the funds budgeted in Category 3, Instructional Salaries, have been spent or
encumbered. It is projected that an additional $16.6 million or 2.0 percent of the budgeted
amount will be spent during the remainder of the year. The $7.9 million surplus projected for
position salaries last month has increased by $100,000 to $8.0 million. This is related to changes
in projections for filling vacancies and an increase of 6.0 vacant positions over the 159 vacant
FTE positions reported last month. The surplus of $2.1 million in non-position salary accounts
reported last month has increased by $400,000 to a total of $2.5 million based on updated
projections for short-term substitutes and other part-time salaries, sick and annual leave payout,
and expenditures for long-term leave.
Category 4-Textbooks and Instructional Supplies
Expenditures in Category 4, Textbooks and Instructional Supplies, are expected be on budget,
and there is no change in the projection from last month. As of February 28, 2013, approximately
76.5 percent of the funds budgeted in this category have been spent or encumbered. Remaining
funds are projected to be spent throughout the rest of the fiscal year for textbooks, instructional
supplies and materials, media materials, and school equipment purchases that cost less than
$1,000.
Category 5-0ther Instructional Costs
Expenditures in Category 5, Other Instructional Costs, are projected to be on budget, and there is
no change from the prior month. As of February 28, 2013, approximately 68 percent of the
funds budgeted in the category have been spent or encumbered. Examples of expenditures that
will be made throughout the rest of the fiscal year include costs for interscholastic sports,
replacement of school furniture and equipment, maintenance of duplicating equipment, and
students living in out-of-county placements.
Category 6-Special Education
Expenditures for Category 6, Special Education, are projected to be on budget. As of
February 28, 2013, 99 percent of the funds budgeted in this category have been spent or
encumbered. The $380,000 deficit projected in position salaries reported last month is reduced
by $330,000 to a deficit of $50,000. Some vacant positions that were projected to be filled are
now projected to be filled with long-term substitutes for the remainder of the year. Also, salary
expenditures for 6.0 positions will be shifted to the Medical Assistance grant. The deficit of
$160,000 in temporary part-time salaries reported last month has increased by $65,000 to
$225,000. The deficit is primarily a result of higher than budgeted expenses for long-term leave
and increased costs for part-time employees. The deficit of $460,000 in contractual services
reported last month has increased by $40,000 to $500,000. The deficit is based on actual billing
and projected spending for contractual speech, occupational therapy, and physical therapy
@
services for students. The surplus of $850,000 reported last month for tuition for students with
disabilities in nonpublic programs has decreased by $150,000 to $700,000 based on an
enrollment increase of five additional students this year. Also, the projected net surplus of
$150,000 in textbooks, instructional materials, and equipment for students has decreased by
$75,000 to $75,000 due to additional purchases of assistive technology devices for students with
disabilities.
Category 7-Student Personnel Services
As reported last month, expenditures for Category 7, Student Personnel Services, are projected to
be on budget. As of February 28, 2013, approximately 96 percent of all budgeted funds in the
category have been spent or encumbered. There is a 0.9 vacant FTE position, the same as last
month, and the projected position salary surplus of $90,000 remains unchanged. Expenditures
for part-time salaries and operating expenses will continue to be made throughout the year and
are expected to offset the surplus in position salaries.
Category 9-Student Transportation
The projection for Category 9, Student Transportation, remains the same as reported last month
and is expected to be on budget. As of February 28, 2013, approximately 90 percent of all
budgeted funds in the category have been spent or encumbered. There are 75 position vacancies,
24 fewer vacancies than reported last month. This change has little impact on the overall
Category 9 projection because changes in position salaries generally are offset by changes in
temporary part-time school bus operator salaries. Additional expenditures will be made for
school bus parts and repairs throughout the year. Bus fuel prices as of the end of February are
the same as the budgeted price per gallon, and it is anticipated that expenditures for school bus
fuel will be on budget.
Category lO-Operation of Plant and Equipment
The projected end-of-year surplus of $1.2 million for Category 10, Operation of Plant and
Equipment, has increased by $500,000 to $1.7 million. Approximately 80 percent of all
budgeted funds in this category have been spent or encumbered. It is projected that
$21.5 million will be spent throughout the remainder of the year on substitute building service
worker salaries and utilities. Currently, there are 24 FTE position vacancies, primarily building
service positions. This is five more vacancies than reported last month. However, the net
position salary surplus of $130,000 projected last month is reduced by $11 0,000 to $20,000 due
to projected expenditures for building services due to community use. The projected deficit of
$550,000 for temporary part-time salaries remains the same as reported last month. The deficit
in temporary part-time salaries is due to higher than budgeted expenses for long-term leave and
projected part-time salary needs. The $1.5 million surplus previously reported for utilities has
increased by $500,000 to $2.0 million. The changes are based on current data that indicate that
electricity, natural gas, and fuel oil consumption are lower than previously projected. Utilities
projections are based on prior-year consumption trends and are adjusted for increased square
footage of building space and weather factors. The surplus of $120,000 projected last month for
Members ofthe Board of Education 6 April 23, 2013
supplies and equipment has increased by $110,000 to $230,000. This change is a result of
inventory adjustments in the Department of Materials Management.
Category ll-Maintenance of Plant
Expenditures in Category 11, Maintenance of Plant, are projected to be on budget, as reported
last month. Approximately 90 percent of budgeted funds have been spent or encumbered as of
February 28, 2013, and all funds are expected to be spent by year end. Currently, there are 18
FTE position vacancies. As a result of adjusting projections on filling position vacancies,
position salary savings from lapse and turnover is projected to be $700,000, an increase of
$100,000 over the $600,000 reported last month. The projected deficit of $170,000 in long-term
leave remains the same. The $430,000 deficit projected last month for contractual maintenance
services, maintenance- supplies, and vehicle operating costs is increased by $100,000 to
$530,000. The change is a result of increased vehicle operating costs.
Category 12-Fixed Charges
There is no change in the projection for Category 12, Fixed Charges, and expenditures are
projected to be on budget. Approximately 71 percent of budgeted funds have been spent as of
February 28, 2013. Since MCPS is planning on transferring the budgeted funds for employee
health benefits to the Employee Benefit Health Plan Trust Fund, there is no projected surplus or
deficit. The projected deficit of $150,000 for unemployment insurance due to trends showing
higher than expected claims is unchanged from last month. Also, there is a projected deficit of
$100,000 for the Federal Insurance Contribution Act (FICA) tax. These deficits are offset by a
projected net surplus of $250,000 for tuition reimbursement for MCPS staff and tuition payments
made on behalf of students attending Johns Hopkins and George Washington universities. M CPS
has partnerships with these universities; MCPS pays the tuition for students who then work in
MCPS classrooms and are paid at long-term substitute rates rather than permanent teacher salary
amounts. The surplus is due to fewer students participating in the partnership programs.
JPS:LAB:TPK:jp
Attachments
@
ATTACHMENT 1
Monthly Financial Report and Year-end Projections
As of February 28, 2013
REVENUE
Projection Current Report
FY 2013 Variance
Source
Original
Budget
Revised
Budget(a)
As of
2/28/2013
As of
1/31/2013
Over (Under)
Revised Budget
County
State
Federal
Other
Appropriated fund balance
$ 1,419,513,701
588,331,986
300,000
3,725,708
17,000,000
$ 1,419,513,701
588,312,375 (d)
300,000
3,725,708
24,069,165 (b)
$ 1,419,513,701
590,494,275
450,000
4,075,708
24,069,165
$ 1,419,513,701
590,494,275
450,000
4,075,708
24,069,165
$
2,181,900
150,000
350,000
Subtotal
Food Services
Real Estate Management
Field Trip
Entrepreneurial Activities
Instructional Television
Supported Projects
Total
2,028,871,395
48,476,295
3,520,603
2,026,046
3,006,936
1,457,591
73,670,729
$ 2,161,029,595
2,035,920,949
48,515,419
3,527,264
2,026,046
3,292,058
1,457,591
90,188,983
$ 2,184,928,310
(e)
(c) (d)
2,038,602,849
48,515,419
3,527,264
2,026,046
3,292,058
1,457,591
90,188,983
$ 2,187,610,210 $
2,038,602,849
47,515,419
3,527,264
2,026,046
3,292,058
1,457,591
90,188,983
2,186,610,210 $
2,681,900
2,681,900
Notes:
(a) Revised budget includes carryover of prior-year encumbrances.
(b) Includes $7,069,165 for prior-year encumbrances.
(c) Includes $9,230,705 carried forward from FY 2012 and $7,267,938 in supplemental appropriations.
