MINUTES CHAIRPERSON S REPORT DISCUSSION OF THE PRELIMINARY ACTUARIAL VALUATION REPORT AND PRELIMINARY GASB 67 AND 68 REPORT

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1 MINUTES Meeting of the Administration Committee of the Board of Trustees of the State Universities Retirement System 9:00 a.m., Wednesday, October 20, 2016 Northern Trust 50 S. LaSalle Global Conference Center-1 st Floor Chicago, Illinois The following trustees were present: Mr. Aaron Ammons, Mr. Dennis Cullen, Dr. John Engstrom, Dr. Fred Giertz, Mr. Paul R.T. Johnson, Mr. Craig McCrohon, Ms. Dorinda Miller and Dr. Steven Rock. Others present: Mr. William Mabe, Interim Executive Director (via conference call); Ms. Phyllis Walker, Chief Financial Officer; Ms. Bianca Green, General Counsel; Mr. Douglas Wesley, Interim Chief Investment Officer; Ms. Kimberly Pollitt and Mr. Shane Willoughby, Senior Investment Officers; Mr. Alex Ramos, Investment Officer; Ms. Kristen Houch, Legislative Liaison; Ms. Allison Kushner, Compliance Officer; Ms. Whitney Jones and Ms. Lori Kern, Executive Assistants; Ms. Mary Pat Burns of Burke, Burns & Pinelli; Mr. Douglas Moseley, Mr. Kevin Leonard and Ms. Deanna Jones of NEPC; Ms. Amy Williams and Ms. Kristen Brundirks of Gabriel Roeder Smith and Company; Ms. Patti Summerville-Koulouris of the Northern Trust Company; Mr. Martin Noven of TIAA, Ms. Angela Myers of Loop Capital, and Ms. Clio McConnell of Fin Daily. Administration Committee roll call attendance was taken. Trustee Ammons, present; Trustee Cross, absent; Trustee Idehen, absent; Trustee Rock, present; Trustee Vasquez, absent. There was not a chairperson s report to present. CHAIRPERSON S REPORT DISCUSSION OF THE PRELIMINARY ACTUARIAL VALUATION REPORT AND PRELIMINARY GASB 67 AND 68 REPORT Ms. Phyllis Walker introduced Ms. Amy Williams and Ms. Kristen Brundirks of Gabriel Roeder Smith and Company (GRS) as presenting the Preliminary Actuarial Valuation Report as of June 30, The report includes the calculation of the proposed fiscal year 2018 state contribution. Ms. Williams informed the board the presentation will consist of an overview of the valuation process, reminder of the actuarial assumptions used and a presentation of the actuarial results. The demographic and economic assumptions used in the actuarial valuation as of June 30, 2016, are the same as those used in the actuarial valuation in the previous year. The funded ratio on market value basis decreased from 44.2 percent to 41.5 percent. The funded ratio on an actuarial smoothed basis remained at 43.3%. The unfunded actuarial accrued liability (UAAL) at June 30, 2016, was $23,225.0 million. The reason for the increase from the expected

2 UAAL was due to loss from assets (returns less than the assumption), loss from salary increases and a loss from plan experience. On an accounting basis for GASB (Governmental Accounting Standards Board) 67, the net pension liability is $25,989.4 million. The current statutory funding policy targets a 90 percent funded ratio in GRS recommended alternate funding policy targets a 100 percent funded ratio. Trustee John Engstrom inquired about a previous resolution passed by the board regarding a recommendation for full funding and whether or not it was necessary to be recommended yearly. Ms. Walker noted that the resolution was presented to the board in 2010/2011. She further stated that ultimately, it is the board s decision to accept the recommendation on a yearly basis. Ms. Kristen Houch clarified the details of the statutory required letter sent every five years to the Commission on Government Forecasting and Accountability (COGFA) pertaining to the appropriateness of 90 percent funding target. The last study was done in Discussion continued regarding the recommendation for full funding. Ms. Mary Patricia Burns stated that since the policy has been adopted, there is no fiduciary need to accept the recommendation yearly. Mr. William Mabe informed the board that when SURS certifies the annual proposed statutory contribution amount to governor, we recommend full actuarial determined funding. Ms. Williams presented the comparison information; projected funding ratio under the current statutory funding policy as well as the GRS recommended funding policy. Ms. Williams noted that GRS will be preparing and presenting to the board several stress test scenarios at the December 2016 board meeting. A copy of the PowerPoint provided by GRS titled Preview of June 30, 2016 Actuarial Valuation Results and a copy of the GRS report titled Actuarial Valuation Report as of June 30, 2016 are incorporated as part of these minutes as Exhibit 1 and Exhibit 2. A copy of the GRS report titled GASB Statement Nos. 6, 7 and 8 Accounting and Financial Reporting for Pensions is incorporated as part of these minutes as Exhibit 3. CERTIFICATION OF PRELIMINARY STATE CONTRIBUTIONS FOR FY 2018 Trustee Engstrom made the following motion: That the amount of $4,133,336 be certified for Fiscal Year 2018 to the Community College Health Insurance Security Fund. Trustee Dennis Cullen seconded and the motion carried with all trustees present voting in favor. Ms. Walker requested a motion for the proposed Fiscal Year 2018 State Contribution. Trustee Aaron Ammons made the following motion: That the amount not to exceed $1,753,873,000 be certified for Fiscal Year 2018 as the proposed state contribution. Trustee Fred Giertz seconded and the motion carried with a majority of trustees present voting in favor excluding Trustee Craig McCrohon and Trustee Paul Johnson who opposed,

3 Ms. Walker commented that due to the alternative investment financial information being received later in Fiscal Year 2016, the certification will be updated. A request to the actuary will be made to reevaluate the proposed certification and produce the updated state contribution by November 1, She also noted that the trustees will be contacted should the certification amount significantly change in the state contribution. Ms. Burns confirmed the process and explained what would be required regarding updating the certification. There was brief discussion amongst trustees regarding the process. They agreed to proceed. Copies of the staff memorandums titled Required State Contribution to the Community College Health Insurance Security Fund for Fiscal Year 2018 and Proposed State Contribution for Fiscal Year 2018 are incorporated as part of these minutes as Exhibit 4 and Exhibit 5. APPROVAL OF FISCAL YEAR 2018 RECOMMENDATION FOR NORMAL COST RATE Ms. Walker presented and explained the employer normal cost as it applies to employers that pay the Federal Trust and Grant contributions beginning with the pay period from July 1, 2017 June 30, She noted that the normal cost has decreased from 12.53% to 12.46% for FY 18. Trustee Steven Rock made the following motion: That the employer normal cost rate of percent be approved for Fiscal Year Trustee Ammons seconded and the motion carried with a majority of trustees present voting in favor, excluding Trustee Craig McCrohon who opposed. Copies of the staff memorandums titled Employer Normal Cost Recommendation and a copy of the GRS memorandum titled Breakdown of Normal Cost for FY are incorporated as part of these minutes as Exhibit 6 and Exhibit 7. INFORMATIONAL ITEMS NOT REQUIRING COMMITTEE ACTION The following items were provided for reference and are incorporated as a part of these minutes: 1. Exhibit 8 GRS Perspectives Solvency Liability 2. Exhibit 9 FY 2017 SURS Administration Committee Summary Work Plan

4 PUBLIC COMMENT There were no public comments presented to the Administration Committee. Since there was no further business before the Committee, Trustee Rock moved that the meeting be adjourned. The motion was seconded by Trustee Engstrom and carried with all trustees present voting in favor. Respectfully submitted, WEM:wj Mr. William Mabe Secretary, Board of Trustees

5 Exhibit 1 State Universities Retirement System of Illinois Preview of June 30, 2016 Actuarial Valuation Results Amy Williams, ASA, MAAA, FCA Lance Weiss, EA, MAAA, FCA Kristen Brundirks Copyright 2016 GRS All rights reserved.

6 Exhibit 1 Agenda Overview of the June 30, 2016, Actuarial Valuation Key Actuarial Valuation Assumptions Summary of Actuarial Valuation Results 1

7 Exhibit 1 Overview of the 2016 Actuarial Valuation Each year the June 30 actuarial valuation is completed in October The October Board meeting includes an agenda item for a brief review of the results of the actuarial valuation A memo is submitted for Board action on the statutory contribution amount A more detailed presentation of the actuarial valuation results will be made at the December Board meeting Today s presentation will focus on the statutory contribution and the funded status 2

8 Exhibit 1 Key Actuarial Valuation Assumptions The demographic assumptions and methods used in the actuarial valuation as of June 30, 2016, are the same as those used in the actuarial valuation as of June 30, 2015 Individual member annual salary increase assumption varies by years of service 15.00% for new hires that grades down to 3.75% for members with 34+ years of service Mortality rates that vary by age and follow a standard mortality table RP2014 White Collar, sex distinct, projected using MP dimensional mortality improvement scale, set forward 1 year for male and female annuitants Generational mortality tables and include a margin for mortality improvements (consistent with typical actuarial practice) 3

9 Exhibit 1 Key Actuarial Valuation Assumptions The demographic assumptions and methods used in the actuarial valuation as of June 30, 2016, are the same as those used in the actuarial valuation as of June 30, 2015 Retirement rates that vary by age Termination rates that vary by service 30% of new hires elect the Self Managed Plan (SMP) 4

10 Exhibit 1 Key Actuarial Valuation Assumptions The economic actuarial assumptions and methods used in the actuarial valuation as of June 30, 2016, are the same as those used in the actuarial valuation as of June 30, % assumed investment return assumption 2.75% assumed price inflation assumption 3.75% assumed payroll growth assumption 7.00% assumed Effective Rate of Interest (ERI) used as the longterm assumption to project account balances to retirement in actuarial valuation Actual ERI in each year continues to be certified by the Comptroller for Rule 2 (Money Purchase) and by the SURS Board for all other purposes The actuarial accrued liability and normal cost are calculated using the Projected Unit Credit actuarial cost method (as required by statute) 5

11 Exhibit 1 Key Actuarial Valuation Findings The funded ratio on a market value basis decreased from 44.2% to 41.5% Rate of return was about 0.2% during fiscal year 2016 The funded ratio on an actuarial value of assets basis remained at 43.3% Rate of return on an actuarial of assets basis (which recognizes a portion of prior years gains and losses) was about 6.3% Net deferred losses still exist in the actuarial value of assets The market value of assets is $16.98 Billion, the actuarial value of assets is $17.70 Billion and the net deferred asset losses are $0.72 Billion There was a gain from lower salary increases than assumed There were losses due to unfavorable investment return on actuarial value of assets and from other demographic experience 6

12 Exhibit 1 Preliminary Actuarial Valuation Results ($ in Millions) 50, % 45,000 40, % 43.3% $39, % 41.5% $40, % 40.0% 35, % $ in Millions 30,000 25,000 20,000 15,000 10,000 5,000 0 $17,463 $17,105 $16,981 $17, Market Value of Assets Actuarial Value of Assets Actuarial Accrued Liabilities Funded Ratio (AVA basis) Funded Ratio (MVA basis) 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Market value rate of return was 0.22% and Actuarial (smoothed) value rate of return was 6.32% in FY

13 Exhibit 1 What Caused the UAAL to Change? ($ in Millions) UAAL at 6/30/2015 $ 22,416.1 Expected UAAL at 6/30/ ,877.8 Increase From Assumption Change $ Loss From Assets* Gain From Salary Increases (135.0) Loss From Plan Experience Total Variation from Expected UAAL Actual UAAL at 6/30/2016 $ 23,225.0 *Based on actuarial (smoothed) assets. UAAL = Unfunded Actuarial Accrued Liability Current funding policy resulted in an expected increase of $461.7 million in the unfunded liability. (The Statutory contribution is less than normal cost plus interest on the unfunded liability.) 8

14 Exhibit 1 Reconciliation of FY 2018 Statutory Contribution ($ in Millions) FY 2017 Statutory Contribution $ 1,718.9 Projected FY 2018 Statutory Contribution* 1,753.7 Increase From: Assumption Changes $ Investment Experience 18.2 Non Investment Plan Experience** 28.5 Total Increase from Projected FY 2018 Statutory Contribution 46.7 Actual FY 2018 Statutory Contribution $ 1,800.4 * From 2015 Actuarial Valuation. ** Includes changes due to actual experience differing from assumptions (retirement, termination, mortality, salary increases) and projected results through

15 Estimated Statutory Contributions From 2016 and 2015 Actuarial Valuations ($ in Millions) Exhibit 1 Fiscal Year SURS SURS SMP* SMP* Total Total Valuation Valuation Valuation Valuation Valuation Valuation 2016 $1,582.6 $64.9 $1, $1, ,650.0 $ $1, , , , , , , , , , , , , , , , , , , , , ,928.4 *Projected SMP contributions net of SMP forfeitures. Note: The fiscal year 2018 Total Statutory Contribution of $1,800.4 million from the 2016 valuation is an increase from the projected amount of $1,753.7 million from the 2015 valuation due to plan experience. 10

16 Exhibit 1 Preliminary Actuarial Valuation Results SURS DB and SMP For fiscal year 2018 The current statutory funding policy Targets a 90% funded ratio in 2045 Contribution equal to $1,800.4 million (estimated amount of $1,727.4 million for the SURS DB plans plus $73.0 million for SMP) GRS recommends an Alternate funding policy Targets a 100% funded ratio in 2045 (or earlier) Contribution equal to $2,068.1 million ($1,995.1 million plus $73.0 million for SMP) Net normal cost, plus 30 year closed period, 28 years remaining as of June 30, 2016, amortization of the unfunded liability as a level percentage of pensionable (capped) payroll 11

17 Exhibit 1 Funded Ratio Comparison Statutory vs. Alternate Funding Policy % 90.00% 80.00% 70.00% Funded Ratio 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Year Statutory Funding Policy Alternate Policy (30-year closed, 28 years remaining for FY 2018 contribution) 12

18 Exhibit 1 Contribution Comparison (DB Only) Statutory vs. Alternate Funding Policy $4,000 $3,500 $3,000 Contribution ($ in Millions) $2,500 $2,000 $1,500 $1,000 $500 $ Statutory Contribution Fiscal Year Alternate Policy (30-year closed, 28 years remaining for FY 2018 contribution) 13

19 Exhibit 1 Summary The SURS Board decreased the investment return assumption from 8.50% (in 2009) to 7.75% (in 2010) and to 7.25% (in 2014) over the last 7 years In past years, the Board recommended a funding policy that targets 100% funding to ensure the future financial health of the System The Board adopted updated demographic assumptions (including generational mortality) based on the experience review covering the period June 30, 2010, through June 30, 2014, first effective with the June 30, 2015, actuarial valuation 14

20 Exhibit 1 Disclosures The actuaries submitting this presentation (Amy Williams and Lance Weiss) are Members of the American Academy of Actuaries and meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein. The purposes of the actuarial valuation are to measure the financial position of SURS, calculate the State contribution calculated in accordance with statute and to calculate other information for financial reporting. Future actuarial measurements may differ significantly from the current and projected measurements presented in this presentation due to such factors as the following: plan experience differing from that anticipated by the economic or demographic assumptions; changes in economic or demographic assumptions; increases or decreases expected as part of the natural operation of the methodology used for these measurements (such as the end of an amortization period or additional cost or contribution requirements based on the plan s funded status); and changes in plan provisions or applicable law. 15

21 Exhibit 1 Disclosures This presentation shall not be construed to provide tax advice, legal advice or investment advice. This is one of multiple documents comprising the actuarial reports for SURS. Additional information regarding actuarial assumptions and methods, and important additional disclosures are provided in the full actuarial valuation report as of June 30, If you need additional information to make an informed decision about the contents of this presentation, or if anything appears to be missing or incomplete, please contact us before relying on this presentation. 16

22 Exhibit 2 STATE UNIVERSITIES RETIREMENT SYSTEM OF ILLINOIS A CTUARIAL V ALUATION R EPORT AS OF J UNE 30, 2016

23 Exhibit 2 September 23, 2016 Board of Trustees State Universities Retirement System of Illinois 1901 Fox Drive Champaign, Illinois Dear Members of the Board: At your request, we present the report of the actuarial valuation of the State Universities Retirement System of Illinois ( SURS ) as of June 30, GRS has prepared this report exclusively for the Trustees of the State Universities Retirement System; GRS is not responsible for reliance upon this report by any other party. This report may be provided to parties other than SURS only in its entirety and only with the permission of the Trustees. This actuarial valuation provides information on the funding status and the contribution requirements of SURS. This actuarial valuation includes a determination of the State contribution level (the Statutory Contribution ) for the fiscal year ending June 30, 2018, under Section of the SURS Article of the Illinois Pension Code and provides estimates of Statutory contributions for subsequent years. Information required by Governmental Accounting Standards Board ( GASB ) Statement Nos. 67 and 68 is provided in a separate report. This report should not be relied on for any purpose other than the purpose described. This actuarial valuation is based on the provisions of SURS in effect as of June 30, 2016, data on the SURS membership and information on the asset value of the trust fund as of that date. Due to the court ruling recent pension reform unconstitutional, this valuation does not reflect the provisions of Public Act The valuation was based upon the information furnished by SURS staff, concerning SURS benefits, financial transactions, plan provisions and active members, terminated members, retirees and beneficiaries. We checked for internal and year-to-year consistency, but did not audit the data. We are not responsible for the accuracy or completeness of the information provided by SURS. The benefit provisions for members hired on or after January 1, 2011, were changed under Public Act Members hired on or after this date and the assumed new hires in the projections were valued under Public Act benefit provisions. The actuarial cost method (Projected Unit Credit, as required by statute) and the asset smoothing method (as required by statute) and all other assumptions and method used in this valuation are unchanged from the prior June 30, 2015, actuarial valuation of SURS.

24 Board of Trustees State Universities Retirement System of Illinois Page 2 Exhibit 2 To the best of our knowledge, this actuarial statement is complete and accurate, fairly presents the actuarial position of SURS as of June 30, 2016, and has been prepared in accordance with generally accepted actuarial principles and practices, with the Actuarial Standards of Practice issued by the Actuarial Standards Board, and with applicable statutes. Future actuarial measurements may differ significantly from the current measurements presented in this report due to such factors as the following: plan experience differing from that anticipated by the economic or demographic assumptions; changes in economic or demographic assumptions; increases or decreases expected as part of the natural operation of the methodology used for these measurements (such as the end of an amortization period or additional cost or contribution requirements based on the plan s funded status); and changes in plan provisions, contribution amounts or applicable law. Due to the limited scope of the actuary s assignment, the actuary did not perform an analysis of the potential range of such future measurements in this report. Actuarial valuations do not affect the ultimate cost of the Plan, only the timing of contributions into the Plan. Plan funding occurs over time. Contribution shortfalls (the difference between the actual contributions and the annual required contributions) 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 contribution levels to take account of this variance, with a view to funding the plan over time. Although the statutory contribution requirements were met, the statutory funding method generates a contribution requirement that is less than a reasonable actuarially determined contribution. Meeting the statutory requirement does not mean that the undersigned agree that adequate actuarial funding has been achieved; we recommend the development and adherence to a funding policy that funds the normal cost of the plan as well as an amortization payment that would seek to pay off the total unfunded accrued liability over a closed period of no less than 15 years (to limit contribution volatility) and no more than the period of time in order to attain 100% funding by 2045 (28 years remaining in the actuarial valuation as of June 30, 2016). The signing actuaries are independent of the plan sponsor. Amy Williams, Lance J. Weiss and David Kausch are Members of the American Academy of Actuaries ( MAAA ) and meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion herein. Respectfully submitted, Amy Williams, ASA, MAAA Lance J. Weiss, EA, MAAA David Kausch, FSA, EA, MAAA Consultant Senior Consultant Senior Consultant AW/LW:kb

25 Exhibit 2 TABLE OF CONTENTS Page Summary of the Valuation 1 Purposes of the Actuarial Valuation 1 Report Highlights 2 Actuarial Assumptions 2 SURS Benefits 2-3 Experience During Statutory Appropriations for the 2018 Fiscal Year and Beyond 5-6 Asset Information 6 Funding Status 7 Actuarial Funding and Statutory Funding 7 Additional Projection Details 8-9 Recommendations 10 GASB Disclosure 10 Future Considerations Appendix A Asset Information 11 Table 1 Statement of Plan Net Position 12 Table 2 Statement of Changes in Plan Net Position Appendix B Membership Data Table 3A-3C Summary of Data Characteristics 16 Table 4 Distribution of Full-Time Active Members by Age and Years of Service 17 Table 5 Distribution of Benefit Recipients by Age Appendix C Actuarial Determinations 18 Table 6 Summary of Actuarial Values 19 Table 7 Defined Benefit Plan Development of the Actuarial Value of Assets 20 Table 8 Analysis of Change in Actuarial Accrued Liability and Actuarial Value of Assets 21 Table 9 Analysis of Change in Unfunded Actuarial Accrued Liability 22 Table 10 Analysis of Actuarial Gains and Losses 23 Table 11 Funded Ratio and Illustrative Contributions Under Funding Policy of Net Normal Cost Plus Level Percentage of Payroll Amortization of Unfunded Liability Appendix D Actuarial Projections 24 Table 12 Baseline Projections 25 Graph 1 Projected Funded Ratio Based on Statutory Contributions 26 Graph 2 Projected Actuarial Accrued Liabilities 27 Graph 3 Projected Benefit Payments State Universities Retirement System of Illinois Actuarial Valuation as of June 30, i-

26 Exhibit 2 TABLE OF CONTENTS 28 Table 13 Projected Statutory Contributions Before Impact of Bonds Issued in Table 14 Projected Statutory Contributions Including Impact of Bonds Issued in Graph 4 Projected Statutory Contributions vs. Contributions Under Alternate Policy 31 Graph 5 Statutory Contributions vs. GASB Annual Required Contributions ( ARC ) Appendix E Additional Projection Detail 32 Table 15 Projections Including Impact of Bonds Issued in 2004 (Does Not Reflect Recognition of Deferred Asset Gains and Losses in Projected Actuarial Value of Assets) 33 Table 16 Development of Market and Actuarial Value of Assets as of June 30, 2016, After Bonds (Valuation Basis) and Before Bonds (Hypothetical Basis) 34 Table 17 Projections Before Impact of Bonds Issued in 2004 (Reflects Recognition of Deferred Asset Gains and Losses in Projected Actuarial Value of Assets) 35 Table 18 Projections Before Impact of Bonds Issued in 2004 (Does Not Reflect Value of Assets) 36 Table 19 Additional Details 37 Table 20 Additional Details 38 Table 21 Additional Details Recognition of Deferred Asset Gains and Losses in Projected Actuarial Appendix F Historical Schedules 39 Table 22 Historical Schedule of Funding Status 40 Table 23 Historical Schedule of Contributions Appendix G Actuarial Methods and Assumptions 41 Projected Unit Credit Method 41 Asset Valuation Method Actuarial Assumptions Appendix H Summary of Benefit Provisions of Traditional SURS Appendix I Glossary of Terms State Universities Retirement System of Illinois Actuarial Valuation as of June 30, ii-

27 Exhibit 2 SUMMARY OF THE VALUATION

28 Exhibit 2 PURPOSES OF THE ACTUARIAL VALUATION At your request we have performed an actuarial valuation of the State Universities Retirement System of Illinois ( SURS ) as of June 30, The purposes of this actuarial valuation are as follows: To determine the funding status of SURS as of the valuation date based on the market value of assets and the actuarial value of assets; and To develop the level of contributions required under Section of the SURS Article of the Illinois Pension Code for the fiscal year ending June 30, 2018, and to estimate contributions required under that Section for subsequent years of the funding period ending in the year Accounting information required under Governmental Accounting Standards Board ( GASB ) Statement Nos. 67 and 68 is presented in a separate report. REPORT HIGHLIGHTS The Statutory contribution for FY 2018 is $1.800 billion, and includes the State s projected normal cost of $424.9 million and the Self Managed Plan ( SMP ) contribution of $73.0 million. The 2015 actuarial valuation had projected the Statutory contribution would increase, from $1.719 billion for FY 2017 to $1.754 billion for FY The key reasons for the increase in the Statutory contribution over the projected amount from the prior actuarial valuation are 1) adverse demographic experience and 2) actual fiscal year 2016 investment rate of return lower than the assumed rate of 7.25%. In the past 10 years, SURS experienced investment gains on a market value basis (compared to the actuarial assumption) in fiscal years 2007, 2010, 2011, 2013 and However, SURS incurred investment losses (or shortfalls in return compared to the actuarial assumption) in fiscal years 2008, 2009, 2012, 2015 and The market return for the year ending June 30, 2016, was approximately 0.22% compared to a return of 2.90% in FY The average market value investment return over the most recent 10 years has been approximately 5.9%. The funded ratio decreased from 44.2% as of June 30, 2015, to 41.5% as of June 30, 2016, based on the market value of assets, and remained at 43.3% as of June 30, 2016, based on the actuarial value of assets. The net deferred asset losses will be recognized in the actuarial value of assets over the next four years. The funded ratio and unfunded actuarial accrued liability are appropriate for assessing the need for and amount of future contributions other than normal cost contributions. They are not appropriate for assessing the sufficiency of plan assets to cover the estimated cost of settling the plan's benefit obligations. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

29 Exhibit 2 ACTUARIAL ASSUMPTIONS The Board voted to decrease the investment return assumption from 7.75% to 7.25% as of June 30, 2014, and to decrease the Effective Rate of Interest ( ERI ) assumption from 7.75% to 7.00% as of June 30, The asset valuation method was changed from market value of assets to actuarial value of assets effective with the actuarial valuation as of June 30, 2009, as required by statute. All other actuarial assumptions were first adopted by the Board for use with the actuarial valuation as of June 30, 2015, and were based on the recommendations from the experience review performed for the period from June 30, 2010, through June 30, The assumptions can be found in Appendix G of the report. In addition, we have assumed that the Statutory contribution will be calculated as a level percentage of pensionable payroll. Pensionable payroll for members hired on or after January 1, 2011, is limited by the pay cap. The basis for this assumption comes from 40 ILCS 5/1-160 (b-5). SURS BENEFITS The benefit provisions valued in this June 30, 2016 actuarial valuation are identical to those valued in the prior valuation as of June 30, Due to the court ruling recent pension reform unconstitutional, this valuation does not reflect the provisions of Public Act EXPERIENCE DURING 2016 The System assets earned approximately 0.22% on a market value basis during FY 2016 which was less than the investment return assumption of 7.25% for FY However, the System assets earned 6.32% on an actuarial value of assets basis during FY 2016, due to recognition of net deferred investment gains under the asset smoothing method. Because 6.32% is less than the assumed rate of investment return of 7.25% for FY 2016, there was an asset loss of $157.0 million on the actuarial value of assets. Primarily due to this actuarial loss on assets, the SURS defined benefit programs experienced an overall actuarial loss of $347.2 million. There was a loss of $190.2 million from actuarial liabilities, which is comprised of a loss of about $325.2 million from demographic experience, which was partially offset by a gain of $135.0 million from lower than expected pay increases. The total gain or loss from liabilities for the system is calculated as follows (dollars in millions): 1. Actuarial Accrued Liability ("AAL") - Prior Year $ 39, Total Normal Cost - Prior Year Benefits and Administrative Expenses Paid in FY 2016 (2,335.6) 4. Interest on the above items 1, 2 and 3 2, Expected AAL 6/30/2016 ( ) 40, Impact of Change in Actuarial Assumptions and Methods Expected AAL 6/30/2016 After Assumption Changes (5+6) 40, Actual AAL 6/30/ , Actuarial (Gain)/Loss on Liabilities (8-7) $ Total Normal Cost from the previous valuation which includes both employee and employer portion. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

30 Exhibit 2 The total net actuarial loss is the total of the loss from assets and the net loss from liabilities. The total actuarial loss for the year is as follows (dollars in millions): 1. Actuarial (Gain)/Loss on Assets $ Actuarial (Gain)/Loss on Liabilities Total Actuarial (Gain)/Loss (1+2) $ The behavior of the population determines the liability gain or loss for the year. There was a gain on salaries, due to lower salary increases than assumed. From last year to this year, there were losses on retirement, disability and termination. Active mortality experience was about as expected and there was a retiree mortality loss, and, as always, there was a new entrant loss. The new entrant loss occurs each year, but is offset by additional contributions to the assets. The other assumptions were so close that they generated very little actuarial gain or loss. See Table 10 (page 22), Appendix C, for detail of the gains and losses by source. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

