CSMFO Hot Topic What latest PERS rate proposal will mean for your agency s budget. 10:00-11:00 a.m. PDT, Thursday, March 21, 2013

Transcription

1 CSMFO Hot Topic What latest PERS rate proposal will mean for your agency s budget 10:00-11:00 a.m. PDT, Thursday, March 21, 2013 Alan Milligan, Chief Actuary, CalPERS Fresh from the CalPERS Board discussions March about proposed changes to PERS rates, Alan Milligan will address the following: * Latest proposal for smoothing future rates * How the rate proposal would affect local agencies * Opportunities for local agencies to comment on the rates before final action at April's Board meeting * Resources for additional information As noted in the Executive Summary of Alan Milligan's report for discussion by the CalPERS Board on March 19: "The proposed methods will result in an increased likelihood of high employer contribution levels in the future. The median employer contribution rate over the next five years is expected to be higher as well." For more details, see: and scroll down to Alan's presentation and attachments. Additional links mentioned by Alan Milligan during the Hot Topic Call: Board Workshop on Amortization and Smoothing Methods Link to Board agenda archive Link to video of workshop (which is also available from the archive link above) Annual Funding Risk Report (not customized for each Plan) Please send questions via before or during the call to mbradley@fremont.gov. Special conference call (no advance registration required for Hot Topic Calls) Connection Details: You have two options for connecting: a. Dial: Caller PIN: # (standard telephone call charges apply) OR b. Use the online broadcast provided through the sponsorship of Granicus go to and click on Live Audio & Archives to find the session. (For your background information, we've attached Alan Milligan's February 22 presentation at the CSMFO Annual Conference to this.)

2 Can t make the session? A digital recording will be available for listening via the web, download, or podcast within 24 hours of the session at the Live Audio & Archives tab of The Career Development Committee of CSMFO has organized this Hot Topic Call to help CSMFO members get the latest information and enable interested agencies to provide timely comments before PERS takes final action. Thanks to Mary Bradley, a Past CSMFO President and member of the Career Development Committee, who helped organize this call and will provide color commentary to help listeners address the implications of the proposed PERS actions on their agencies. Enjoy the many ways that CSMFO supports the profession. Don Maruska, Master Certified Coach Director, CSMFO Coaching Program See "Coaching Corner" at Don Maruska & Company, Inc. 895 Napa Avenue, Suite A-5, Morro Bay, CA ; fax: ; Author of "How Great Decisions Get Made" and "Take Charge of Your Talent"

3 Pension Funding Risks & Coming Changes Alan Milligan CalPERS Chief Actuary

4 Pension Funding Risks & Coming Changes Agenda What s happening? Discussion of funding risks Possible changes to funding methods Impact on contribution rates 2

5 What s Happening? Accounting Changes Pension Reform Assumption Changes

6 What s Happening? Accounting Changes GASB Statement No Applies to plans (CalPERS) - Replaces GASB Statements No. 25 GASB Statement No Applies to employers (Cities, Counties, Special Districts) - Replaces GASB Statements No. 27 4

7 What s Happening? Highlights of GASB 68 Accounting Funding Have to Report Unfunded Liability on Balance Sheet - Using market (fair) value of assets Pension expenses no longer the ARC - Based on shorter amortization periods Pooled Employers will have to report their share of the pool s UAL and pension expense 5

8 What s Happening? Will CalPERS Provide the Information? Planning on it Will require extensive changes Cannot use trust fund money - Will have to charge employers asking for the information CalPERS Board approval needed - March agenda item? GASB valuations will be done on request 6

9 What s Happening? Potential GASB Implementation Issues Need actuarial computer system re-write Ability to hire staff Competing priorities - Pension reform (AB 340) implementation Budget growth in an era of austerity 7

10 What s Happening? Pension Reform Its here signed into law Sept. 12 th Where to get information: - CalPERS website (FAQ, circular letters, etc.) - Public Retirement Journal - League of Cities - County systems - Law firms 8

11 What s Happening? Pension Reform Clean Up CalPERS is pursuing regulations Clean up Legislation (SB 13) - Issues Special compensation Contribution and benefit offsets 9

12 What s Happening? Pension Reform Employer Inquiries MOU impairment Working after retirement Member rate, EPMC Compensation cap 10

13 What s Happening? Pension Reform Risk Pool Impact CalPERS Board created two new risk pools - Miscellaneous 2% at 62 - Safety 2.7% at 57, 2.5% at 57 and 2% at 57 Existing Pools are closed to new entrants - Need to address amortization of side funds and pool unfunded liability Looking at various solutions 11

