THE PUBLIC RETIREMENT JOURNAL Options to Pay Down the Unfunded Liability, OPEB, CalPERS Issues, etc. John E. Bartel.

Transcription

1 THE PUBLIC RETIREMENT JOURNAL Options to Pay Down the Unfunded Liability, OPEB, CalPERS Issues, etc. John E. Bartel March 24,

2 Agenda CalPERS Recent Changes 1 GASB GASB GASB OPEB Implicit Rate Subsidy 36 Paying Down the Unfunded Liability & 41 Rate Stabilization PEPRA Issues 56 Impact of an Additional 1% Pay Increase 59 66

3 CalPERS Recent Changes 1

4 Recent CalPERS Changes Contribution Policy Changes Assumption Changes Risk Pool Changes Risk Mitigation Strategy 2

5 Contribution Policy Changes Old Method Designed to smooth contribution rates Used Actuarial Value of Assets (AVA) to determine contribution so two different funded status/ratios (Actuarial & Market) Investment gains/losses recognized over rolling 15 year period Gains & losses amortized over 30 year rolling period If assumptions are met then: Contributions never come down and Unfunded Liability never gets paid off 3

6 Contribution ti Policy Changes No asset smoothing 5-year ramp up All amortization bases have fixed amortization periods No rolling amortization 4

7 Contribution Policy Changes Designed to: First pay off UAL and Second smooth rates New Method Uses MVA so only one funded status/ratio If assumptions are met then: Contributions go up in the short run but then come down UAL will be paid off 5

8 Contribution Policy Changes Eti Estimated tdcontribution tib ti Rate Rt Increase Impact phased in over 5 years beginning with 2016/17 fiscal year Miscellaneous 7% Safety 9% 6

9 Assumption Changes No changes to economic assumptions Anticipate future mortality improvement Other, modest, changes to assumptions 7

10 Assumption Changes Eti Estimated tdcontribution tib ti Rate Rt Increase Impact phased in over 5 years beginning with 2016/17 fiscal year Miscellaneous 4% Safety 7% 8

11 Risk Pool Changes All Risk Pools combined into 2 Miscellaneous Safety Collect payment on UAL as dollar amount Risk Pools UAL payment allocated based on liability & assets rather than payroll Some agencies saw significant cost increases Side Fund payoff no longer guaranteed savings! 9

12 Risk Mitigation Strategy t Move to more conservative e investments over time Only when investment return is better than expected Lower discount rate in concert with investment changes Essentially use 50% of investment gains to pay for cost increases Likely reduces discount rate from 7½% to 6½% over 20 years 10

13 Why De-Risk Investment t Portfolio? Miscellaneous 11

14 Why De-Risk Investment t Portfolio? Safety 12

15 Risk Mitigation Strategy Eti Estimated tdcontribution tib ti Rate Rt Increase Decrease discount rate from 7½% to6½% over 20 years Miscellaneous 6-12% Safety 10-19% 19% 13

16 Timingi First Full Valuation Impact Impact Contribution 6/30/ / /20 Policy Risk Pool 6/30/ / /16 Assumptions 6/30/ / /21 De-Risk Plan Because based on investment gains timing is uncertain 14

17 Risk Mitigation Timing Discount Rate used as of Actuarial Date 7.75% 7.50% 7.25% 7.00% 6.75% 6.50% 6.25% 95th percentile 75th percentile 50th percentile 25th percentile 5th Percentile 15

18 GASB 73 Overview 16

19 GASB 73 Unfunded d Pension Plans Effective FY Beginning g > 6/15/16 Everyone will recognize pension liability Does not affect contributions (or require funding) Discount rate will be 20 year Aa municipal bond rate Change in net pension liability => pension expense Additional note disclosures and RSI 17

20 Unfunded d Pension Plans Unfunded single employer plans Plans that provide pension benefits Not funded, or funds not in Trust Often small plans (limited number of people) or old plans Applies to those that have employees in CalPERS subject to IRC