31 STATUTORY APPROPRIATIONS FOR THE 2018 FISCAL YEAR AND BEYOND Section , which governs the development of Employer/State contributions to SURS, provides that: 1. Employer/State contributions are determined under the following process: a) The overall objective of the statute is to achieve a funding ratio of 90% by the end of fiscal year ( FY ) b) The Employer/State contribution for FY 2012 and each year thereafter to and including FY 2045 is to be based on a (theoretically) constant percentage of the payroll 1 of active members of SURS based on the actuarial value of assets at the valuation date and assuming the actuarial value of assets earns the assumed investment return in the future. c) After 2045, the Employer/State contribution rate is to be sufficient to maintain the funding level at 90%. 1 We have assumed the contribution would be based on pensionable payroll. Pensionable payroll for the members hired on or after January 1, 201l, is limited by the pay cap. 2. During the period of amortization of the 2003 bond issue, the Employer/State contribution in any fiscal year may not exceed the excess of: a) the contribution, as developed in 1. above, assuming that the special contribution (from the bond proceeds) has not been made, over b) the debt service on the bond issue for the fiscal year. Exhibit 2 3. Pursuant to Public Act , Section , the dollar amount of the proposed Employer/State contribution required for a fiscal year shall be certified to the Governor no later than November 1 for the fiscal year commencing on the following July 1. The required amounts are budgeted pursuant to the continuing appropriations process. The State Actuary is required to review the actuarial assumptions and actuarial valuation and issue a preliminary report. After the Board considers the State Actuary s report, the certification is finalized no later than January 15. Based on the actuarial value of assets, Employer/State contributions for FY 2018 and estimates of the required contributions for the subsequent five fiscal years follow. The estimates for fiscal years are calculated based on the expected actuarial value of assets at each of the future corresponding actuarial valuations, including the recognition of deferred gains and losses in future years as shown in Table 7 (page 19). In addition, the following table shows the certified Employer/State contributions for FY 2017 for comparison purposes, as calculated in the actuarial valuation as of June 30, State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

32 Exhibit 2 Estimated Statutory Contribution (in Millions) Fiscal 30% of New Members to SMP Year 1 SURS SMP 2 Total 2017 $ 1, $ $ 1, , , , , , , , , , , , , Seven year total $ 12, $ $ 13, Total FY 2017 Contribution based on June 30, 2015, actuarial valuation. FY 2018 Contribution and projected FY contributions based on June 30, 2016, actuarial valuation. The Statutory contribution does not include debt service. 2 Projected Self Managed Plan ( SMP ) contribution is based on projection of current SMP members and assumption that 30% of new members elect SMP, which is the defined contribution plan option. The Statutory contribution for FY 2018 is $1,800,373,000. This is equal to a gross Statutory contribution of $1,805,657,000 less $5,284,000 in SMP forfeitures. The projected SMP contributions for FY are net of assumed projected SMP forfeitures. The Statutory contribution increased from $1.719 billion for fiscal year 2017 to $1.800 billion for fiscal year Estimates of Statutory contributions through 2045, assuming that 30% of future new members elect SMP and all other actuarial assumptions are realized, are set out in Table 14 (page 29). The Statutory contributions set out in this report represent the contribution amount determined consistent with the state Statute. The net State appropriation certified to the Governor is the total shown in this report, adjusted by contributions from federal and trust funds. ASSET INFORMATION Prior to the actuarial valuation as of June 30, 2009, it was agreed that market value, without adjustment, would be used for all actuarial purposes. Legislation in 2009 determined that first effective for the actuarial valuation as of June 30, 2009, contribution projections would be calculated based on the actuarial value of assets. Funding status determinations and the contribution requirements were calculated based on the actuarial value of assets. The market value of the assets of the fund that is available for benefits decreased from $17,463.0 million as of June 30, 2015, to $16,981.5 million as of June 30, The actuarial value of assets as of June 30, 2016 is $17,698.3 million, which is $716.8 million higher than the market value of assets. This difference is due to the continuing recognition of deferred investment gains and losses. Twenty percent of these gains and losses are recognized each year. The $716.8 million, which is the value of net deferred losses, will be smoothed into the actuarial value of assets over the next four years. The remaining unrecognized net asset gains from FY 2013 and FY 2014 will be smoothed in over the next one and two years, respectively, and the remaining asset loss from FY 2015 and FY 2016 will be State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

33 Exhibit 2 smoothed in over the next three and four years, respectively. The detailed determinations of asset values utilized in this valuation and asset growth in the last year are set out in Appendix A and Table 7 (page 19) of Appendix C. FUNDING STATUS The funding status of SURS is measured by the Funding Ratio. The Funding Ratio is the ratio of the assets available for benefits compared to the actuarial accrued liability of the System. Thus, it reflects the portion of benefits earned to date by SURS members, which are covered by current System assets. A funding ratio of 100% means that all of the benefits earned to date by SURS members are covered by assets. By monitoring changes in the funding ratio each year we can determine whether or not funding progress is being made. As shown below, the SURS funding ratio decreased from 44.2% as of June 30, 2015, to 41.5% as of June 30, 2016, based on the market value of assets, and remained at 43.3% at June 30, 2016, based on the actuarial value of assets. There are net deferred losses that will be smoothed into the actuarial value of assets over the next four years. As a result of the net deferred losses and the funding policy, the funded ratio is projected to remain relatively flat over the next four years if all assumptions are realized and all employer contributions are made on a timely basis. Fiscal Year Funded Ratio AVA MVA % 41.3 % The following table shows a comparison for fiscal years 2008 through 2016 of the percentage of benefits that are covered by the actuarial value of assets. The employer financed liabilities for current active and inactive members are 0% funded by the assets. Only a portion of the retiree liabilities are funded by current assets and the percentage covered increased from 41.9% as of June 30, 2015, to 42.3% as of June 30, Percentage of Benefits Covered by Net Assets (in Millions) Member Members Act/Inact Net % of Benefits Covered by Assets Acc Receiving Employer Actuarial Fiscal Year Contrib. (1) Benefits (2) Portion (3) Value of Assets (1) (2) (3) 2008 $ 5,426.8 $ 13,978.1 $ 5,512.8 $ 14, % 65.5% 0.0% , , , , % 58.1% 0.0% , , , , % 47.8% 0.0% , , , , % 42.0% 0.0% , , , , % 38.7% 0.0% , , , , % 38.2% 0.0% , , , , % 40.0% 0.0% , , , , % 41.9% 0.0% , , , , % 42.3% 0.0% State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

34 Exhibit 2 ACTUARIAL FUNDING AND STATUTORY FUNDING Measuring the Statutory Contribution against a funding policy under which the sum of the normal cost and amortization of the unfunded accrued liability is contributed helps evaluate the funding adequacy of the current Statutory funding method. The reason for the accrual pattern of normal cost plus amortization of the unfunded liability is to have benefits accrued within the same generation that has earned them as well as to ensure that all benefit obligations will be met. Table 14 illustrates an alternative policy contribution which is the sum of the employer normal cost and a 30-year closed from June 30, 2015 (28 years remaining as of June 30, 2017) period level percentage of capped payroll amortization payment. The alternative funding policy would require higher contributions in the near term compared to the Statutory funding policy. However, as shown in Graph 1 (page 25) and Graph 4 (page 30), the funded ratio would increase more quickly and require lower contributions than under the Statutory policy after approximately 15 years. The actual SURS contribution (excluding SMP) for FY 2016 was $1.584 billion, which compares to the projected statutory SURS contribution of $1.590 billion determined in the valuation as of June 30, 2014, and the FY 2016 contribution calculated in a manner consistent with the GASB 25 ARC of $1.666 billion. Graph 5 (page 31) compares the Statutory contribution and contributions based on normal cost plus amortization of the unfunded liability. The Statutory contributions are projected to continue to rise in order to meet the ultimate funding objective of a 90% funded ratio in Based on projections assuming that the Statutory contributions are made every year (as shown in Table 12, page 24) and an investment return of 7.25% each year, the funded ratio is projected to begin to increase from about 43% funded to 90% funded at The funded ratio is not projected to exceed 50% until 2030, 70% until 2041, and is projected to increase to 90% during the four year period from 2041 until If the Statutory contributions are not made or investment return is less than the assumption of 7.25%, the funded ratio will be lower and the cash flow strain will be higher. If another significant market downtown occurred while the System s funded ratio is low, the System could be required to liquidate a large amount of assets in order to pay benefits which could have a further adverse effect on the funded status of the System. The projected actuarial accrued liability of current retirees, current active and inactive members and future members is expected to increase from $ billion as of the end of FY 2016 to $ billion as of the end of FY 2045 (as shown in Graph 2, page 26, and Table 21, page 38). Total benefit payments are projected to increase from $2.321 billion in fiscal year 2016 to $4.537 billion in fiscal year Graph 3 (page 27, and Table 21, page 38) shows projected benefit payments separately for retirees as of June 30, 2016, active and inactive members as of June 30, 2016, and future members. ADDITIONAL PROJECTION DETAILS At the request of the State Actuary, we have included exhibits with additional projection details that can be found in Appendix E. The additional projections illustrate the impact on contributions and funded status if deferred asset gains and losses are not recognized. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

35 Exhibit 2 RECOMMENDATIONS The calculations in this report were prepared based on the methods required by the Statutory funding policy including the asset smoothing method that was adopted for the first time in the June 30, 2009, actuarial valuation. GRS does not endorse this funding policy because the Statutory funding policy defers funding for these benefits into the future and places a higher burden on future generations of taxpayers. We recommend the following changes: 1. Implementing a funding policy that contributes normal cost plus closed period amortization as a level percentage of capped payroll amortization of the unfunded liability. (Policy which recognizes unfunded liability at the valuation date and not projected liability in the year 2045) 2. Eliminating the maximum contribution cap if the current Statutory funding policy is retained 3. Implementing an asset corridor to constrain the actuarial value of assets within a certain percentage of the market value of assets (for example, 20 percent) 4. Changing the actuarial cost method for calculating liabilities from the Projected Unit Credit to the Entry Age Normal method Change Funding Policy to a More Standard Actuarial Method We recommend a funding policy that contributes normal cost plus closed period amortization as a level percentage of capped payroll for paying off the current unfunded accrued liability (i.e., the amortization period declines by one year with each actuarial valuation) such that the funded ratio is projected to be 100 percent funded by 2045 or earlier. A 30-year closed amortization period (at the actuarial valuation as of June 30, 2014) methodology pays off the unfunded accrued liability in full by the end of the 30-year period in The fiscal year 2018 contribution would be $2, ($1, million for the SURS contribution and $ million for SMP) under this funding policy. The current Statutory contribution does not comply with this recommendation. Underfunding the System creates the risk that ultimately benefit obligations cannot be met from the trust, and will require a greater amount of funding from other State resources. In addition, continually underfunding the System also creates more of a funding need from contributions and less is available from investment return thereby creating a more expensive plan. Projected contributions under the current Statutory policy and the recommended policy are shown in Graph 4 on page 30 and projected funded ratios are shown in Graph 1 on page 25. Eliminate Maximum Contribution Cap If the current statutory funding policy is not changed, we recommend that the provision that establishes a maximum contribution cap be eliminated. The contribution cap is based on the projected hypothetical contributions if the proceeds from the 2003 bond issue had not been received. The cap is projected to lower contributions during fiscal years 2025 through 2033 compared to if no maximum contribution methodology was in place. Implement an Asset Corridor In addition, we recommend that an asset corridor on the actuarial value of assets be implemented, in the event that there is another significant market downturn similar to fiscal year The table on the following page compares the ratio of the actuarial value of assets to the market value of assets since fiscal year Using an actuarial value of assets that is significantly higher than the market value of assets delays funding to the system by further deferring contributions into the future. The plan is already in serious funding jeopardy, and we cannot recommend an asset valuation method that does not include a corridor because it could add additional risk to the funding of the benefit obligations if another downturn occurred. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

36 Exhibit 2 Year Actuarial Value of Assets ($ in Millions) Market Value of Assets Ratio of Actuarial Value to Market Value 2009 $ 14, $ 11, % , , , , , , , , , , , , , , Change the Actuarial Cost Method to the Entry Age Normal Method The current actuarial cost method is the Projected Unit Credit method, which is required by statute. The Projected Unit Credit method recognizes costs such that the normal cost for an individual member increases as a percentage of payroll throughout his/her career. The Entry Age Normal cost method is the most commonly used method in the public sector. It is also the method required to be used for financial reporting under GASB 67 and 68. The Entry Age Normal method recognizes costs as a level percentage of payroll over a member s career. We recommend a change to the Entry Age Normal method. We recognize that the State Statute governs the funding policy of the System. The purpose of these comments is to highlight the difference between the Statutory appropriation and the recommended actuarially sound funding policy and to highlight the risks and additional costs of continuing to underfund the System. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

37 Exhibit 2 GASB DISCLOSURE Prior to fiscal year ending June 30, 2014, the accounting policies of the State of Illinois relative to its retirement systems were based on the terms of GASB Statement Nos. 25 and 27. GASB Statement No. 67 and 68 are new accounting standards which replaced Statement Nos. 25 and 27. GASB Statement No. 67 was first effective for fiscal year 2014 and GASB Statement No. 68 was first effective for fiscal year A separate GASB 67 and 68 report has been provided. The significant provisions of GASB Statement No. 67 and 68 include: 1. Recognizing the entire Net Pension Liability (similar to the unfunded liability) on the balance sheet (compared with the Net Pension Obligation which was previously recognized). 2. Use of a blended discount rate to calculate liabilities for accounting purposes. 3. Use of market value of assets to calculate the Net Pension Liability. 4. Elimination of the Annual Required Contribution (ARC) and replacing it with a pension expense that requires a much shorter amortization period than 30 years. FUTURE CONSIDERATIONS Changes (such as five-year asset smoothing and the addition of the new benefit tier) have had the effect of reducing the Statutory contribution amounts that would have otherwise been made. However, the change in the investment return assumption and other changes to align the actuarial assumptions with current market expectations have increased the contribution amounts that would otherwise have been made. Assuming the statutory contributions are received (and the actuarial assumptions are met (including a 7.25% investment rate of return, each year through 2045) SURS is currently projected to have contributions sufficient to increase the funded ratio from the current level of 43.3% to 90.0% by This is a severely underfunded plan and the ability of the plan to reach 90% funding by 2045 is heavily dependent on the plan sponsor contributing the statutory contributions each and every year until We are not able to assess the plan sponsor s ability to make contributions when due. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

38 Exhibit 2 APPENDICES

39 Exhibit 2 APPENDIX A A SSET I NFORMATION

40 Exhibit 2 TABLE 1 STATEMENT OF PLAN NET POSITION AS OF JUNE 30, 2016 AND JUNE 30, 2015 Assets Defined Benefit Self Managed Reporting Entity Totals Plan Plan Cash and short-term investments $ 670,477,625 - $ 670,477,625 $ 749,161,649 Receivables Members 8,634,589 $ 3,267,042 11,901,631 14,124,665 Non-employer contributing entity 229,869,588 1,910, ,780, ,687,997 Federal, trust funds, and other 1,655,088 (184,537) 1,470,551 1,815,690 Pending investment sales 433,893, ,893, ,748,331 Interest and dividends 42,366,778-42,366,778 42,333,100 Total receivables 716,419,559 4,992, ,412, ,709,783 Prepaid expenses 133, , ,059 Investments, at fair value Equity investments 8,953,569,340 65,509,892 9,019,079,232 11,307,523,098 Fixed income investments 4,721,834,968 29,270,615 4,751,105,583 4,590,860,760 Real estate investments 980,483,705 1,817, ,301, ,605,561 Alternative investments 1,814,282, ,950 1,814,543,251 Mutual fund and variable annuities 1,723,653,945 1,723,653,945 1,654,146,781 Total investments 16,470,170,314 1,820,512,824 18,290,683,138 18,427,136,200 Securities lending collateral 602,404, ,404, ,561,440 Capital assets, at cost, net of accum deprec $ 19,100,014 and $ 18,627,220 respectively 6,249,153-6,249,153 6,169,023 Total assets 18,465,854,292 1,825,505,768 20,291,360,060 20,599,896,154 Liabilities Benefits payable 9,645,900-9,645,900 8,689,007 Refunds payable 6,459,653-6,459,653 4,639,366 Securities lending collateral 602,089, ,089, ,410,673 Payable to brokers for unsettled trades 853,366, ,366, ,790,779 Administrative expenses payable 12,799,833-12,799,833 16,844,459 Total liabilities 1,484,361,950-1,484,361,950 1,383,374,284 Plan Net Position $ 16,981,492,342 $ 1,825,505,768 $ 18,806,998,110 $ 19,216,521,870 State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

41 Exhibit 2 TABLE 2 STATEMENT OF CHANGES IN PLAN NET POSITION FOR YEARS ENDED JUNE 30, 2016 AND JUNE 30, 2015 Defined Benefit Self Managed Reporting Entity Totals Plan Plan Additions Contributions Employer $ 39,348,478 $ 6,836,109 $ 46,184,587 $ 46,658,889 Non-employer contributing entity 1,544,729,756 58,533,526 1,603,263,282 1,544,200,000 Member 278,883,776 76,457, ,341, ,010,444 Total Contributions 1,862,962, ,826,959 2,004,788,969 1,930,869,333 Investment Income Net appreciation in fair value of investments (286,901,628) 3,191,609 (283,710,019) 315,741,290 Interest 113,996, ,996, ,077,945 Dividends 219,145, ,145, ,278,974 Securities lending 4,215,195-4,215,195 4,690,554 Gross Investment Income 50,456,011 3,191,609 53,647, ,788,763 Less investment expense Asset management expense 58,953,877-58,953,877 55,705,026 Securities lending expense 379, , ,320 Net investment income (8,877,234) 3,191,609 (5,685,625) 593,661,417 Total additions 1,854,084, ,018,568 1,999,103,344 2,524,530,750 Deductions Benefits 2,235,812,995 45,956,700 2,281,769,695 2,160,843,600 Refunds of contributions 85,015,923 26,630, ,646, ,644,121 Administrative expense 14,731, ,171 15,210,543 14,535,656 Total deductions 2,335,560,290 73,066,814 2,408,627,104 2,284,023,377 Net increase (481,475,514) 71,951,754 (409,523,760) 240,507,373 Plan Net Position Beginning of year 17,462,967,856 1,753,554,014 19,216,521,870 18,976,014,497 End of Year $ 16,981,492,342 $ 1,825,505,768 $ 18,806,998,110 19,216,521,870 State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

42 Exhibit 2 APPENDIX B M EMBERSHIP D ATA

43 Exhibit 2 Active Members TABLE 3A SUMMARY OF DATA CHARACTERISTICS ($ IN MILLIONS) June 30, 2015 June 30, 2016 Number Earnings Number Earnings Full time Traditional SURS 45,866 $2, ,721 $2,213.5 Portable SURS 18,595 1, ,993 1,138.8 SMP 11, , Total Full Time 1 75,781 $4, ,062 $4,179.6 Part time Traditional SURS 4,214 $ ,874 $ 28.3 Portable SURS SMP Total Part Time 5,528 $ ,063 $ 38.8 Total 81,309 $4, ,125 $4,218.4 Inactive Members Traditional SURS 66,208 67,946 Portable SURS 10,776 11,549 SMP 8,476 9,041 Total 85,460 88,536 1 Includes 688 police officers and firefighters (including SMP) as of June 30, 2015 and 685 as of June 30, Annual Annual Number Benefits Number Benefits Benefit Recipients Retirement Traditional SURS 46,964 $ 1, ,318 $ 1,905.5 Portable SURS 4, , Total Retirement 51,631 $ 1, ,596 $ 2,074.8 Survivor Traditional SURS 8,194 $ ,308 $ Portable SURS Total Survivor 8,342 $ ,481 $ Disability Traditional SURS 870 $ $ 17.7 Portable SURS Total Disability 1,047 $ ,069 $ 22.2 Total 61,020 $ 2, ,146 $ 2,247.6 Total Participants Total Traditional SURS 172, ,047 Total Portable SURS 35,069 35,839 Total SMP 20,404 20,921 Total 227, ,807 Values may not add due to rounding. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

44 Exhibit 2 Active Members TABLE 3B SUMMARY OF DATA CHARACTERISTICS ($ IN MILLIONS) June 30, 2015 June 30, 2016 Number Earnings Number Earnings Full time Continuing Actives - Tier 1 Traditional SURS 34,753 $1, ,787 $1,793.1 Portable SURS 13, , SMP 6, , Total 55,188 $3, ,604 $3,152.6 Continuing Actives - Tier 2 Traditional SURS 7,474 $ ,927 $354.0 Portable SURS 3, , SMP 3, , Total 14,481 $ ,439 $875.9 New Actives - Tier 1 Traditional SURS 508 $ $8.6 Portable SURS SMP Total 706 $ $14.1 New Actives - Tier 2 Traditional SURS 3,131 $65.8 2,629 $57.8 Portable SURS 1, , SMP 1, Total 5,406 $ ,486 $136.9 Total Actives - Tier 1 Traditional SURS 35,261 $1, ,165 $1,801.7 Portable SURS 13, , SMP 7, , Total 55,894 $3, ,137 $3,166.8 Total Actives - Tier 2 Traditional SURS 10,605 $ ,556 $411.8 Portable SURS 4, , SMP 4, , Total 19,887 $ ,925 $1,012.8 Total Actives - Tier 1 and Tier 2 Traditional SURS 45,866 $2, ,721 $2,213.5 Portable SURS 18,595 1, ,993 1,138.8 SMP 11, , Total 75,781 $4, ,062 $4,179.6 Values may not add due to rounding. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

45 Exhibit 2 Active Members TABLE 3C SUMMARY OF DATA CHARACTERISTICS ($ IN MILLIONS) June 30, 2015 June 30, 2016 Number Earnings Number Earnings Part time Total Actives - Tier 1 Traditional SURS 1,514 $10.4 1,309 $9.0 Portable SURS SMP Total 1,963 $14.0 1,695 $11.8 Total Actives - Tier 2 Traditional SURS 2,700 $20.2 2,565 $19.4 Portable SURS SMP Total 3,565 $28.6 3,368 $27.0 Total Actives - Tier 1 and Tier 2 Traditional SURS 4,214 $30.6 3,874 $28.3 Portable SURS SMP Total 5,528 $42.6 5,063 $38.8 Inactive Members Total Inactives - Tier 1 Traditional SURS 60,164 $ ,746 $37.8 Portable SURS 9, , SMP 7, , Total 76,849 $ ,649 $118.6 Total Inactives - Tier 2 Traditional SURS 6,044 $16.7 8,200 $22.4 Portable SURS 1, , SMP 1, , Total 8,611 $ ,887 $52.4 Total Inactives - Tier 1 and Tier 2 Traditional SURS 66,208 $ ,946 $60.2 Portable SURS 10, , SMP 8, , Total 85,460 $ ,536 $171.0 Values may not add due to rounding. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

46 Exhibit 2 TABLE 4 DISTRIBUTION OF FULL-TIME ACTIVE MEMBERS BY AGE AND YEARS OF SERVICE AS OF JUNE 30, 2016 Years of Service Age Under & Over Totals Under $ 81,373 $ 138,888 $ - $ - $ - $ - $ - $ - $ 220, ,006 $ 2,650,677 $ 17,883,880 $ 322,241 $ - $ - $ - $ - $ - $ 20,856, , ,635 $ 7,190,057 $ 137,286,879 $ 23,051,837 $ 621,873 $ - $ - $ - $ - $ 168,150, ,331 2, ,692 $ 6,720,246 $ 210,915,592 $ 117,287,268 $ 26,194,037 $ 1,276,426 $ - $ - $ - $ 362,393, ,363 2,794 1, ,698 $ 5,109,786 $ 176,546,866 $ 157,933,448 $ 102,827,931 $ 29,970,486 $ 875,966 $ - $ - $ 473,264, ,337 2,417 2,030 1, ,763 $ 4,640,652 $ 120,902,771 $ 147,996,511 $ 140,250,195 $ 94,378,624 $ 21,620,364 $ 706,610 $ - $ 530,495, ,030 2,224 2,131 1, ,855 $ 3,856,850 $ 100,336,323 $ 122,216,628 $ 146,305,070 $ 140,504,460 $ 72,067,037 $ 26,002,029 $ 956,015 $ 612,244, ,782 2,023 1,918 2,064 1, ,462 $ 3,476,000 $ 84,367,378 $ 101,997,649 $ 119,871,216 $ 149,192,173 $ 102,719,645 $ 77,015,013 $ 14,170,644 $ 652,809, ,482 1,770 1,816 1,928 1,288 1, ,873 $ 2,957,666 $ 68,947,327 $ 87,023,982 $ 108,162,899 $ 129,446,562 $ 104,040,200 $ 93,192,322 $ 38,214,178 $ 631,985, ,369 1,365 1, ,231 $ 1,375,462 $ 44,019,021 $ 64,373,344 $ 75,998,621 $ 91,490,631 $ 64,365,875 $ 70,631,618 $ 44,145,331 $ 456,399, & Over , ,824 $ 541,742 $ 14,791,281 $ 34,783,941 $ 48,083,187 $ 56,175,854 $ 38,386,878 $ 32,032,552 $ 45,942,543 $ 270,737,978 Total Count 2,527 21,001 16,552 12,492 10,161 5,390 3,595 1,344 73,062 Total Payroll $ 38,600,509 $ 976,136,206 $ 856,986,848 $ 768,315,028 $ 692,435,216 $ 404,075,965 $ 299,580,143 $ 143,428,711 $ 4,179,558,628 State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

47 Exhibit 2 TABLE 5 DISTRIBUTION OF BENEFIT RECIPIENTS BY AGE AS OF JUNE 30, 2016 Age Number Annual Benefit Retirees and Survivors Under $ 3,732, ,450, , ,148, , ,321, , ,682, , ,283, , ,637, , ,238, , ,731, & Over 2,619 68,100,488 Total 62,077 $ 2,225,327,137 Disabilitants Under $ 3,480, ,495, ,519, ,945, ,663, , , , , & Over 2 21,218 Total 1,069 $ 22,242,258 State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

48 Exhibit 2 APPENDIX C A CTUARIAL D ETERMINATIONS

49 Exhibit 2 TABLE 6 SUMMARY OF ACTUARIAL VALUES AS OF JUNE 30, 2016 ($ IN MILLIONS) Projected Unit Credit Values Actuarial Actuarial Gross Present Value Accrued Normal Gross of Projected Liability Cost NC % Benefits (APV) (AAL) (NC) 1 of Pay 1 1. Active Members a. Retirement $14,158.8 $ 9,352.7 $ % b. Death % c. Disability % d. Termination 1, , % Total - Active Members $16,806.5 $ 11,020.7 $ % 2. Benefit Recipients a. Retirement $25,684.7 $25,684.7 $ 0.0 b. Survivor 1, , c. Disability Total - Benefit Recipients $27,342.2 $27,342.2 $ Other Inactive $ 2,560.4 $ 2, Grand Total $46,709.1 $40,923.3 $ % 5. Operating Expense $ % 6. Total Normal Cost 2 $ % 7. Expected Pay During Fiscal Year 2017 for Defined Benefit Plans 1 8. Present Value of Future Salaries (PVFS) 1 $ $ 3, , For members currently active as of June 30, 2016, in the Traditional and Portable defined benefit plans and includes the use of capped payroll for members hired on or after January 1, The normal cost as a percent of pay is 23.31% for Tier 1 members and 10.52% for Tier 2 members. Values may not add due to rounding. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