14 What s Happening? Asset Allocation and Discount Rate Board reviews asset allocation every 3 years Asset liability workshop scheduled for November Final asset allocation will be adopted in December 2013 Implications are potential changes to discount rate assumption - Would be adopted in February Would impact 2013 valuation setting rates 12

15 What s Happening? Discount Rates Two issues - Is the expected return too high? - Should we be using the expected return to discount liabilities? 13

16 What s Happening? Expected Return Long-term (20+ years) Similar to what the private sector assumes - CalPERS long-term expected return = 7.5% - Median for 100 of the largest corporate plans = 7.75% 14

17 What s Happening? Discount Rate Differing bases: - Private sector uses high quality bond yield - Public sector uses long-term expected return on assets Which is better? - Focus on value of company vs. funding of benefits How conservative? 15

18 What s Happening? Experience Study Review of demographic assumptions Once every 4 years - Will work on new one in Expect to present result in early Future mortality improvement (i.e people living longer) will be looked at - Expected to result in higher contribution requirements 16

19 Funding Risk

20 Funding Risk Risk Board priority - New Risk and Audits Committee - Funding risk report Actuarial Office priority - Volatility index - Discount rate sensitivity analysis - Investment return sensitivity analysis - Hypothetical termination liability 18

21 Funding Risk Contribution Rate Risk Investment return sensitivity analysis - Projection of rates up to Shows that contribution rates are more sensitive to poor investment experience than good experience - Included in your valuation report 19

22 Funding Risk Volatility Index Indicator of how vulnerable an employer is to varying investment returns - Ratio of assets to payroll - Higher index more contribution volatility - Typical ratios 4 to 6 for miscellaneous plans 6 to 8 for safety plans 20

23 Funding Risk Volatility Index Illustration Plan with an asset to payroll ratio (volatility index) of 4 - Assume asset loss of 12% (one standard deviation) - Loss is 48% of payroll Plan with an asset to payroll ratio (volatility index) of 8 - Assume same asset loss (12%) - Loss is 96% of payroll Same loss has double the impact! 21

24 Funding Risk 20 Year History of Investment Return 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30%

25 Funding Risk Where Rates are Going - Example Plan with an asset to payroll ratio (volatility index) of 6 - Assume AVA = 120% of MVA This is about where it was as of June 30, Unrecognized asset loss is 20% of MVA Equals 120% of payroll (6 times 20%) - This is NOT built into your rates - Interest on loss = 7.5% times 120% of payroll 9% of payroll 23

26 Where Rates are Going Other plans The above example was for a plan with a volatility index (asset to payroll ratio) of 6. How will other plans fare? Volatility Index Interest on Unrecognized Asset Loss 4 6% of payroll 6 9% of payroll 8 12% of payroll 10 15% of payroll 12 18% of payroll 24

27 Possible Changes

28 Review of Smoothing and Amortization Methods CalPERS actuarial staff performing a review of existing methods - 15 year asset smoothing - 30 year rolling amortization Results of review will be presented in March Potential for a recommendation to shorten asset smoothing period and/or amortization period 26

29 Issues with the Current Methods Asset corridor Very slow progress towards full funding Transparency Accounting requirements 27

30 1 st Issue - Asset Corridor Actuarial Value of Assets must stay within 20% of the Market Value of Assets - Results in high volatility in extreme markets - Tendency to change methods when corridor applies - May understate risk 28

31 Deterministic Scenario 7.5% Every Year 20.0% Contribution Rate - PA Miscellaneous - Baseline Scenario 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Current Policy 29

32 Random Scenario Returns Are Random 30.0% Contribution Rate - PA Miscellaneous - Scenario % 20.0% 15.0% 10.0% 5.0% 0.0% Current Policy 30

33 Another Random Scenario 30.0% Contribution Rate - PA Miscellaneous - Scenario % 20.0% 15.0% 10.0% 5.0% 0.0% Current Policy 31

34 Tendency to Change Methods What did we do after the market collapse in the fall of 2008? - We temporarily widened the corridor % in first year % in second year % in third year - This eased the impact on employers Would we do it again? 32

35 Asset Corridors and Risk Corridors help control risk of low funded status - Only work if they are followed - Impact employers at the WORST time May understate risk if used in modeling but not in practice 33

36 2 nd Issue - Slow Progress Towards Full Funding Current methods smooth asset losses over 15 years - Actually longer since rolling smoothing periods are used Amortize the losses over 30 year rolling periods It takes a long time to significantly improve funded status 34

37 Funded Status Deterministic Scenario 120% Funded Ratio - PA Miscellaneous - Baseline Scenario 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% Current Policy 35

38 3 rd Issue Transparency Currently very difficult for employers to answer the questions - When will contribution rates peak? - How high will the peak be? - Result of rolling smoothing and amortization periods Two asset values two funded statuses and two unfunded liability amounts - Causes confusion 36