(d) Includes $19,611 for fund shift from Foundation grant to Federal Education Job funds
(e) Includes $1,000,000 for Food Services Enterprise Fund supplemental appropriations
ATTACHMENT 2
EXPENDITURES
Actual Expenditures Current Report Prior Report
Year-ta-Date and Projected Projected Projected Variance
Authorized Expenditures Encumbrances Encumbrances Expenditures Year-end Year-end Over (a)
Category Expenditures 212812013 212812013 212812013 613012013 Balance Balance (Under) Percentage
01 Administration $ 38.896,271 $ 24.102,532 $ 12.071,369 $ 36.173.901 $ 2,222.370 $ 500,000 $ 500,000 $ 1.29
Position salaries 17,738,350 10,943,100 28,681,449
Non-position salaries 444,108 0 444.108
____ e!p_elJ.s:s__________________ ____ ____ _____________________________________ _
02 Midlevel Administration 136,605.026 $ 81,397,065 $ 51,098,428 $ 132,495,494 1,309,533 2.800,000 2,800.000 2.05
Non-position salaries 1,127,802 168,195 1,295,997
____ e!p_elJ.s:s_ _ _ _ _ _ _ __________ _____ ____ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __________________ _
03 Instructional Salaries 819,313,949 471,285,020 320,940,985 792,226,005 16,587,944 10,500,000 10,000,000 500,000 1.28
____ ________________ _ _____ _ _ _____________________________________ _
04 Textbooks and Instructional Supplies 24,920,279 14.699,426 4,352,137 19.051,563 5,868,716
-05 - OtherlnsiructiOnalCoSts- - - - - - - "11.6-82,9M - - - - 6.509,286 - - - - 1.367,446 - - - -7.876,733 - - - -3;866;236- - - - - - - - - - - - - - - - - - - - - -:. - - - - - :-
-06 -Special-Education - - - - - - - - - - 252.387.539 - - - f44. f93, 562 - - - f04,801.825 - - - 248,995.387 - - - -3;392:152- - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Position salaries 120,856,623 86.613,309 207,469.932
Nonposition salaries 3,371,895 366,746 3,738,641
____ _________________ _ ___ ..n,8. .2!,7}!! ___ _____________________________________ _
07 Student Personnel Services 10,268,248 6.112,984 3,768,095 9,881,079 387,168
Non-position salaries 77,126 0 77,126
____ ___________________ ______ _____ _____________________________________ _
08 Health Services 37,402 16,736 0 16,736 20,666
Position salaries
Non..position salaries 1,924 1,924
____.._____ __..__.._.._______________......__.........__......._...._........ ..___.._...._..___..........___.. _Q_. _..____......___.. __..__....__....______..___..__..___.._..........____..__..__________..______________.........._________.._______..___

ATTACHMENT 2
EXPENDITURES
Actual Expenditures Current Report Prior Report
Year-ta-Date and Projected Projected Projected Variance
Authorized Expenditures Encumbrances Encumbrances Expenditures Year-end Year-end Over (a)
Category Expenditures 2128/2013 2/28/2013 212812013 6/30/2013 Balance Balance (Under) Percentage
09 Student Transportation 95,352,853 54,084,878 31,447,973 85,532,851 9,820,003
____ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ____ ___ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _________________ _
10 Operation of Plant & Equipment 114,851,533 66,401,875 25,244,284 91,646,159 ,505,374 1,700,000 1,200,000 500,000 1.48
Operating expenses 26,553,207 1,097,706 27,650,913
-11 -Maintenance of Plant - - - - - - - - 34,329,672 - - - -20,160,464 - -"10,71:2",8-84 - - - 30,873,348 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Non-position salaries 652,537 78,208 730,745
____ __________________ ____ ____ _____________________________________ _
12 Fixed Charges 497,225,209 355,086,701 297,548 355,384,249 141,840,960
-14 -Commu-nitySerVices- - - - - - - - - - - -50,600 - - - - - -61,170 - - - - - - - - 0 - - - - - -61,170 - - - - -(1(170) - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Non-position salaries 11,170 0 11,170
Operating expenses 50,000 50,000
Subtotal - - - - - - - - - - - - 2,035,920,949 1,244,111,702 566,102,973 1,810,214,675 210,206,274 15,500,000 14,500,000 1,000,000 0,76
61 Food Services 48,515,419 31,211,743 7,370,159 38,581,902 9,933,517
51 Real Estate Management 3,527,264 2,585,861 809,851 3,395,712 131,553
71 Field Trip 2,026,046 1,009,076 118,851 1,127,927 898,119
81 Entrepreneurial Activities 3,292,058 1,994,657 334,913 2,329,570 962,488
37 Instructional Television 1,457,591 862,129 354,106 1,216,235 241,356
Supported Projects 90,188,983 43,932,248 18,620,397 62,552,645 27,636,338
Total $ 2,184,928,310 $ 1,325,707,416 $ 593,711,249 $ 1,919,418,665 $ 250,009,645 $ 15,500,000 $14,500,000 $ 1,000,000 0.71
Note:
(a) Percentage of projected year-end balance to authorized expenditures.

850 Hungerford Drive. Rockville
l
Maryland 20850
March 26, 2013
The Honorable Nancy Navarro
071973
President
Montgomery County Council
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."rl" Stella B. Werner Council Office Building
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100 Maryland Avenue

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Dear Ms. Navarro:
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As requested in then-Council President Roger Berliner's memorandum of 2012;.tms
letter provides the information regarding State Expenditure Category 12.-< The
Management Committee of the Board of Education monitors the expenditures in this category
closely, as we do with all expenditures. I look forward to working with you, councilmembers,
members of the Board of Education, and the superintendent of schools to continue to address the
fiscal challenges we all face.
1. Estimates of the amount of the annual employer contributions to the MCPS pension
fund for the next five fiscal years.
The estimated annual required contributions are expected to be the following amounts:
Current percentages Reported April 4, 2012
FY 2014 $79.5 million 5.74 5.81
FY 2015 $84.3 million 6.00 6.02
FY 2016 $82.9 million 5.79 5.85
FY2017 $82.2 million 5.60 5.69
FY 2018 $83.6 million 5.55 5.64
FY 2019 $83.7 million 5.42
2. A description of the major factors (e.g., salary adjustments, changes in workforce size,
investment performance, plan modifications, actuarial assumptions) that affect
estimated pension fund contributions. over the next five
The calculation of the annual employer contribution above is based on actuarial work
performed by the Montgomery County Public Schools (MCPS) actuary, AON Hewitt, and
submitted to Mrs. Susanne G. DeGraba, chief financial officer, on February 19, 2013
(Enclosure A). The estimate is based on the updated market value of the plan as of
January 31, 2013. The actuary's estimate of the percentage of salary that is required to be
Phone 301-279-3617 Fax 301-279-3860 boe@mcpsmd.org www.montgomeryschoolsmd.org
The Honorable Nancy Navarro 2 March 26, 2013
contributed each year is applied to the anticipated salaries to be paid from the MCPS
operating budget. The percentage contribution is based on actuarial assumptions as follows:
a. Salary adjustments: Aggregate salaries for continuing employees will increase one
percent overall during the next two years, reflecting current economic realities, returning
to two percent after two years.
b. Changes in workforce size: The number of employees will increase by one percent each
year, with salaries adjusted to 0.57 percent to reflect the lower salaries paid to new
employees.
c. Investment Performance: MCPS will achieve its actuarial assumed rate of return on its
pension fund of 7.5 percent in all future years. Pension fund investment performance is
included through January 31, 2013.
d. Plan Modifications: The pension plan changes effective July 1,2011, are amortized over
a 30-year closed period, the same method used to incorporate the impact of the July 1,
2006, changes.
e. Actuarial Assumptions: Current assumptions of mortality, age at retirement, marital
status, and payment option selected will remain the same. The transition of actuaries in
201i identified very slight differences in disability assumptions. The net impact of the
changes was an increase of contribution of 0.01 percent.
3. A written summary of the Board's current strategy to achieve a desired pension
funding level ("funded ratio") and the short- and long-term effects of this strategy on
the Category 12 budget.
As described in the letter of April 4, 2012, to then-Council President Roger Berliner from
Ms. Shirley Brandman, then-president of the Board of Education (Enclosure B), the Board's
Fiscal Management Committee continues to discuss strategies to improve the fund's status in
light of the current fiscal environment. A decision point will occur with the Fiscal Year (FY)
2016 budget, when the actuarial projection identifies a decrease in percentage of salary
contribution. At that time, it might be appropriate to recommend maintaining the contribution
percentage to achieve an 80 percent funding level sooner.
As described above, the investment performance of the fund over the past year has helped
maintain the funded status. We are optimistic that the improved positioning of the portfolio
into index funds along with an allocation to alternative strategies, the implementation of a
cash overlay strategy, and the accompanying reduction of costs will enable investment
returns to contribute to improvement of the fund's status. Additionally, the last year of
recognition of the 2009 investment losses occurs with the valuation as of June 30, 2013.
After that point, the funded status of the plan should begin to improve more rapidly.