50 Exhibit 2 TABLE 7 DEFINED BENEFIT PLAN DEVELOPMENT OF THE ACTUARIAL VALUE OF ASSETS FOR THE YEAR ENDING JUNE 30, 2016 Beginning of Year: (1) Market Value of Assets $ 17,391,323,132 $ 17,462,967,856 (2) Actuarial Value of Assets 15,844,713,727 17,104,606,665 End of Year: (3) Market Value of Assets 17,462,967,856 16,981,492,342 (4) Net of Contributions and Disbursements (431,555,233) (472,598,280) (5) Total Investment Income =(3)-(1)-(4) 503,199,957 (8,877,234) (6) Projected Rate of Return 7.25% 7.25% (7) Projected Investment Income =(1)x(6)+([1+(6)]^.5-1)x(4) 1,245,500,760 1,249,233,223 (8) Investment Income in Excess of Projected Income (742,300,803) (1,258,110,457) (9) Excess Investment Income Recognized This Year (5 year recognition) (9a) From This Year (148,460,161) (251,622,091) (9b) From One Year Ago 302,890,656 (148,460,161) $ (251,622,091) (9c) From Two Years Ago 129,284, ,890,656 (148,460,161) $ (251,622,091) (9d) From Three Years Ago (215,038,203) 129,284, ,890,656 (148,460,161) $ (251,622,091) (9e) From Four Years Ago 377,271,085 (215,038,203) 129,284, ,890,655 (148,460,159) $ (251,622,093) (9f) Total Recognized Investment Gain/(Loss) 445,947,411 (182,945,765) 32,092,439 (97,191,597) (400,082,250) (251,622,093) (10) Change in Actuarial Value of Assets =(4)+(7)+9[f] 1,259,892, ,689,178 End of Year: (3) Market Value of Assets 17,462,967,856 16,981,492,342 (11) Final Actuarial Value of Assets 17,104,606,665 17,698,295,843 (12) Difference Between Market & Actuarial Values 358,361,191 (716,803,501) (13) Actuarial Value Rate of Return % 6.32 % (14) Estimated Market Value Rate of Return 2.93 % (0.05)% (15) Ratio of Actuarial Value to Market Value 98 % 104 % (16) SURS Reported Market Value Rate of Return 2.90 % 0.22 % State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

51 TABLE 8 ANALYSIS OF CHANGE IN Exhibit 2 ACTUARIAL ACCRUED LIABILITY AND ACTUARIAL VALUE OF ASSETS FOR THE YEAR ENDING JUNE 30, 2016 ($ IN MILLIONS) 1. Actuarial (Gain)/Loss on Actuarial Accrued Liability ("AAL") (a) AAL 6/30/2015 $ 39,520.7 (b) Normal Cost FY 2016 $ (c) Benefits and Admin Expenses Paid FY 2016 (2,335.6) (d) Interest on (a), (b), and (c) at 7.25% 2,808.4 (e) Expected AAL 6/30/2016 (a+b+c+d) 40,733.1 (f) Actual AAL 6/30/2016 Before Assumption and Method Changes 40,923.3 (g) Actuarial (Gain)/Loss on AAL (f-e) $ (h) Impact of Benefit Changes 0.0 (i) Impact of Change in Actuarial Assumptions and Methods 0.0 (j) Actual AAL After Changes (f+h+i) $ 40, Actuarial (Gain)/Loss on Assets (a) Actuarial Value of Assets 6/30/2015 $ 17,104.6 (b) Contributions FY ,863.0 (c) Benefits and Administrative Expenses (2,335.6) (d) Interest on (a), (b), and (c) at 7.25% 1,223.3 (e) Expected Assets 6/30/2016 (a+b+c+d) $ 17,855.3 (f) Actual Actuarial Value of Assets 6/30/ ,698.3 (g) Actuarial (Gain)/Loss on Assets (e-f) $ Total Actuarial (Gain)/Loss (a) (Gain)/Loss on AAL $ (b) (Gain)/Loss on Assets (c) Net (Gain)/Loss (a+b) $ Values may not add due to rounding. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

52 Exhibit 2 TABLE 9 ANALYSIS OF CHANGE IN UNFUNDED ACTUARIAL ACCRUED LIABILITY FOR THE YEAR ENDING JUNE 30, 2016 ($ IN MILLIONS) 1. Unfunded Actuarial Accrued Liability (UAAL) at 06/30/2015 $ 22, Contributions a. Contributions due i Interest on 1) $ 1,625.2 ii Member contributions iii Employer/State normal cost iv Interest on ii and iii 26.3 v Total due $ 2,391.1 b. Contributions paid i Member contributions $ ii Employer/State contributions 1,584.1 iii Interest on i and ii 66.4 iv Total paid $ 1,929.4 c. Expected increase in UAAL Expected UAAL at 06/30/ , (Gains)/Losses a. Investment income $ b. Salary increases (135.0) c. Demographic d. Total $ Plan Provision Changes - 6. Assumption Changes - 7. Total Change in UAAL (2c + 4d ) UAAL at 06/30/2016 (1 + 7) $ 23,225.0 State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

53 Exhibit 2 TABLE 10 ANALYSIS OF ACTUARIAL (GAINS) AND LOSSES ($ IN MILLIONS) Amount of (Gain) or Loss FY 2013 FY 2014 FY 2015 FY 2016 Investment Return 1 $ $ (802.4) $ (558.1) $ Salary Increase (53.6) (94.3) (45.3) (135.0) Age and Service Retirement (17.0) 59.3 General Employment Termination Disability Incidence 2.3 (8.3) (3.4) 3.0 In Service Mortality (3.7) Benefit Recipient (2.0) 68.2 New Entrants Other (47.2) (68.8) Total Actuarial (Gain)/Loss $ $ (743.7) $ (602.3) $ BOY Actuarial Accrued Liability (AAL) $ 33,170.2 $ 34,373.1 $ 37,429.5 $ 39,520.7 (Gain)/Loss as a % of BOY AAL 1.6% (2.2)% (1.6)% 0.9% Total Non-Investment (Gain)/Loss $ $ 58.7 $ (44.2) $ (Gain)/Loss as a % of BOY AAL 0.4% 0.2% (0.1)% 0.5% 1 Gain/Loss is based on actuarial value of assets. 2 Benefit recipient (gain)/loss includes mortality gains and losses as well as gains and losses due to unexpected changes in benefit amounts from year to year. Unexpected changes may occur when benefits that are initially paid as preliminary estimates are finalized. Mortality gains and losses include deviations in the assumed demographic of future beneficiaries compared to the actual demographics of new beneficiaries. Beginning with the valuation as of June 30, 2011, there is an additional load of 10% on the liabilities of those retirees who are currently receiving benefits as a preliminary estimate. Beginning with the valuation as of June 30, 2013, Staff provided additional data fields for members whose benefits are paid as preliminary estimates in order to better measure the liabilities for these retirees whose benefits have not been finalized. Beginning with the valuation as of June 30, 2015, the load of 10% was reduced to 5% for retirees for whom Staff provided a best formula benefit. 3 Includes other experience such as deviations between actual and expected benefit payments and refunds that were not easily attributable to one of the categories above. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

54 TABLE 11 Exhibit 2 FUNDED RATIO AND ILLUSTRATIVE CONTRIBUTIONS UNDER FUNDING POLICY OF NET NORMAL COST PLUS LEVEL PERCENTAGE OF PAYROLL AMORTIZATION OF UNFUNDED LIABILITY ($ IN 000S) Fiscal Year DB Payroll 1 Actuarial Value of Assets (AVA) Actuarial Unfunded Accrued Liability Actuarial Accrued (AAL) Liability (UAAL) Funded Ratio Total Normal Cost Member Contributions 2 Amortization of UAAL (30-year open) 3 Net State Contribution (30-year open) 3 Amortization of UAAL (30-year closed) 4 Net State Contribution (30-year closed) 4 Net State 30- year closed with 1 year Interest Adjustment $3, $17, $39, $22, % $ $ $1, $1, , , , , , , $1, $1, $1, , , , , , Defined Benefit Plan payroll is rolled forward with one year of salary scale at 3.75% and uses capped payroll for members hired on and after January 1, Projected for FY 2017 and actual for years prior. 3 A 30-year open period amortization policy is not a funding policy recommended by GRS. This illustrative contribution was included at the request of the Governor s Office. The amortization payment was calculated as a level percentage of total uncapped payroll. 4 GRS recommends a 30-year (or shorter) closed amortization period beginning with fiscal year 2015, 28 years remaining at fiscal year (The statutory contribution would apply to fiscal year 2018; therefore a one year interest adjustment was applied). The amortization payment was calculated as a level percentage of pensionable (capped) payroll. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

55 Exhibit 2 APPENDIX D A CTUARIAL P ROJECTIONS

56 TABLE 12 BASELINE PROJECTIONS ACTUARIAL VALUATION JUNE 30, 2016 Exhibit 2 ASSUMES CONTRIBUTIONS BASED ON TABLE 14 & INVESTMENT RETURN OF 7.25% EACH YEAR ($ IN MILLIONS) Fiscal Year Total SMP DB SURS Member Assets Funding Debt Maximum SURS Contribution Ending Payroll 1 Payroll Payroll 1 Contributions 2 Contributions Benefits Expenses EOY AAL Ratio Service Contribution 3 % of Total Payroll 2016 $ 4, $ $ 3, $ 1, $ $ 2, $ $ 17, $ 40, % $ $ 1, % , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , NA 2, % , , , , , , , NA 2, % , , , , , , , NA 3, % , , , , , , , NA 3, % , , , , , , , NA 3, % , , , , , , , NA 3, % , , , , , , , NA 3, % , , , , , , , NA 3, % , , , , , , , NA 3, % , , , , , , , NA 3, % , , , , , , , NA 3, % , , , , , , , NA 3, % 1 Payroll shown is pensionable pay. It does not include amounts in excess of the pay cap that is applicable to members hired on or after January 1, 2011, participating in the Traditional and Portable plans. 2 Excludes SMP contributions. 3 Maximum contribution after impact of debt service. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

57 Exhibit 2 GRAPH 1 PROJECTED FUNDED RATIO BASED ON STATUTORY CONTRIBUTIONS ACTUARIAL VALUATION AS OF JUNE 30, 2016 ($ IN MILLIONS) % 90.00% 80.00% 70.00% Funded Ratio 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Year Statutory Funding Policy Alternate Policy (30-year closed, 28 years remaining for FY 2018 contribution) State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

58 Exhibit 2 GRAPH 2 PROJECTED ACTUARIAL ACCRUED LIABILITIES ACTUARIAL VALUATION AS OF JUNE 30, 2016 ($ IN MILLIONS) $60,000 $50,000 Actuarial Accrued Liabilities ($ in Millions) $40,000 $30,000 $20,000 $10,000 $ Year Current Retirees Current Actives & Inactives Future Actives State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

59 Exhibit 2 GRAPH 3 PROJECTED BENEFIT PAYMENTS ACTUARIAL VALUATION AS OF JUNE 30, 2016 ($ IN MILLIONS) $5,000 $4,500 $4,000 Benefit Payments ($ in Millions) $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $ Year Current Retirees Current Actives & Inactives Future Actives State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

60 Exhibit 2 TABLE 13 PROJECTED STATUTORY CONTRIBUTIONS ACTUARIAL VALUATION AS OF JUNE 30, 2016 BEFORE IMPACT OF BONDS ISSUED IN 2004 ($ IN MILLIONS) 30% of New Members to SMP Total Contribution FYE SURS Cont. SMP Cont. $ % of Pay $ 1, $ $ 1, % , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Total $79, $4, $83, Percent of pay amounts are calculated based on pensionable pay. Pensionable pay does not include amounts in excess of the pay cap that is applicable to members hired on or after January 1, 2011, participating in the Traditional and Portable plans. 2 Fiscal Year 2017 contribution amounts as determined in the actuarial valuation as of June 30, State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

61 Exhibit 2 TABLE 14 PROJECTED STATUTORY CONTRIBUTIONS ACTUARIAL VALUATION AS OF JUNE 30, 2016 INCLUDING IMPACT OF BONDS ISSUED IN 2004 ($ IN MILLIONS) 30% of New Members to SMP Total Contribution Debt Service SURS Alternate Policy FYE SURS Cont. SMP Cont. $ % of Pay 1 $ % of Pay 1 Contribution 2 Projected % of Alternate Policy Contributed $ 1, $ $ 1, % $ % $ 1, , , , % , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Total $ 73, $ 4, $ 77, $ 2, $ 71, Percent of pay amounts are calculated based on pensionable pay. Pensionable pay does not include amounts in excess of the pay cap that is applicable to members hired on or after January 1, 2011, participating in the Traditional and Portable plans. 2 Alternate funding policy of normal cost plus 30-year closed period amortization of the unfunded liability as a level percentage of capped payroll beginning in FY 2016 with 28 years remaining as of FY Statutory Contribution is shown for FY Excludes SMP. 3 Compares the SURS Statutory contribution, which targets a funded ratio of 90% in 2045, against an alternate funding policy, which targets a funded ratio of 100% in Excludes SMP contribution. 4 Total fiscal Year 2017 contribution amount as determined in the actuarial valuation as of June 30, State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

62 Exhibit 2 GRAPH 4 PROJECTED STATUTORY CONTRIBUTIONS VS. CONTRIBUTIONS UNDER ALTERNATE POLICY (NORMAL COST PLUS 30-YEAR CLOSED PERIOD LEVEL PERCENT OF PAY AMORTIZATION) (28 YEARS REMAINING IN AMORTIZATION PERIOD FOR FY 2018 CONTRIBUTION) ($ IN MILLIONS) $4,000 $3,500 $3,000 Contribution ($ in Millions) $2,500 $2,000 $1,500 $1,000 $500 $ Statutory Contribution Fiscal Year Alternate Policy (30-year closed, 28 years remaining for FY 2018 contribution) Alternate funding policy of normal cost plus 30-year closed period amortization of the unfunded liability as a level percentage of capped payroll beginning in FY 2016 and 28 years remaining in FY 2018 Alternate funding policy contributions based on actual assets as of the current valuation date, the certified statutory contribution in the year following the current valuation date and the alternate policy contribution being made thereafter. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

63 GRAPH 5 STATUTORY CONTRIBUTIONS VS. NET NORMAL COST PLUS LEVEL PERCENTAGE OF PAYROLL AMORTIZATION OF UNFUNDED LIABILITY AND ALTERNATE POLICY ($ IN MILLIONS) Exhibit 2 2,000 1,800 1,600 $1,560.5 $1,622.7 $1,502.9 $1,528.5 $1,995.1 $1,727.4 $1,665.7 $1,684.3 $1,649.2 $1,697.4 $1, ,400 ($ in millions) 1,200 1, Net Normal Cost Plus 30-Year Open Period Level Percentage of Total Payroll Amortization of Unfunded Actuarial Accrued Liability (UAAL) SURS Statutory Contribution (Defined Benefit Plans) Alternate Policy (Net Normal Cost Plus 30-Year Closed (28 years remaining for FY 2018 contribution) Period Level Percentage of Pensionable (Capped) Payroll Amortization of UAAL) Amounts prior to fiscal year 2016 are based on the Annual Required Contribution ( ARC ). Beginning in fiscal year 2015, a contribution equal to normal cost plus 30-year closed period amortization of the unfunded liability as a level percentage of capped payroll is used. Amounts are projected for fiscal years 2017 and Consistent underfunding compared to the ARC is a primary cause of the current low funded status. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

64 Exhibit 2 APPENDIX E A DDITIONAL P ROJECTION D ETAILS

65 Fiscal TABLE 15 PROJECTIONS DOES NOT REFLECT RECOGNITION OF DEFERRED ASSET GAINS AND LOSSES IN PROJECTED ACTUARIAL VALUE OF ASSETS (IMPACT OF BONDS ISSUED IN 2004 INCLUDED) ASSUMES INVESTMENT RETURN OF 7.25% EACH YEAR ON ACTUARIAL VALUE OF ASSETS ($ IN MILLIONS) Exhibit 2 Year Total SMP DB SURS Member Assets Funding Debt Maximum SURS Contribution Ending Payroll 1 Payroll Payroll 1 Contributions 2 Contributions Benefits Expenses EOY AAL Ratio Service Contribution 3 % of Total Payroll 2016 $ 4, $ $ 3, $ 1, $ $ 2, $ $ 17, $ 40, % $ $ 1, % , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , , % , , , , , , , NA 2, % , , , , , , , NA 2, % , , , , , , , NA 2, % , , , , , , , NA 3, % , , , , , , , NA 3, % , , , , , , , NA 3, % , , , , , , , NA 3, % , , , , , , , NA 3, % , , , , , , , NA 3, % , , , , , , , NA 3, % , , , , , , , NA 3, % , , , , , , , NA 3, % 1 Payroll shown is pensionable pay. It does not include amounts in excess of the pay cap that is applicable to members hired on or after January 1, 2011, participating in the Traditional and Portable plans. 2 Excludes SMP contributions. 3 Maximum contribution after impact of debt service. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

66 TABLE 16 DEVELOPMENT OF MARKET AND ACTUARIAL VALUE OF ASSETS AS OF JUNE 30, 2016 AFTER BONDS (VALUATION BASIS) AND BEFORE BONDS (HYPOTHETICAL BASIS) Exhibit 2 After Bonds Before Bonds (Valuation Basis) (Hypothetical) 1 Market Value at 6/30/2015 $17,462,967,856 $15,126,950,233 2a Employer and Non-Employer Contributing Entity Contributions 1,584,078,234 1,712,191,365 2b Member Contributions 278,883, ,883,776 2c Benefits and Expenses 2,335,560,290 2,335,560,290 2d Net Non-Investment Cash Flow (472,598,280) (344,485,149) 3 Investment Return (8,877,234) (7,706,437) (Based on Estimated Rate of -0.05%) 4 Expected Return 1,249,233,223 1,084,434,792 (Based on Estimated Rate of 7.25%) 5 Market Value at 6/30/2016 (1+2d+3) 16,981,492,342 14,774,758,647 6 Expected Market Value at 6/30/2016 (1+2d+4) 18,239,602,799 15,866,899,876 7a Actuarial Gain/(Loss) Current Year (1,258,110,457) (1,092,141,229) 7b Actuarial Gain/(Loss) 1 Year Prior (742,300,803) (641,546,753) 7c Actuarial Gain/(Loss) 2 Years Prior 1,514,453,279 1,303,474,812 7d Actuarial Gain/(Loss) 3 Years Prior 646,420, ,235,951 7e Actuarial Gain/(Loss) 4 Years Prior (1,075,191,015) (915,795,790) 8 Actuarial Value at 6/30/ ,104,606,665 14,819,967,506 9 Actuarial Value at 6/30/2016 (8+2d+4+.2*(7a+7b+7c+7d+7e)) 17,698,295,843 15,401,362,547 State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

67 TABLE 17 HYPOTHETICAL ASSETS TO DETERMINE MAXIMUM CONTRIBUTION PROJECTIONS REFLECTS RECOGNITION OF DEFERRED ASSET GAINS AND LOSSES IN PROJECTED ACTUARIAL VALUE OF ASSETS (BEFORE IMPACT OF BONDS ISSUED IN 2004) ($ IN MILLIONS) Fiscal Year Total SMP DB SURS Member Assets Funding Debt SURS Contribution Ending Payroll 1 Payroll Payroll 1 Contributions 2 Contributions Benefits Expenses EOY AAL Ratio Service % of Total Payroll 2016 $ 4, $ $ 3, $ 1, $ $ 2, $ $ 15, $ 40, % NA 40.59% , , , , , , NA 39.75% , , , , , , , NA 40.79% , , , , , , , NA 40.82% , , , , , , , NA 41.02% , , , , , , , NA 41.58% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% , , , , , , , NA 41.92% 1 Payroll shown is pensionable pay. It does not include amounts in excess of the pay cap that is applicable to members hired on or after January 1, 2011, participating in the Traditional and Portable plans. 2 Excludes SMP contributions. Exhibit 2 State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

68 TABLE 18 HYPOTHETICAL ASSETS TO DETERMINE MAXIMUM CONTRIBUTION PROJECTIONS DOES NOT REFLECT RECOGNITION OF DEFERRED ASSET GAINS AND LOSSES IN PROJECTED ACTUARIAL VALUE OF ASSETS (BEFORE IMPACT OF BONDS ISSUED IN 2004) ASSUMES INVESTMENT RETURN OF 7.25% EACH YEAR ON ACTUARIAL VALUE OF ASSETS ($ IN MILLIONS) Fiscal Year Total SMP DB SURS Member Assets Funding Debt SURS Contribution Ending Payroll 1 Payroll Payroll 1 Contributions 2 Contributions Benefits Expenses EOY AAL Ratio Service % of Total Payroll 2016 $ 4, $ $ 3, $ 1, $ $ 2, $ $ 15, $ 40, % NA 40.59% , , , , , , NA 39.75% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% , , , , , , , NA 40.79% Exhibit 2 1 Payroll shown is pensionable pay. It does not include amounts in excess of the pay cap that is applicable to members hired on or after January 1, 2011, participating in the Traditional and Portable plans. 2 Excludes SMP contributions. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

69 Exhibit 2 Fiscal Year Total Normal Cost 1 Normal Cost with Admin Expense Tier 2 Tier 2 TABLE 19 ADDITIONAL DETAILS ($ IN MILLIONS) Expected Defined Benefit Plan Pay 2 Tier 2 Normal Cost Rate 2 Tier 2 Ending Tier 1 Current Future Total Tier 1 Current Future Total Tier 1 Current Future Total Tier 1 Current Future Total 2017 $ $ $ $ $ $ $ $ $ 2, $ $ $ 3, % 10.52% 20.46% , , % 10.85% 10.44% 20.11% , , % 11.21% 10.38% 19.73% , , % 11.55% 10.36% 19.30% , , % 11.82% 10.42% 18.87% , , , % 12.03% 10.52% 18.47% , , , % 12.24% 10.63% 18.09% , , , % 12.43% 10.73% 17.71% , , , % 12.63% 10.83% 17.34% , , , % 12.84% 10.94% 17.01% , , , % 13.07% 11.05% 16.69% , , , % 13.32% 11.14% 16.39% , , , % 13.60% 11.23% 16.10% , , , % 13.90% 11.32% 15.81% , , , % 14.21% 11.41% 15.53% , , , % 14.54% 11.49% 15.24% , , % 14.88% 11.57% 14.98% , , % 15.24% 11.66% 14.74% , , % 15.61% 11.75% 14.51% , , % 16.01% 11.84% 14.29% , , % 16.43% 11.93% 14.08% , , % 16.86% 12.02% 13.88% , , % 17.31% 12.11% 13.70% , , % 17.78% 12.21% 13.55% , , % 18.26% 12.30% 13.45% , , % 18.75% 12.40% 13.39% , , % 19.24% 12.50% 13.36% , , % 19.74% 12.60% 13.36% , , % 20.23% 12.70% 13.37% , , % 20.70% 12.81% 13.39% 1 Normal Cost excludes expense portion. 2 Expected pay for members in the defined benefit plans at June 30. Used to develop normal cost as a percent of pay. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

70 Exhibit 2 TABLE 20 ADDITIONAL DETAILS ($ IN MILLIONS) Fiscal SMP Total Number of Active Members Defined Benefit Plan Payroll 1 Member Contributions Year Active Tier 2 Tier 2 Tier 2 Ending Members Tier 1 Current Future Total Tier 1 Current Future Total Tier 1 Current Future Total ,880 46,144 20, ,245 $ 2, $ $ $ 3, $ $ $ $ ,321 41,402 16,789 6,613 64,804 2, , ,628 37,106 13,903 12,488 63,497 2, , ,791 33,266 11,589 17,479 62,334 2, , ,619 30,106 10,302 21,099 61,507 2, , ,267 27,372 9,426 24,058 60,856 2, , , ,845 24,882 8,680 26,720 60,282 1, , , ,364 22,597 8,034 29,129 59,760 1, , , ,833 20,492 7,470 31,330 59,292 1, , , ,252 18,557 6,974 33,343 58,874 1, , , ,627 16,774 6,541 35,182 58,497 1, , , ,972 15,120 6,156 36,878 58,154 1, , , ,281 13,599 5,817 38,429 57,845 1, , , ,559 12,182 5,508 39,876 57,566 1, , , ,818 10,854 5,219 41,236 57,309 1, , , ,060 9,611 4,944 42,508 57,063 1, , , ,295 8,463 4,683 43,684 56, , , ,509 7,425 4,435 44,755 56, , , ,710 6,474 4,202 45,740 56, , , ,896 5,586 3,986 46,658 56, , , ,065 4,770 3,778 47,512 56, , , ,225 4,011 3,574 48,315 55, , , ,376 3,322 3,379 49,048 55, , , ,512 2,718 3,189 49,706 55, , , ,630 2,193 3,003 50,297 55, , , ,728 1,780 2,817 50,800 55, , , ,806 1,450 2,631 51,238 55, , , ,874 1,182 2,443 51,626 55, , , , ,249 51,978 55, , , , ,053 52,298 55, , , Payroll shown is pensionable pay at the valuation date. It does not include amounts in excess of the pay cap that is applicable to members hired on or after January 1, 2011, participating in the Traditional and Portable plans. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

71 Exhibit 2 TABLE 21 ADDITIONAL DETAILS ($ IN MILLIONS) Fiscal Present Value of Future Benefits Benefit Payments Actuarial Accrued Liability Year Current Current Tier 1 Tier 2 Actives Current Current Tier 1 Tier 2 Actives Current Current Tier 1 Tier 2 Actives Ending Retirees Inactives Actives Current Future Total Retirees Inactives Actives Current Future Total Retirees Inactives Actives Current Future Total 2016 $ 27, $ 2, $ 15, $ 1, $ $ 46, $ 2, $ $ $ $ $ 2, $ 27, $ 2, $ 10, $ $ $ 40, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

72 Exhibit 2 APPENDIX F H ISTORICAL S CHEDULES

73 Exhibit 2 TABLE 22 HISTORICAL SCHEDULE OF FUNDING STATUS ($ IN 000S) As of June 30 Actuarial AAL UAAL Funding Ratio Payroll/DB* UAAL as % of Payroll Value of Assets 2001 $ 10,753,297 $ 14,915,317 $4,162, % $2,474, % ,814,677 16,654,041 6,839, ,607, ,714,547 18,025,032 8,310, ,763, ,586,305 19,078,583 6,492, ,814, ,350,278 20,349,922 6,999, ,939, ,175,147 21,688,935 7,513, ,054, ,985,730 23,362,079 7,376, ,180, ,586,325 24,917,678 10,331, ,303, ,032,973 26,316,231 15,283, ,463, ** 14,281,998 26,316,231 12,034, ,463, *** 13,966,643 30,120,427 16,153, ,491, ,945,680 31,514,336 17,568, ,460, ,949,905 33,170,216 19,220, ,477, ,262,621 34,373,104 20,110, ,533, *** 15,844,714 37,429,515 21,584, ,522, ,104,607 39,520,687 22,416, ,606, ,698,296 40,923,301 23,225, ,513, AAL - Actuarial Accrued Liability. UAAL - Unfunded Actuarial Accrued Liability. * Payroll is rolled forward with salary scale for one year and uses capped payroll for members hired on and after January 1, ** Assets at Actuarial Value (Market Value through first 2009, then Actuarial Value). *** Investment rate of return assumption decreased from 8.50 percent to 7.75 percent in plan year 2010, and decreased from 7.75 percent to 7.25 percent in plan year State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

74 Exhibit 2 TABLE 23 HISTORICAL SCHEDULE OF CONTRIBUTIONS ($ IN MILLIONS) Fiscal Year (5) (1) (2) (3) (4) (3) - (4) (6) Total Amortization (1) + (2) Member Net State Actual State Normal Cost of UAAL Total ADC Contributions ARC* Contribution (7) (6) / (5) State Cont. as Percent of Net ARC 2002 $ $ $ $ % , , ** 1, , *** $ $ , , , , , , , , , , , , , * ARC - Annual Required Contribution as defined in GASB Statements No. 25 and 27. The ARC is the Actuarially Determined Contribution ( ADC ) net of member contributions. ** Assets at Actuarial Value (Market Value through 2009, then Actuarial Value beginning with fiscal year 2010). *** Investment rate of return assumption decreased from 8.50 percent to 7.75 percent in fiscal year Beginning in fiscal year 2011, dollars are shown rounded to three decimal places. Information beginning with fiscal year 2015 can be found in Table 11 of the report. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