21 ClPERSR CalPERS Replacement tbenefit fitfund Benefits > IRC 415 limit ($210,000/yr in 2016) Retirees and non-retirees with large projected benefits No liability valued by CalPERS for funding or GASB 68 Who will value for GASB 73? Materiality? 19

22 GASB 74 Overview 20

23 GASB 74 OPEB Plans Replaces GASB 43 Effective FY Beg. > 6/15/16 Similar to GASB 67 Reporting for OPEB funded d plans In the plan s financial statements Stand-alone Fiduciary fund in employer s financial statements Does not affect/require contributions 21

24 GASB 74 OPEB Plans Additional note disclosures and RSI for single employer plans and cost-sharing plans Net OPEB Liability Funded status & contributions relative to payroll Change in NOL Investment return Sensitivity of NOL to 1 % increase/decrease in: Discount rate Medical trend rate 22

25 GASB 74 OPEB Plans New definition of OPEB Plan, arrangement through which: OPEB is determined Assets dedicated for OPEB (if any) are managed Benefits e are paid as they come due Some think requires agencies sponsoring funded plans, including those funding with CERBT, PARS, etc., will have to report GASB 74 23

26 GASB 75 Overview 24

27 GASB 75 Employer OPEB Reporting Effective FY Beginning g > 6/15/17 Replaces GASB 45 Similar il to GASB 68 Everyone will recognize OPEB liability Change in net OPEB liability => OPEB expense Additional note disclosures and RSI Does not affect contributions (or require funding) 25

28 GASB 75 Employer OPEB Reporting Crossover test to determine discount rate Not the same as GASB 45 If plan assets are projected to cover benefit payments, discount rate = expected rate of return on assets Provided assets invested so as to generate that return Contribution tion policy of full ARC, with reasonable amortization period should be OK Look to last 5 years of actual contributions ti 26

29 Sample Crossover Test Projected Asset &B Benefit Payments 1 (Amounts in 000 s) Single Equivalent Discount Rate of 5.31% 27

30 GASB 75 Unfunded and poorly funded plans use 20 year AA municipal bond discount rate Variable rate will cause large changes in total t OPEB liability 28

31 GASB 75 Sample 20 year AA municipal bond discount rate 29

32 GASB 75 All plans need biennial valuation Implied Subsidy required Cadillac Tax must be included d Will affect CalPERS medical plans Insured plans Means plans where entire future OPEB obligation is transferred to insurer 30

33 Alternative Measurement Method (AMM) Still permitted for small plans < 100 active and inactive employees However: More complicated More assumptions Builds in equivalent of implied subsidy Check with your auditor 31

34 GASB 75 Audit issues may be fewer than with GASB 68 since employers generally control data Work with your actuary and auditor to: Select measurement date Choose valuation dates CERBT may no longer collect valuation results Some employers may implement early 32

35 GASB 75 Net OPEB liabilities may be quite large Particularly for those not pre-funding Almost certainly not news to bond analysts May be more of a surprise to Boards, Councils, ratepayers or taxpayers 33

36 OPEB Implicit Rate Subsidy 34

37 GASB 45 Implicit it Rate Subsidy Employer cost for allowing retirees to participate at active premium rates Monthly Cost 1,200 1, Single Coverage Retiree Medical Cost Premium Male Cost Female Cost Age 35

38 Implied Subsidy Implied Subsidy Retiree premiums < claims (benefits) 36

39 GASB Implicit it Rate Subsidy GASB generally defers to Actuarial Standards of Practice (ASOP) for implicit rate subsidy Old ASOP says community-rated tdmedical plans not required to value implicit rate subsidy PEMHCA is, for most participating agencies, considered a community-rated plan 37

40 GASB 45 Implicit it Rate Subsidy New ASOP requires Implicit rate subsidy be valued for all plans Based on medical plan s (not agency s) demographics Cross-employer subsidy would be ignored A few agencies will have liability that will not be defeased A few others will have liability that will be over defeased Actuaries must comply with valuation measurement after March 31,

