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Home My WebLink AboutCalPERS Proposed Actuarial Valuation - Presentation by JohnCITY OF H NTINGTON I EACII B RT E L MISCELLANEOUS AND SAFETY PLANS SS0C1A'1-I:S. LL.L CalPERS Actuarial Issues — 6/30/11 Valuation Preliminary Results Presented by John E. Bartel Prepared by Bianca L in Tina Haugbro Bartel Associates, LLC" April 15, 2013 Agenda Topic Ca1PERS Issues PEPRA Impact GASB 68 Contribution Rate Projections Safety Miscellaneous Summary Recommendations Append ix/Definitions Pap-e 1 3 7 it 19 26 27 28 clicntr Cth o0unnngum le ach prilo tx calfv, (011-11 ha hunttagumthcachd I A-04-1! calms In1w snfch i i -ftnnl doc,% ■ ■ CaIPERS Issues CalPERS actuarial staff is looking to make some changes to their contribution policy. Four reasons why: • Asset corridor generates volatility when extreme events happen • Slow progress towards increased funded status • Current method needs improved transparency • GASB 68 encourages faster funding by requiring a lower discount rate for slower funding CaIPERS looking at following alternatives: • No asset corridor in conjunction with shorter smoothing period and fixed (likely shorter) amortization periods • Direct rate smoothing based on: ❑ 5 year ramp up ❑ No asset smoothing ❑ 25 year amortization period ❑ No cap on rate increases each year (1171) April 15. 2013 1 F ■ ■ ■ Ca1PERS Issues Chief Actuary recommended to Board in March direct rate smoothing (final reading in April): • Will likely result in much higher contribution rates and higher volatility in normal years but much less volatility for extreme events • May be easier for Board to accept assumption changes (see below) if included in direct rate smoothing Ca1PERS starting an assumption study and Chief Actuary will likely recommend generational mortality improvement Ca1PERS starting an asset allocation study and Chief Actuary will: • Likely recommend a .25% margin • Possibly recommend .25% reduction in real rate of return. Timing: • All the above will likely be included in 6/30/13 valuation (first impact 15/16 rates) but will be estimated as part of 6/30/12 valuation when they project contribution rates. a' ,l April 15, 2013 2 Contribution Projections PEPRA Impact ■ AB 340 (PEPRA) was adopted on September 12, 2011 ■ Creates new tiers for both Safety and Miscellaneous Plans ■ Market Value Investment Return: • ,June 30, 2011 21.7% • June 30, 2012 1.0%1 • June 30, 2013 - 2016 Expected Investment Ret: 7.25% ■ No Other: Gains/Losses, Method/Assumption Changes, Benefit Improvements ■ Excludes Employer Paid Member Contributions (EPMC) ■ No phase in on the impact of assumption changes ■ New hire assumptions: • Assumes 50% of 2013 new hires will be Classic Members (Lateral) and 50% will be New Members with PEPRA benefits. • Assumes Classic Members will decrease from 50% to 0% of new hires over 10 years for Safety Members, 20 years for Miscellaneous Members. Based on CaIPERS press release. April Ii. 2013 3 Contribution Projections Safety Impact of PEPRA 7.5% Expected Return 0V-0 500:0 30% �po:o 11"13 13 14 14/15 15,16 16/17 17/18 l 8!19 19'20 —Currenov o PEPRA 35.0% 38.806 39.3% 39.6% 39.8% 40.0% 40.:.% 40.4% Currentt,'PEPRA 35.0% 38.8% 39.3% 39.5% 39.6ONO 39.406 39.3% 39.1% n April 15. 201 El Contribution Projections Miscellaneous Impact of PEPRA 7.5% Expected Return ^a, *4V70 35P0 300o "500 2000. 