75 Exhibit 2 APPENDIX G A CTUARIAL M ETHODS AND A SSUMPTIONS

76 Exhibit 2 PROJECTED UNIT CREDIT METHOD The Projected Unit Credit Method is mandated under Section as the funding method to be used for all purposes under SURS. The concept of this method is that funding of benefits should occur as benefits are accrued (earned) by active members of SURS. The Normal Cost ( NC ) for a fiscal year under this method is the actuarial present value of all benefits expected to be accrued during the fiscal year adjusted for future expected salary increases. The Actuarial Accrued Liability ( AAL ) under this method is the actuarial present value of all benefits accrued to the valuation date. To the extent that the assets of the fund are insufficient to cover the AAL, an Unfunded Actuarial Accrued Liability ( UAAL ) develops. Under the classical application of this method, the contribution for a year is the NC for that year plus an amount to amortize the UAAL. Under Section , the employer/state contribution is determined such that the assets of SURS reach 90% of the AAL by the end of FY This contribution is determined as a level percentage of pay for all years except that the contribution rates through 2010 shall grade in equal steps to the desired level contribution rate. We have assumed the contribution would be based on pensionable (capped) payroll for members hired on or after January 1, 2011 ( Tier 2 members ). Pensionable pay does not include amounts in excess of the pay cap ($111,572 in 2016, increased by the lesser of 3% and 1/2 of the increase in CPI-U as measured in the preceding 12-month calendar year) that is applicable to members hired on or after January 1, 2011, participating in the defined benefit plans. ASSET VALUATION METHOD Prior to the valuation as of June 30, 2009, market value of assets was used. Under statue (l), beginning with the June 30, 2009, valuation, the asset value is the actuarial value of assets which is calculated by recognizing 20% of the investment gain or loss (the difference between the actual investment return and the expected investment return) on the market value of assets for each of the five following fiscal years. This method was not applied retroactively to recognize a portion of investment gains or losses from previous fiscal years. Following is a table with the recent investment return assumptions. Valuation Date Investment Return Assumption Prior to June 30, % June 30, 2010 through June 30, % June 30, 2014 and after 7.25% State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

77 Exhibit 2 ACTUARIAL ASSUMPTIONS (MOST ADOPTED EFFECTIVE WITH THE JUNE 30, 2015 ACTUARIAL VALUATION) Under statute (a), the Board adopts the assumptions after consultation with the actuary. All actuarial assumptions are expectations of future experience and are not market measures. The rationale for the assumption may be found in the experience study report issued to the Board of Trustees on January 16, Rate of Investment Return. For all purposes under the system the rate of investment return is assumed to be 7.25% per annum beginning with the June 30, 2014, valuation. This assumption is net of investment expenses. Price Inflation (Increase in Consumer Price Index CPI ). The assumed rate is 2.75% per annum. Effective Rate of Interest. The actuarial valuation assumed rate credited to member accounts is 7.00% per annum, beginning with the June 30, 2013, actuarial valuation. Cost of Living Adjustment COLA. The assumed rate is 3.00% per annum for members hired before January 1, 2011, based on the benefit provision of 3.00% annual compound increases. The assumed rate is 1.375% for members hired on or after January 1, 2011, based on the benefit provision of increases equal to ½ of the increase in CPI with a maximum increase of 3.00%. Annual Compensation Increases. Each member s compensation is assumed to increase by 3.75% each year, 2.75% reflecting salary inflation and 1.00% reflecting standard of living increases. That rate is increased for members with less than 34 years of service. The total assumed increase follows: Service Year Total Increase % % % % % % % % % % % % % % % Payroll Growth. The assumed rate of total payroll growth is 3.75%. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

78 Exhibit 2 ACTUARIAL ASSUMPTIONS (MOST ADOPTED EFFECTIVE WITH THE JUNE 30, 2015 ACTUARIAL VALUATION) (CONTINUED) Mortality. The mortality assumptions are as follows: Base Table with 2014 Base Year RP-2014 White Collar Employee, sex distinct (pre-retirement) RP-2014 White Collar Healthy Annuitant, sex distinct (nondisabled post-retirement) RP-2014 Disabled Annuitant, sex distinct (disabled post-retirement) Male Set Forward Female Set Forward Male Multiplier None None 110% pre 60, 80% at ages 60+ Female Multiplier 1 year 1 year 100% 100% 9 years 10 years 100% 100% 90% pre 60, 90% at ages 60+ The provision for future mortality improvement is based on the generational application of the MP improvement scales. Age Male Female Male Female Male Female Male Female Future Life Expectancy (years) in 2016 Future Life Expectancy (years) in 2030 Postretirement Disabled - Retiree Postretirement Disabled - Retiree State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

79 Exhibit 2 ACTUARIAL ASSUMPTIONS (MOST ADOPTED EFFECTIVE WITH THE JUNE 30, 2015 ACTUARIAL VALUATION) (CONTINUED) Disability. A table of disability incidence with rates follows: Age Male Female Age Male Female % 0.060% % 0.249% % 0.064% % 0.257% % 0.067% % 0.264% % 0.071% % 0.272% % 0.074% % 0.279% % 0.078% % 0.287% % 0.081% % 0.294% % 0.085% % 0.302% % 0.088% % 0.309% % 0.092% % 0.317% % 0.099% % 0.324% % 0.107% % 0.332% % 0.114% % 0.339% % 0.122% % 0.347% % 0.129% % 0.354% % 0.137% % 0.362% % 0.144% % 0.369% % 0.152% % 0.377% % 0.159% % 0.384% % 0.167% % 0.392% % 0.174% % 0.392% % 0.182% % 0.392% % 0.189% % 0.392% % 0.197% % 0.392% % 0.204% % 0.392% % 0.212% % 0.392% % 0.219% % 0.392% % 0.227% % 0.392% % 0.234% % 0.392% % 0.242% % 0.392% Disability rates apply during the retirement eligibility period. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

80 Exhibit 2 ACTUARIAL ASSUMPTIONS (MOST ADOPTED EFFECTIVE WITH THE JUNE 30, 2015 ACTUARIAL VALUATION) (CONTINUED) Retirement. Upon eligibility, active members are assumed to retire as follows: Members Hired Before January 1, 2011 Members Hired on or after January 1, and Eligible for 2011 and Eligible for Age Normal Retirement Early Retirement Normal Retirement Early Retirement Under % % % % Members that retire are assumed to elect the most valuable option on a present value basis refund of contributions (or portable lump sum retirement, if applicable) or a retirement annuity. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

81 Exhibit 2 ACTUARIAL ASSUMPTIONS (MOST ADOPTED EFFECTIVE WITH THE JUNE 30, 2015 ACTUARIAL VALUATION) (CONTINUED) General Turnover. A table of termination rates based on experience in the period. The assumption is a table of turnover rates by years of service. A sample of these rates follows: Years of Service All Members % Part-time members with less than 3 years of service (all members classified as part time for valuation purposes) are assumed to terminate at the valuation date. Members that terminate with at least 5 years of service (10 years of service for Tier 2 members) are assumed to elect the most valuable option on a present value basis refund of contributions or a deferred benefit. Termination rate for 29 years of service used for Tier 2 members until retirement eligibility is met. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

82 Exhibit 2 ACTUARIAL ASSUMPTIONS (MOST ADOPTED EFFECTIVE WITH THE JUNE 30, 2015 ACTUARIAL VALUATION) (CONTINUED) Operational Expenses. The amount of operational expenses for administration incurred in the latest fiscal year are supplied by SURS staff and incorporated in the Normal Cost. Marital Status. Members are assumed to be married in the following proportions: Age Males Females % 40 % Spouse Age. The female spouse is assumed to be 3 years younger than the male spouse. Benefit Commencement Age. Inactive members eligible for a deferred benefit are assumed to commence benefits at their earliest normal retirement age. For Tier 1 members this is age 62 with at least 5 years of service, age 60 with at least 8 years of service, or immediately if at least 30 years of service. For Tier 2 members, this is age 67 with 10 or more years of service. Load on Final Average Salary. No load is assumed to account for higher than assumed pay increases in final years of employment before retirement. Load on Liabilities for Service Retirees With Non-finalized Benefits. A load of 10% on liabilities for service retirees whose benefits have not been finalized as of the valuation date is assumed to account for finalized benefits that on average are 10% higher than 100% of the preliminary estimated benefit. A load of 5% is used if a best formula benefit was provided in the data by Staff. Valuation of Inactives. An annuity benefit is estimated based on information provided by staff for Tier 1 inactive members with five or more years of service and Tier 2 members with 10 or more years of service. Assumption for Missing Data. Members with an unknown gender are assumed to be female. Active and inactive members with an unknown date of birth are assumed to be 37 years old at the valuation. An assumed spouse date of birth is calculated for current service retirees in the traditional plan for purposes of calculating future survivor benefits. The female spouse is assumed to be 3 years younger than the male spouse. 70% of current total male retirees and 80% of current total female retirees in the traditional plan that have not elected a survivor refund are assumed to have a spouse at the valuation date. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

83 Exhibit 2 ACTUARIAL ASSUMPTIONS (MOST ADOPTED EFFECTIVE WITH THE JUNE 30, 2015 ACTUARIAL VALUATION) (CONTINUED) Reciprocal Service. Reciprocal service is included for current inactive members for purposes of determining vesting eligibility and eligibility age to commence benefits. The recently updated actuarial assumptions (including retirement and termination rates) were based on SURS service only. Therefore, reciprocal service was not included for current active members. Reciprocal service will be collected and analyzed in the future and will be considered in the next experience review. Projection Assumptions. The number of total active members throughout the projection period will remain the same as the total number of active members in the defined benefit plans and the SMP in the current valuation. 30% of total future hires will elect to participate in the Self Managed Plan. New entrants have an average age of 37.1 and average capped pay of $37,154 and average uncapped pay of $38,672 (2016 dollars). These values are based on the average age and average pay of current members. The range profile is based on the age at hire and assumed pay at hire (using the actuarial assumptions, inflated to 2016 dollars) of current active members with service between one and four years. Uncapped Average Pay Average Pay Average Pay Age Number Males Capped Male Male Number Females Capped Female Uncapped Female Total Number Capped Total Uncapped Total <20 59 $16,107 $16, $13,789 $13, $14,938 $14, ,799 27,799 1,220 26,320 26,320 1,987 26,891 26, ,786 37,574 38,109 2,383 34,770 34,912 4,169 35,971 36, ,661 44,499 46,305 2,149 38,199 39,143 3,810 40,946 42, ,082 45,535 48,736 1,465 37,749 38,783 2,547 41,057 43, ,334 48,078 1,165 35,853 37,082 1,935 39,626 41, ,933 45, ,100 35,173 1,643 37,328 39, ,479 45, ,392 32,777 1,490 35,442 38, ,280 44, ,982 35,007 1,041 35,338 39, ,870 41, ,569 33, ,249 37, ,899 22, ,973 17, ,553 20,553 Total 8,217 40,239 42,621 11,093 34,378 35,227 19,310 36,872 38,373 SMP Contribution Assumptions. The projected SMP contributions are equal to 7.6% of SMP payroll, plus estimated SMP expenses minus SMP employer forfeitures. Estimated SMP expenses for FY 2017 are $488,530 and actual FY 2016 SMP employer forfeitures used to reduce the certified contributions for FY 2018 are $5,284,434. Estimated SMP expenses for FY 2018 and after are assumed to increase by 2.75%. Estimated SMP employer forfeitures used to reduce the certified contributions for FY 2019 and after are assumed to be 7.5% of the gross SMP employer contribution. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

84 Exhibit 2 ACTUARIAL ASSUMPTIONS (MOST ADOPTED EFFECTIVE WITH THE JUNE 30, 2015 ACTUARIAL VALUATION) (CONTINUED) Pensionable Earnings Greater than 6%. No additional assumption was made for earnings used in the calculation of the final average compensation. The participant s employer is required to pay the present value of the increase in benefits resulting from the portion of the increase in excess of 6.00%. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

85 Exhibit 2 APPENDIX H S UMMARY OF B ENEFIT P ROVISIONS OF T RADITIONAL SURS

86 Exhibit 2 It should be noted that the purpose of this Appendix is to describe the benefit structures of SURS for which actuarial values have been generated. There is no description of the Self Managed Plan (SMP) and many portions of the defined plans are described in a manner which is not legally complete or precise. It is not our intent to provide an exhaustive description of all benefits provided under SURS or the policies and procedures utilized by SURS staff. A more precise description of the provisions of SURS is contained in the Member s Guide, published by SURS staff. Of course, the statute is controlling. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

87 Exhibit 2 GENERAL Plans There are two defined benefit plans available under SURS, the Traditional Plan and the Portable Plan, and one defined contribution plan, the Self Managed Plan (SMP). A Member must select one of these plans within the first six months of participation. If no choice is made in that time, the Traditional Plan is deemed chosen. A new tier of benefits was established for members hired on or after January 1, Members hired before January 1, 2011, ( Tier 1 members ) are not subject to a pay cap. Members hired on or after January 1, 2011, ( Tier 2 members ) are eligible to choose one of the benefit plans. Tier 2 members that participate in the Traditional and Portable Plans are subject to the pay cap established under Public Act The pay cap history is as follows: Year CPI-U ½ CPI-U Pensionable Pay Cap 2011 $106, % 1.95% $108, % 1.00% $109, % 0.60% $110, % 0.85% $111, % 0.00% $111, The pay cap is calculated annually by the Illinois Department of Insurance. The Self Managed Plan is a defined contribution plan under which members contribute 8.0% of compensation and the State contributes 7.6% of compensation. A portion of the employer contribution is used to fund disability benefits for SMP participants. Members hired on or after January 1, 2011, who participate in the SMP are not subject to the pay cap established under Public Act The provisions of the defined benefit plans are identical in many areas. The description below is primarily of the Traditional Plan. Where different, the Portable plan provisions will be described in italics. Member Contributions Most members contribute a total of 8% of compensation. Police officers and firefighters contribute a total of 9.5% of compensation, with the additional 1.5% allocated to the retirement annuity. The total contribution is broken down as follows: Police/Fire All Others Retirement Annuity 8.0% 6.5% Survivor Benefits 1.0% 1.0% Annual Increases in Retirement Benefits 0.5% 0.5% Total Contribution 9.5% 8.0% Portable Plan members contribute a total of 8% of compensation, but the breakdown set out above does not apply. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

88 The retirement annuity portion of the total contribution (8.0% of compensation for police officers and firefighters and 6.5% of compensation for all others) is annuitized for the money purchase formula (Rule 2) calculation. Contributions for members hired on or after January 1, 2011, are assumed not to be made on pay in excess of $106,800 in 2011 ($111,572 in 2016), increased by the lesser of 3% and 1/2 of the increase in CPI-U as measured in the preceding 12-month calendar year. Since January 1, 1981, the member contributions under SURS have been picked up by employers. Effective Rate of Interest Exhibit 2 The Effective Rate of Interest ( ERI ) is the interest rate that is applied to member contribution balances. Effective for the 2006 fiscal year, the ERI for the purpose of determining the money purchase benefit is established by the State Comptroller annually. The ERI for other purposes such as the calculation of purchases of service credit, refunds for excess contributions, portable plan refunds and lump sum portable retirements is determined by the SURS Board annually and certified to the Governor. For purposes of the actuarial valuation, the assumed ERI is 7.00%. For the purposes of withdrawal of contributions at termination or death by Traditional Plan Members, this rate is not greater than 4.5% by statute. Normal Retirement: RETIREMENT BENEFITS Eligibility For police officers and firefighters, separation from service on or after the attainment of the earlier of: 1. Age 55 with 20 years of service, or 2. Age 50 with 25 years of service. For other members hired before January 1, 2011, separation from service on or after attainment of the earlier of: 1. Age 62 with 5 years of service, 2. Age 60 with 8 years of service, and years of service regardless of age. For members hired on or after January 1, 2011, separation from service on or after attainment age 67 with 10 years of service. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

89 Exhibit 2 Initial Benefit Amount There are 3 alternate formulae. The initial benefit is the largest produced by one of the three: 1. General Formula: The following percentages of high four consecutive year average compensation for each year of service: Year of Service General Police/Fire 1 st 10 Years 2.20 % 2.25 % Next 10 Years Over For members hired on or after January 1, 2011, the above percentages of high final eight consecutive year average compensation within the last 10 years of service for each year of service. The pay cap for 2010 through 2013 is shown in the table on the previous page. We have assumed the limit applies to individual pay amounts that are used to develop the final average compensation. 2. Money Purchase Formula: a) The member contributions for retirement benefits (8.0% of compensation for police officers and firefighters and 6.5% of compensation for all others) accumulated with interest at the ERI, plus b) An imputed employer contribution match at $1.40 per dollar of member contribution accumulated with interest at the ERI. c) The total of the accumulations in (a) and (b) is converted into an annuity using a life annuity factor that takes into account neither the automatic 50% spousal survivor benefit nor the automatic annual increases. Members hired on or after July 1, 2005, no longer receive the Money Purchase Formula under the plan. 3. Minimum Benefit A benefit for each year of service, up to 30, based on final annual pay, as follows: Under 3,500 $ 8 $3,500 - $4,500 9 $4,500 - $5, $5,500 - $6, $6,500 - $7, $7,500 - $8, $8,500 - $9, Over $9, State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

90 Exhibit 2 Minimum Retirement Annuity No retiree shall receive a retirement annuity less than $25 per month for each year of service up to 30. The comparable benefit for survivor benefit recipients is $17.50 per month for each year of service up to 30. Maximum Benefit 80% of high four-year average compensation for members hired before January 1, 2011, and 80% of final eight-year average for members hired on or after January 1, Contribution waivers are applicable to members whose benefits are capped at 80% of final average compensation. Member contributions made once the maximum benefit is achieved are refunded to the member with interest (at the Effective Rate of Interest). The present value of the benefits for pay increases in excess of 6% during the last four years prior to retirement will be paid by the employer. The employer will pay this amount in a lump sum to the Retirement System. Benefit Duration The Normal Retirement benefit is payable for the lifetime of the retired member. If the retiree under the Traditional Plan has a spouse at date of retirement and if that spouse survives the retiree the spouse will receive, upon the death of the retiree, a survivor benefit equal to 50% of the monthly benefit being paid to the retiree as of the date of death. Such benefit will continue for the lifetime of the surviving spouse. The survivor benefit for members hired on or after January 1, 2011, is equal to 66 2/3% of the monthly benefit being paid to the retiree as of the date of death. For retirees under the Portable Plan, the normal form of benefit is a single-life annuity for unmarried participants and a reduced 50% joint and survivor benefit for married participants. With spousal consent, a member may designate a contingent annuitant to receive a joint and survivor annuity or elect a single-life annuity or lump sum distribution. Those providing a joint and survivor annuity will have their benefit reduced to cover the cost of the option. The available joint and survivor options are 50%, 75% and 100%. A member may elect the 75% or 100% spousal joint and survivor annuity without consent. Portable Plan members may also elect to receive their retirement benefit as a lump sum equal to member contributions with an equal employer match (if have at least five years of service), accumulated with interest (at the Effective Rate of Interest that is certified annually by the SURS Board). Annual Increases For members hired before January 1, 2011, each January 1 subsequent to retirement date the monthly benefit being paid each retiree shall be increased by 3%. The adjustment for the first January after retirement shall be proportional based on the portion of the year retired. For members hired on or after January 1, 2011, each January 1 subsequent to retirement date the monthly benefit being paid each retiree shall be increased fifty percent of the Consumer State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

91 Price Index ( CPI ) up to a maximum of 3% applied to the original benefit. The first increase will be granted upon the later of the attainment of age 67 or the first anniversary of the commencement of the annuity. The historical development of the Annual Increase as determined by the Illinois Department of Insurance for members hired on or after January 1, 2011 can be found in the following table. Year CPI-U ½ CPI-U Annual Increase % % 1.95% 1.95% % 1.00% 1.00% % 0.60% 0.60% % 0.85% 0.85% % 0.00% 0.00% Exhibit 2 Early Retirement Eligibility For members hired before January 1, 2011, other than police and fire employees, separation from service on or after attainment of age 55 with 8 years of service but not eligible for Normal Retirement. For members hired on or after January 1, 2011, separation from service on or after attainment of age 62 with 10 years of service but not eligible for Normal Retirement. Benefits The benefit amounts and all terms of benefit payment are the same as that for Normal Retirement, except that the benefit amounts calculated under the General Formula and the Minimum Formula shall be reduced by.5% for each month by which the retirement date precedes the 60 th birthday for members hired before January 1, The Minimum Formula shall be reduced by.5% for each month by which the retirement date precedes the 67 th birthday for members hired on or after January 1, Survivor Benefits Traditional Plan Eligibility BENEFITS ON DEATH BEFORE RETIREMENT Payable to eligible survivor(s) (spouse, child or dependent parent) for the death of an active member with at least 1.5 years of service or a terminated member with at least 10 years of service. For this purpose, service under the State Employees Retirement System, the Teachers Retirement System of the State of Illinois and the Public School Teachers Pension Fund of Chicago is recognized. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

92 Benefits For members hired before January 1, 2011, an annuity to the eligible survivor(s) equal to the greater of: 1. 50% of the benefit accrued to the date of the death of the member, and 2. The lowest applicable benefit from the following list: a) $400 per month to a single eligible survivor or $600 per month to two or more eligible survivors. b) 30% (one survivor), or 60% (two survivors), or 80% (three or more survivors) of the member s final rate of earnings. c) If member inactive, 80% of base retirement annuity. For members hired on or after January1, 2011, an annuity to the survivor(s) equal to 66 2/3% of the benefit accrued to the date of the death of the member. Benefit Duration Exhibit 2 Surviving spouse May receive a lifetime benefit commencing at the later of the member s date of death and the spouse s attainment of age 50. May be payable at the date of death if a dependent child in their care is also receiving benefits. Dependent child Payable to unmarried child(ren) under age 18 (over 18 if disabled prior to age 18), and children age if a qualified full-time student. Dependent parent Payable until dependency conditions are not met, so long as they were dependent upon the member at the time of their death. Annual Increases For members hired before January 1, 2011, each January 1 subsequent to retirement date the monthly benefit being paid each survivor annuity recipient shall be increased by 3%. The adjustment for the first January after retirement shall be proportional. For members hired on or after January 1, 2011, each January 1 subsequent to retirement date the monthly benefit being paid each survivor annuity recipient shall be increased fifty percent of the Consumer Price Index ( CPI ) up to a maximum of 3% of the originally granted survivor annuity. The first increase will be granted upon January 1 following the first anniversary of the commencement of the annuity. Portable Plan Eligibility Payable to an eligible spouse for the death of an active or inactive member with at least 1.5 years of SURS service. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

93 Benefits An annuity to the eligible spouse equal to 50% of the member s earned retirement benefit after the reductions to pay for the cost of providing the pre-retirement survivor annuity. (Applicable to both Tier 1 and Tier 2 members.) Benefit Duration Surviving spouse May receive a lifetime benefit commencing at the member s earliest retirement age. Exhibit 2 Annual Increases For members hired before January 1, 2011, each January 1 subsequent to retirement date the monthly benefit being paid each survivor annuity recipient shall be increased by 3%. The adjustment for the first January after retirement shall be proportional. For members hired on or after January 1, 2011, each January 1 subsequent to retirement date the monthly benefit being paid each survivor annuity recipient shall be increased fifty percent of the Consumer Price Index ( CPI ) up to a maximum of 3% of the originally granted survivor annuity. The first increase will be granted upon January 1 following the first anniversary of the commencement of the annuity. Lump Sum Death Benefit Death of member prior to retirement. Eligibility Traditional Plan Benefit With Eligible Survivor Refund of accumulated member contributions for retirement and annual adjustment at 4.5% interest Without Eligible Survivor Refund of the total accumulated member contribution at 4.5% interest, and $5,000 to a dependent beneficiary or $2,500 to a non-dependent beneficiary State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

94 Exhibit 2 Portable Plan Benefit With Eligible Spouse Refund of total accumulated member contributions at the full Effective Rate of Interest, plus, if the member has at least 1.5 years of service at death, a like amount of imputed employer contributions less the actuarial equivalent of the Pre- Retirement Survivor Annuity. Without Eligible Spouse Refund of total accumulated member contributions at the full Effective Rate of Interest, plus, if the member has at least 1.5 years of service at death, a like amount of imputed employer contributions. BENEFITS ON DEATH AFTER RETIREMENT In addition to survivor/spouse benefits payable from the System, the following death benefit is payable if a member does not have an eligible survivor/spouse/contingent annuitant: The greater of the total accumulated member contributions or $1,000. Disability Benefit BENEFITS FOR DISABILITY Eligibility Disablement after completing 2 years of service. The service requirement is waived if the disablement is accidental. Disability definition inability to perform the duties of own occupation. Pregnancy and childbirth are, by definition, disablement. Benefit 50% of the basic compensation paid at date of disablement. This base benefit level is offset dollar for dollar by each of the following: 1. Earnings while disabled in excess of the disability benefit. 2. Other disability insurance either fully or partially employer provided. 3. Worker s compensation benefits. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

95 Exhibit 2 Duration of Benefit Benefits become payable on the later of the termination of salary and sick leave, or the 61 st day after disablement and continue to the earlier of the following: 1. Recovery or death. 2. Benefits paid equal 50% of total compensation during the period of SURS service. 3. If disablement occurs prior to age 65, the disability benefit may not continue past the August 31 following 70 th birthday. 4. If disablement occurs at or after attainment of age 65, completion of 5 years in disablement. Survivor and death benefits are payable if a member dies while receiving disability benefits. If, at discontinuance of the disability benefit, the member is eligible for a retirement benefit (based on service, which includes the period of disability and may also include time receiving a disability retirement annuity), the member may retire and receive that benefit. The member may commence the retirement benefit once age and service requirements are met. The early retirement reduction does not apply for members that began first participating prior to January 1, 2011 (Tier 1). The benefit is based on the greatest of 3 formulas (General Formula, Money Purchase and Minimum Benefit), subject to applicable maximums. Contributions are not made during the disability period. However, accumulated contributions continue to accrue interest. Annual Increases Each January 1 subsequent to retirement date the monthly benefit being paid each retiree shall be increased by 3%. The adjustment for the first January after retirement shall be proportional. Disability Retirement Annuity Eligibility Continuing disablement after discontinuation of the disability benefit as a result of reaching the 50% of total earnings limitation. Disability is defined in accordance with the Social Security disability definition. Benefit 35% of the compensation being earned at disablement. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

96 Exhibit 2 Duration of Benefit Benefits become payable upon discontinuance of the disability benefit and continue to the earlier of the following: 1. Recovery or death 2. Election to receive a retirement benefit Survivor and death benefits are payable if a member dies while receiving a disability retirement annuity. Annual Increases Eligibility Benefit Each January 1 subsequent to retirement date the monthly benefit being paid each retiree shall be increased by 3%. The adjustment for the first January after retirement shall be proportional. For members hired on or after January 1, 2011, if the member converts to a service retirement annuity (item 2 above), each January 1 subsequent to retirement date the monthly benefit being paid each retiree shall be increased fifty percent of the Consumer Price Index ( CPI ) up to a maximum of 3% of the originally granted benefit. The first increase will be granted upon the later of the attainment of age 67 or the first anniversary of the commencement of the annuity. BENEFITS FOR DEFERRED MEMBERS For members hired before January 1, 2011, separation from employment with at least 5 years of service and separation from employment with at least 10 years of service for members hired on or after January 1, Benefit as defined for normal retirement purposes, but calculated based on final average compensation and service at date of termination. Commencement of Benefit Benefits commence when member reaches the age condition for either normal or early retirement. Annual Increases For members hired before January 1, 2011, each January 1 subsequent to retirement date the monthly benefit being paid each retiree shall be increased by 3%. The adjustment for the first January after retirement shall be proportional. For members hired on or after January 1, 2011, each January 1 subsequent to retirement date the monthly benefit being paid each retiree shall be increased fifty percent of the Consumer Price Index ( CPI ) up to a maximum of 3% applied to the original benefit. The first increase will be granted upon the later of the attainment of age 67 or the first anniversary of the commencement of the annuity. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

97 Exhibit 2 APPENDIX I G LOSSARY OF T ERMS

98 Exhibit 2 GLOSSARY OF TERMS Actuarial Accrued Liability ( AAL ). The difference between (i) the actuarial present value of future plan benefits, and (ii) the actuarial present value of future normal cost. Sometimes referred to as accrued liability or past service liability. Actuarial Assumptions. Estimates of future plan experience such as investment return, expected lifetimes and the likelihood of receiving a pension from the Pension Plan. Demographic, or people assumptions, include rates of mortality, retirement and separation. Economic, or money assumptions, include expected investment return, inflation and salary increases. Actuarial Cost Method. A mathematical budgeting procedure for allocating the dollar amount of the actuarial present value of future plan benefits between the actuarial present value of future normal cost and the actuarial accrued liability. Sometimes referred to as the actuarial funding method. Actuarial Present Value of Future Plan Benefits ( APV ). The amount of funds presently required to provide a payment or series of payments in the future. It is determined by discounting the future payments at a predetermined rate of interest, taking into account the probability of payment. Actuarial Value of Assets ( AVA ). Smoothed value of assets that recognizes the difference between the expected investment return using the valuation assumption of 8.0 percent and the actual investment return over a five-year period. Dampens volatility of asset value over time. Actuarially Determined Contribution ( ADC ). The sum of the gross normal cost (including employee contributions) and amortization of the unfunded actuarial accrued liability over a period not to exceed 30 years. Amortization. Paying off an interest-bearing liability by means of periodic payments of interest and principal, as opposed to paying it off with a lump sum payment. Annual Required Contribution ( ARC ). The sum of the normal cost (net of employee contributions) and amortization of the unfunded actuarial accrued liability over a period not to exceed 30 years. Currently required for accounting purposes by the Governmental Accounting Standards Board (GASB). Asset Return. The net investment return for the asset divided by the mean asset value. Example: if $1.00 is invested and yields $1.08 after a year, the asset return is 8.00 percent. Funded Ratio. The actuarial value of assets divided by the actuarial accrued liability. Measures the portion of the actuarial accrued liability that is currently funded. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

99 Exhibit 2 GLOSSARY OF TERMS (CONTINUED) Market Value of Assets ( MVA ). The value of assets currently held in the trust available to pay for benefits of the Pension Plan. Each of the investments in the trust is valued at market price which is the price at which buyers and sellers trade similar items in the open market Net Pension Obligation ( NPO ). The accumulated value of contribution variances (the difference between the Annual Pension Contribution and the actual employer contributions). Currently required for accounting purposes by the Governmental Accounting Standards Board (GASB). Normal Cost ( NC ). The annual cost assigned, under the actuarial funding method, to current and subsequent plan years. Sometimes referred to as current service cost. Any payment toward the unfunded actuarial accrued liability is not part of the normal cost. Unfunded Actuarial Accrued Liability ( UAAL ). The difference between the actuarial accrued liability and valuation assets. Sometimes referred to as unfunded accrued liability. State Universities Retirement System of Illinois Actuarial Valuation as of June 30,

100 Exhibit 3 S TAT E U NIVERSITIES R E T I REMENT SYSTEM OF I L L INOIS G A S B S T A T E M E N T N O S. 6 7 A N D 6 8 A C C O U N T I N G AND F I N A N C I A L R E P O R T I N G F O R P E N S I O N S J U N E 3 0,

101 Exhibit 3 October 7, 2016 The Board of Trustees State Universities Retirement System of Illinois Dear Board Members: This report provides accounting and financial reporting information that is intended to comply with the Governmental Accounting Standards Board (GASB) Statement Nos. 67 and 68 for the State Universities Retirement System of Illinois ( SURS ). These calculations have been made on a basis that is consistent with our understanding of these Statements. GASB Statement No. 67 is the accounting standard that applies to the stand-along financial reports issued by retirement systems. GASB Statement No. 68 establishes accounting and financial reporting for state and local government employers who provide their employees (including former employees) pension benefits through a trust. Our calculation of the liability associated with the benefits described in this report was performed for the purpose of providing reporting and disclosure information that satisfies the requirements of GASB Statement Nos. 67 and 68. The calculation of the plan s liability for this report is not applicable for funding purposes of the plan. A calculation of the plan s liability for purposes other than satisfying the requirements of GASB Statement No. 67 may produce significantly different results. This report may be provided to parties other than the State Universities Retirement System of Illinois ( SURS ) only in its entirety and only with the permission of SURS. This report is based upon information, furnished to us by SURS, concerning retirement and ancillary benefits, active members, deferred vested members, retirees and beneficiaries, and financial data. This information was checked for internal consistency, but it was not audited. This report complements the funding actuarial valuation report that was provided to SURS and should be considered in conjunction with that report. Please see the actuarial valuation reports as of June 30, 2015, and June 30, 2016, for additional discussion of the nature of actuarial calculations and more information related to participant data, economic and demographic assumptions and benefit provisions. To the best of our knowledge, the information contained with this report is accurate and fairly represents the actuarial position of the State Universities Retirement System of Illinois in accordance with the requirements of GASB Statement Nos. 67 and 68. All calculations have been made in conformity with generally accepted actuarial principles and practices, with the Actuarial Standards of Practice issued by the Actuarial Standards Board, and with our understanding of GASB Statement Nos. 67 and 68.

