CSG Policy Academy Public Pensions and Retirement Security “Actuarial Valuations and Your State Budget” Presented by Ed Koebel, EA, FCA, MAAA Principal and Consulting Actuary Cavanaugh Macdonald Consulting, LLC.
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Funding Equation: C + I = B + E OUTFLOW: INFLOW: Contributions Benefit Payments + + Investment Income Expenses
Discount Rate ➢ Investment rate reflects what the pension plan’s assets can reasonably be expected to earn over the long term. ➢ Discount rate is used in the determination of the present value of a stream of benefit payments in today’s dollars. ➢ By moving assets and discounting back benefit payments at the same rates provides for level funding. ➢ Discount rate plays a key role in assessing whether a plan has enough assets to meet its pension obligations. ➢ Must be realistic to avoid masking plan funding issues that could impact future generations of members and/or taxpayers.
Volatility vs. Predictability Market Value Rate vs. Discount Rate Assumptions 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 -5.00% -10.00% -15.00% -20.00% Return 8% 7%
Determining Discount Rate ➢ Analysis may include: ▪ Long term historical information ▪ Recent experience ▪ Forward looking modeling ▪ Peer system comparison
Determining Discount Rate ➢ Discount Rate made up of: ▪ Price Inflation Rate – Consistently applied to Discount Rate, Salary Scale and Cost of Living Adjustments ▪ Real Rate of Return – Reflects the Asset Portfolio as adopted by Board and Capital Market Assumptions as provided by Investment Consultant
Determination of Discount Rate * Time-weighted, net of fees, annualized market rates of return for the pooled investment assets
Peer Comparison Source: NASRA Public Fund Survey
Other Discount Rates? ➢ Accounting ▪ Under Governmental Accounting Standards Board (GASB) Statements 67 and 68, pension plans and their employers must place their portion of the unfunded liability on the financial statements at potential municipal bond discount rates ➢ Bond – Rating Agencies ▪ Moody’s and Fitch assess the creditworthiness of sponsors of pension plans using discount rates independent of investment portfolio of plan Stress test pension plan liabilities at rates below any ▪ funding discount rates
Funded Scenarios Projection of Funded Ratio under Several Scenarios 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 Valuation Year Baseline (7.5% Discount Rate) Under Funding - 75% of ADEC Contributed Lower Returns - 6% Market Return Each Year Assumes closed amortization method with separate bases
Actuarially Determined Employer Contribution (ADEC) Scenarios Projection of ADEC under Several Scenarios $5,000 $4,500 $4,000 $3,500 Millions $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 Baseline (7.5% Discount rate) Under Funding - 75% of ADEC Contributed Lower Return - 6% Market Return Each Year Assumes closed amortization method with separate bases
Amortization of Unfunded ➢ Amortization of Unfunded Accrued Liability (UAL) has become a major component of actuarial contribution rate in recent years ➢ Amortization policy decisions ▪ One base or multiple bases ▪ Amortization period open or closed ▪ Length of amortization period ▪ Payment is level dollar or level percent of pay
Sample of Contributions under Different Amortization Methods Projection of UAL Payments as a Percent of Payroll using Two Different Amortization Methods 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 Fiscal Year Level Percentage of Payroll Level Dollar
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