During FY 2012, the pension fund lost 0.6 percent to end the year at $1.021 billion. During
FY 2013 through January 31, 2013, the total fund has exceeded its actuarial rate ofretum to
earn 10 percent, up to a value of $1.165 billion. While the 2012 performance did not achieve
The Honorable Nancy Navarro 3 March 26,2013
the actuarial return, the flat performance was equal to the investment benchmark and does
not create significant losses to be recognized in the future, unlike 2008 and 2009.
4. A comparison of current fiscal year budgeted versus actual revenues and expenditures
to date for the Active Employee and Retiree Group Insurance Funds.
The comparison is attached for active employees (Enclosure C) and retirees (Enclosure D).
5. The projected year-end balance for the Active Employee and Retiree Group Insurance
Funds. This should include an accompanying explanation of the factors causing the
variation (e.g., claims experience, plan enrollment) if the projected balance in either
Fund differs from what was assumed at the beginning of the fiscal year.
These figures are based on revenues and expenses as of January 31, 2013.
Active employees
Beginning fund balance $22.9 million
Anticipated change to fund balance 9.3 million
Projected ending fund balance $32.2 million
Retirees
Beginning fund balance $13.5 million
Changes were made to co-payments for both medical and prescription plans effective
January 1, 2013. We also introduced a mandatory generic step therapy program and
pharmacy restrictions for specialty medications. Due to the lag of billing and payment, these
changes have not yet begun to impact the actual experience of the plans, although their
impact is in our projections.
The active employee fund balance is projected to increase by just over $9 million. It was
expected that the fund balance would be reduced by $3.3 million, but claims continue to be
below projection. Improved claims performance is in both the medical and prescription plans.
The retiree fund balance is projected to increase by $2.3 million. It was expected that the
fund balance would increase by $1.7 million, but claims continue to be below projection.
The projected retiree fund balance increase is due to favorable claims experience. While the
overall number of retirees continues to increase, the number of under-65 retirees continues to
decline, due primarily to later retirements. This continues to contribute to reduced claims, as
over-65 retirees have primary coverage from Medicare, reducing MCPS claim liability.
The Honorable Nancy Navarro 4 March 26, 2013
The members of the Board of Education, the superintendent of schools, and MCPS staff are
prepared to work with the County Council and Council staff to provide additional clarifications
as needed.
Sincerely,
C/M441
IBarc1ay
President
CSB:jer
Enclosures
Copy to:
Members of the County Council
Dr. Starr
Mr. Bowers
Mrs. DeGraba
Mr. Klausing
Mr. Ikheloa
Enclosure A
AONHewitt
February 19, 2013
Ms. Susanne DeGraba
Chief Financial Officer
Montgomery County Public Schools
850 Hungerford Drive
Rockville, MD 20850-1747
Re: Six-Year Projection of Board Contributions to MCPS's Pension Plans
Dear Sue:
We estimated Board contributions to the Montgomery County Public Schools Employees' Retirement
and Pension Systems (the "Plan") for the next six years under the investment return/contribution
assumptions used for the July 1, 2012 valuation. As a reminder, this assumes assets will earn 7.5%
gross (before investment expenses are subtracted). The actual contribution percentage will vary and
may vary significantly from the results of this projection due to actuarial gains/losses and
demographic changes.
The results are summarized in the table below.
Board
Fiscal Year (FY) Contribution as % Funded % Funded
Valuation Date Ending % of Payroll AVA Basis MVA Basis
July 1. 2012 June 30. 2014 5.74 68.83 66.51
July 1, 2013 June 30. 2015 6.00 68.82 73.36
July 1. 2014 June 30. 2016 5.79 72.67 75.19
July 1. 2015 June 30, 2017 5.60 76.02 77.07
July 1, 2016 June 30. 2018 5.55 77.75 78.66
July 1,2017 June 30, 2019 5.42 79.97 79.97
July 1, 2018 June 30, 2020 5.41 81.18 . 81.18
The slight contribution increase from FY 2014 to FY 2015 is due to recognizing a large asset loss in
200812009. The contribution decreases as a percentage of payroll after FY 15 through FY 2020 are
due to past asset gains (including those from July 1, 2012 to January 31, 2013) being recognized in
the actuarial value of assets. In addition to the contribution decreasing due to recognizing prior asset
gains, the contribution savings are increasing over time as more and more partiCipants are covered
by the new plan features for new hired described in the July 1, 2012 actuarial valuation report.
For a historical perspective, the table below shows the Board contributions from July 1, 1994 until
now.
Aon Hewitt I Retirement & Investment Consulting
555 East Lancaster Avenue, Suite 300 I P.O. Box 73001 Radnor, PA 190877300
t+1.610.834.2100 I f+1.610.B34.2176 I aonhewltlcom
Ms. Susanne DeGraba
February 19, 2013
Page 2
Board Contribution
Valuation Date Fiscal Year Ending as % of Payroll
July 1,1994 June 30, 1996 2.92
July 1,1995 June 30, 1997 3.30
July 1,1996 June 30, 1998 2.83
July 1,1997 June 30, 1999 2.53
July 1,1998 June 30, 2000 2.11
July 1,1999 June 30,2001 1.98
July 1, 2000 June 30, 2002 1.89
July 1, 2001 June 30, 2003 1.86
July 1, 2002, June 30, 2004 2.06
July 1,2003 June 30, 2005 2.74
July 1, 2004 June 30, 2006 3.30
July 1, 2005
July 1, 2006
June 30, 2007
June 30, 2008
4.85
4.59
July 1, 2007 June 30, 2009 4.53
July 1,2008 June 30, 2010 4.53 *
July 1,2009 June 30, 2011
July 1, 2010 June 30, 2012
July 1, 2011 June 30, 2013 5.42
The valuation resulted in a 4.37% Board contribution rate, but MCPS continued with the same contribution rate as the
previous valuation to avoid a larger increase from fiscal year 2010 to fiscal year 2011.
+ Beginning with the July 1, 2010 valuation report, the contribution was increased with interest from July 1 to October 1
based on expected timing of the actual contribution. The FY 2012 Board contribution was later revised to 5.12%, as
described In Mercer's May 13, 2011 letter, to reflect the Plan changes effective July 1, 2011. Prior to reflecting the Plan
changes, the Board contribution would have been 5.57% of pay.
The last half of the 1990s was characterized by high asset returns, allowing a drop in the Board
contributions. The challenging market environment during 2001-2003 caused Board contributions to
increase. The Plan amendment associated with House Bill 1737 caused the spike in Board
contribution for the fiscal year ending June 30, 2007. All increases in cost sharing from the
amendment (i.e. phased increase in employee contributions) were reflected fully in the contribution
for the fiscal year ending June 30, 2009. MCPS's favorable returns on assets during 2004-2007
helped to lower contributions in FY 2008 & 2009. It is expected that there will be approximately 95
million of unrecognized asset gains as of July 1, 2013, contribution should decline over the next few
years as the asset gains are reflected in the smoothed asset value.
There has been a great deal of volatility in the contribution rate in the past, and the causes of this
volatility will continue into the future. One of the main causes of this volatility is the asset returns the
fund generates. To calculate contributions, MCPS uses an actuarial value of assets which smoothes
market returns over a 5-year period, but even with this smoothing technique, contributions and funded
ratios can be volatile. The following table illustrates a distribution of financial outcomes over the
course of a one-year time period including the potential change in the Plan's funded status and the
corresponding impact on the contribution required for the fiscal year ending in 2015 assuming that all
actuarial assumptions are met. Please note, the average expected return below is base on average
market returns using the board's investment policy, which is lower than the boards long term rate of
7.50% investment return. Also, for illustrative purposes, for a full year's volatility the table below is
projected from the June 30, 2012 asset value as apposed from the January 31, 2013 value used in
the 6-year prOjection above. '
Ms. Susanne DeGraba
February 19, 2013
Page 3
Board
Fiscal Year Expected Contribution as % Funded % Funded
(FY) Ending Percentile Return % of Payroll AVA Basis MVABasis
June 30, 2015 5
th
(13.2%) 6.24 65.14 54.95
June 30. 2015 25
th
(1.9%) 6.15 66.56 62.07
June 30, 2015 50
th
6.8% 6.08 67.66 67.55
June 30, 2015 75
th
16.2% 6.00 68.84 73.47
June 30. 2015 95
th
31.3% 5.87 70.74 82.99
. The following statement can be used to interpret the first row of this chart: there is a 5% chance (or 1
chance in 20) that asset returns will be bad enough to result in a funded status of 65.14% or lower,
and a Board contribution of 6.24% of payroll or higher. Similarly, there is a possibility that higher than
expected returns will actually decrease the future board contributions needed to fund the Plan. These
percentages assume a normal distribution of returns around the mean. There is a school of thought
that a normal distribution understates the portion bf returns in the tails (I.e. below 10% ofabove 90%)
of the curve. In determining the returns. we did not take into consideration the positive return from
July 1, 2012 to the present. The normal distribution of return is based on a short term period of 1
year.