102 The Board of Trustees State Universities Retirement System of Illinois Page 2 Exhibit 3 The signing actuaries are independent of the plan sponsor. Amy Williams and Lance J. Weiss are Members of the American Academy of Actuaries (MAAA) and meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein. Respectfully submitted, By Amy Williams, ASA, MAAA, FCA Consultant By Lance J. Weiss, EA, MAAA, FCA Senior Consultant and Team Leader

103 State Universities Retirement System of Illinois Exhibit 3 Auditor s Note This information is intended to assist in preparation of the financial statements of the State Universities Retirement System of Illinois. Financial statements are the responsibility of management, subject to the auditor s review. Please let us know if the auditor recommends any changes.

104 State Universities Retirement System of Illinois Exhibit 3 TABLE OF CONTENTS Section A Section B Section C Section D Executive Summary Executive Summary... 1 Discussion... 2 Financial Statements Statement of Pension Expense... 6 Statement of Outflows and Inflows Arising from Current Reporting Period... 7 Statement of Outflows and Inflows Arising from Current and Prior Reporting Periods... 8 Statement of Fiduciary Net Position... 9 Statement of Changes in Fiduciary Net Position Required Supplementary Information Schedule of Changes in Net Pension Liability and Related Ratios Current Reporting Period.. 11 Schedule of Changes in Net Pension Liability and Related Ratios Multiyear Schedule of Net Pension Liability Multiyear Schedule of Contributions Multiyear Notes to Schedule of Contributions Schedule of Investment Returns Multiyear Notes to Financial Statements Sensitivity of Net Pension Liability to the Single Discount Rate Assumption Summary of Population Statistics Page Section E Summary of Benefits Section F Actuarial Cost Method and Actuarial Assumptions Valuation Methods, Entry Age Normal Actuarial Assumptions, Input to Discount Rates, Mortality Assumptions, and Experience Studies Section G Calculation of the Single Discount Rate Calculation of the Single Discount Rate Projection of Contributions Projection of Plan Fiduciary Net Position Present Values of Projected Benefits Projection of Plan Net Position and Benefit Payments Section H Glossary of Terms... 46

105 Exhibit 3 SECTION A EXECUTIVE SUMMARY Section A Executive Summary 0

106 State Universities Retirement System of Illinois Exhibit 3 Section A EXECUTIVE SUMMARY AS OF JUNE 30, Actuarial Valuation Date June 30, 2015 Measurement Date of the Net Pension Liability June 30, 2016 Employer's Fiscal Year Ending Date (Reporting Date) for GASB 67 June 30, 2016 Employer's Fiscal Year Ending Date (Reporting Date) for GASB 68 June 30, 2017 Membership Number of - Retirees and Beneficiaries 61,020 - Inactive, Nonretired Members 76,984 - Active Members 69,381 - Total 207,385 Covered Payroll 1 $ 3,513,107,948 Net Pension Liability Total Pension Liability $ 42,970,901,717 Plan Fiduciary Net Position 16,981,492,342 Net Pension Liability $ 25,989,409,375 Plan Fiduciary Net Position as a Percentage of Total Pension Liability % Net Pension Liability as a Percentage of Covered Payroll % Development of the Single Discount Rate Single Discount Rate, Beginning of Year 7.12 % Single Discount Rate, End of Year 7.01 % Long-Term Expected Rate of Investment Return 7.25 % Long-Term Municipal Bond Rate, Beginning of Year* 3.80 % Long-Term Municipal Bond Rate, End of Year* 2.85 % Last year ending June 30 in the 2016 to 2115 projection period for which projected benefit payments are fully funded 2073 Total Pension Expense $ 2,610,646,715 Deferred Outflows and Deferred Inflows of Resources by Source to be recognized in Future Pension Expenses Deferred Outflows of Resources Deferred Inflows of Resources Difference between expected and actual experience $ 14,215,881 $ 2,298,574 Changes in assumptions 655,463,758 0 Difference between projected and actual earnings on pension plan investments 1,451,868, ,552,976 Total $ 2,121,548,487 $ 637,851,550 1 Payroll for active members from census data as of June 30, 2016, increased by the wage inflation assumption of 3.75%. *Source: State & local bonds rate from Federal Reserve statistical release (H.15) as of June 25, 2015, at the beginning of the year and as of June 30, 2016, at the end of the year. The statistical release describes this rate as "Bond Buyer Index, general obligation, 20 years to maturity, mixed quality." In describing this index, the Bond Buyer notes that the bonds average credit quality is roughly equivalent to Moody s Investors Service s Aa2 rating and Standard & Poor s Corp. s AA. 1

107 State Universities Retirement System of Illinois Exhibit 3 Section A DISCUSSION Accounting Standard For pension plans that are administered through trusts or equivalent arrangements, Governmental Accounting Standards Board (GASB) Statement No. 67 establishes standards of financial reporting for separately issued financial reports and specifies the required approach for measuring the pension liability. Similarly, GASB Statement No. 68 establishes standards for state and local government employers (as well as non-employer contributing entities) to account for and disclose the net pension liability, pension expense and other information associated with providing retirement benefits to their employees (and former employees) on their basic financial statements. The following discussion provides a summary of the information that is required to be disclosed under these accounting standards. A number of these disclosure items are provided in this report. However, certain non-actuarial information, such as notes regarding accounting policies and investments, is not included in this report and the retirement system and/or plan sponsor will be responsible for preparing and disclosing that information to comply with these accounting standards. Financial Statements GASB Statement No. 68 requires state or local governments to recognize the net pension liability and the pension expense on their financial statements. The net pension liability is the difference between the total pension liability and the plan s fiduciary net position. In traditional actuarial terms, this is analogous to the accrued liability less the market value of assets (not the smoothed actuarial value of assets that is often encountered in actuarial valuations performed to determine the employer s contribution requirement). Paragraph 57 of GASB Statement No. 68 states, Contributions to the pension plan from the employer subsequent to the measurement date of the collective net pension liability and before the end of the employer s reporting period should be reported as a deferred outflow of resources related to pensions. The information contained in this report does not incorporate any contributions made to SURS subsequent to the measurement date of June 30, The pension expense recognized each fiscal year is equal to the change in the net pension liability from the beginning of the year to the end of the year, adjusted for deferred recognition of the liability and investment experience. Pension plans that prepare their own, stand-alone financial statements are required to present two financial statements a statement of fiduciary net position and a statement of changes in fiduciary net position in accordance with GASB Statement No. 67. The statement of fiduciary net position presents the assets and liabilities of the pension plan at the end of the pension plan s reporting period. The statement of changes in fiduciary net position presents the additions, such as contributions and investment income, and deductions, such as benefit payments and expenses, and net increase or decrease in the fiduciary net position. 2

108 State Universities Retirement System of Illinois Exhibit 3 Section A Notes to Financial Statements GASB Statement No. 68 requires disclosure of the total pension expense, the pension plan s liabilities and assets, and deferred outflows and inflows of resources related to pensions in the notes of the employer s financial statements. GASB Statement Nos. 67 and 68 require disclosure of certain additional information in the notes of the financial statements for the employers and pension plans. The list of disclosure items should include: A description of benefits provided by the plan; The type of employees and number of members covered by the pension plan; A description of the plan s funding policy, which includes member and employer contribution requirements; The pension plan s investment policies; The pension plan s fiduciary net position and the net pension liability; The net pension liability using a discount rate that is 1% higher and 1% lower than the rate used to calculate the total pension liability and net pension liability for financial reporting purposes; Significant assumptions and methods used to calculate the total pension liability; Inputs to the discount rates; and Certain information about mortality assumptions and the dates of experience studies. Retirement systems that issue stand-alone financial statements are required to disclose additional information in accordance with GASB Statement No. 67. This information includes: The composition of the pension plan s Board and the authority under which benefit terms may be amended; A description of how fair value is determined; Information regarding certain reserves and investments, which include concentrations of investments greater than or equal to 5%, receivables and insurance contracts excluded from plan assets; and Annual money-weighted rate of return. 3

109 State Universities Retirement System of Illinois Exhibit 3 Section A Required Supplementary Information GASB Statement No. 67 requires a 10-year fiscal history of: Sources of changes in the net pension liability; Information about the components of the net pension liability and related ratios, including the pension plan s fiduciary net position as a percentage of the total pension liability, and the net pension liability as a percent of covered-employee payroll; and A comparison of the actual employer contributions to the actuarially determined contributions based on the plan s funding policy. General Implications of SURS Statutory Funding Policy on Future Expected Plan Contributions and Funded Status Given the plan s statutorily defined funding policy, if all actuarial assumptions are met (including the assumption of the plan earning 7.25% on the actuarial value of assets), then the following outcomes are expected: 1. The unfunded liability is not expected to be fully amortized during the lifetimes of current members. 2. The funded status of the plan is expected to increase gradually towards a 90% funded ratio at 2045 and then remain level at 90% funded thereafter. This statutory funding policy results in an expected crossover date in 2073 and a GASB single discount rate of 7.01% to measure the total pension liability as of June 30, The projections in this report are strictly for the purpose of determining the GASB single discount rate and are different from a funding projection for the ongoing plan. Timing of the Valuation An actuarial valuation to determine the total pension liability is required to be performed at least every two years. The net pension liability and pension expense should be measured as of the pension plan s fiscal year end (measurement date) on a date that is within the employer s prior fiscal year. If the actuarial valuation used to determine the total pension liability is not calculated as of the measurement date, the total pension liability is required to be rolled forward from the actuarial valuation date to the measurement date. The total pension liability shown in this report is based on an actuarial valuation performed as of June 30, 2015, and a measurement date of June 30, Single Discount Rate Projected benefit payments are required to be discounted to their actuarial present values using a Single Discount Rate that reflects (1) a long-term expected rate of return on pension plan investments (to the extent that the plan s fiduciary net position is projected to be sufficient to pay benefits) and (2) a tax-exempt municipal bond rate based on an index of 20-year general obligation bonds with an average AA credit rating (which is published by the Federal Reserve) as 4

110 State Universities Retirement System of Illinois Exhibit 3 Section A of the measurement date (to the extent that the contributions for use with the long-term expected rate of return are not met). For the purpose of this valuation, the expected rate of return on pension plan investments is 7.25%; the municipal bond rate is 2.85% (based on the weekly rate closest to but not later than the measurement date of the state & local bonds rate from Federal Reserve statistical release (H.15)); and the resulting Single Discount Rate is 7.01%. The last year for which projected benefits for current members are fully funded by projected assets attributable to those members changed from 2072 from the measurement performed in the last actuarial valuation to 2073 in this year s actuarial valuation. Effective Date and Transition GASB Statement Nos. 67 and 68 are effective for fiscal years beginning after June 15, 2013, and June 15, 2014, respectively. Earlier application is encouraged by the GASB. 5

111 Exhibit 3 SECTION B FINANCIAL STATEMENTS Section B Financial Statements Auditor s Note This information is intended to assist in preparation of the financial statements of the State Universities Retirement System of Illinois. Financial statements are the responsibility of management, subject to the auditor s review. Please let us know if the auditor recommends any changes. 6

112 State Universities Retirement System of Illinois Exhibit 3 Section B A. Expense PENSION EXPENSE UNDER GASB STATEMENT NO. 68 FISCAL YEAR ENDED JUNE 30, 2016* 1. Service Cost $ 666,374, Interest on the Total Pension Liability 2,876,930, Current-Period Benefit Changes 0 4. Employee Contributions (made negative for addition here) (278,883,776) 5. Projected Earnings on Plan Investments (made negative for addition here) (1,249,233,223) 6. Pension Plan Administrative Expense 14,731, Other Changes in Plan Fiduciary Net Position 0 8. Recognition of Outflow (Inflow) of Resources due to Liabilities 498,421, Recognition of Outflow (Inflow) of Resources due to Assets 82,305, Total Pension Expense $ 2,610,646,715 *Based on a measurement date of June 30, Will be used for fiscal year ending June 30, Employers proportionate share of calculations of the net pension liability, pension expense and deferred inflows and outflows are outside the scope of this report. 6

113 State Universities Retirement System of Illinois Exhibit 3 Section B STATEMENT OF OUTFLOWS AND INFLOWS ARISING FROM CURRENT REPORTING A. Outflows (Inflows) of Resources due to Liabilities PERIOD FISCAL YEAR ENDED JUNE 30, 2016* 1. Difference between expected and actual experience of the Total Pension Liability (gains) or losses $ (3,426,377) 2. Assumption Changes (gains) or losses $ 532,522, Recognition period for Liabilities: Average of the expected remaining service lives of all employees {in years} Outflow (Inflow) of Resources to be recognized in the current pension expense for the difference between expected and actual experience of the Total Pension Liability $ (1,127,803) 5. Outflow (Inflow) of Resources to be recognized in the current pension expense for assumption changes $ 175,281, Outflow (Inflow) of Resources to be recognized in the current pension expense due to Liabilities $ 174,153, Deferred Outflow (Inflow) of Resources to be recognized in future pension expenses for the difference between expected and actual experience of the Total Pension Liability $ (2,298,574) 8. Deferred Outflow (Inflow) of Resources to be recognized in future pension expenses for assumption changes $ 357,241, Deferred Outflow (Inflow) of Resources to be recognized in future pension expenses due to Liabilities $ 354,942,767 B. Outflows (Inflows) of Resources due to Assets 1. Net difference between projected and actual earnings on pension plan investments (gains) or losses $ 1,258,110, Recognition period for Assets {in years} Outflow (Inflow) of Resources to be recognized in the current pension expense due to Assets $ 251,622, Deferred Outflow (Inflow) of Resources to be recognized in future pension expenses due to Assets $ 1,006,488,366 *Based on a measurement date of June 30, Will be used for fiscal year ending June 30, Employers proportionate share of calculations of the net pension liability, pension expense and deferred inflows and outflows are outside the scope of this report. 7

114 State Universities Retirement System of Illinois Exhibit 3 Section B STATEMENT OF OUTFLOWS AND INFLOWS ARISING FROM CURRENT AND PRIOR REPORTING PERIODS FISCAL YEAR ENDED JUNE 30, 2016* A. Outflows and Inflows of Resources due to Liabilities and Assets to be Recognized in Current Pension Expense Outflows Inflows Net Outflows of Resources of Resources of Resources 1. Due to Liabilities $ 499,549,210 $ 1,127,803 $ 498,421, Due to Assets $ 400,082,252 $ 317,776,488 $ 82,305, Total $ 899,631,462 $ 318,904,291 $ 580,727,171 B. Outflows and Inflows of Resources by Source to be Recognized in Current Pension Expense Outflows Inflows Net Outflows of Resources of Resources of Resources 1. Differences between expected and actual experience $ 13,096,161 $ 1,127,803 $ 11,968, Assumption Changes 486,453, ,453, Difference between projected and actual earnings on pension plan investments 400,082, ,776,488 82,305, Total $ 899,631,462 $ 318,904,291 $ 580,727,171 Deferred Outflows Deferred Inflows Net Deferred Outflows of Resources of Resources of Resources C. Deferred Outflows and Deferred Inflows of Resources by Source to be Recognized in Future Pension Expenses 1. Differences between expected and actual experience $ 14,215,881 $ 2,298,574 $ 11,917, Assumption Changes 655,463, ,463, Difference between projected and actual earnings on pension plan investments 1,451,868, ,552, ,315, Total $ 2,121,548,487 $ 637,851,550 $ 1,483,696,936 D. Deferred Outflows and Deferred Inflows of Resources by Year to be Recognized in Future Pension Expenses Year Ending June 30 Net Deferred Outflows of Resources 2017 $ 544,733, ,623, ,717, ,622, Thereafter 0 Total $ 1,483,696,936 *Based on a measurement date of June 30, Will be used for fiscal year ending June 30, Employers proportionate share of calculations of the net pension liability, pension expense and deferred inflows and outflows are outside the scope of this report. 8

115 State Universities Retirement System of Illinois Exhibit 3 Section B Assets STATEMENT OF FIDUCIARY NET POSITION AS OF JUNE 30, Cash and short-term investments $ 670,477,625 Receivables Members $ 8,634,589 Non-employer contributing entity 229,869,588 Federal, trust funds, and other 1,655,088 Pending investment sales 433,893,516 Interest and dividends 42,366,778 Total Receivables $ 716,419,559 Prepaid expenses $ 133,157 Investments, at fair value Equity investments $ 8,953,569,340 Fixed income investments 4,721,834,968 Real estate investments 980,483,705 Alternative investments 1,814,282,301 Total Investments $ 16,470,170,314 Securities lending collateral $ 602,404,484 Capital assets, at cost, net of accum deprec $ 19,100,014 $ 6,249,153 Total Assets $ 18,465,854,292 Liabilities Payables Benefits payable $ 9,645,900 Refunds payable 6,459,653 Securities lending collateral 602,089,896 Payable to brokers for unsettled trades 853,366,668 Administrative expenses payable 12,799,833 Total Liabilities $ 1,484,361,950 Net Position Restricted for Pensions $ 16,981,492,342 9

116 State Universities Retirement System of Illinois Exhibit 3 Section B Additions Contributions STATEMENT OF CHANGES IN FIDUCIARY NET POSITION FOR YEAR ENDED JUNE 30, Employer $ 39,348,478 Non-employer contributing entity 1,544,729,756 Member 278,883,776 Investment Income Total Contributions $ 1,862,962,010 Net Appreciation in Fair Value of Investments $ (286,901,628) Interest 113,996,822 Dividends 219,145,622 Securities lending 4,215,195 Gross Investment Income $ 50,456,011 Less investment expense Asset management expense 58,953,877 Securities lending expense 379,368 Net investment income $ (8,877,234) Total Additions $ 1,854,084,776 Deductions Benefits $ 2,235,812,995 Refunds of contributions 85,015,923 Administrative expense 14,731,372 Total Deductions $ 2,335,560,290 Net Increase in Net Position $ (481,475,514) Net Position Restricted for Pensions Beginning of Year $ 17,462,967,856 End of Year $ 16,981,492,342 10

117 Exhibit 3 SECTION C REQUIRED SUPPLEMENTARY INFORMATION Section C Required Supplementary Information Auditor s Note This information is intended to assist in preparation of the financial statements of the State Universities Retirement System of Illinois. Financial statements are the responsibility of management, subject to the auditor s review. Please let us know if the auditor recommends any changes. 11

118 State Universities Retirement System of Illinois Exhibit 3 Section C SCHEDULE OF CHANGES IN NET PENSION LIABILITY AND RELATED RATIOS A. Total pension liability CURRENT REPORTING PERIOD FISCAL YEAR ENDED JUNE 30, Service cost $ 666,374, Interest on the total pension liability 2,876,930, Changes of benefit terms 0 4. Difference between expected and actual experience of the total pension liability (3,426,377) 5. Changes of assumptions 532,522, Benefit payments, including refunds of employee contributions (2,320,828,918) 7. Net change in total pension liability 1,751,572, Total pension liability beginning 41,219,328, Total pension liability ending $ 42,970,901,717 B. Plan fiduciary net position 1. Contributions employer & non-employer contributing entity $ 1,584,078, Contributions employee 278,883, Net investment income (8,877,234) 4. Benefit payments, including refunds of employee contributions (2,320,828,918) 5. Pension plan administrative expense (14,731,372) 6. Other 0 7. Net change in plan fiduciary net position (481,475,514) 8. Plan fiduciary net position beginning 17,462,967, Plan fiduciary net position ending $ 16,981,492,342 C. Net pension liability $ 25,989,409,375 D. Plan fiduciary net position as a percentage of the total pension liability % E. Covered-employee payroll $ 3,513,107,948 F. Net pension liability as a percentage of covered-employee payroll % 11

119 State Universities Retirement System of Illinois Exhibit 3 Section C SCHEDULES OF REQUIRED SUPPLEMENTARY INFORMATION SCHEDULE OF CHANGES IN NET PENSION LIABILITY AND RELATED RATIOS MULTIYEAR Last 10 Fiscal Years (which may be built prospectively) Fiscal year ending June 30, Total pension liability Service cost $ 666,374,861 $ 654,968,438 $ 675,257,078 Interest on the total pension liability 2,876,930,310 2,723,714,885 2,643,353,237 Changes of benefit terms Difference between expected and actual experience (3,426,377) 40,408,204 - Changes of assumptions 532,522, ,624, ,585,622 Benefit payments (2,235,812,995) (2,129,977,721) (2,002,869,428) Refunds (85,015,923) (83,715,720) (82,897,092) Net change in total pension liability 1,751,572,774 2,037,022,672 1,363,429,417 Total pension liability - beginning 41,219,328,943 39,182,306,271 37,818,876,854 Total pension liability - ending (a) $ 42,970,901,717 41,219,328,943 $ Plan fiduciary net position Employer & non-employer contributing entity contributions $ 1,584,078,234 $ 1,528,525,398 $ 1,502,863,618 Employee contributions 278,883, ,682, ,081,326 Pension plan net investment income (8,877,234) 503,199,957 2,667,900,403 Benefit payments (2,235,812,995) (2,129,977,721) (2,002,869,428) Refunds (85,015,923) (83,715,720) (82,897,092) Pension plan administrative expense (14,731,372) (14,069,273) (13,857,522) Other Net change in plan fiduciary net position (481,475,514) 71,644,724 2,354,221,305 Plan fiduciary net position - beginning 17,462,967,856 17,391,323,132 15,037,101,827 Plan fiduciary net position - ending (b) $ 16,981,492,342 $ 17,462,967,856 $ 17,391,323,132 Net pension liability - ending (a) - (b) $ 25,989,409,375 $ 23,756,361,087 $ 21,790,983,139 Plan fiduciary net position as a percentage of total pension liability % % % Covered-employee payroll $ 3,513,107,948 $ 3,606,536,514 $ 3,522,245,937 Net pension liability as a percentage of covered-employee payroll % % % $ 39,182,306,271 Single Discount Rate, Beginning of Year 7.12 % 7.09 % 7.12 % Single Discount Rate, End of Year 7.01 % 7.12 % 7.09 % 7.12 % Long-Term Municipal Bond Rate 2.85 % 3.80 % 4.29 % 4.63 % Long-Term Municipal Bond Rate Date June 30, 2016 June 25, 2015 June 26, 2014 June 27, fiscal years will be built prospectively. Covered employee payroll is equal to defined benefit payroll from the actuarial valuation as of the same date and rolled forward with one year of wage inflation at 3.75%. 12

120 State Universities Retirement System of Illinois Exhibit 3 Section C SCHEDULES OF REQUIRED SUPPLEMENTARY INFORMATION SCHEDULE OF THE NET PENSION LIABILITY MULTIYEAR Last 10 Fiscal Years (which may be built prospectively) Total Plan Net Position Net Pension Liability FY Ending Pension Plan Net Net Pension as a % of Total Covered as a % of June 30, Liability Position Liability Pension Liability Payroll Covered Payroll 2014 $ 39,182,306,271 $ 17,391,323,132 $ 21,790,983, % $ 3,522,245, % ,219,328,943 17,462,967,856 23,756,361, % 3,606,536, % ,970,901,717 16,981,492,342 25,989,409, % 3,513,107, % Covered employee payroll is equal to defined benefit payroll from the actuarial valuation as of the same date and rolled forward with one year of wage inflation at 3.75%. 13

121 State Universities Retirement System of Illinois Exhibit 3 Section C SCHEDULE OF CONTRIBUTIONS MULTIYEAR LAST 10 FISCAL YEARS ($ in 000s) Actuarially Contribution Actual Contribution FY Ending Determined Actual Deficiency Covered as a % of June 30, Contribution Contribution (Excess) Payroll Covered Payroll 2007 $ 705,900 $ 261,100 $ 444,800 $ 3,180, % , , ,637 3,303, % , , ,432 3,463, % ,003, , ,731 3,491, % ,259, , ,453 3,460, % ,443, , ,533 3,477, % ,549,287 1,401, ,806 3,533, % ,560,524 1,502,864 57,660 3,522, % ,622,656 1,528,525 94,130 3,606, % ,811,060 1,584, ,981 3,513, % For fiscal years 2015 and prior, the Actuarially Determined Contribution is equal to normal cost plus 30-year open period amortization of the unfunded actuarial accrued liability as a level percentage of total payroll. For fiscal years 2016 and after, the Actuarially Determined Contribution is equal to normal cost plus 29-year closed period amortization of the unfunded actuarial accrued liability (from June 30, 2016) as a level percentage of pensionable (capped) payroll. Covered employee payroll is equal to defined benefit payroll from the actuarial valuation as of the same date and rolled forward with one year of wage inflation at 3.75%. 14