39 4 th Issue - Accounting Requirements Current accounting standard - Pension expense = funding contribution - 30 year minimum amortization - Only permits asset smoothing New accounting standard - Pension expense funding contribution - Closed periods favored - No smoothing 37

40 Amortization and Smoothing Policies Example Fixed vs Rolling 14% Employer Contribution Rate 12% 10% 8% 6% 4% 2% 0% Year 0 Year 5 Year 10 Year 15 Year 20 Year 25 Year 30 Year 35 Year 40 Year 45 Method A Method A' 38

41 Amortization and Smoothing Policies Example Fixed vs Rolling 110% Funded Status 100% 90% 80% 70% Year 0 Year 5 Year 10 Year 15 Year 20 Year 25 Year 30 Year 35 Year 40 Year 45 Method A Method A' 39

42 Accounting Requirement Will require a separate calculation of actuarial liabilities if UAL not funded quickly enough Rolling amortization will not meet standard Options - Continue with rolling for funding; second calculation for accounting - Change to fixed period amortization 40

43 The Concept No corridor Shorter (fixed) smoothing period Fixed amortization periods Smoothing the contribution rate directly 41

44 Asset Smoothing vs. Direct Rate Smoothing Asset Smoothing is a form of indirect rate smoothing Creates an Actuarial Value of Assets - Smoother than Market Value of Assets - Results in smoother employer contribution rates Does the Actuarial Value of Assets mean anything? Why not smooth the employer contribution rate directly? 42

45 Direct Rate Smoothing Current contribution rate is A Calculate the needed contribution rate using the Market Value of Assets (B) Figure out how to get from A to B - Over a reasonable period - Don t restart each year 43

46 Direct Rate Smoothing What we like: - Transparency of future contribution requirement - Only one asset value; only one unfunded liability - Potential to smooth assumption changes What we don t like - Non-traditional 44

47 How Does this Concept Compare? Current methods vs. Concept methods Public Agency miscellaneous plan Deterministic and two random scenarios 45

48 Method Comparison Deterministic Scenario 25.0% Contribution Rate - PA Miscellaneous - Baseline Scenario 20.0% 15.0% 10.0% 5.0% 0.0% Current Policy DRS - 25 year Amort, 5 year smoothing 46

49 Method Comparison Deterministic Scenario 120% Funded Ratio - PA Miscellaneous - Baseline Scenario 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% Current Policy DRS - 25 year Amort, 5 year smoothing 47

50 Method Comparison Random Scenario 35.0% Contribution Rate - PA Miscellaneous - Scenario % 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Current Policy DRS - 25 year Amort, 5 year smoothing 48

51 Method Comparison Random Scenario 120% Funded Ratio - PA Miscellaneous - Scenario % 100% 90% 80% 70% 60% 50% 40% 30% 20% Current Policy DRS - 25 year Amort, 5 year smoothing 49

52 Method Comparison 2 nd Random Scenario 30.0% Contribution Rate - PA Miscellaneous - Scenario % 20.0% 15.0% 10.0% 5.0% 0.0% Current Policy DRS - 25 year Amort, 5 year smoothing 50

53 Method Comparison 2 nd Random Scenario 120% Funded Ratio - PA Miscellaneous - Scenario % 100% 90% 80% 70% 60% 50% 40% 30% 20% Current Policy DRS - 25 year Amort, 5 year smoothing 51

54 Impact on Employer Contributions

55 Accounting Changes No impact on employer contributions Will impact pension expense on your financial statements 53

56 Pension Reform No impact at start Gradual phase in of lower normal cost - As you hire new employees Member contribution rate increases - Direct offset if/when implemented - Consult your actuary as to timing 54

57 New Assumptions Expect to recommend changes in early 2014 May be effective for or Mortality projection - Impact is? Discount rate - Impact will depend on results of asset allocation work - Impact of a 1% change shown in actuarial valuation report 55

58 New Smoothing Methods Timing - Hope to implement in projections in 6/30/2012 report - First impact on contribution rates in Impact - Gradual increases in first few years - More volatile rates in normal years - Less chance of a sharp rate increase (cliff) 56

59 Timeline of Pension Changes GASB Approval No impact on rates Applies to Fiscal years beginning after June 15, 2014 for most Employers Information needed Fall 2015 AB340 Approval Impacts rates of new Employees when hired (or shorty thereafter) Impact on Rates* Assumption Changes Method Change Impacts FY rates Includes discount rate and mortality projection Impacts FY rates Approval Approval Impact on Rates* Impact on Rates* *For illustrative purposes only 57

60 QUESTIONS?