In order to complete this 6 year projection, we used the following methods and assumptions: .
A 7.5% annual return on the market value of assets (gross) from the actual January 31,2013
assets to June 30. 2013 and all future years. Reflecting the updated asset amount as of January
31.2013 results in an $86 million gain compared to the 7.5% assumption.
Payroll and employee contributions for the current number of active partiCipants, short term are
assumed to increase by 1.00% for three years. 2.00% thereafter to reflect current conditions.
Total expenses are assumed to be 0.70% of beginning of year market value of assets.
We amortize unrecognized gains and losses over an open 15-year period.
For the contribution volatility exhibit, we have relied on portfolio volatility based on Hewitt Ennis
Knupp's one-year time horizon projection.
Unless otherwise noted. we used the same assumptions and Plan provisions as for the 2012
valuation. We assumed there will be no changes to the valuation assumptions or provisions in
the future.
Please give us a call if you have any questions.
Sincerely.
Michael Schooley, A.S.A . E.A.
MJS/edr
Enclosure
cc: Jamie. Roberts
Thomas G. Vicente
Enclosure B
850 Hungerford Drive + Rockville, Maryland 20850
April 4 ~ 2012
The Honorable Roger Berliner, President
Montgomery County Council
Stella B. Werner Office Building
100 Maryland Avenue
Rockville, Maryland 20S50
Dear Mr. Berliner:
As requested in your memorandum of January IS, 2012, this letter provides the information
regarding State Expenditure Category 12, an area continually monitored by the Board's Fiscal
Management Committee. I look forward to working with you, other County Council members, Board
of Education members, and the superintendent ofschools to address the fiscal challenges we face.
1. Estimates of the amount of the annual employer contributions to the MCPS pension fund
for the next five fiscal years.
The estimated annual required contributions are expected to be the following amounts:
FY2013* $70.5 million 5.42 percent ofpayroll
FY2014 $77.0 million 5.81 percent ofpayroll
FY2015 $S1.0 mUlion 6.02 percent ofpayroll
FY2016 $80.0 million 5.85 percent of payroll
FY 2017 $79.8 million 5.69 percent of payroll
FY 2018 $SI.1 million 5.64 percent ofpayroH
*FY2013 provided as a point ofreference
2. A description of the major factors (e.g., salary adjustments, changes in workforce size,
investment performance, plan modifications, actuarial assumptions) that affect estimated
pension fund contributions over the next five years.
The calculation of the annual employer contribution above is based on actuarial work performed by
the Montgomery County Public Schools (MCPS) actuary, Mercer, and submitted to
Mrs. Susanne G. DeGraba, chief financial officer, on February 15, 2012 (Attachment A). An
addendum was submitted by Mercer (Attachment B) that incorporates the updated market value of
assets as of February 14, 2012. The actuary's estimate of the percentage of salary that is required to
be contributed each year is applied to the anticipated salaries to be paid from the MCPS operating
budget. The percentage contribution is based on actuarial assumptions as follows:
L SalaJ.)! Adjustments: Aggregate salaries for continuing employees will increase one percent
overall over the next three years, reflecting the current economic realities, returning to two
percent after three years.
Phone 301-279-3617 + Fax 301-279-3860 boe@mcpsmd.org www.montgomeryschoolsmd.org
The Honorable Roger Berliner 2 April 4, 2012
2. Changes in Workforce Size: The number of employees will increase by one percent each year,
w i ~ salaries adjusted to .57 percent to reflect the lower salaries paid to new employees.
3. Investment Performance: MCPS will achieve its actuarial assumed rate of return on its pension
fund of 7.5 percent in all future years. Pension fund investment performance is included through
February 14,2012.
4. Plan Modifications: The pension plan changes effective July 1, 2011, are amortized over a 30
year closed period, the same method used to incorporate the impact of the July 1,2006, changes.
5. Actuarial Assumptions: Current assumptions of mortality, age at retirement, marital status, and
payment option selected will remain the same.
Staff applied the percentages supplied by the actuary to the Fiscal Year (FY) 2013 Board of
Education-adopted budget request to calculate the amount of the future required pension
contributions.
3. A written summary of the Board's current strategy to achieve a desired pension funding
level ("funded ratio") and the sbort- and long-term effects of this strategy on the Category
12 budget.
On February 17, 2012, the MCPS actuary, Mercer, provided a letter (Attachment C) to
Mrs. DeGraba about the funded ratio ofthe MCPS Employees Retirement and Pension Systems. The
letter describes the actuarial methodology used to reach 100 percent funding. However, it states that
"in the absence of plan changes, assumption changes, or future actuarial gains/losses) the Unfunded
Actuarial Accrued Liability will never reach zero" because of the re-amortization process. It is
important to note that MCPS continues to fund ] 00 percent of the actuarially determined
contribution.
The Board of Education, the superintendent of schools, and MCPS staff have been working with our
actuary to identify strategies that focus on improving the funding level. The actuary letter outlines
possible strategies. Strategies that have already been implemented include the following: .
Reduced retiree benefits for newly hired employees as of July 1,2011.
Reduced the maximum cost-of-living increases on benefits earned after July 1,2011.
Maintaining the contribution level even when projections indicate a reduced percentage.
The Board of Education currently does not have another funding goal to reach a specific funded ratio
within a certain period of time. However, the Fiscal Management Committee continues to evaluate
possible options. If the Board decided on a funded ratio goal of 80 or 90 percent, the fo!lo\ ...ing
strategies could be considered:
Making additional contributions when the funded ratio falls below a certain percentage of
the obligation.
Shortening the amortization period when the funded ratio falls below a certain percentage
ofthe obligation.
Setting policy to not reduce the contribution level in the future when the funding ratio is
below a certain percentage of the obligation, even when the projections calculate a
reduced percentage.
There are a number of challenges with any of these strategies. As indicated in the response to # 1
above, the operating budget is projected to increase by $11.5 million over the next five years based
on all of the current assumptions and methodology. In addition, the legislature is considering shifting
more than $40 million of state pension costs to MCPS. These increases, along with other financial
pressures, will make it difficult to contribute more to the pension each year. If the decision was made
to increase the funded ratio to 80 percent by 2018, an additional $7.5 million would have to be
contributed each year for FY 2014 through FY 201S.
4. A comparison of current fiscal year budgeted versus actual revenues and expenditures to
date for the Active Employee and Retiree Group Insurance Funds.
The comparison is attached for active employees (Attachment D) and retirees (Attachment E).
5. The projected year-end balance for the Active Employee and Retiree Group insurance
funds. This should include an accompanying explanation of the factors causing the
variation (e.g., claims experience, plan enrollment) if the projected balance in either Fund
differs from what was assumed at the beginning of the year.
These figures are based on revenues and expenses as of February 29, 2012.
Active employees
Beginning fund balance $21.6 mill ion
Retirees
Beginning fund balance $ 8.S million
Anticipated change to fund balance 4.S million
The active fund balance is projected to increase slightly, by only $1.1 million. It was expected that
the fund balance would be reduced by several million dollars, but claims are running below
projections and there is a slight increase in revenue.
The projected retiree fund balance increase is lower than expected because revenues are lower.
While there has been a 2 percent increase in the number of retirees, there has been a decrease in the
under-65 retiree enrollment of approximately 9 percent, which has reduced claims. When retirees
reach age 65, Medicare becomes their primary health plan and the MCPS plan becomes a
supplement, reducing MCPS claims exposure.
Members of the Board of Education, the superintendent of schools, and MCPS staff are prepared tei
work with the County Council and Council staff to provide additional clarification as needed.
Sincerely,
Aiey:a1)
President
SB:sgd
Copy to:
Members ofthe County Council
Dr. Starr
Mr. Bowers
Mrs. DeGraba
Mr.Ikheloa
Attachment A
Douglas L. Rowe, FSA, MAAAI EA
Principal
One South Street. Suite 1001
MMERCER
Baltimore. MD 21202
+14103472806
Fax +1 4107273347
douglas.rowe@mercer.com
www.mercer.com
Via Electronic Mail
Ms. Susanne OeGraba
Rockville, MD 20850-1747
February 15,2012
Subject: Six-Year Projection of Board Contributions to MCPS's Pension Plans
Dear Sue:
We estimated Board contributions to the Montgomery County Public Schools Employees'
Retirement and Pension Systems (the "Plan") for the next six years under the investment
return/contribution assumptions used for the July 1, 2011 valuation. As a reminder, this
assumes assets will earn 7.5% gross (before investment expenses are subtracted). The
actual contribution percentage will vary and may vary significantly from the results of this
projection due to actuarial gains/losses and demographic changes.