122 State Universities Retirement System of Illinois Exhibit 3 Section C NOTES TO SCHEDULE OF CONTRIBUTIONS Valuation Date: June 30, 2015 Notes Actuarially determined contribution rates are calculated as of June 30, which is 12 months prior to the beginning of the fiscal year in which contributions will be made. Methods and Assumptions Used to Determine Contribution Rates: Actuarial Cost Method Projected Unit Credit Amortization Method The Statutory Contributions is equal to the level percentage of pay contributions determined so that the Plan attains a 90% funded ratio by the end of Remaining Amortization Period Not Applicable. An amortization payment is not directly calculated. The amortization payment is the difference between the total statutory contribution and the employer normal cost contribution. Asset Valuation Method 5 Year smoothed market. Inflation 2.75%. Salary Increases 3.75% to 12.00% including inflation. Investment Rate of Return 7.25% beginning with the actuarial valuation as of June 30, Retirement Age Mortality Experience-based table of rates. Last updated for the 2015 valuation pursuant to an experience study of the period Non-disabled post-retirement mortality uses RP-2014 White Collar Healthy Annuitant, sex distinct with rates set forward 1 year for males and rates set forward 1 year for females. Disabled post-retirement mortality uses RP-2014 Disabled Annuitant, sex distinct with rates set forward 9 years for males and rates set forward 10 years for females. Pre-retirement mortality uses RP-2014 White Collar Employee, sex distinct with rates multiplied by 110% for males younger than 60, and multiplied by 80% for males 60 or older and rates multiplied by 90% for females for all ages. Cost-of-Living Adjustment Other Information: Notes The provision for future mortality improvement is based on the generational application of the MP-2014 improvement scales. 3.00% compound for members hired before January 1, The lesser of 1/2 of CPI-U or 3.00% simple for members hired on or after January 1, The statutory contribution for fiscal year ending June 30, 2015 was determined in the actuarial valuation as of June 30, 2013 and the statutory contribution for fiscal year ending June 30, 2016 was determined in the actuarial valuation as of June 30, All other contributions are projected using current assumptions. 15

123 State Universities Retirement System of Illinois Exhibit 3 Section C SCHEDULE OF INVESTMENT RETURNS MULTIYEAR LAST 10 FISCAL YEARS FY Ending June 30, Annual Return Annual money-weighted rate of return, net of investment expenses. To be provided by SURS. 16

124 Exhibit 3 SECTION D NOTES TO FINANCIAL STATEMENTS Section D Notes to Financial Statements Auditor s Note This information is intended to assist in preparation of the financial statements of the State Universities Retirement System of Illinois. Financial statements are the responsibility of management, subject to the auditor s review. Please let us know if the auditor recommends any changes. 17

125 State Universities Retirement System of Illinois Exhibit 3 Section D Single Discount Rate A Single Discount Rate of 7.01% was used to measure the total pension liability. This Single Discount Rate was based on an expected rate of return on pension plan investments of 7.25% and a municipal bond rate of 2.85%. The projection of cash flows used to determine this Single Discount Rate were the amounts of contributions attributable to current plan members, and assumed that plan member contributions will be made at the current contribution rate and that employer contributions will be made at rates equal to the statutory contribution rates under the System s funding policy. Based on these assumptions, the pension plan s fiduciary net position and future contributions were sufficient to finance the benefit payments through the year As a result, the long-term expected rate of return on pension plan investments was applied to projected benefit payments through the year 2073, and the municipal bond rate was applied to all benefit payments after that date. Regarding the sensitivity of the net pension liability to changes in the Single Discount Rate, the following presents the plan s net pension liability, calculated using a Single Discount Rate of 7.01%, as well as what the plan s net pension liability would be if it were calculated using a Single Discount Rate that is one percent lower or one percent higher: SENSITIVITY OF NET PENSION LIABILITY TO THE SINGLE DISCOUNT RATE ASSUMPTION Current Single Discount 1% Decrease Rate Assumption 1% Increase 6.01% 7.01% 8.01% $ 31,372,969,262 $ 25,989,409,375 $ 21,526,559,421 17

126 State Universities Retirement System of Illinois Exhibit 3 Section D SUMMARY OF POPULATION STATISTICS Inactive Plan Members or Beneficiaries Currently Receiving Benefits 61,020 Inactive Plan Members Entitled to But Not Yet Receiving Benefits 76,984 Active Plan Members 69,381 Total Plan Members 207,385 Excludes SMP. 18

127 Exhibit 3 SECTION E SUMMARY OF BENEFITS Section E Summary of Benefits 19

128 State Universities Retirement System of Illinois Exhibit 3 Section E It should be noted that the purpose of this Appendix is to describe the benefit structures of SURS for which actuarial values have been generated. There is no description of the Self Managed Plan (SMP) and many portions of the defined plans are described in a manner which is not intended to be legally complete or precise. It is not our intent to provide an exhaustive description of all benefits provided under SURS or the policies and procedures utilized by SURS staff. SURS benefits are determined by statute. A more precise description of the provisions of SURS is contained in the Member s Guide, published by SURS staff. 19

129 State Universities Retirement System of Illinois Exhibit 3 Section E GENERAL Plans There are two defined benefit plans available under SURS, the Traditional Plan and the Portable Plan, and one defined contribution plan, the Self Managed Plan (SMP). A Member must select one of these plans within the first six months of participation. If no choice is made in that time, the Traditional Plan is deemed chosen. A new tier of benefits was established for members hired on or after January 1, Members hired before January 1, 2011, ( Tier 1 members ) are not subject to a pay cap. Members hired on or after January 1, 2011, ( Tier 2 members ) are eligible to choose one of the benefit plans. Tier 2 members that participate in the Traditional and Portable Plans are subject to the pay cap established under Public Act The pay cap history is as follows: The pay cap is calculated annually by the Illinois Department of Insurance. The Self Managed Plan is a defined contribution plan under which members contribute 8.0% of compensation and the State contributes 7.6% of compensation. A portion of the employer contribution is used to fund disability benefits for SMP participants. Members hired on or after January 1, 2011, who participate in the SMP are not subject to the pay cap established under Public Act The provisions of the defined benefit plans are identical in many areas. The description below is primarily of the Traditional Plan. Where different, the Portable plan provisions will be described in italics. Member Contributions Year CPI-U ½ CPI-U Pensionable Pay Cap 2011 $106, % 1.95% $108, % 1.00% $109, % 0.60% $110, % 0.85% $111, % 0.00% $111, Most members contribute a total of 8% of compensation. Police officers and firefighters contribute a total of 9.5% of compensation, with the additional 1.5% allocated to the retirement annuity. 20

130 State Universities Retirement System of Illinois Exhibit 3 Section E The total contribution is broken down as follows: Portable Plan members contribute a total of 8% of compensation, but the breakdown set out above does not apply. The retirement annuity portion of the total contribution (8.0% of compensation for police officers and firefighters and 6.5% of compensation for all others) is annuitized for the money purchase formula (Rule 2) calculation. Contributions for members hired on or after January 1, 2011, are assumed not to be made on pay in excess of $106,800 in 2011 ($111,572 in 2016), increased by the lesser of 3% and 1/2 of the increase in CPI-U as measured in the preceding 12-month calendar year. Since January 1, 1981, the member contributions under SURS have been picked up by employers. Effective Rate of Interest Police/Fire All Others Retirement Annuity 8.0% 6.5% Survivor Benefits 1.0% 1.0% Annual Increases in Retirement Benefits 0.5% 0.5% Total Contribution 9.5% 8.0% The Effective Rate of Interest ( ERI ) is the interest rate that is applied to member contribution balances. Effective for the 2006 fiscal year, the ERI for the purpose of determining the money purchase benefit is established by the State Comptroller annually. The ERI for other purposes such as the calculation of purchases of service credit, refunds for excess contributions, portable plan refunds and lump sum portable retirements is determined by the SURS Board annually and certified to the Governor. For purposes of the actuarial valuation, the assumed ERI is 7.00%. For the purposes of withdrawal of contributions at termination or death by Traditional Plan Members, this rate is not greater than 4.5% by statute. Normal Retirement: RETIREMENT BENEFITS Eligibility For police officers and firefighters, separation from service on or after the attainment of the earlier of: 1. Age 55 with 20 years of service, or 2. Age 50 with 25 years of service. 21

131 State Universities Retirement System of Illinois Exhibit 3 Section E For other members hired before January 1, 2011, separation from service on or after attainment of the earlier of: 1. Age 62 with 5 years of service, 2. Age 60 with 8 years of service, and years of service regardless of age. For members hired on or after January 1, 2011, separation from service on or after attainment age 67 with 10 years of service. Initial Benefit Amount There are three alternate formulae. The initial benefit is the largest produced by one of the three: 1. General Formula: The following percentages of high 4 consecutive year average compensation for each year of service: Year of Service 1 st 10 Years 2.20 % 2.25 % Next 10 Years For members hired on or after January 1, 2011, the above percentages of high final eight consecutive year average compensation within the last 10 years of service for each year of service. The pay cap for 2010 through 2013 is shown in the table on the previous page. We have assumed the limit applies to individual pay amounts that are used to develop the final average compensation. 2. Money Purchase Formula: General Police/Fire Over a) The member contributions for retirement benefits (8.0% of compensation for police officers and firefighters and 6.5% of compensation for all others) accumulated with interest at the ERI, plus b) An imputed employer contribution match at $1.40 per dollar of member contribution accumulated with interest at the ERI. c) The total of the accumulations in (a) and (b) is converted into an annuity using a life annuity factor that takes into account neither the automatic 50% spousal survivor benefit nor the automatic annual increases. Members hired on or after July 1, 2005, no longer receive the Money Purchase Formula under the plan. 22

132 State Universities Retirement System of Illinois Exhibit 3 Section E 3. Minimum Benefit A benefit for each year of service, up to 30, based on final annual pay, as follows: Under 3,500 $ 8 $3,500 - $4,500 9 $4,500 - $5, $5,500 - $6, $6,500 - $7, $7,500 - $8, $8,500 - $9, Over $9, Maximum Benefit Minimum Retirement Annuity No retiree shall receive a retirement annuity less than $25 per month for each year of service up to 30. The comparable benefit for survivor benefit recipients is $17.50 per month for each year of service up to % of high 4-year average compensation for members hired before January 1, 2011, and 80% of final 8-year average for members hired on or after January 1, Contribution waivers are applicable to members whose benefits are capped at 80% of final average compensation. Member contributions made once the maximum benefit is achieved are refunded to the member with interest (at the Effective Rate of Interest). The present value of the benefits for pay increases in excess of 6% during the last four years prior to retirement will be paid by the employer. The employer will pay this amount in a lump sum to the Retirement System. Benefit Duration The Normal Retirement benefit is payable for the lifetime of the retired member. If the retiree under the Traditional Plan has a spouse at date of retirement and if that spouse survives the retiree the spouse will receive, upon the death of the retiree, a survivor benefit equal to 50% of the monthly benefit being paid to the retiree as of the date of death. Such benefit will continue for the lifetime of the surviving spouse. The survivor benefit for members hired on or after January 1, 2011, is equal to 66 2/3% of the monthly benefit being paid to the retiree as of the date of death. For retirees under the Portable Plan, the normal form of benefit is a single-life annuity for unmarried participants and a reduced 50% joint and survivor benefit for married participants. With spousal consent, a member may designate a contingent annuitant to receive a joint and survivor annuity or elect a single-life annuity or lump sum distribution. 23

133 State Universities Retirement System of Illinois Exhibit 3 Section E Those providing a joint and survivor annuity will have their benefit reduced to cover the cost of the option. The available joint and survivor options are 50%, 75% and 100%. A member may elect the 75% or 100% spousal joint and survivor annuity without consent. Portable Plan members may also elect to receive their retirement benefit as a lump sum equal to member contributions with an equal employer match (if have at least five years of service), accumulated with interest (at the Effective Rate of Interest that is certified annually by the SURS Board). Annual Increases For members hired before January 1, 2011, each January 1 subsequent to retirement date the monthly benefit being paid each retiree shall be increased by 3%. The adjustment for the first January after retirement shall be proportional based on the portion of the year retired. For members hired on or after January 1, 2011, each January 1 subsequent to retirement date the monthly benefit being paid each retiree shall be increased fifty percent of the Consumer Price Index ( CPI ) up to a maximum of 3% applied to the original benefit. The first increase will be granted upon the later of the attainment of age 67 or the first anniversary of the commencement of the annuity. The historical development of the Annual Increase as determined by the Illinois Department of Insurance for members hired on or after January 1, 2011 can be found in the following table. Early Retirement Eligibility Year CPI-U ½ CPI-U Annual Increase % % 1.95% 1.95% % 1.00% 1.00% % 0.60% 0.60% % 0.85% 0.85% % 0.00% 0.00% For members hired before January 1, 2011, other than police and fire employees, separation from service on or after attainment of age 55 with 8 years of service but not eligible for Normal Retirement. For members hired on or after January 1, 2011, separation from service on or after attainment of age 62 with 10 years of service but not eligible for Normal Retirement. 24

134 State Universities Retirement System of Illinois Exhibit 3 Section E Benefits The benefit amounts and all terms of benefit payment are the same as that for Normal Retirement, except that the benefit amounts calculated under the General Formula and the Minimum Formula shall be reduced by.5% for each month by which the retirement date precedes the 60 th birthday for members hired before January 1, The Minimum Formula shall be reduced by.5% for each month by which the retirement date precedes the 67 th birthday for members hired on or after January 1, Survivor Benefits Traditional Plan Eligibility BENEFITS ON DEATH BEFORE RETIREMENT Payable to eligible survivor(s) (spouse, child or dependent parent) for the death of an active member with at least 1.5 years of service or a terminated member with at least 10 years of service. For this purpose, service under the State Employees Retirement System, the Teachers Retirement System of the State of Illinois and the Public School Teachers Pension Fund of Chicago is recognized. For members hired before January 1, 2011, an annuity to the eligible survivor(s) equal to Benefits the greater of: 1. 50% of the benefit accrued to the date of the death of the member, and 2. The lowest applicable benefit from the following list: a) $400 per month to a single eligible survivor or $600 per month to two or more eligible survivors. b) 30% (one survivor), or 60% (two survivors), or 80% (three or more survivors) of the member s final rate of earnings. c) If member inactive, 80% of base retirement annuity. For members hired on or after January1, 2011, an annuity to the survivor(s) equal to 66 2/3% of the benefit accrued to the date of the death of the member. Benefit Duration Surviving spouse May receive a lifetime benefit commencing at the later of the member s date of death and the spouse s attainment of age 50. May be payable at the date of death if a dependent child in their care is also receiving benefits. Dependent child Payable to unmarried child(ren) under age 18 (over 18 if disabled prior to age 18), and children age if a qualified full-time student. 25

135 State Universities Retirement System of Illinois Exhibit 3 Section E Dependent parent Payable until dependency conditions are not met, so long as they were dependent upon the member at the time of their death. Annual Increases For members hired before January 1, 2011, each January 1 subsequent to retirement date the monthly benefit being paid each survivor annuity recipient shall be increased by 3%. The adjustment for the first January after retirement shall be proportional. For members hired on or after January 1, 2011, each January 1 subsequent to retirement date the monthly benefit being paid each survivor annuity recipient shall be increased fifty percent of the Consumer Price Index ( CPI ) up to a maximum of 3% of the originally granted survivor annuity. The first increase will be granted upon January 1 following the first anniversary of the commencement of the annuity. Portable Plan Eligibility Payable to an eligible spouse for the death of an active or inactive member with at least 1.5 years of SURS service. An annuity to the eligible spouse equal to 50% of the member s earned retirement benefit Benefits after the reductions to pay for the cost of providing the pre-retirement survivor annuity. (Applicable to both Tier 1 and Tier 2 members.) Benefit Duration Surviving spouse May receive a lifetime benefit commencing at the member s earliest retirement age. Annual Increases For members hired before January 1, 2011, each January 1 subsequent to retirement date the monthly benefit being paid each survivor annuity recipient shall be increased by 3%. The adjustment for the first January after retirement shall be proportional. For members hired on or after January 1, 2011, each January 1 subsequent to retirement date the monthly benefit being paid each survivor annuity recipient shall be increased fifty percent of the Consumer Price Index ( CPI ) up to a maximum of 3% of the originally granted survivor annuity. The first increase will be granted upon January 1 following the first anniversary of the commencement of the annuity. 26

136 State Universities Retirement System of Illinois Exhibit 3 Section E Lump Sum Death Benefit Eligibility Death of member prior to retirement. Traditional Plan Benefit With Eligible Survivor Refund of accumulated member contributions for retirement and annual adjustment at 4.5% interest Without Eligible Survivor Refund of the total accumulated member contribution at 4.5% interest, and $5,000 to a dependent beneficiary or $2,500 to a non-dependent beneficiary Portable Plan Benefit With Eligible Spouse Refund of total accumulated member contributions at the full Effective Rate of Interest, plus, if the member has at least 1.5 years of service at death, a like amount of imputed employer contributions less the actuarial equivalent of the Pre-Retirement Survivor Annuity. Without Eligible Spouse Refund of total accumulated member contributions at the full Effective Rate of Interest, plus, if the member has at least 1.5 years of service at death, a like amount of imputed employer contributions. BENEFITS ON DEATH AFTER RETIREMENT In addition to survivor/spouse benefits payable from the System, the following death benefit is payable if a member does not have an eligible survivor/spouse/contingent annuitant: The greater of the total accumulated member contributions or $1,

137 State Universities Retirement System of Illinois Exhibit 3 Section E BENEFITS FOR DISABILITY Disability Benefit Eligibility Disablement after completing two years of service. The service requirement is waived if the disablement is accidental. Disability definition inability to perform the duties of own occupation. Pregnancy and childbirth are, by definition, disablement. Benefit 50% of the basic compensation paid at date of disablement. This base benefit level is offset dollar for dollar by each of the following: 1. Earnings while disabled in excess of the disability benefit. 2. Other disability insurance either fully or partially employer provided. 3. Worker s compensation benefits. Benefits become payable on the later of the termination of salary and sick leave, or the 61 st Duration of Benefit day after disablement and continue to the earlier of the following: 1. Recovery or death. 2. Benefits paid equal 50% of total compensation during the period of SURS service. 3. If disablement occurs prior to age 65, the disability benefit may not continue past the August 31 following 70 th birthday. 4. If disablement occurs at or after attainment of age 65, completion of 5 years in disablement. Survivor and death benefits are payable if a member dies while receiving disability benefits. If, at discontinuance of the disability benefit, the member is eligible for a retirement benefit (based on service, which includes the period of disability and may also include time receiving a disability retirement annuity), the member may retire and receive that benefit. The member may commence the retirement benefit once age and service requirements are met. The early retirement reduction does not apply for members that began first participating prior to January 1, 2011 (Tier 1). The benefit is based on the greatest of three formulas (General Formula, Money Purchase and Minimum Benefit), 28

138 State Universities Retirement System of Illinois Exhibit 3 Section E subject to applicable maximums. Contributions are not made during the disability period. However, accumulated contributions continue to accrue interest. Annual Increases Each January 1 subsequent to retirement date the monthly benefit being paid each retiree shall be increased by 3%. The adjustment for the first January after retirement shall be proportional. Disability Retirement Annuity Eligibility Continuing disablement after discontinuation of the disability benefit as a result of reaching the 50% of total earnings limitation. Disability is defined in accordance with the Social Security disability definition. Benefit 35% of the compensation being earned at disablement. Duration of Benefit Benefits become payable upon discontinuance of the disability benefit and continue to the earlier of the following: 1. Recovery or death 2. Election to receive a retirement benefit Survivor and death benefits are payable if a member dies while receiving a disability retirement annuity. Annual Increases Each January 1 subsequent to retirement date the monthly benefit being paid each retiree shall be increased by 3%. The adjustment for the first January after retirement shall be proportional. For members hired on or after January 1, 2011, if the member converts to a service retirement annuity (item 2 above), each January 1 subsequent to retirement date the monthly benefit being paid each retiree shall be increased fifty percent of the Consumer Price Index ( CPI ) up to a maximum of 3% of the originally granted benefit. The first increase will be granted upon the later of the attainment of age 67 or the first anniversary of the commencement of the annuity. 29

139 State Universities Retirement System of Illinois Exhibit 3 Section E BENEFITS FOR DEFERRED MEMBERS Eligibility Benefit For members hired before January 1, 2011, separation from employment with at least 5 years of service and separation from employment with at least 10 years of service for members hired on or after January 1, Benefit as defined for normal retirement purposes, but calculated based on final average compensation and service at date of termination. Commencement of Benefit Benefits commence when member reaches the age condition for either normal or early retirement. Annual Increases For members hired before January 1, 2011, each January 1 subsequent to retirement date the monthly benefit being paid each retiree shall be increased by 3%. The adjustment for the first January after retirement shall be proportional. For members hired on or after January 1, 2011, each January 1 subsequent to retirement date the monthly benefit being paid each retiree shall be increased fifty percent of the Consumer Price Index ( CPI ) up to a maximum of 3% applied to the original benefit. The first increase will be granted upon the later of the attainment of age 67 or the first anniversary of the commencement of the annuity. 30

140 Exhibit 3 SECTION F ACTUARIAL COST METHOD AND ACTUARIAL ASSUMPTIONS Section F Actuarial Cost Methods and Assumptions 31

141 State Universities Retirement System of Illinois Exhibit 3 Section F VALUATION METHODS CALCULATION OF THE TOTAL PENSION LIABILITY ENTRY AGE NORMAL METHOD Actuarial Cost Method - Normal cost and the allocation of benefit values between service rendered before and after the valuation date were determined using an Individual Entry-Age Actuarial Cost Method having the following characteristics: (i) The annual normal cost for each individual active member, payable from the date of employment to the date of retirement, is sufficient to accumulate the value of the member s benefit at the time of retirement; (ii) Each annual normal cost is a constant percentage of the member s year by year projected covered pay. VALUATION METHODS CALCULATION OF CONTRIBUTIONS PROJECTED UNIT CREDIT METHOD The Projected Unit Credit Method is mandated under Section as the funding method to be used for all purposes under SURS. The concept of this method is that funding of benefits should occur as benefits are accrued (earned) by active members of SURS. The Normal Cost ( NC ) for a fiscal year under this method is the actuarial present value of all benefits expected to be accrued during the fiscal year adjusted for future expected salary increases. The Actuarial Accrued Liability ( AAL ) under this method is the actuarial present value of all benefits accrued to the valuation date. To the extent that the assets of the fund are insufficient to cover the AAL, an Unfunded Actuarial Accrued Liability ( UAAL ) develops. Under the classical application of this method, the contribution for a year is the NC for that year plus an amount to amortize the UAAL. Under Section , the employer/state contribution is determined such that the assets of SURS reach 90% of the AAL by the end of FY This contribution is determined as a level percentage of pay for all years except that the contribution rates through 2010 shall grade in equal steps to the desired level contribution rate. We have assumed the contribution would be based on pensionable (capped) payroll for members hired on or after January 1, 2011 ( Tier 2 members ). Pensionable pay does not include amounts in excess of the pay cap ($111,572 in 2015, increased by the lesser of 3% and 1/2 of the increase in CPI-U as measured in the preceding 12-month calendar year) that is applicable to members hired on or after January 1, 2011, participating in the defined benefit plans. 31

142 State Universities Retirement System of Illinois Exhibit 3 Section F ACTUARIAL ASSUMPTIONS (MOST ADOPTED EFFECTIVE WITH THE JUNE 30, 2015 ACTUARIAL VALUATION) Under statute (a), the Board adopts the assumptions after consultation with the actuary. All actuarial assumptions are expectations of future experience and are not market measures. The rationale for the assumption may be found in the experience study report issued to the Board of Trustees on January 16, Rate of Investment Return. For all purposes under the system the rate of investment return is assumed to be 7.25% per annum beginning with the June 30, 2014, valuation. This assumption is net of investment expenses. Price Inflation (Increase in Consumer Price Index CPI ). The assumed rate is 2.75% per annum. Effective Rate of Interest. The actuarial valuation assumed rate credited to member accounts is 7.00% per annum, beginning with the June 30, 2013 actuarial valuation. Cost of Living Adjustment COLA. The assumed rate is 3.00% per annum for members hired before January 1, 2011, based on the benefit provision of 3.00% annual compound increases. The assumed rate is 1.375% for members hired on or after January 1, 2011, based on the benefit provision of increases equal to ½ of the increase in CPI with a maximum increase of 3.00%. Annual Compensation Increases. Each member s compensation is assumed to increase by 3.75% each year, 2.75% reflecting salary inflation and 1.00% reflecting standard of living increases. That rate is increased for members with less than 34 years of service. The total assumed increase follows: Service Year Total Increase % % % % % % % % % % % % % % % Payroll Growth. The assumed rate of total payroll growth is 3.75%. 32

143 State Universities Retirement System of Illinois Exhibit 3 Section F ACTUARIAL ASSUMPTIONS (MOST ADOPTED EFFECTIVE WITH THE JUNE 30, 2015 ACTUARIAL VALUATION) (CONTINUED) Mortality. The mortality assumptions are as follows: Base Table with 2014 Base Year RP-2014 White Collar Employee, sex distinct (pre-retirement) RP-2014 White Collar Healthy Annuitant, sex distinct (nondisabled post-retirement) RP-2014 Disabled Annuitant, sex distinct (disabled post-retirement) Male Set Forward Female Set Forward Male Multiplier Female Multiplier None None 110% pre 90% pre 60, 60, 80% at 90% at ages ages year 1 year 100% 100% 9 years 10 years 100% 100% The provision for future mortality improvement is based on the generational application of the MP-2014 improvement scales. Future Life Expectancy (years) in 2016 Future Life Expectancy (years) in 2030 Age Male Female Male Female Male Female Male Female Postretirement Disabled - Retiree Postretirement Disabled - Retiree

144 State Universities Retirement System of Illinois Exhibit 3 Section F ACTUARIAL ASSUMPTIONS (MOST ADOPTED EFFECTIVE WITH THE JUNE 30, 2015 ACTUARIAL VALUATION) (CONTINUED) Disability. A table of disability incidence with rates follows: Age Male Female Age Male Female % 0.060% % 0.249% % 0.064% % 0.257% % 0.067% % 0.264% % 0.071% % 0.272% % 0.074% % 0.279% % 0.078% % 0.287% % 0.081% % 0.294% % 0.085% % 0.302% % 0.088% % 0.309% % 0.092% % 0.317% % 0.099% % 0.324% % 0.107% % 0.332% % 0.114% % 0.339% % 0.122% % 0.347% % 0.129% % 0.354% % 0.137% % 0.362% % 0.144% % 0.369% % 0.152% % 0.377% % 0.159% % 0.384% % 0.167% % 0.392% % 0.174% % 0.392% % 0.182% % 0.392% % 0.189% % 0.392% % 0.197% % 0.392% % 0.204% % 0.392% % 0.212% % 0.392% % 0.219% % 0.392% % 0.227% % 0.392% % 0.234% % 0.392% % 0.242% % 0.392% Disability rates apply during the retirement eligibility period. 34

145 State Universities Retirement System of Illinois Exhibit 3 Section F ACTUARIAL ASSUMPTIONS (MOST ADOPTED EFFECTIVE WITH THE JUNE 30, 2015 ACTUARIAL VALUATION) (CONTINUED) Retirement. Upon eligibility, active members are assumed to retire as follows: Members Hired Before January 1, 2011 Members Hired on or after January 1, and Eligible for 2011 and Eligible for Age Normal Retirement Early Retirement Normal Retirement Early Retirement Under % % % % Members that retire are assumed to elect the most valuable option on a present value basis refund of contributions (or portable lump sum retirement, if applicable) or a retirement annuity. 35

146 State Universities Retirement System of Illinois Exhibit 3 Section F ACTUARIAL ASSUMPTIONS (MOST ADOPTED EFFECTIVE WITH THE JUNE 30, 2015 ACTUARIAL VALUATION) (CONTINUED) General Turnover. A table of termination rates based on experience in the period. The assumption is a table of turnover rates by years of service. A sample of these rates follows: Years of Service All Members % Part-time members with less than 3 years of service (all members classified as part time for valuation purposes) are assumed to terminate at the valuation date. Members that terminate with at least 5 years of service (10 years of service for Tier 2 members) are assumed to elect the most valuable option on a present value basis refund of contributions or a deferred benefit. Termination rate for 29 years of service used for Tier 2 members until retirement eligibility is met. 36