1500 10°0 12 13 13 14 14 15 15 16 16 17 17 18 18 19 1920 �— Currentw oPEPRA 16.3%0 21.40,o 2=.000 22.5°0 22.9% 23.3% 23.7% 24.0% Current mv PEPRA 16.3% 21.4% 22.000 :2.4?o 22.8% 23.1% 23.40,o 23.'70o April 1 >. 2013 5 Contribution Projections Miscellaneous This page is intentionally left blank. April15.2013 G GASB 68 ■ Pension Accounting: • GASB 68, Accounting for Employers, approved June 25, 2012 • Replaces GASB 27 • Effective 2014/15 ■ Major Issues: • Unfunded liability on balance sheet (currently only in notes) • Expense calculation disconnected from funding calculation • Discount rate is ❑ Expected return on plan assets when assets sufficient to pay benefits ❑ Municipal bond rate when assets not sufficient to pay benefits Likely cactse C'aIPERS to morlify asset smoothing and/or amortization policy to avoid llsing, tliscount rtlte lower than e.vpected return (7.5%). ■ June 30, 2011 Unfunded Actuarial Liability (in Millions) Total Pension Fiduciary Net — --- Net Pension Plan Liability AAL Position MVA Liability UAL Safety $531.8 $358.7 $173.1 Miscellaneous 415.2 309.6 105.6 Total Net Pension Liability $278.7 1 April 15, 2013 7 GASB 68 ■ CalPERS: • Actuaries going to Board for approval to make necessary system changes & need approval before they can do anything. • Will likely not be ready to provide information for fiscal years < 2014/15. • Expect to provide information but only upon request. • Will charge small fee. )!, April 15.2013 Current Ca1PERS Asset Smoothing & Amortization Policy Sample Safety Plan GASB 68 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 1/1/11 1/1/21 nol April 15, 2013 1/1/31 1/1/41 1/1/51 1/1/61 1/1/71 1/1/81 1/1/91 9 0 500,000 450,000 400,000 350,000 300,000 2509000 200,000 150,000 100,000 50,000 Modified CalPERS Asset Smoothing & Amortization Policy Sample Safety Plan GASB 68 1/1/11 1/1/21 1/1/31 1/1/41 1/1/51 1/1/61 1/1/71 1/1/81 1/1/91 1) April 15, 2013 10 ■ ■ L Contribution Projections Safety In addition to above assumptions: • Proposed Amortization Periods and Smoothing Methods ❑ P&HBC Agenda Item 7 ❑ 5 Year Direct Rate Smoothing ❑ 25 Years (Fixed) Amortization Period of Gains and Losses, paid over 30 years Assumes changes take place June 30, 2013 affecting 2015/16 contribution rates We expect Ca1PERS will amortize the smoothing method change paid over 30 years. ( IlMOM April 15, 2013 Contribution Projections Safety Impact of Direct Rate Smoothing, 7.5% Expected Return VU" 0 400o 30% 20o/a 12/13 13,114 14115 15/16 16/17 17/18 18/19 19/20 —t—CunentAsset Method 35.0% 38.8% 39.3% 39.5% 39.6% 39.4% 39.3% 39.1% * Direct Rate Method 35.0% 1 38.8% 1 39.3% 1 40.9% 1 42.2% 1 43.3% 44.4% 45.6% nb- April 15, 2013 12 Contribution Projections Safety ■ In addition to above assumptions: • Proposed Amortization Periods and Smoothing Methods; • Discount rate change from 7.50% to 7.25%; and • Anticipated mortality assumption changes. ■ Above changes assumed to take place June 30, 2013 affecting 2015/16 contribution rates ■ We expect Ca1PERS will amortize the above changes as follows: • The smoothing method change will be paid over 30 years. • The discount rate and mortality changes will be paid over 20 years. 1)7) April 15, 2013 13 n 60,0 ;00o 40° o -000 Contribution Projections Safety Impact of Direct Rate Smoothing, 7.25%Discount Rate and 'Mortality Changes 7.25% aS 7.5% Expected Return i .4-- A t. 20°l0 12 13 13 111 14 15 15'16 16 17 1718 18,19 1920 fC'urrentAsset Method 35.0°0 38.8*0 39.30o 39 5°o 39.6% 39.4% 39.3% 39.100 DR Method, 11ort &. DR 35.00o 38.8% 39.3*0 44.3% 46.7% 49.1'0 51.30,,0 53.5% April 15. 