Fiscal Y..r (FY) Board Contribution "/0 Funded % Funded
Valu.ation Date Ending as % of Payroll AVA Basis MVA Basis
July 1, 2011 June 30, 2013 5.42 70.1 68.5
July 1, 2012 June 30. 2014 5.85 67.4 64.7
July 1, 2013 June 30, 2015 6.15 66.7 66.6
July 1, 2014 June 30, 2016 6.05 69.5 68.7
July 1, 2015 June 30, 2017 5.95 71.9 71.0
July 1, 2016 June 30, 2018 5.96 73.0 73.0
July 1, 2017 June 30, 2019 5.87 74.9 74.9
The contribution increases as a percentage of payroll through FY2015 are due to past asset
losses (including those from July 1, 2011 to December 31, 2011) being recognized in the
actuarial value of assets. As an offset to the contribution increases due to these losses, the
contribution savings are increasing over time as more and more partiCipants are covered by the
new plan features for new hires described in the July 1. 2011 actuarial valuation report.
~ MARSH & McLENNAN
CONSULTING. OUTSOURCING. INVESTMENTS. I I ( ~ COMPANIES
M MERCER
Page 2
February 15.2012
Ms. Susanne OeGraba
For a historical perspective, the table below shows the Board contributions from July 1, 1994
until now.
Board Contribution
Valuation Date Fiscal Year Ending as % of Payroll
July 1, 1994 June 3D, 1996 2.92
July 1, 1995 June 3D, 1997 3.30
July 1, 1996 June 30,1998 2.83
July 1,1997 June 3D, 1999 2.53
July 1,1998 June 3D, 2000 2.11
July 1,1999 June 3D, 2001 1.9B
July 1, 2000 June 30, 2002 1.89
July 1, 2001 June 30, 2003 1.86
July 1, 2002 June 30, 2004 2.06
July 1, 2003 June 30, 2005 2.74
July 1, 2004 June 30, 200S 3.30
July 1,2005 June 30,2007 4.85
July 1, 2006 June 30, 2008 4.59
July 1, 2007 June 30, 2009 4.53
July 1, 2008 June 30,2010 4.53*
July 1,2009 June 30, 2011 4.67
July 1, 2010 June 30,2012 5.12+
"The valuation resulted in a 4.37% Board contnbution rate. but MCPS continued with the same co.ntribution rate as the
previous valuation to avoid a larger increase from fiscal year 2010 to fiscal year 2011 .
... Beginning with the July 1, 2010 valuation report, the COntribution was increased with interest from July 1 to October 1
based on expected timing of the actual contribution. The FY2012 Board contribution was later revised to 5.12%, as
described in our May 13, 2011 letter, to refiect the plan changes effective July 1, 2011. PriOr to rellec1ing the plan
changes. the Board contribution would have been 5.57% of pay.
The last half of the 1990s was characterized by high asset returns, allowing a drop in the
Board contributions. The challenging market environment during 2001-2003 caused Board
contributions to increase. The plan amendment associated with House Bill 1737 caused the
spike in Board contribution for the fiscal year ending June 30, 2007. All increases in cost
sharing from the amendment (Le. phased increase in employee contributions) were reflected
fully in the contribution for the fiscal year ending June 3D, 2009. MCPS's favorable returns
on assets during 2004-2007 helped to lower contributions in FY2008 &2009. However, the
~ MARSH &MCLENNAN
, , ~ . . , COMPANIES
M t"'ERCER
Page 3
February 15,2012
Ms. Susanne DeGraba
FY2008-09 investment losses reversed these gains, and will cause higher future
contributions as the asset losses are reflected in the smoothed asset value.
There has been a great deal of volatility in the contribution rate in the past. and the causes
of this volatility will continue into the future. One of the main causes of this volatility is the
asset returns the fund generates. To calcUlate contributions, MCPS uses an actuarial value
of assets which smoothes market returns over a 5-year period, but even with this smoothing
technique, contributions and funded ratios can be volatile. The following table illustrates a
distribution of financial outcomes over the course of a one-year time period including the
potential change in the plan's funded status and the corresponding impact on the
contribution required for the fiscal year ending in 2014 assuming that all actuarial
assumptions are met. Please note that at the 50th percentile the Board contribution is lower
than the corresponding contribution in the 6-year projection table above because it
incorporates an expected 7.50% investment return, while the 6-year projection incorporates
actual unfavorable investment performance through December 31, 2011.
Fiscal Year (FY) Board ContnDution % Funded % Funded
Ending Percentile as % of Payroll AVA Basis MV,," Basis
June 30, 2014 5th 6.05 65.6 55.4
June 30,2014 10th 5.98 66.2 58.7
June 30, 2014 25th 5.86 67.3 64.2
June 30, 2014 50th 5.73 68.5 70.3
June 30, 2014 75th 5.60 69.8 76.4
June 30, 2014 90th 5.49 70.9 82.0
June 30,2014 95th 5.42 71.5 85.3
The following statement can be used to interpret the f l r s ~ row of this chart: there is a 5%
chance (or 1 chance in 20) that asset returns will be bad enough to result in a funded status
of 65.6% or lower, and a Board contribution of 6.05% of payroll or higher. Similarly, there is
a possibility that higher than expected returns will actually decrease the future board
contributions needed to fund the plan. These percentages assume a normal distribution of
returns around the mean. There is a school of thought that a normal distribution understates
the portion of returns in the tails (Le. below 10% or above 90%) of the curve.
..M;A.RSH &McLENNAN
..-:P COMPANIES
__
Page 4
Febl1Jary 15.2012
Ms. Susanne OeGraba
Assumptions and Methods for Contribution Projection
In order to complete this projection, we used the following methods and assumptions;
A 7.5% annual return on the market value of assets (gross) from the actual December 31,
2011 assets to June 30, 2012 and all future years. Reflecting the updated asset amount as of
December 31, 2011 results in an $88 million loss compared to the 7.5% assumption
Payroll and employee contributions for the current number of active participants are assumed
to increase by 1.00% for three years after 2012 to reflect lower across the board increases.
After three years, we assume that payroll will return to an ultimate rate of 2% annual
increases.
.. Based on guidance from MCPS, the active population is assumed to grow at 1 % per year. In
order to incorporate this guidance into the projections, we have made adjustments to the rate
at which normal cost and total payroll will increase. The payroll is assumed to grow with an
additional annual factor that takes into account the lower compensation typically paid to new
h;rescompared to the average for the population. Since the average pay for participants with
less than or equal to one year of service was 57% of the average pay for all participants,
payroll was assumed to grow by an additional 0.57% each year instead of 1.00%. Similarly,
the normal cost for new partiCipants is generally lower than the normal cost of an average
participant. We assumed that the normal cost increased proportionally to the normal cost of
participants as if they were in the "new plan" who had less than or equal to one year of
service in the 2011 valuation. Since the average normal cost for participants with less than or
equal to one year of service as of July 1,2011 is 41 % the average normal cost for the whole
plan, normal cost was assumed to grow at by an additional 0.41 % for determining the FY
2014 contribution.
.. Normal cost for benefits as percent of payroll is assumed to increase by 1% per year in order
to reflect the aging of MCPS' workforce given the current economic environment. This results
in a normal cost of 3.61 % of payroll for the FY2014 valuation (before the 0.41"% load
discussed in the bullet above). Normal cost is the value of benefits accrued during the year,
and is one component of the board's contribution rate after being adjusted for employee
contributions.
Total expenses are assumed to be 0.70% of beginning of year market value of assets
Benefit payments increase at a constant rate of 5.63% per year, which is the average rate of
increase from 2008-2011.
.... MARSH&McLENNAN
.. COMPANIES
MMERCER
PageS
February 15, 2012
Ms. Susanne DeGraba
We amortize unrecognized gains and losses over an open 15
M
year period. The amount of the
amortization is increasing over the next 2 years due to the smoothing of the large asset
losses in FY2009.
,. The results of the plan change effective June 30, 2011 was amortized over a closed 30 year
period, which is the same as the method used to amortize the plan change made in 2006.
We assumed that MCPS will contribute the policy contribution from the valuation each year,
which is the amount required to fund the normal cost and amortize the unfunded actuarial
accrued liability.
6enefit payments, employee contributions and expenses are assumed to occur at the middle
of each year, and employer contributions are assumed to occur 3 months into each year.
We assumed there will be no other gains or losses other than investment (due solely to
recognition of past asset losses), pay and retiree COLAs. In practice, it is quite likely there
will be gains or losses due to future asset performance, pay increases, COLAs and
demographics.
For the contribution volatility exhibit, we have relied on portfolio volatility from expected
based on Mercer's Capital Market Outlook on a time horizon.
In order to incorporate the of the savings from the July 1, 2011 plan' change, we first
calculated the estimate ultimate savings of the plan change. We calculated the Normal Cost
(NC) as if all of the current EPS participants had always been employed under the new plan
and compared that to the NC of the same population assuming they had always been
employed under the current accrual rate and contribution environment
With the ultimate impact of the plan change calculated, the of savings in the first
year is calculated as the percent reduction in NC if all particrpants with less thanoreqUial to
1 year of service were replaced with similar participants under the new plan. This percentage
reduction was applied to the NC previously calculated for the July 1, 2011 actuarial valuation
report The process of using current, short service employees as proxies for future hires was
repeated for participants with less than or equal to 2, 3, 4, 5, and 6 years of service for the
valuations accordingly. Furthermore, because of the below normal turnover
experienced over the past few years, the reduction factor was amplified by assuming that the
future turnover would be identical to the average experience for FY 2006-2008.