147 State Universities Retirement System of Illinois Exhibit 3 Section F ACTUARIAL ASSUMPTIONS (MOST ADOPTED EFFECTIVE WITH THE JUNE 30, 2015 ACTUARIAL VALUATION) (CONTINUED) Operational Expenses. The amount of operational expenses for administration incurred in the latest fiscal year are supplied by SURS staff and incorporated in the Normal Cost. Marital Status. Members are assumed to be married in the following proportions: Age Males Females % 40 % Spouse Age. The female spouse is assumed to be 3 years younger than the male spouse. Benefit Commencement Age. Inactive members eligible for a deferred benefit are assumed to commence benefits at their earliest normal retirement age. For Tier 1 members this is age 62 with at least 5 years of service, age 60 with at least 8 years of service, or immediately if at least 30 years of service. For Tier 2 members, this is age 67 with 10 or more years of service. Load on Final Average Salary. No load is assumed to account for higher than assumed pay increases in final years of employment before retirement. Load on Liabilities for Service Retirees With Non-finalized Benefits. A load of 10% on liabilities for service retirees whose benefits have not been finalized as of the valuation date is assumed to account for finalized benefits that on average are 10% higher than 100% of the preliminary estimated benefit. A load of 5% is used if a best formula benefit was provided in the data by Staff. Valuation of Inactives. An annuity benefit is estimated based on information provided by staff for Tier 1 inactive members with five or more years of service and Tier 2 members with 10 or more years of service. Assumption for Missing Data. Members with an unknown gender are assumed to be female. Active and inactive members with an unknown date of birth are assumed to be 37 years old at the valuation. An assumed spouse date of birth is calculated for current service retirees in the traditional plan for purposes of calculating future survivor benefits. The female spouse is assumed to be 3 years younger than the male spouse. 70% of current total male retirees and 80% of current total female retirees in the traditional plan that have not elected a survivor refund are assumed to have a spouse at the valuation date. 37

148 State Universities Retirement System of Illinois Exhibit 3 Section F ACTUARIAL ASSUMPTIONS (MOST ADOPTED EFFECTIVE WITH THE JUNE 30, 2015 ACTUARIAL VALUATION) (CONTINUED) Reciprocal Service. Reciprocal service is included for current inactive members for purposes of determining vesting eligibility and eligibility age to commence benefits. The recently updated actuarial assumptions (including retirement and termination rates) were based on SURS service only. Therefore, reciprocal service was not included for current active members. Reciprocal service will be collected and analyzed in the future and will be considered in the next experience review. Projection Assumptions. The number of total active members throughout the projection period will remain the same as the total number of active members in the defined benefit plans and the SMP in the current valuation. 30% of total future hires will elect to participate in the Self Managed Plan. New entrants have an average age of 37.2 and average capped pay of $36,607 and average uncapped pay of $37,954 (2015 dollars). These values are based on the average age and average pay of current members. The range profile is based on the age at hire and assumed pay at hire (using the actuarial assumptions, inflated to 2015 dollars) of current active members with service between one and four years. Average Pay Average Pay Average Pay Age Number Males Capped Male Uncapped Male Number Females Capped Female Uncapped Female Total Number Capped Total Uncapped Total <20 63 $15,625 $15, $14,030 $14, $14,919 $14, ,868 27,868 1,198 26,866 26,866 1,935 27,248 27, ,830 37,401 38,058 2,406 34,209 34,275 4,236 35,588 35, ,622 43,460 44,993 2,029 37,989 38,733 3,651 40,419 41, ,068 45,119 48,118 1,378 37,205 38,062 2,446 40,661 42, ,908 45,651 1,177 36,194 37,190 2,006 38,969 40, ,675 46,460 1,004 33,367 34,424 1,728 37,267 39, ,025 46, ,002 33,340 1,550 36,386 39, ,799 41, ,298 33,933 1,092 34,696 37, ,456 40, ,022 32, ,758 36, ,789 17, ,405 25, ,965 19,965 Total 8,311 39,843 42,039 10,999 34,163 34,867 19,310 36,607 37,954 SMP Contribution Assumptions. The projected SMP contributions are equal to 7.6% of SMP payroll, plus estimated SMP expenses minus SMP employer forfeitures. Estimated SMP expenses for FY 2016 are $488,530 and SMP employer forfeitures used to reduce the certified contributions for FY 2017 are $4,235,356. Estimated SMP expenses for FY 2017 and after are assumed to increase by 2.75%. Estimated SMP employer forfeitures used to reduce the certified contributions for FY 2018 and after are assumed to be 7.5% of the gross SMP employer contribution. 38

149 State Universities Retirement System of Illinois Exhibit 3 Section F ACTUARIAL ASSUMPTIONS (MOST ADOPTED EFFECTIVE WITH THE JUNE 30, 2015 ACTUARIAL VALUATION) (CONTINUED) Pensionable Earnings Greater than 6%. No additional assumption was made for earnings used in the calculation of the final average compensation. The participant s employer is required to pay the present value of the increase in benefits resulting from the portion of the increase in excess of 6.00%. 39

150 Exhibit 3 SECTION G CALCULATION OF THE SINGLE DISCOUNT RATE Section G Calculation of the Single Discount Rate 40

151 State Universities Retirement System of Illinois Exhibit 3 Section G CALCULATION OF THE SINGLE DISCOUNT RATE GASB Statement No. 67 includes a specific requirement for the discount rate that is used for the purpose of the measurement of the Total Pension Liability. This rate considers the ability of the Fund to meet benefit obligations in the future. To make this determination, employer contributions, employee contributions, benefit payments, expenses and investment returns are projected into the future. The Plan Net Position (assets) in future years can then be determined and compared to its obligation to make benefit payments in those years. As long as assets are projected to be on hand in a future year, the assumed valuation discount rate is used. In years where assets are not projected to be sufficient to meet benefit payments, the use of a municipal bond rate is required, as described in the following paragraph. The Single Discount Rate (SDR) is equivalent to applying these two rates to the benefits that are projected to be paid during the different time periods. The SDR reflects (1) the long-term expected rate of return on pension plan investments (during the period in which the fiduciary net position is projected to be sufficient to pay benefits) and (2) a tax-exempt municipal bond rate based on an index of 20-year general obligation bonds with an average AA credit rating (which is published by the Federal Reserve) as of the measurement date (to the extent that the contributions for use with the long-term expected rate of return are not met). For the purpose of this valuation, the expected rate of return on pension plan investments is 7.25%; the municipal bond rate is 2.85%; and the resulting Single Discount Rate is 7.01%. The tables in this section provide detailed information on the development of the Single Discount Rate. The Projection of Contributions table shows the development of expected contributions in future years. Normal Cost contributions for future hires are not included (nor are their liabilities). The Projection of Plan Fiduciary Net Position table shows the development of expected asset levels in future years. The Present Values of Projected Benefit Payments table shows the development of the Single Discount Rate (SDR). It breaks down the benefit payments into present values for funded and unfunded portions and shows the equivalent total at the SDR. As shown on Page 44, the sum of the present value of (1) the funded portion of projected benefit payments using the expected 7.25% rate of return on assets plus (2) the present value of the unfunded projected benefit payments using a tax-exempt municipal bond rate of 2.85% is equal to the present value of all projected benefit payments using a single equivalent discount rate of 7.01%. 40

152 State Universities Retirement System of Illinois Exhibit 3 Section G SINGLE DISCOUNT RATE DEVELOPMENT PROJECTION OF CONTRIBUTIONS ENDING JUNE 30 FOR 2016 TO 2065 Year Projected Contributions from Current Employees Projected Service Cost and Expense Contributions Projected UAL Contributions Projected Total Contributions 0 1 $ 271,642,397 $ 389,402,660 $ 1,211,032,936 $ 1,872,077, ,231, ,024,285 1,291,206,769 1,912,462, ,272, ,226,808 1,334,612,280 1,919,111, ,336, ,556,380 1,365,839,628 1,916,732, ,492, ,508,935 1,407,954,433 1,927,955, ,475, ,497,162 1,473,616,462 1,964,588, ,938, ,519,527 1,528,663,585 1,992,121, ,797, ,164,813 1,585,430,965 2,022,393, ,940, ,361,672 1,643,051,038 2,054,352, ,406, ,022,457 1,701,533,548 2,087,962, ,301, ,233,086 1,761,320,596 2,123,855, ,432, ,083,177 1,822,581,351 2,162,096, ,929, ,383,132 1,885,352,327 2,202,664, ,573, ,264,824 1,948,881,085 2,244,719, ,246, ,470,630 2,007,082,976 2,281,799, ,959, ,862,628 2,068,208,049 2,322,030, ,806, ,479,554 2,137,240,889 2,370,527, ,070, ,519,914 2,214,431,935 2,428,022, ,624, ,300,346 2,290,919,228 2,485,844, ,315,882 94,702,410 2,364,464,654 2,541,482, ,130,785 84,672,007 2,439,160,568 2,598,963, ,072,927 75,189,409 2,515,540,786 2,658,803, ,294,259 66,167,709 2,594,025,450 2,721,487, ,982,408 57,736,141 2,674,749,808 2,787,468, ,158,566 50,070,253 2,757,192,203 2,856,421, ,223,873 43,186,921 2,842,337,671 2,929,748, ,919,296 37,495,980 2,929,155,816 3,006,571, ,049,494 32,685,940 3,017,663,867 3,086,399, ,441,892 28,540,560 3,107,504,664 3,168,487, ,066,080 24,883,339 3,198,823,144 3,252,772, ,868,497 21,651, ,555, ,075, ,794,908 18,751, ,957, ,503, ,863,697 16,118, ,302, ,284, ,004,856 13,756, ,729, ,490, ,315,386 11,567, ,022, ,905, ,850,980 9,585, ,585, ,021, ,677,424 7,816, ,114, ,608, ,755,257 6,317, ,173, ,246, ,103,404 5,032, ,466, ,602, ,723,347 3,938, ,215, ,877, ,607,924 3,025, ,231, ,865, ,724,221 2,291, ,543, ,558, ,030,226 1,710, ,189, ,930, ,509,397 1,255, ,201, ,966, ,125, , ,556, ,594, , , ,275, ,777, , , ,378, ,489, , , ,836, ,653, , , ,637, ,233, , , ,760, ,193,542 Year 1 is the year beginning June 30, 2015, and ending June 30, The projections in this report are strictly for the purpose of determining the GASB single discount rate and are different from a funding projection for the ongoing plan. 41

153 State Universities Retirement System of Illinois Exhibit 3 Section G SINGLE DISCOUNT RATE DEVELOPMENT PROJECTION OF PLAN NET POSITION ENDING JUNE 30 FOR 2016 TO 2065 Year Projected Beginning Plan Net Position Projected Total Contributions Projected Benefit Payments Projected Administrative Expenses Projected Investment Earnings at 7.250% Projected Ending Plan Net Position (a) (b) (c) (d) (e) (f)=(a)+(b)-(c)-(d)+(e) 1 $ 17,462,967,856 $ 1,872,077,993 $ 2,307,847,990 $ 14,374,546 $ 1,250,032,930 $ 18,262,856, ,262,856,244 1,912,462,342 2,403,581,220 13,907,552 1,306,070,178 19,063,899, ,063,899,992 1,919,111,920 2,511,513,147 13,435,151 1,360,555,427 19,818,619, ,818,619,041 1,916,732,806 2,616,684,468 13,008,268 1,411,457,272 20,517,116, ,517,116,382 1,927,955,512 2,726,739,546 12,609,235 1,458,592,551 21,164,315, ,164,315,663 1,964,588,994 2,835,958,034 12,220,308 1,502,943,180 21,783,669, ,783,669,496 1,992,121,307 2,944,674,229 11,827,911 1,544,968,883 22,364,257, ,364,257,546 2,022,393,630 3,053,472,710 11,427,426 1,584,279,012 22,906,030, ,906,030,052 2,054,352,909 3,162,015,906 11,019,788 1,620,844,442 23,408,191, ,408,191,709 2,087,962,387 3,273,315,421 10,608,582 1,654,498,818 23,866,728, ,866,728,911 2,123,855,411 3,381,943,364 10,200,381 1,685,166,795 24,283,607, ,283,607,372 2,162,096,661 3,488,666,804 9,784,754 1,712,966,241 24,660,218, ,660,218,715 2,202,664,660 3,590,709,447 9,371,496 1,738,095,815 25,000,898, ,000,898,247 2,244,719,241 3,689,623,992 8,950,144 1,760,784,978 25,307,828, ,307,828,329 2,281,799,685 3,787,441,209 8,514,320 1,780,889,744 25,574,562, ,574,562,229 2,322,030,015 3,823,161,255 8,064,086 1,800,404,625 25,865,771, ,865,771,527 2,370,527,310 3,907,557,473 7,606,468 1,820,255,030 26,141,389, ,141,389,926 2,428,022,390 3,982,899,804 7,158,924 1,839,617,660 26,418,971, ,418,971,249 2,485,844,075 4,050,466,592 6,715,031 1,859,411,036 26,707,044, ,707,044,737 2,541,482,945 4,111,415,982 6,265,395 1,880,123,240 27,010,969, ,010,969,547 2,598,963,360 4,164,983,563 5,809,532 1,902,313,383 27,341,453, ,341,453,195 2,658,803,122 4,210,315,076 5,347,541 1,926,806,624 27,711,400, ,711,400,324 2,721,487,417 4,248,638,642 4,890,926 1,954,511,680 28,133,869, ,133,869,852 2,787,468,357 4,276,734,649 4,454,948 1,986,505,549 28,626,654, ,626,654,161 2,856,421,022 4,292,838,638 4,043,291 2,024,129,318 29,210,322, ,210,322,573 2,929,748,465 4,295,248,464 3,689,582 2,068,983,661 29,910,116, ,910,116,653 3,006,571,092 4,281,304,207 3,377,104 2,122,962,592 30,754,969, ,754,969,026 3,086,399,301 4,256,594,925 3,092,471 2,187,947,709 31,769,628, ,769,628,639 3,168,487,115 4,220,753,940 2,822,684 2,265,720,263 32,980,259, ,980,259,393 3,252,772,564 4,174,460,012 2,565,734 2,358,150,828 34,414,157, ,414,157, ,075,548 4,120,800,959 2,317,487 2,365,988,963 33,157,103, ,157,103, ,503,991 4,059,184,023 2,073,442 2,276,892,959 31,868,242, ,868,242, ,284,665 3,991,053,706 1,835,294 2,185,735,292 30,552,373, ,552,373, ,490,525 3,919,271,127 1,596,761 2,092,764,742 29,211,760, ,211,760, ,905,217 3,842,684,114 1,366,720 1,998,178,531 27,849,793, ,849,793, ,021,663 3,763,103,500 1,150,829 1,902,175,230 26,468,736, ,468,736, ,608,457 3,678,612, ,195 1,804,978,759 25,072,754, ,072,754, ,246,719 3,590,821, ,994 1,706,854,630 23,665,255, ,665,255, ,602,778 3,500,206, ,096 1,608,020,796 22,249,047, ,249,047, ,877,189 3,406,333, ,791 1,508,703,569 20,827,801, ,827,801, ,865,351 3,307,302, ,567 1,409,229,421 19,407,210, ,407,210, ,558,286 3,203,048, ,206 1,310,013,106 17,993,438, ,993,438, ,930,664 3,094,205, ,312 1,211,478,162 16,592,417, ,592,417, ,966,901 2,981,481, ,077 1,114,028,937 15,209,761, ,209,761, ,594,118 2,865,195, ,376 1,018,058,648 13,851,089, ,851,089, ,777,742 2,746,497,691 99, ,932,525 12,521,203, ,521,203, ,489,579 2,626,582,888 76, ,955,240 11,223,988, ,223,988, ,653,238 2,506,024,411 58, ,385,544 9,962,945, ,962,945, ,233,501 2,385,177,628 44, ,463,167 8,741,420, ,741,420, ,193,542 2,264,240,841 33, ,422,513 7,562,762,138 Year 1 is the year beginning June 30, 2015, and ending June 30, The projections in this report are strictly for the purpose of determining the GASB single discount rate and are different from a funding projection for the ongoing plan. 42

154 State Universities Retirement System of Illinois Exhibit 3 Section G SINGLE DISCOUNT RATE DEVELOPMENT PRESENT VALUES OF PROJECTED BENEFITS ENDING JUNE 30 FOR 2016 TO 2065 Year (a) Projected Beginning Plan Net Position Projected Benefit Payments Funded Portion of Projected Benefit Payments Unfunded Portion of Projected Benefit Payments Present Value of Funded Benefit Payments using Expected Return Rate (v) Present Value of Unfunded Benefit Payments using Municipal Bond Rate (vf) Present Value of All Benefit Payments using Single Discount Rate (SDR) (b) (c) (d) (e) (f)=(d)*v^((a)-.5) (g)=(e)*vf ^((a)-.5) (h)=((c)/(1+sdr)^(a-.5) 1 $ 17,462,967,856 $ 2,322,222,536 $ 2,322,222,536 $ 0 $ 2,242,359,211 $ 0 $ 2,244,918, ,262,856,244 2,417,488,772 2,417,488, ,176,549, ,184,010, ,063,899,992 2,524,948,298 2,524,948, ,119,625, ,131,749, ,818,619,041 2,629,692,737 2,629,692, ,058,327, ,074,828, ,517,116,382 2,739,348,781 2,739,348, ,999,214, ,019,844, ,164,315,663 2,848,178,342 2,848,178, ,938,126, ,962,597, ,783,669,496 2,956,502,140 2,956,502, ,875,839, ,903,863, ,364,257,546 3,064,900,137 3,064,900, ,813,161, ,844,452, ,906,030,052 3,173,035,694 3,173,035, ,750,241, ,784,512, ,408,191,709 3,283,924,003 3,283,924, ,688,957, ,725,961, ,866,728,911 3,392,143,745 3,392,143, ,626,681, ,666,118, ,283,607,372 3,498,451,559 3,498,451, ,564,252, ,605,834, ,660,218,715 3,600,080,943 3,600,080, ,500,880, ,544,296, ,000,898,247 3,698,574,137 3,698,574, ,437,708, ,482,676, ,307,828,329 3,795,955,529 3,795,955, ,375,815, ,422,088, ,574,562,229 3,831,225,342 3,831,225, ,294,730, ,341,333, ,865,771,527 3,915,163,941 3,915,163, ,233,657, ,280,980, ,141,389,926 3,990,058,727 3,990,058, ,172,266, ,220,015, ,418,971,249 4,057,181,623 4,057,181, ,111,410, ,159,321, ,707,044,737 4,117,681,376 4,117,681, ,051,732, ,099,576, ,010,969,547 4,170,793,094 4,170,793, ,285, ,040,842, ,341,453,195 4,215,662,618 4,215,662, ,103, ,163, ,711,400,324 4,253,529,568 4,253,529, ,663, ,049, ,133,869,852 4,281,189,597 4,281,189, ,471, ,989, ,626,654,161 4,296,881,929 4,296,881, ,427, ,887, ,210,322,573 4,298,938,046 4,298,938, ,489, ,706, ,910,116,653 4,284,681,311 4,284,681, ,486, ,271, ,754,969,026 4,259,687,396 4,259,687, ,515, ,756, ,769,628,639 4,223,576,624 4,223,576, ,588, ,189, ,980,259,393 4,177,025,746 4,177,025, ,842, ,728, ,414,157,038 4,123,118,446 4,123,118, ,649, ,789, ,157,103,103 4,061,257,465 4,061,257, ,863, ,232, ,868,242,588 3,992,889,001 3,992,889, ,558, ,155, ,552,373,544 3,920,867,887 3,920,867, ,900, ,754, ,211,760,923 3,844,050,834 3,844,050, ,623, ,761, ,849,793,836 3,764,254,329 3,764,254, ,743, ,210, ,468,736,401 3,679,568,745 3,679,568, ,953, ,784, ,072,754,873 3,591,601,216 3,591,601, ,249, ,493, ,665,255,005 3,500,831,248 3,500,831, ,523, ,238, ,249,047,331 3,406,826,352 3,406,826, ,613, ,851, ,827,801,737 3,307,685,848 3,307,685, ,282, ,088, ,407,210,662 3,203,343,216 3,203,343, ,434, ,855, ,993,438,837 3,094,430,191 3,094,430, ,013, ,101, ,592,417,472 2,981,651,860 2,981,651, ,962, ,773, ,209,761,451 2,865,324,529 2,865,324, ,201, ,793, ,851,089,688 2,746,596,847 2,746,596, ,688, ,124, ,521,203,108 2,626,659,023 2,626,659, ,374, ,719, ,223,988,904 2,506,082,435 2,506,082, ,182, ,504, ,962,945,252 2,385,221,828 2,385,221, ,031, ,394, ,741,420,092 2,264,274,009 2,264,274, ,837, ,306,041 Year 1 is the year beginning June 30, 2015, and ending June 30, The projections in this report are strictly for the purpose of determining the GASB single discount rate and are different from a funding projection for the ongoing plan. 43

155 State Universities Retirement System of Illinois Exhibit 3 Section G SINGLE DISCOUNT RATE DEVELOPMENT PRESENT VALUES OF PROJECTED BENEFITS ENDING JUNE 30 FOR 2066 TO 2115 (CONCLUDED) Year (a) Projected Beginning Plan Net Position Projected Benefit Payments Funded Portion of Projected Benefit Payments Unfunded Portion of Projected Benefit Payments Present Value of Funded Benefit Payments using Expected Return Rate (v) Present Value of Unfunded Benefit Payments using Municipal Bond Rate (vf) Present Value of All Benefit Payments using Single Discount Rate (SDR) (b) (c) (d) (e) (f)=(d)*v^((a)-.5) (g)=(e)*vf ^((a)-.5) (h)=((c)/(1+sdr)^(a-.5) 51 $ 7,562,762,138 $ 2,143,472,352 $ 2,143,472,352 $ 0 $ 62,525,071 $ 0 $ 70,159, ,430,292,031 2,022,987,447 2,022,987, ,021, ,881, ,347,309,046 1,902,977,103 1,902,977, ,258, ,399, ,317,421,645 1,783,634,475 1,783,634, ,174, ,649, ,343,908,146 1,665,235,282 1,665,235, ,713, ,573, ,430,255,533 1,548,126,364 1,548,126, ,824, ,119, ,579,775,712 1,432,672,584 1,432,672, ,459, ,237, ,641,723 1,319,299, ,641, ,657,552 14,219, ,063,960 26,882, ,208,475, ,208,475, ,499,784 23,012, ,100,658, ,100,658, ,774,586 19,586, ,320, ,320, ,986,580 16,569, ,943, ,943, ,116,862 13,924, ,996, ,996, ,140,097 11,619, ,932, ,932, ,023,387 9,622, ,162, ,162, ,724,124 7,904, ,043, ,043, ,189,282 6,437, ,873, ,873, ,355,212 5,194, ,871, ,871, ,147,161 4,150, ,168, ,168, ,479,105 3,281, ,801, ,801, ,254,589 2,566, ,704, ,704, ,368,199 1,983, ,717, ,717, ,707,206 1,513, ,581, ,581, ,153,302 1,140, ,949, ,949, ,585, , ,405, ,405, ,881, , ,476, ,476, ,924, , ,652, ,652, ,600, , ,406, ,406, ,803, , ,218, ,218, ,438, , ,592, ,592, ,419, , ,064, ,064, ,672,683 68, ,217, ,217, ,135,700 45, ,690, ,690, ,004 28, ,174, ,174, ,198 18, ,415, ,415, ,822 11, ,211, ,211, ,068 6, ,403, ,403, ,477 4, , , ,684 2, , , ,255 1, , , , , , , , , , , , , , , , , , , , , , , , , Totals $ 45,507,299,444 $ 1,689,515,911 $ 47,196,815,355 Year 1 is the year beginning June 30, 2015, and ending June 30, The projections in this report are strictly for the purpose of determining the GASB single discount rate and are different from a funding projection for the ongoing plan. 44

156 State Universities Retirement System of Illinois Exhibit 3 Section G $ [thousands] PROJECTION OFPLAN NET POSITION AND BENEFIT PAYMENTS 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000, Projected Plan Net Position Projected Benefit Payments for Current Members Year Year 1 is the year beginning June 30, 2015, and ending June 30, The projections in this report are strictly for the purpose of determining the GASB single discount rate and are different from a funding projection for the ongoing plan. 45

157 Exhibit 3 SECTION H GLOSSARY OF TERMS Section H Financial Statements 46

158 State Universities Retirement System of Illinois Exhibit 3 Section H GLOSSARY OF TERMS Accrued Service Actuarial Accrued Liability (AAL) Actuarial Assumptions Actuarial Cost Method Actuarial Equivalent Actuarial Gain (Loss) Actuarial Present Value (APV) Actuarial Valuation Actuarial Valuation Date Actuarially Determined Contribution (ADC) or Annual Required Contribution (ARC) Service credited under the system that was rendered before the date of the actuarial valuation. The AAL is the difference between the actuarial present value of all benefits and the actuarial value of future normal costs. The definition comes from the fundamental equation of funding which states that the present value of all benefits is the sum of the Actuarial Accrued Liability and the present value of future normal costs. The AAL may also be referred to as "accrued liability" or "actuarial liability." These assumptions are estimates of future experience with respect to rates of mortality, disability, turnover, retirement, rate or rates of investment income and compensation increases. Actuarial assumptions are generally based on past experience, often modified for projected changes in conditions. Economic assumptions (compensation increases, payroll growth, inflation and investment return) consist of an underlying real rate of return plus an assumption for a long-term average rate of inflation. A mathematical budgeting procedure for allocating the dollar amount of the actuarial present value of the pension trust benefits between future normal cost and actuarial accrued liability. The actuarial cost method may also be referred to as the actuarial funding method. A single amount or series of amounts of equal actuarial value to another single amount or series of amounts, computed on the basis of appropriate actuarial assumptions. The difference in liabilities between actual experience and expected experience during the period between two actuarial valuations is the gain (loss) on the accrued liabilities. The amount of funds currently required to provide a payment or series of payments in the future. The present value is determined by discounting future payments at predetermined rates of interest and probabilities of payment. The actuarial valuation report determines, as of the actuarial valuation date, the service cost, total pension liability, and related actuarial present value of projected benefit payments for pensions. The date as of which an actuarial valuation is performed. A calculated contribution into a defined benefit pension plan for the reporting period, most often determined based on the funding policy of the plan. Typically the Actuarially Determined Contribution has a normal cost payment and an amortization payment. 46

159 State Universities Retirement System of Illinois Exhibit 3 Section H GLOSSARY OF TERMS Amortization Method Amortization Payment Cost-of-Living Adjustments Cost-Sharing Multiple- Employer Defined Benefit Pension Plan (cost-sharing pension plan) Covered-Employee Payroll Deferred Inflows and Outflows Deferred Retirement Option Program (DROP) Discount Rate The method used to determine the periodic amortization payment may be a level dollar amount, or a level percent of pay amount. The period will typically be expressed in years, and the method will either be open (meaning, reset each year) or closed (the number of years remaining will decline each year). The amortization payment is the periodic payment required to pay off an interest-discounted amount with payments of interest and principal. Postemployment benefit changes intended to adjust benefit payments for the effects of inflation. A multiple-employer defined benefit pension plan in which the pension obligations to the employees of more than one employer are pooled and pension plan assets can be used to pay the benefits of the employees of any employer that provides pensions through the pension plan. The payroll of employees that are provided with pensions through the pension plan. The deferred inflows and outflows of pension resources are amounts used under GASB Statement No. 68 in developing the annual pension expense. Deferred inflows and outflows arise with differences between expected and actual experiences; changes of assumptions. The portion of these amounts not included in pension expense should be included in the deferred inflows or outflows of resources. A program that permits a plan member to elect a calculation of benefit payments based on service credits and salary, as applicable, as of the DROP entry date. The plan member continues to provide service to the employer and is paid for the service by the employer after the DROP entry date; however, the pensions that would have been paid to the plan member are credited to an individual member account within the defined benefit pension plan until the end of the DROP period. Other variations for DROP exist and will be more fully detailed in the plan provision section of the valuation report. For GASB purposes, the discount rate is the single rate of return that results in the present value of all projected benefit payments to be equal to the sum of the funded and unfunded projected benefit payments, specifically: 1. The benefit payments to be made while the pension plans fiduciary net position is projected to be greater than the benefit payments that are projected to be made in the period; and 2. The present value of the benefit payments not in (1) above, discounted using the municipal bond rate. 47