41 GASB 45 Implicit Rate Subsidy Estimated t Liability Impact Varies based on agency demographics PEMHCA Minimum: % 100% Single Premium: % 100% Family Premium % 39

42 Paying Down Unfunded Liability & Rate Stabilization 40

43 Options Pension Obligation Bonds (POBs) Borrow from General Fund Amortization Period One time payments Internal Service Fund Irrevocable Supplemental ( 115) Trust 41

44 POBs Usually though of as interest arbitrage between expected earnings and rate paid on POB No guaranteed savings Including paying off CalPERS Side Fund PEPRA prevents contributions from dropping below normal cost Savings offset when investment return is good 42

45 Borrow from General lfund Pay GF back like a loan Payments should come from all funds 43

46 Request Shorter Amortization Period Higher short term payments Less interest and lower long term payments PEPRA prevents contributions from dropping below normal cost Savings offset when investment return is good 44

47 One Time Payments Council/Board resolution to use a portion of one time money to reduce unfunded liability, e. g. 1/3 to one time projects 1/3 to replenish reserves and 1/3 to pay down unfunded liability 45

48 EtblihI Establish Internal lservice Fund Could be used for rate stabilization Restricted investments: Likely low (0.5%-1.0%) investment returns Short term/high quality Designed dfor preservation of principal i Assets could be used by Board/Council for other purposes Does not reduce GASB 68 Net Pension Liability 46

49 Establish Irrevocable Supplemental ( 115) Trust Could be used for rate stabilization Reduces GASB 68 Net Pension Liability Investments significantly less restricted: Designed for long term returns Likely much higher (5%-7%) investment returns 47

50 Establish Irrevocable Supplemental Canonlybeusedto: ( 115) Trust Reimburse for CalPERS contributions Make payments directly to CalPERS Assets could not be used by City Council for other purposes PARS & PFM > 15 agencies 48

51 Establish Irrevocable Supplemental Can mitigate: ( 115) Trust CalPERS investment volatility Impact of plan becoming over funded Requires modest seed contribution to trust ( 10% of annual dollar contribution) 49

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57 PEPRA Issues 55

58 Compensation Limit it 2012 Social Security Taxable Wage Base, adjusted for inflation, $117,020 in 2016 $140, if not participating i in Social Security Approximately 44% of Federal limit ($265,000) for private sector pensions 53% if not participating in Social Security 56

59 Compensation Limit it Example, formula reduced for employee with base salary $160, results in a 15%formula 1.5% $200,000 results in a 1.2% formula Pension can be supplemented with separate defined contribution benefit Will almost certainly create difficulty in hiring from out of State or from the private sector 57

60 Minimum i Contribution ti Contribution can t be less than Normal Cost Overreaction to contribution holidays in early 2000s May discourage agencies from trying to be 100% funded 58

61 Impact of an Additional 1% Pay Increase 59

62 ClPERSP CalPERS Pay Related RltdAssumptions Aggregate g Payroll Growth Inflation 2.75% Increase Above Inflation 0.25% Total 3.00% 60

63 ClPERSP CalPERS Pay Related RltdAssumptions Individual Pay Increases: Inflation, Step Rate, Merit, Promotion, Longevity, etc. Varies based on hire age & Agency service For example, hired at age 30: Service Miscellaneous Police Safety % 14.7% 5 6.0% 5.8% % 4.3% Earlier hire ages have higher anticipated pay increases and later hire ages have lower anticipated pay increases 61

64 Impact of an Additional 1% Pay Increase Above Assumption Based on a 20 year amortization without ramp up/down. Miscellaneous % Safety % 62

65 Appendices Public Retirement Journal & PERS PAC Alert Bartel Associates GASB 68 Summary PEPRA Summary Other exciting stuff Anthony T. Oliveira, The Local Challenges of Pension Reform 63

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