Unless ,otherwise noted, we used the same assumptions and plan provisions as for the 2011
valuation. We assumed there will be no changes to the valuation assumptions or provisions
in the Mure.
MARSH & MclENNAN
-.s--P COMPANIES
MMERCER
Page 6
February 15, 2012
Ms. Susanne DeGraba
Important Notices
Mercer has prepared this analysis exclusively for the Montgomery County Public Schools
(MCPS); it may not be relied upon by any other party. Mercer is not responsible for reliance
upon this letter by any other party.
The only purpose of the letter is to provide an idea of the possible pattern of future
oontribution rates and funded ratio changes. The letter may not be used for any other
purpose; Mercer is' not responsible for the consequences of any unauthorized use.
Decisions about benefit changes, granting new benefits, investment policy, funding policy,
benefit security and/or benefit-related issues should not be made on the basis of an analysis
using a single set of assumptions, but only after careful consideration of alternative
economic. finanCial, demographic and social factors, including financial scenarios that
assume sustained investment losses.
MCPS is solely responsible for selecting the plan's investment policies, asset allocations and
individual investments. Mercer's actuaries have not provided any investment advice to
MCPS.
This letter includes or is derived from projections of future funding and/or accounting costs
and/or benefit related results. To prepfilre these projections or results, various actuarial
assumptions, as described in this letter and the 2011 actuarial vaJuatio,n reports were used
to project a limited number of scenarios from a range of possibilities. However. the future is
uncertain, and the plan's actual experience wil! likely differ from the assumptions utilized and
the scenarios presented; these differences may be significant or material. In addition .
different assumptions or scenarios may also be within the reasonable range and results
based on those assumptions would be different. This letter has been created for a limited
purpose, is presented at a particular point in time and should not be viewed as a prediction
of the plan's future financial condition. To prepare the results shown in this letter, various
actuarial methods, as described in this letter and the 2011 actuarial valuation report were
used.
Because modeling all aspects of a situation is not possible or practical, we use summary
information, estimates, or simplifications of calculations to facilitate the modeling of future events
in an efficient and cost-effective manner. We also exclude factors or data that are immaterial in
our judgment. Use of such Simplifying techniques does not. in our judgment, affect the
reasonableness of projected vaJuationresults for the plan.
To prepare this analysis, actuarial assumptions as described herein and in the July 1, 2011
actuarial valuation report are used in a forward looking financial and demographic model to
tII!:.d'IlII MARSH &McLENNAN
1 i I I ~ COMPANIES
MMERCER
Page 7
February 15, 2012
Ms. Susanne DeGraba
present a single scenario from a wide range of possibilities. The results based on that single
scenario are included in this letter. The future is uncertain and the plans' actual experience will
differ from the assumptions used; these differences may be significant or material because these
results are very sensitive to the assumptions made and, in some cases, to the interaction
between the assumptions.
Different assumptions or scenarios within the range of possibilities may also be reasonable and
results based on those assumptions would be different As a result of the uncertainty inherent in
a forward looking projection over a very long period of time, no one projection is ucorrect" and
many alternative projections of the future could also be regarded as reasonable, Two different
actuaries could, quite reasonably, arrive at different results based on the same data and different
views of the future. Due to the limited scope of Mercer's assignment, Mercer will not perform or
present an analysis of the potential range of future possibilities and scenarios unless requested.
At MCPS's request, Mercer is available to determine the cost of a range of scenarios.
Actuarial assumptions may also be changed from one valuation to the next because of changes
in mandated requirements, plan experience, changes in expectations about the future and other
factors. A change in assumptions is not an indication that prior assumptions were unreasonable
when made.
The calculation of actuarial liabilities for valuation purposes is based on a current estimate of
future benefit payments. The calculation includes a computation of the "present value" of those
estimated future benefit payments using an assumed discount rate; the higher the discount rate
.assumption, the lower the estimated liability will be. For purposes of estimating the liabilities
(future and accrued) in this letter, you selected an assumption based on the expected long term
rate of retum on plan investments. Using a lower discount rate assumption, such as a rate based
on longterm bond yields. could substantially increase the estimated present value of future and
accrued liabllities, thus increasing the sevlngs estimated in this letter, but also increasing the cost
of the remaining benefits.
Because analyses are a snapshot in time and are based on estimates and assumptions that are
not precise and will differ from actual experience. contribution calculations are similarly
imprecise. There is no actuarially correct" level of contributions for a particular plan year.
Valuations do not affect the ultimate cost of the Plan, only the timing of contributions and/or
expense recognition into the Plan. Plan funding occurs over time. Contributions not made one
year, for whatever reason, including errors, remain the responsibility of the plan sponsor and can
be made in later years. If the contribution levels over a period of years are lower or higher than
necessary, it is normal and expected practice for adjustments to be made to future contribuUon
levels to take account of this with a view to funding the plan over time.
~ MARSH & McLENNAN
I/IIII:-:P COMPANIES
MMERCER
PageS
February 15, 2012
Ms. Susanne DeGraba
Oata, computer coding, and mathematical errors are possible in the preparation of an analysis
involving complex computer programming, thousands of calculations and data inputs, and limited
time to complete the analysis. Errors in an analysis discovered after its preparation may be
corrected by amendment to the analysis letter.
Assumptions used are based on the last experience study. as adopted by the Board. IVICPS is
responsible for selecting the plan's funding policy, actuarial valuation methods. asset valuation
methods, and assumptions. The policies, methods and assumptions used in this analysis are
those that have been so prescribed and are described in the July 1, 2010 valuation report. MCPS
is solely responsible for communicating to Mercer any changes required thereto.
To prepare this analysis, Mercer used and relied on financial data and participant data supplied
by MCPS and summarized in the July 1,2011 actuarial valuation report. Mercer also included an
updated trust asset value of $990 million provided by Jon Grabel at January 1. 2012. You are
responsible for ensuring that such participant data provides an accurate description of all
persons who are participants under the terms of the Plan or otherwise entitled as of the date of
the analysis that is SUfficiently comprehensive and accurate for purposes of this analysis.
Although Mercer has reviewed the data in accordance with Actuarial Standards of Practice
No. 23, Mercer has not verified or audited any of the data or information provided.
Mercer has also used and relied on the plan documents, including amendments, and
interpretations of plan provisions, supplied by MCPS and will assume for purposes of the
analysis that copies of any official plan document, including all amendments and collective
bargaining agreements, as well as any interpretations of any such document, have been
provided to Mercer along with a written summary of any other substantive commitments. MCPS
is solely responsible for the validity, accuracy and comprehensiveness of this information. If the
data or plan provisions supplied are not accurate and complete, the analysis results may differ
significantly from the results that would be obtained with accurate and complete information; this
may require a later revision of the analYSis. Moreover, plan documents may be susceptible to
different interpretations. each of which could be reasonable, and that the different interpretations
could lead to different valuation results.
MCPS should notify Mercer promptly after receipt of thjs letter if MCPS disagrees with anything
contained in the report or is aware of any information that would affect the results of the report
that has not been communicated to Mercer or incorporated therein. The report will be deemed
final and acceptable to MCPS unless MCPS promptly provides such notice to Mercer.
The information contained in this document (including any attachments) is not intended by
Mercer to be used, and it cannot be used, for the purpose of avoiding penalties under the
Internal Revenue Code that may be imposed on the taxpayer.
..MARSH &MctENNAN
1fI;;w":JJ COMPANIES
M rv1ERCER
Page 9
February 15, 2012
Ms. Susanne DeGraba
Professional Qualifications
We are available to answer any questions on the material contained in the report, or to .
provide explanations or further details as may be appropriate. The undersigned credentialed
actuaries meet the Qualification Standards of the American Academy of Actuaries to render
the actuarial opinion contained in this report. We are not aware of any direct or material
indirect financial interest or relationship, including investments or other services that could
create a conflict of interest, that would impair the objectivity of our work. Please call Doug
Rowe at410 347 2806 or Colin Bracis at 202331 5294 if you have any questions or
concems regarding the projections.
Sincerely,
Colin Bracis, ASA, EA, MAAA
Copy:
Jonathan Grabel, MCPS
Matt Fishel, Mercer
Enclosure
'..
.... MARSH&McLENNAN
I I I ( ~ COMPANIES
Attachment B
_MERCER
Addendum to the February 15, 2012 "Six-Year Projection
of Board Contributions to MCPS's Pension Plans" Letter
As you requested, we have updated the projected Board contributions and funded ratios to
the Montgomery County Public Schools Employees' Retirement and Pension Systems (the
"Plan") for the next six years to incorporate the updated market value of assets of $1 ,040
million as of February 14, 2012 provided by Jon Grabel.