160 State Universities Retirement System of Illinois Exhibit 3 Section H GLOSSARY OF TERMS Entry Age Actuarial Cost Method (EAN) Fiduciary Net Position GASB Long-Term Expected Rate of Return Money-Weighted Rate of Return Multiple-Employer Defined Benefit Pension Plan Municipal Bond Rate Net Pension Liability (NPL) Non-Employer Contributing Entities Normal Cost The EAN is a cost method for allocating the costs of the plan between the normal cost and the accrued liability. The actuarial present value of the projected benefits of each individual included in an actuarial valuation is allocated on a level basis (either level dollar or level percent of pay) over the earnings or service of the individual between entry age and assumed exit ages(s). The portion of the actuarial present value allocated to a valuation year is the normal cost. The portion of this actuarial present value not provided for at a valuation date by the actuarial present value of future normal costs is the actuarial accrued liability. The sum of the accrued liability plus the present value of all future normal costs is the present value of all benefits. The fiduciary net position is the market value of the assets of the trust dedicated to the defined benefit provisions. The Governmental Accounting Standards Board is an organization that exists in order to promulgate accounting standards for governmental entities. The long-term rate of return is the expected return to be earned over the entire trust portfolio based on the asset allocation of the portfolio. GASB Statement No. 67, money-weighted rate of return is calculated as the The money-weighted rate of return is a method of calculating the returns that adjusts for the changing amounts actually invested. For purposes of internal rate of return on pension plan investments, net of pension plan investment expense. A multiple-employer plan is a defined benefit pension plan that is used to provide pensions to the employees of more than one employer. The Municipal Bond Rate is the discount rate to be used for those benefit payments that occur after the assets of the trust have been depleted. The NPL is the liability of employers and non-employer contributing entities to plan members for benefits provided through a defined benefit pension plan. Non-employer contributing entities are entities that make contributions to a pension plan that is used to provide pensions to the employees of other entities. For purposes of the GASB accounting statements, plan members are not considered non-employer contributing entities. The portion of the actuarial present value allocated to a valuation year is called the normal cost. For purposes of application to the requirements of this Statement, the term normal cost is the equivalent of service cost. 48

161 State Universities Retirement System of Illinois Exhibit 3 Section H GLOSSARY OF TERMS Other Postemployment Benefits (OPEB) Real Rate of Return Service Cost Total Pension Expense All postemployment benefits other than retirement income (such as death benefits, life insurance, disability, and long-term care) that are provided separately from a pension plan, as well as postemployment healthcare benefits regardless of the manner in which they are provided. Other postemployment benefits do not include termination benefits. The real rate of return is the rate of return on an investment after adjustment to eliminate inflation. The service cost is the portion of the actuarial present value of projected benefit payments that is attributed to a valuation year. The total pension expense is the sum of the following items that are recognized at the end of the employer s fiscal year: 1. Service Cost 2. Interest on the Total Pension Liability 3. Current-Period Benefit Changes 4. Employee Contributions (made negative for addition here) 5. Projected Earnings on Plan Investments (made negative for addition here) 6. Pension Plan Administrative Expense 7. Other Changes in Plan Fiduciary Net Position 8. Recognition of Outflow (Inflow) of Resources due to Liabilities 9. Recognition of Outflow (Inflow) of Resources due to Assets Total Pension Liability (TPL) Unfunded Actuarial Accrued Liability (UAAL) Valuation Assets The TPL is the portion of the actuarial present value of projected benefit payments that is attributed to past periods of member service. The UAAL is the difference between actuarial accrued liability and valuation assets. The valuation assets are the assets used in determining the unfunded liability of the plan. For purposes of GASB Statement Nos. 67 and 68, the valuation assets are equal to the market value of assets. 49

162 Exhibit 4 To: Administration Committee From: Phyllis L. Walker Date: October 1, 2016 Re: Required State Contribution to the Community College Health Insurance Security Fund for Fiscal Year 2018 Overview The total amount to be certified for Fiscal Year 2018 to the Community College Health Insurance Security Fund is $ 4,133,336. Section 6.10 of the State Employees Group Insurance Act of 1971 (the Group Insurance Act ) requires the State Universities Retirement System (SURS) Board of Trustees to certify to the Governor, the Director of Central Management Services and the State Comptroller by November 15 of each year the estimate of the total amount of contributions that will be paid under subsection (a) of 6.10 for the next fiscal year. Under subsection (a) of 6.10, every active contributor of SURS who is a full time employee of a community college district or an association of community college boards and who is not an employee as defined in 3 of the Group Insurance Act must make contributions at the rate of 0.50% of salary. The state appropriates a matching amount to the Community College Health Insurance Security Fund. The Illinois Community College Board has provided SURS with the estimated annual payroll for Fiscal Year 2018 for such full time community college employees. It is $ 895,695,980. Section 6.10 of the State Employees Group Insurance Act of 1971 (through Public Act ) require that the amount be either decreased or increased by the amount that the actual active employee contributions either fell short of or exceeded the estimate used by the Board in making the certification for previous years. Below is a table reflecting this calculation: Fiscal Year 2016 Actual Employee Contributions Projected Employee Contributions Actual Certified (Over) / Under $4,437,127 $4,782,271 $(345,144) Total Over-Certified for 2016 $(345,144) Projected Contributions for Fiscal 2018 $4,478,480 Total Certified for Fiscal Year 2018 (Projected + Total Over Certified for 2016) $4,133,336

163 Exhibit 4 Recommendation SURS staff recommends the amount of $4,133,336 be certified for Fiscal Year 2018 to the Community College Health Insurance Security Fund.

164 Exhibit 5 To: Administration Committee From: Phyllis L. Walker Date: October 1, 2016 Re: Proposed State Contribution for Fiscal Year 2018 Overview The proposed State contribution for Fiscal Year 2018 will be certified at $1,753,873,000. Section (a-5) of the Illinois Pension Code requires the SURS Board of Trustees each year to certify to the State Actuary, Governor and the General Assembly by November 1st the proposed State contribution for the following fiscal year which begins July 1. The Statutory contribution calculated by Gabriel, Roeder, Smith & Company (GRS) for Fiscal Year 2018 is $1,800,373,000 (includes $73,022,000 projected Self-Managed (SMP) State contribution). 1 The contribution is 39.20% of the $4.6 billion, the assumed pensionable payroll for Fiscal Year The estimated trust, federal, and other funds is projected to be $46,500,000 for Fiscal Year The State contribution is reduced by the projected trust, federal and other funds. Statutory defined benefit and SMP contribution calculated by GRS $1,800,373,000 Less projected trust, federal, other funds $46,500,000 Proposed net contribution to be certified for Fiscal Year 2018 $1,753,873,000 Recommendation SURS staff recommends the amount of $1,753,873,000 be certified for Fiscal Year 2018 as the proposed State Contribution. 1 This is the gross State contribution. The certified State Contribution will be this amount less amounts estimated to be received directly from the colleges and universities from trust, federal, and other funds. 2 See table attached.

165 Fiscal Years ********** STATE APPROPRIATIONS ************ Fiscal Federal/Trust & State Pension General Revenue/ Total State Total Year Other Sources Fund Educ Assistance Fnd Appropriations All Sources Bond Issue Proceeds ,247, ,000, ,485, ,485,000 1,031,732, ,920, ,000,000 1,252,800,000 1,402,800,000 1,450,720, ,259, ,000,000 1,311,766,000 1,509,766,000 1,560,025, ,658, ,000,000 1,347,200,000 1,544,200,000 1,590,858, ,184, ,000,000 1,411,480,000 1,601,480,000 1,647,664, * 47,500, ,000,000 1,411,480,000 1,601,480,000 1,648,980,000 * = Estimated amount Average Fed/Trust/Other Sources for Fiscal Year : 48,454,130 Exhibit 5 The federal/trust/other sources includes contributions due to 6% billing of employers. (FY 2016 $2.5 million, FY 2015 $5.9 million, FY 2014 $2.3 million, FY 2013 $1.2 million and FY 2012 $2.0 million) Staff recommends a continued conservative projection of $ 46,500,000 be used in determining the state appropriation for FY 2018.

166 Exhibit 6 To: Administration Committee From: Phyllis L. Walker Date: October 1, 2016 Re: Employer Normal Cost Recommendation At the October 20, 2016 Administration Committee meeting, Gabriel Roeder Smith & Company (GRS) will present the preliminary actuarial valuation results as of June 30, Attached for your review is the breakdown of the Employer Normal Cost rate by benefit type of the defined benefit plan for Fiscal Year 2018 which is allocated to employers. The normal cost is the pension cost assigned to fund the current year s portion of the expected total cost of future benefits for the average State Universities Retirement System (SURS) member. This employer normal cost is the employer contribution rate that is to be applied to all earnings paid from federal, grant and trust funds for any pay period beginning July 1, 2017 through June 30, The Fiscal Year 2018 employer normal rate of 12.46% is a decrease from the previous fiscal year s rate of 12.53%. The GRS document follows this memorandum. Recommendation SURS staff recommends that the Employer Normal Cost Rate of 12.46% be approved for Fiscal Year 2018.

167 Exhibit 7 October 7, 2016 Ms. Phyllis Walker Chief Financial Officer State Universities Retirement System of Illinois 1901 Fox Drive Champaign, IL Re: Breakdown of Normal Cost for FY Dear Phyllis: At your request, we have developed a breakdown of the portion of the Normal Cost of the Defined Benefit plans within SURS for the fiscal year allocated to Employers. The Employer Normal Cost, expressed as a percentage of covered payroll, breaks down as follows: Benefit Type Normal Cost Retirement and Termination Benefits 7.96 % Automatic Annual Increase (AAI) 3.70 % Death and Survivor Benefits 1 (0.23)% Disability Benefits 0.57 % Administration Expense 0.46 % Total % 1 Includes normal cost attributable to benefits assumed to be paid to survivors of retired members under the Traditional Plan and survivors of active members. The employee contribution toward death and survivor benefits is calculated as 1.0 percent of total payroll although Portable Plan members do not receive automatic benefits paid to survivors of retired members. The calculation was based on the results of the actuarial valuation as of June 30, 2016, and the same actuarial assumptions and methods that were used in the valuation, including an investment return assumption of 7.25%. The results of the actuarial valuation as of June 30, 2016, include the most recent measurement of the normal cost at the time this letter is being issued. The calculated normal cost rate of 12.46% allocated to Employers applicable to FY has decreased from the 12.53% rate allocated to Employers applicable to the current fiscal year The decrease is attributable to additional members receiving Tier 2 benefits, which provide lower benefits and therefore have a lower normal cost. The normal cost rate was calculated as a percentage of pensionable payroll. Members hired on or after January 1, 2011, are subject to a payroll cap of $111, in 2016, which will increase annually by the lesser of 3% and ½ of the annual increase in the Consumer Price Index.

168 Exhibit 7 Ms. Phyllis Walker State Universities Retirement System of Illinois Page 2 The allocation of the employee contribution of 6.5% of pay for the retirement annuity, 1.0% for survivor benefits and 0.5% for Automatic increases in retirement benefits does not apply to the Portable Plan (under which there are additional refund features instead of automatic post-retirement survivor benefits). This letter is considered part of the actuarial valuation report as of June 30, Please see the full actuarial valuation report for a description of the benefit provisions, data, actuarial assumptions and all applicable disclosures which also apply to this letter. Amy Williams and Lance Weiss are Members of the American Academy of Actuaries (MAAA) and meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion herein. Respectfully submitted, Amy Williams, ASA, MAAA Consultant Lance Weiss, EA, MAAA Senior Consultant cc: David Kausch, Gabriel, Roeder, Smith & Company Kristen Brundirks, Gabriel, Roeder, Smith & Company Enclosure L:\c2003_SURS\2016\Valuation_FYE2017\PostVal\SURSNC16.docx

169 Exhibit 7 Ms. Phyllis Walker State Universities Retirement System of Illinois Page 3 State Universities Retirement System of Illinois Normal Cost Rates Based on the Actuarial Valuation as of June 30, 2016 ($ in 000's) Member Employer % of Total Provided Provided Payroll Retirement Benefits $ 393,636 $ 228,534 $ 165, % Automatic Annual Increase (AAI) 147,890 17, , % Death and Survivor Benefits 1 26,928 35,159 (8,231) (0.23)% Disability Benefits 20,052-20, % Termination Benefits 114, , % Administration Expense 16,087-16, % Total $ 719,225 $ 281,273 $ 437, % Estimated Defined Benefit Plan Payroll for FY $ 3,515,900 1 Includes normal cost attributable to benefits assumed to be paid to survivors of retired members under the Traditional Plan and survivors of active members. The employee contribution toward death and survivor benefits is calculated as 1.0 percent of total payroll although Portable Plan members do not receive automatic benefits paid to survivors of retired members. 2 For members currently active as of June 30, 2016, in the Traditional and Portable defined benefit plans and includes the use of capped payroll for members hired on or after January 1, 2011.

170 Exhibit 8 October 2016 Perspectives Potential Solvency Liability Disclosure May Have Significant Implications for Public Employee Retirement Systems David T. Kausch, FSA, EA, FCA, MAAA, PhD In recent years, Public Employee Re rement Systems (PERS) have adjusted to having two separate liability calcula ons: 1) the actuarial accrued liability for funding purposes; and 2) the total pension liability for the new Governmental Accoun ng Standards Board (GASB) accoun ng disclosures. Now, there is a third poten al liability calcula on on the horizon: solvency liability. Solvency liability is a market based measurement of the present value of accrued benefits discounted at risk free interest rates. In the current low interest rate environment, a pension plan s solvency liability would likely be significantly higher than its actuarial accrued liability or total pension liability. Why introduce this new measure? Will PERS be required to disclose solvency liability? How can solvency liability be useful to trustees and other stakeholders? And, most importantly, what do trustees need to know about solvency liability in order to effec vely communicate what it means and what it doesn t mean? This GRS Perspec ves addresses these ques ons and other relevant issues. Background In June 2016, the Pension Task Force (PTF) 1 of the Actuarial Standards Board (ASB) released a report 2 with several sugges ons for changes to the Actuarial Standards of Prac ce (ASOPs) governing actuarial services for pension plans. The most significant sugges on is to require the actuary to calculate and disclose a solvency liability for pension plans single employer private sector plans, mul employer plans and public sector plans in every funding report. This could have significant implica ons for many U.S. re rement systems. This new measure will likely show a much higher pension liability measure than the usual funding and accoun ng measures. For this reason, it is cri cal that plan trustees have an understanding of the purpose of a solvency measure, its uses, and its limita ons. What is Solvency Liability? A key point in understanding the difference between solvency liability and the more standard actuarial accrued liability is to consider the purpose of the measurement. The purpose of a solvency liability for a pension plan is to es mate the cost, as of the valua on date, to se le all liabili es accrued under the plan in the marketplace analogous to the plan sponsor selling the pension plan in the open market and having no future obliga on. Whereas, the purpose of actuarial accrued liability is to measure funding progress over 1 The Pension Task Force (PTF) was created in 2014 by the Actuarial Standards Board to review comments and recommenda ons received on the Request for Comments ASOPs and Public Pension Plan Funding and Accoun ng. 2 A summary of the PTF report may be found in the GRS News Scan issued in July GRS All rights reserved.

171 Exhibit 8 GRS Perspec ves October 2016 me assuming that the plan sponsor has an ongoing funding obliga on to provide benefits. The calcula on of solvency liability is based on securing the benefits in the market with the most stable assets possible, such as U.S. Treasuries. Therefore, the discount rate 3 would be based on Treasury yields currently some of the lowest yield rates ever (as of July 1, 2016, the 10 year Treasury yield rate was 1.46% and 30 year Treasury yield rate was 2.24%). For the funding purpose of a public sector plan, actuarial accrued liabili es are based upon the plan s assumed rate of investment return generally 7% 8% per year. In recent years, the assumed rates of investment return have gradually been declining as well. Notably, a lower discount rate results in a higher liability calcula on. If assets are expected to earn less in the future, then more must be set aside today to pay promised benefits. 4 Connec on between Solvency Liability and Investment Risk There is a significant connec on between the discount rates used in the two liability measures (i.e., actuarial accrued and solvency) and the treatment of investment risk. Most public sector pension plans invest a por on of the por olio in risky assets in order to earn a higher return or risk premium. However, earning a risk premium is not guaranteed. When the actuary uses the por olio s expected return as a discount rate for the actuarial accrued liability, the risk that future returns will be higher or lower than expected in the future is generally 5 borne by the plan sponsor(s) through future contribu on increases or decreases based on future experience. The measurement of solvency liability a empts to es mate reducing the investment risk as much as possible and, therefore, charge the sponsor(s) today to eliminate that risk. In today s market, where risk free Treasury rates are significantly lower than expected por olio returns, 6 the cost of elimina ng that risk is very high. To clarify, by using the assumed rate of return, the system gives the plan sponsor a reduced contribu on today with the understanding that the sponsor is responsible for future contribu on increases if asset returns are less than expected. Without that commitment, the system would be be er off asking for a much higher contribu on today such as an amount that would be enough to remove as much risk as possible from the investments. Examples of Solvency Liability The following examples show hypothe cal new, mature, and supermature plans which have a ra o of assets to liability 7 of 80% on the basis of the entry age normal actuarial accrued liability determined at 7.5%. The solvency liability shown is es mated based on adjus ng the discount rate from 7.5% to stripped U.S. Treasury yields as of June 30, 2016 and adjus ng the entry age liability to the present value of accrued benefits. The impact of the solvency liability will depend on the maturity of the plan. A less mature plan (i.e., one with more ac ve liability) will generally see the largest increase in liability over the actuarial accrued liability 3 Technically, more than one discount rate would be used. Each future cash flow would be discounted at the discount rate applicable to when it is paid e.g., the 10 year Treasury stripped yield for a cash flow in 10 years, etc. Stripped yields are the equivalent yields on hypothe cal zero coupon Treasuries that would result in the published yields on the exis ng coupon bearing Treasuries. 4 There are other factors that absent the low discount rates would result in a solvency liability lower than the actuarial accrued liability. First, solvency liability only reflects the present value of accrued benefits for ac ve members without an cipa ng any future salary increases which are reflected in actuarial accrued liability. Second, for those plans with COLAs that vary with infla on, the solvency liability uses of a market measure of infla on which currently is likely lower in the current market environment than the long term actuarial assump on for infla on. Today s low interest rate environment will drive solvency liability far higher than these other factors would reduce it. 5 Some public sector plans have risk sharing features where the members bear some of the risk. 6 This has not always been the case. In the late early 1980s, U.S. 10 year Treasury yields peaked at over 15% and were as high as 6% as recently as the early 2000s. 7 For purposes of the illustra on, we refer to the ra o of assets to liability under the various measures without referring to that ra o as a funded ra o. In order to avoid misinterpreta on, a plan s funded ra o should be based on the liability and assets specifically intended for funding determina ons. The ra o of solvency liability to assets could be thought of as a solvency ra o. The Percent Change shown for the assets over liability is strictly the difference between the funded and solvency ra os GRS All rights reserved. 2

172 Exhibit 8 GRS Perspec ves October 2016 since the benefits are payable farther in the future (i.e., the liability has a higher dura on). A re ree only plan without infla on adjusted Cost of Living Adjustments (COLAs) would likely see less of an increase in liability because of the shorter dura on of benefit payments (i.e., there is less me to earn on investments before paying benefits, so there will be less of a change in liability). Actuarial Accrued Liability or Funding Liability (7.5%) EXAMPLE 1 New Ac ve Only Plan (all $=millions) Solvency Liability (June 30, 2016 Stripped Treasury Yields) Percent Increase/Change Ac ve Plan Dollar Change Ac ve Liability $150 $450 $ % Re ree Liability % Total Liability $150 $450 $ % Assets % Unfunded Liability $ 30 $330 $ % Assets/Liability 80% 27% N/A 53% Actuarial Accrued Liability or Funding Liability (7.5%) EXAMPLE 2 Mature Plan (all $=millions) Solvency Liability (June 30, 2016 Stripped Treasury Yields) Percent Increase/Change Mature Plan Dollar Change Ac ve Liability $ 50 $150 $ % Re ree Liability % Total Liability $150 $420 $ % Assets % Unfunded Liability $ 30 $300 $ % Assets/Liability 80% 29% N/A 51% EXAMPLE 3 Supermature Re ree Only Plan (all $=millions) Actuarial Accrued Liability or Funding Liability (7.5%) Solvency Liability (June 30, 2016 Stripped Treasury Yields) Percent Increase/Change Supermature Plan Dollar Change Ac ve Liability $ 0 $ 0 $ 0 0% Re ree Liability % Total Liability $150 $405 $ % Assets % Unfunded Liability $ 30 $285 $ % Assets/Liability 80% 30% N/A 50% 2016 GRS All rights reserved. 3

173 Exhibit 8 GRS Perspec ves October 2016 So What Does It Mean? If solvency liability is a measure of se ling a plan s obliga ons, what does it mean for a going concern plan with a commitment for future sponsor contribu ons? The answer lies in the link between solvency liability and future contribu ons as described earlier. As long as there is a commitment from the plan sponsor to bear future investment risk in future contribu ons, the actuarial accrued liability is generally appropriate for determining employer contribu ons. Absent that commitment, solvency liability allows for assessment of the full cost of elimina ng investment risk today to secure the accrued benefits payable in the future. In general, public sector plans rely on the presump on that the plan sponsor will con nue to exist and meet its future contribu on obliga ons. Private sector plans may be less likely to presume the plan sponsor will even exist in the future to provide future contribu ons. Consequently, for private sector plans, there is an argument for using the solvency liability for the purposes of determining employer contribu ons. The Pension Protec on Act (PPA) of 2006 took steps to design employer funding requirements along these lines. 8 Another way of describing solvency liability is that it is an es mate of the amount of funds necessary to achieve full benefit security. This is an economic view that may have implica ons for fiduciaries when measuring and managing risks and to plan sponsors and members when determining or amending benefit provisions. A consequence of using a solvency or market liability for es ma ng the cost of a benefit change is that a change being considered today will appear more expensive than if the same change had been considered 10 or 20 years ago simply because interest rates are now lower. Withdrawal Liability: A system with a withdrawing employer (such as a cost sharing mul ple employer plan or even a single employer plan with a withdrawing component unit such as a hospital, airport, etc.) could be a situa on where an employer s future contribu on obliga on to the system ceases even though that employer s members will con nue to benefit from the plan for years. In that case, one could argue that the withdrawal liability for that employer changes from the going concern actuarial liability to the se lement solvency liability. Liability Driven Inves ng (LDI): Solvency liability or other market based liability measures may be used for alterna ve investment or risk management strategies such as liability driven inves ng (LDI). LDI a empts to expand the investment focus from an asset only view to a view of the assets and liabili es together. From an actuary s view, LDI treats the plan liability as a nega ve asset that is part of the total asset/ liability por olio. In order to find other invested assets to match or offset this nega ve asset, the plan s liability must be measured on some form of a market basis. Pension Obliga on Bonds (POBs): Solvency liability may be useful when the plan sponsor issues a pension obliga on bond and deposits the proceeds into the pension trust. A large cash infusion today will generally result in a lower future employer funding requirement. If the reduc on in future employer contribu ons is es mated using the expected return, there is the risk that future returns will not meet expecta ons and the future contribu ons will vary as well. In fact, bonding in this manner may increase the investment risk to the sponsor because the level of invested assets has increased as well as the level of debt. In order to mi gate the increase in risk, the solvency liability may be used as a measure of the cost needed to reduce the overall risk. A public sector plan that uses an actuarial accrued liability for funding purposes may have reasons to calculate a solvency liability. Some examples of special situa ons include: 8 PPA was subsequently amended to provide some funding relief for employers due, in part, to rapidly decreasing discount rates GRS All rights reserved. 4

174 Exhibit 8 GRS Perspec ves October 2016 Service Purchases: A final example where public plans may receive a one me contribu on with no future contribu on obliga on is when individual service purchases are made by members. In this case, a member generally makes a payment (or a fixed series of payments) to the system with no future commitment dependent upon future investment returns. This is analogous to an annuity purchase in the private insurance market where annuity purchase rates are generally market based interest rates rather than por olio expected returns. A system may want to explore using market based discount rates as a component of the assump ons used for service purchase calcula ons as a form of insurance for the addi onal risk borne by the plan. So What Doesn t It Mean? For a going concern PERS, solvency liability is not a funding liability nor is it an accoun ng liability. Solvency liability is an addi onal measure with purposes and uses as described earlier. A system s funding liability and funding obliga on may s ll be appropriately determined by the actuarial accrued liability. Furthermore, a system s accoun ng liability may s ll be appropriately determined by the required GASB disclosures. 9 Having a third measure of pension liability will likely increase the difficulty in communica ng plan financial results. Disclosing a solvency liability that is not intended for funding purposes runs the risk that it may be misused by outside par es for other purposes especially when the solvency liability is a higher number. This makes adequate communica on of this new measure even more important. The fact is that pension plans are complicated financial obliga ons that cannot be adequately explained by just one number. Measuring a pension plan s financial health and associated risks requires substan al technical informa on and thorough analysis from many perspec ves. What Comes Next? The calcula on and disclosure of solvency liability for pension plans is currently not required under the ASOPs. The recommenda on made to the ASB earlier this year to require disclosure of solvency liability with each funding valua on must proceed with a formal process to update the ASOPs. Any change to an exis ng ASOP or issuance of a new ASOP is made public in an exposure dra with a public comment period. Anyone may comment on an exposure dra (e.g., actuaries, taxpayers, public plan representa ves, associa ons, etc.). The ASB will receive and publish all comments, but the final ASOP must be consistent with its objec ve to establish and improve standards of actuarial prac ce. Whether or not solvency liability becomes a new disclosure requirement, it is important to have an understanding of its purpose, uses and misuses. There may be valid reasons why a public plan may want to calculate solvency liability for specific purposes. The goal of the actuary is to perform high quality calcula ons that involve complex financial con ngencies in a way that is understandable and usable. For public sector pension plans, this is a major undertaking. Incorpora ng new measurements in a professional field filled with technical calcula ons and jargon must be done with great care. The measurement of solvency liability is no excep on. Our goal is to consider solvency liability as another tool in the tool box for public systems to assess the condi on of their plans and make informed decisions. 9 When developing the new pension accoun ng standards under Statement Nos. 67 and 68, the GASB received comments and deliberated on the ques on of using a market based measurement of liability for accoun ng purposes. The GASB ul mately rejected the measure, in part, because the long term expected rate of return is consistent with the long term perspec ve of the employer employee rela onship in the public sector GRS All rights reserved. 5

175 GRS Perspec ves October 2016 About the Author David T. Kausch, FSA, EA, FCA, MAAA, PhD is GRS Chief Actuary and Senior Consultant who has more than 15 years of pension consul ng experience. As Chief Actuary, David serves each and every GRS actuarial client. In addi on, he has provided direct actuarial and consul ng services for many state and local public employee re rement systems in Michigan, Missouri, New Hampshire and Rhode Island. Contact David at: ng.com Exhibit 8 The author thanks Mita Drazilov and Mary Ann Vitale at GRS for their review and helpful comments. About GRS GRS is a na onal actuarial and benefits consul ng firm. We help our clients develop and maintain fiscally sustainable benefit programs that preserve financial security for millions of Americans. Our reputa on for providing independent advice and quality consul ng services has remained unmatched for over 75 years. Corporate Office One Towne Square, Suite 800 Southfield, Michigan ng.com GRS is the na onal brand under which Gabriel, Roeder, Smith & Company Holdings, Inc. and its subsidiaries operate and provide professional services. The GRS companies comprise a na onal actuarial and benefits consul ng firm and are commi ed to working together to provide quality service offerings for clients throughout the na on. Each company within the GRS group can use the GRS name and draw on the resources and methodologies of the GRS group. While each company within the GRS group is a separate legal en ty, GRS is o en used to refer either to the individual companies within the group or to several or all of them collec vely. However, each company within the GRS group has its own legal status and is responsible for its own services and work product and not those of any other GRS group company. GRS Perspec ves contains ar cles, news, and commentary from the various companies comprising the GRS group. The informa on provided is not intended as legal, income tax, or investment advice or opinion of a similar nature. Ar cles a ributed to individuals do not necessarily reflect the views of any company within the GRS group GRS All rights reserved. 6