201 3 14 Contribution Projections Safety ■ Market Value Investment Return: • June 30, 2011 • June 30, 2012 • June 30, 2013 - 2016 Based on CalPERS press release. (1 1) April 15, 2013 Poor Investment Return: Expected Investment Ret: Good Investment Return: 15 21.7% 1.0%' 0.2% - 3.4% 7.25% 11.6% - 15.1% n Contribution Projections Safety Direct Rate Smoothing, 7.275% Discount Rate and Mortality Changes Impact of Investment Return on ER Rates 650o 600 o 5500 5000 450o 400 o ;coo 30% -*-All W 3 Changes -Poor IR -*-All %X* 3 Changes • Esp IR -*-All fit' 3 Changes - Good IR April 15. 2013 12 13 13'14 14'15 1516 1 1617 1- 18 18119 19'20 35.0°o 38.8°o 39.3% 44.6% 48.3% 52.-% 5'. % 62.5°o 35.0°0 38.806 39.1% 44.30o 46.'?'o 49.10o 51.3% 53.5% 35.0% 38.806 39.30o 43.99-0 -14.9010 45.0°,0 44.1?0 42.40.0 V Contribution Projections Safety Direct Rate Smoothing, 7.25% Discount Rate and Mortality Changes Impact of Investment Return on ER Rates (S Millions) QN-1. I- S30 Annual Employer Conuibution s-5 S20 S15 slo 12r13 13/14 14/13 1546 16117 17/18 18i19 I9120 -*-- All W 3 Changes - Poor IR S15.8 $16.7 S17.4 S20.4 $22.7 $25.5 S28.6 S32.1 f All W 3 Changes - Exp IR $15.8 S16.7 S17A S20.2 $21.9 S23.8 $25.6 S27.5 ♦- All W 3 Chwgvs - Good IR S15.8 S 16.7 S 17.4 S20.0 S21.1 $21.8 $22.0 $21.9 *Dollar amounts reflect employer contribution only and does not reflect EPMC. April 15.2013 17 April 15,2013 Contribution Projections Safety This page is intentionally left blank. 18 u Contribution Projections Miscellaneous ■ In addition to above assumptions: • Proposed Amortization Periods and Smoothing Methods ❑ P&HBC Agenda Item 7 ❑ 5 Year Direct Rate Smoothing ❑ 25 Years (Fixed) Amortization Period of Gains and Losses, paid over 30 years ■ Assumes changes take place June 30, 2013 affecting 2015/16 contribution rates ■ We expect Ca1PERS will amortize the smoothing method change using 25 Year (Fixed) Amortization Period paid over 30 years. April 15, 2013 U Contribution Projections Miscellaneous Impact of Direct Rate Smoothing 7.5% Expected Return 4V-,, 500 000 2500 A 1500 1000 12 13 13 14 14 1i 15 16 16 1' 1' 1S 1S 19 19`20 �—C'urretltAsset�lrth�d 16.3.eo, o; ..1.;0 4 11a. .o O _�_� o .� o 2.8% 23.1o0 23 4% 22'oo Direct Rate Method 16.3% 21.4% 2:.0% 23.4° o 24.70,10 25.9' o 2 7._% 28.5% (17 �1) April 15, 2013 20 Contribution Projections Miscellaneous ■ In addition to above assumptions: • Proposed Amortization Periods and Smoothing Methods; • Discount rate change from 7.50% to 7.25%; and • Anticipated mortality assumption changes. ■ Above changes assumed to take place June 30, 2013 affecting 2015/16 contribution rates ■ We expect Ca1PERS will amortize the above changes as follows: • The smoothing method change will be paid over 30 years. • The discount rate and mortality changes will be paid over 20 years. 