Fiscal Year (FY) Board Contribution 0/0 Funded 0/0 Funded
Valuation Date Ending as % of Payroll AVA Basis MVA Basis
July 1. 2011 June 30.2013 5.42 70.1 68.5
July 1, 2012 June 30,2014 5.81 68.0 67.7
July 1, 2013 June ~ . 2015 6.02 68.1 69.7
July 1, 2014 June 3 ~ . 2016 5.85 71.5 71.8
July 1. 2015 June 30,2017 5.69 74.4 74.0
July 1, 2016 June 30,2018 5.64 75.9 75.9
July 1, 2017 June 30.2019 5.55 n.6 n.6
Data, assumptions, methods, and plan proviSions utilized in the above calculations are
detailed in the February 15, 2012 letter.
Please also refer to the Important Notices outlined in the February 15, 2012 letter.
g:IWp511db1mcp,jlslx year proJectioo lelter,.2012 eddeodi.lm.doe
.... MARSH&McLENNAN
CONSULTING. OUTSOURCING. INVESTMENTS. ~ COMPANIES .
Attachment C
Douglas L. Rowe, FSA, MAAA, EA
Principal
One South Street, Suite 1001
_MERCER
Baltimore. MD 21202
+14103472806
Fax +1 4107273347
douglas.rowe@mercer.com
www.mercer.com
Via Electronic Mail
Susanne G. DeGraba
Rockville. MD 20850
February 17. 2012
Subject: Funded ratio of the Employees' Retirement and Pension Systems
Dear Sue:
The purpose of this letter is to respond to your question about ways to improve the funded ratio of
the Employees' Retirement and Pension Systems. We will leave out most of the theory and just
cover the options themselves for improving the plan's funded ratio. If you want more background
or theory. please let us know. Some of the options may not be practical now or anytime soon, but
we'll mention them anyway for the sake of comprehensiveness.
You've probably seen the following equation used to explain the ultimate cost of retirement
programs.
Contributions (emp/oyer and employee) + investment earnings = Benefits + expenses
. The same four elements control your funded ratio, but with a few twists.
For example, MCPS already contributes each year to cover plan expenses. So the only way that
reducing ptan expenseswould help to improve the funded ratio is if you continued to contribute
the higher amount even after reducing expenses.
Lower benefits reduce liabilities and, everything else being equal, improve the funded ratio. Lower
benefits can come from plan amendments. such as last year'S change or lower pay as your phm
has experienced over the last couple of years due to budget constraints. Someone using
employer contributions as the measure of individual pension remuneration and believing in a total
remuneration approach might argue for lower pay increases when pension contributions increase
regardless of budget constraints.
Higher investment income improves the funded ratio. The amount of investment income can be
increased by increasing plan assets. A higher rate of investment income usually has risk
implications and its timing can't be controlled. For many years during the last quarter of the 20th
century, investment gains led to significant improvements in funded ratios for many public sector
plans and, in some plans. Significant improvements in benefits. Few investment advisors seem to
expect this to be a significant source of actuarial gain over the next 10 years considering that
~ MARSH & McLENNAN
CONSULTING.OUTSOURCING,INVESTMENTS.
. ~ " COMPANIES
"MERCER
Page 2
February 17, 2012
Susanne G. OeGraba
investment performance needs to exceed the Plan's investment return assumption of 7.50% in
order to generate gains. Reducing the assumption could lead to actuarial gains, but would also
reduce the Plan's funded ratio immediately.
Higher employee contributions only improve the funded ratio if the employer doesn't reduce its
contributions correspondingly. When the budget allows. you might consider reversing some or aU
of the reduction in MCPS contributions that you recognized for the July, 2011 increase in
employee contributions until the funded ratio reaches the desired level.
That leaves higher employer contributions as the only other way to improve the funded ratio more
quickly than it otherwise would improve. Increasing contributions to improve the funded ratio
involves a trade off between higher volatility in contributions (if you only want to contribute extra
when the funded ratio is below a desired level). higher contributions (if you're willing to contribute
more regardless of the fL!nded ratio) and slower improvement in funding ratio. In other words, if
you want to increase the funded ratio quickly when it's low, you have to be ready to increase
contributions quickly in meaningful amounts. Before we go into detail on forms of higher
contributions, we would like to like to describe what the combination of actuarial cost methods and
current GASB standards are suppose to do and what can go wrong.
Most
1
actuarial cost methods produce (1) a Normal Cost and (2) an Unfunded Actuarial Accrued
Liability (UML) to amortize to reach 100% funding. If the amortization period is closed (a GASB
term meaning that the remaining amortization period is reduced each year until it reaches zero), in
the absence of future actuarial gains/losses. assumption changes, or plan changes, the UAAL will
eventl;lally reach zero. GASB allows average amortization periods of up to 30 years and allows
both level dollar amortization and level percentage of assumed payroll amortization. long
amortization periods and level percentage of assumed payroll amortization can result in the UML
increasing for many years before it finally decreases back to its original amount and then to zero.
The plan change portions of MCPS's UML are in this increase period now. For example. the
UAAL for the 2006 improvement increased from $124.2 million at July 1, 2010 to $125.2 million at
July 1j 2011, but this $1 million increase is only 0.07% of the AAL so its impact of the funded ratio
is minimal. Please also note that the funded ratio can improve even while the UAAL is increasing.
GASB also a1Jows open amortization. This means that in the absence of plan changes,
assumption changes, or future actuarial gains/losses, the UAAL will never reach zero because the
1 A relatively small percentage of plans use a cost method that does not directly caiculate an
Actuarial Accrued Liability (ML) each year.
.... MARSH&McLENNAN

_MERCER
Page 3
February 17, 2012
Susanne G. DeGraba
UAAL is re-amortized over its set period every year. MCPS uses this method and a 15 year
amortization period for actuarial gainsllosses and assumption changes in order to reduce the
volatility of contribution reqUirements. You might say that this approach depends on future
actuarial gains to offset past actuarial losses in order to reach 100% funding. Or you might say
that this approach serves to continually improve the plan's funded status and funding ratio, but by
a smaller and smaller margin each year so that the funded status will never reach 100% without
actuarial gains, assumption changes, or plan changes. Under the GASB Exposure Drafts,
continuing to use this method may have negative consequences for plan accounting, Le. the
required use of a discount rate based on a combination of expected plan asset returns and
municipal bond returns (GASB has stated that it is not trying to govern plan funding).
Relatively few plans use a cost method that does not directly calculate an Actuarial Accrued
Liability (AAL) each year.
The things that can prevent this designed progression to 100% funding are actuarial experience
losses (e.g. lower than assumed investment returns, higher than assumed pay increases or retiree
COLAs, retirees living longer than assumed, a lag in actually contributing higher amounts when
contribution requirements are increasing, etc.), changes in actuarial assumptions. and plan
improvements. Of course, actuarial gains and benefit reductions can improve the funded ratio.
At July 1,2011, MCPS had UAAL of $435 million due to a combination of:
The UAAL amount of $176 million in 2005 when the amortization period was re-set. This
included assumption changes made at that time, one of which was the reduction in the
investment return assumption from 8% to 7.5%.
A net of $1 08 million due a plan improvement in 2006 and a benefit reduction in 2011
Actuarial losses and changes in actuarii;lI assumptions since 2005
In the addendum to our letter dated February 15, 2012, our projections show the AVA funded ratio
improving from 70.1 % at July 1, 2011 to 77.6% at July 1, 2017 based on February 14, 2012 plEin
assets (or 74.9% projecting from December 31,2011 assets which were $50 million lower). During
this projection period $24 million of pre-July 1, 2011 actuarial investment losses (compared to the
assumption) will be recognized in the AVA as will approximately $40 million using February 14,
2012 plan assets (or $88 million using December 31, 2011 assets) of actuarial investment losses
from July 1. 2011 through December 31,2011. Those projections assume no other actuarial
gains/losses except the impact of the one year lag between the valuation date and the date that
the contribution rate changes. The projections do not show steady improvement from 70.1 % to
~ MARSH&McLENNAN
~ : - . p COMPANIES
_MERCER
Page 4
February 17, 2012
Susanne G. OeGraba
77.6% (or 74.9%). They show the AVA funded ratio dipping to 68.0% (or 66.7%) due to'
recognition of investment losses in the AVA and then steadily improving to 2017.
Here are some possibilities for improving the funded ratio more that it would otherwise improve.
Choose a dollar amount of additional contributions. Since the ML was $1.454 billion at July 1,
2011, an additional contribution of $14.54 million on that date would have improved the funded
ratio by 1%. The AAL is likely to grow for the foreseeable future, so the cost of each 1%
improvement is likely to grow. An extra half or quarter of a percent might be worthy goals also,
with proportionately lower cash requirements. For any given dollar amount or improvement
percentage. multi-year additional contributions will have more impact than only one additional
contribution. '
Avariation on the extra contribution concept is to make the extra contributions any time the
funded ratio falls below your minimum desired level and to make the extra contributions
until the funded ratio returns to the desired level. This policy could result in high
contribution volatility.