1,1) April 15, 2013 21 Contribution Projections Miscellaneous Impact of Direct Rate Smoothing, 7.25%Discount Rate and Mortality Changes 7.25% & 7.5% Expected Return O' 90 ?O 35% A 30% e 25% 20% r r .r. 15% 10% 12/13 13/14 14/15 15/16 16/17 17/18 18119 19/20 Current Asset Method 16.3% 21.4% 22.0% 22.4% 22.8% 23.1 % 23.4% 23.7% A DR Method, Mort & DR 16.30,'O 21.4% 22.0% 25.6% 27.8% 30.0% 32.21-1 34.4% 1) April 15, 2013 22 Contribution Projections Miscellaneous ■ Market Value Investment Return: • June 30, 2011 • June 30, 2012 • June 30, 2013 - 2016 Based on CalPERS press release. t I! April 15, 2013 Poor Investment Return: Expected Investment Ret: Good Investment Return: 23 21.7% 1.0%3 0.2% - 3.4% 7.25% 11.6% - 15.1 % Contribution Projections Miscellaneous Direct Rate Smoothing, 7.25% Discount Rate and Mortality Changes Impact of Investment Return on ER Rates 5000 4500 40ga 350o ;0o;o �SQo 15016 1000 - I L';13 13 14 14 15, 15 16 16'1' 1- Is 1819 19 20 -W Allot 3Cilanges-PoorlR 16.30o 21.J0o ::.00o 25.90o 29.1°o 32.90o 3".I°o 41.60o -*-All NV 3 Changes - Exp IR 16.30o 21.40o 22.00o 25.61)o =-.50'o 30.00o 32.20o 34.40o -*-AllN ? Chaenes- GoodIR 16.30o 21.40o 22.0110 25.30o =6.40o .6.-0o 26.50o 25,60o (7 1) April 15.2013 24 Contribution Projections Miscellaneous Direct Rate Smoothing, 7.25% Discount Rate and N fortality Changes Impact „f Investment Return on ER Rates (` Millions) 3-- S_1 Annual Employer S15 Contributions SICI SS 1-1 15 15 16 16 1 17.18 15.19 19 au -l-All W3 Changes -PomIR SS.5 S9.8 S10.•1 S12_6 S14.6 S17.0 S19.8 SZZ.S -�rAilW3C'lumt,es-Fxp1R SS.S S9.fi S1t7.4 S12-5 S14.0 S15.5 S1'.2 S1S.9 ♦-AllW 3 Changes -GmA rR S8.5 S9 S S10.4 S12.3 sl3.3 S13.8 S1-1.1 S14.1 *Dollar amounts reflect employer contribution only and does not reflect EPMC. April I5. ?013 25 Contribution Projections Summary Direct Rate Smoothing, 7.25% Discount Rate and Mortality Changes Impact of Employer Contribution $ (millions) Expected Investment Return Safe 12/ 13 $15.8 13/ 14 $16.7 14/ 15 $17.4 l 5 / 16 $20.2 16/ 17 $21.9 17/ 18 $23.8 18/ 19 $25.6 1 9/20 $27.5 Misc $ 8.5 $ 9.8 $10.4 $12.5 $14.0 $15.5 $17.2 $18.9 Total $ 24.3 $ 26.5 $ 27.8 $ 32.7 $ 35.9 J $ 39.3 1.$ 42.8 $ 46.4 April 15. 201 i 26 Recommendations ■ Budget the full impact of the previous discount rate change (7.75% to 7.5%) in FY 2013/14 ■ Use extra one time money to pay down unfunded liabilities ■ Options to fund higher future pension costs include: • Allocate/Find additional ongoing revenue to fully fund increasing future pension costs • Reduce current services • Negotiate to have employees pay more ■ Create a long-term financial plan that expedites full funding for increased Ca1PERS costs I , April 15.2013 27 Definitions Prere®t VOW orBeaetlts Jane J0.2011 Fuca. Normal Co►h Corretll Normal Colt Aclwrb 110111r ■ PVB - Present Value of all Projected Benefits: • Discounted value (at valuation date - 6/30/ 11), of all future expected benefit payments based on various (actuarial) assumptions ■ Actuarial Liability: • Discounted value (at valuation date) of benefits earned through valuation date [value of past service benefit] • Portion of PVB "earned" at measurement ■ Current Normal Cost: • Portion of PVB allocated to (or **earned*' during) current year • Value of employee and employer current service benefit nk, April 15.2013 28 Definitions P"at Value of HeaeQtr J aae 30.2011 L-orea 4 P%11 (UaAUW N LIOWNly) ■ Target- Have money in the bank to cover Actuarial Liability (past service) ■ Unfunded Liability - Money short of target at valuation date ■ Excess Assets / Surplus: • Money over and above target at that point in time. • Doesn't mean you're done contributing. ■ Super Funded: • Assets cover whole pie (PVQ) • if everything goes exactly like PERS calculated, you'll never have to put another (employer or employee) dime in. 11) April 15, 2013 29