One way to increase contributions is to reduce the amortization period. For accounting
purposesGASB has proposed a period equal to the average remaining expected work years
of active participants. We'll be measuring that period for MCPS as we look at the GASB
proposals. The period probably is closer to 10 years than it is to 15 and may be even shorter
than 10 years. If we had used a 10 year amortization period in the 2011 valuation instead of a
combination of 15. 25 and 29 years remaining, the contribution for FY 2013 would have
increased by $16.8 million. You could phase down the amortization period instead of jumping
all the way to 10 years. Using 15 years for all UML would have only increased the FY 2013
contribution by $2.6 million; using 14 years would have meant a $4.6 million increase
(cumulative. not in addition to the $2.6 million).
Alternatively. you might accelerate the amortization only for the portion of UAAL below a
specified minimum goal. You were $143.9 million below 80% funded on July 1, 2011 and
$2&9.3 million below 90% funded at that time. Additional contributions to fund those shortfalls
over 5 or 10 years instead of 15 would have been as follows.
Funding goal
Amortization period 80% 90%
5 years $18.9 million $38.0 million
10 years $4.7 million $9.4 million
.. MERCER
Page 5
February 17, 2012
Susanne G. DeGraba
If you had that policy in 2010, the additional contributions would have been even higher.
Please note that we do not mean to imply that either 80% or 90% should be your ultimate
funding ratio target, only that they may be sufficient targets for accelerated contributions.
While improvement in the funded ratio is an important goal, the need for additional steps to speed
that improvement and the priority of that goal versus other budget considerations are less clear. In
the absence of further actuarial losses or plan improvements, the six year projections in the
February 15, 2012 letter show the funded ratio dipping then improving over the next six years.
Only you can decide whether that improvement will be sufficient to satisfy bond rating agencies.
constituents, etc. Your 7.5% investment return assumption and 15 year amortization period
probably are better than the average public sector plan's already, but they aren't on the leading
edge. A shorter amortization period would move you toward the leading edge and closer to the
GASS Exposure Drafts' accounting requirements. Remember that GASS only governs
accounting, not funding. We recommend that you consider the implications under a range of
economic scenarios before making any change in funding policy.
The liability, contributions and funded ratios in this letter are based on the data, assumptions,
actuarial methods, plan provisions and important notices shown in the 2011 Actuarial Valuation
Report dated October 17.2011 and the Six-Year Projection letter dated February 15,2012.
The undersigned credentialed actuaries meet the Qualification Standards of the American
Academy of Actuaries to render the actuarial opinion contained in this document. We are not
aware of any relationship. including investments or other services that could create a con11ict-of
interest that would impair our objectivity.
Sincerely,

FSA, MAAA. EA Colin Bracis, ASA. MAAA, EA,
Principal Senior Associate
MF/DLR:CB/elb
fundlng 02172012.doc
....... MARSH & McLENNAN

MCPS Employee Benefit Trust Fund
Attachment D
Schedule of FY2012 Actual Expenditures for the Active Employee Trust Account
As of June 30,2012 (Actual Through February 29, 2012)
FY12 Projected Variance
Projection YTDactual Remaining Total Fav - (Unfav)
Revenue Receipts:
County Appropriation 215,479,223 211,391,723 4,087,500 215,479,223
Enterprise Funds 8,683,933 5,182,596 3,501,336 8,683,933
Capital Projects 775,679 485,567 245,219 730,785 (44,894)
Supported Programs 6,577,451 4,608,540 2,680,810 7,289,350 711,899
Employee Payments 22,559,100 14,041,405 8,682,716 22,724,121 165,021
Optional Life 686,026 409,163 271,328 680,491 (5,535)
Investment Earnings 29.370 14.553 11.882 26,435 (2,935)
Rebates/ Recoveries/Other 5,923,584 4.805,946 939.575 5.745.521 (178,063}
Total Revenue 260.714,366 236,481,749 24,878,110 261,359,860 645,494
Expenditures:
Premiums:
Prudential Life 3,506,400 2.361,515 1,195,385 3,556,900 (50.500)
Aetna Dental 1.920,800 1,217.556 619,454 1,837.010 83,790
Kaiser Permanente Health Plan 39.675.600 25,347,339 13.449,386 38,796.725 878,875
All Other 9.893,280 6.709.888 3,395,144 10,105,033 (211,753)
Claims:
Dental 13,171,785 8,611,118 4,486,900 13,098,018 73,767
Health 140,959,162 90,574,266 47,263,800 137,838,066 3,121,096
Prescription 53.596,565 35,625,461 18,311,800 53,937,261 (340,696)
Vision 172,034 94.623 50.500 145,123 26.911
Administrative Expenses 940,197 28,354 920.089 948,443 (8,246l
Total Expenditures 263,835,823 170,570,120 89,692,458 260,262
1
578 3,573,246
(3,121,457) 1.097
1
282 4.218.139
Schedule of FY2013 Actual Expenditures for the Active Employee Trust Account
As of January 31,2013 (Actual Through January 31,2013)
FY13
Budget/Projection YTO actual
Revenue Receipts:
County Appropriation 224,902,252 220,802,252
Enterprise Funds 9,060,134 4,421,535
Capital Projects 861,279 564,286
Supported Programs 6,414,517 3,726,696
Employee Payments 23,717,650 12,068,235
Optional Life 679,146 366,233
In\estment Eamings 26,249 19,766
Rebates! Reco\eriesfOther 4,421,798 2,786,687
Projected
Remaining
4,100,000
..
4,696,906
362,818
3,281,245
11,915,074
336,519
11,577
966,945
Enclosure C
Variance
Total Fav - (Unfav)
224,902,252
9,118,441 58,307
927,104 , 65,825
7,007,940 593,423
23,983,309 265,659
702,752 23,606
31,343 5,094
3,753,632 (668,166)
Total Revenue 270,083,025 244,755,690 25,671,084 270,426,773 343,748
Expenditures:
Premiums:
Prudential Life 3,594,298 2,138,694 1,542,123 3,680,818 (86,520)
Aetna Dental 1,902,233 1,079,662 810,153 1,889,815 12,418
Kaiser Pennanente Health Plan 39,842,292 23,005,983 16,486,234 39,492,217 350,075
r
All Other 10,279,285 5,918,565 4,275,476 10,194,041 85,243
Claims:
Dental 13,641,544 7,114,682 5,886,799 13,001,482 640,062
Health 152,064,904 81,414,460 61,717,819 143,132,279 8,932,625
Prescription 52,156,925 28,088,992 20,434,368 . 48,523,360 3,633,565
Vision 152,099 83,281 63,800 147,081 5,018
Administrative Expenses: 963,282 706,393 396,158 1,102,551 (139,269)
Total Expenditures 274,596,862 149,550,713 111,612,931 261,163,644 13,433,217
(4,513,837) 9,263,129 13,776,965
Enclosure D
Schedule of FY 2013 Actual Expenditures for the Retired Employee Trust Account
-As of January 31,2013 (Actual Through January 31, 2013)
FY13 Projected Variance
Budget/Projection YTO actual Remaining Total Fav (Unfav)
Revenue Receipts:
County Appropriation 49,258,001 48,358,001 . 900,000 49,258,001
Retiree Payments 29,314,051 17,670,337 12,079,046 29,749,383 435,332
r
Imestment Earnings 6,061 3,500 9,561 9,562
Rebatesl Recol.eries/Other 4,217,000 1,553,189 1,668,943 3,222,132 (994,868)
Medicare Part 0 Reimbursements 3,050,000 1,950,162 1,808,183 3,758,345 708,345
Total Revenue 85,839,052 69,537,750 16,459,671 85,997,421 158,370
Expenditures:
Premiums:
Prudential Life 2,143,200 1,277,819 923,498 2,201,317 (58,117)
Aetna 369,030 216,507 158,348 374,855 (5,825)
Kaiser Permanente Health Plan 6,717,000 4,036,206 2,937,142 6,973,348 (256,348)
All Other 3,502,200 2,063,271 1,460,173 3,523,444 (21,244)
Claims:
Dental 4,649,000 2,433,997 1,910,290 4,344,288 304,712
Health 35,382,300 18,383,547 14,623,895 33,007,443 2,374,857
Prescription 30,932,700 20,339,729 12,508,133 32,847,862 (1,915,162)
Vision 59,000 34,689 25,400 60,089 (1,089)
Administrative Expenses:
386,799 133,681 203,982 337,663 49,136
Total Expenditures 84,141,229 48,919,447 34,750,862 83,670,309 470,920
1,697,823 2,327,113 629,290

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