Arkansas Public Employees Retirement System (Including District Judges) GASB Statement Nos. 67 and 68 Accounting and Financial Reporting for Pensions

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1 Arkansas Public Employees Retirement System (Including District Judges) GASB Statement Nos. 67 and 68 Accounting and Financial Reporting for Pensions June 30, 2017

2 October 18, 2017 Board of Trustees Arkansas Public Employees Retirement System Little Rock, Arkansas Ladies and Gentlemen: This report provides information required by the Arkansas Public Employees Retirement System (APERS) in connection with the Governmental Accounting Standards Board (GASB) Statement No. 67 Financial Reporting for Pension Plans and Governmental Accounting Standards Board (GASB) Statement No. 68 Accounting and Financial Reporting for Pensions. Our actuarial calculations for this report were prepared for the purpose of complying with the requirements of GASB Statement Nos. 67 and 68. In accordance with the auditor s request, these calculations are made for all members of APERS (including all District Judges) as if APERS is one costsharing plan. Our calculation of the liability associated with the benefits described in this report was performed for the purpose of satisfying the requirements of GASB Statement Nos. 67 and 68. The calculation of the plan s liability for this report may not be applicable for funding purposes of the plan. A calculation of the plan s liability for purposes other than satisfying the requirements of GASB Statement Nos. 67 and 68 may produce significantly different results. This report may be provided to parties other than System only in its entirety and only with the permission of the Retirement Board. GRS is not responsible for unauthorized use of this report. This report is based upon information, furnished to us by Retirement System staff, concerning retirement and ancillary benefits, active members, deferred vested members, retirees and beneficiaries, and financial data. If your understanding of this information is different, please let us know. This information was checked for internal consistency, but it was not audited. This information is presented in draft form for review by the plan s auditor. Please let us know if there are any items that the auditor changes so that we may maintain consistency with the plan s financial statements. Please see the actuarial valuation report as of June 30, 2017 for additional discussions of the nature of actuarial calculations and more information related to participant data, economic and demographic assumptions, and benefit provisions.

3 Board of Trustees October 18, 2017 Page 2 To the best of our knowledge, this report is complete, accurate, and in accordance with generally recognized actuarial methods. Mita D. Drazilov and Heidi G. Barry are Members of the American Academy of Actuaries (MAAA) and meet the Qualification Standards of the Academy of Actuaries to render the actuarial opinions herein. The signing individuals are independent of the plan sponsor. Respectfully submitted, Mita D. Drazilov, ASA, FCA, AAA Heidi G. Barry, ASA, FCA, MAAA David L. Hoffman MDD/HGB/DLH:dks:bd

4 Table of Contents Section A Section B Section C Section D Executive Summary Executive Summary... 1 Discussion Financial Statements Statement of Pension Expense... 5 Statement of Outflows and Inflows Arising from Current Reporting Period... 6 Statement of Outflows and Inflows Arising from Current and Prior Reporting Periods... 7 Statement of Fiduciary Net Position... 8 Statement of Changes in Fiduciary Net Position... 9 Required Supplementary Information Schedule of Changes in Net Pension Liability and Related Ratios Current Period Schedule of Changes in Net Pension Liability and Related Ratios (Multiyear) Schedule of the Net Pension Liability (Multiyear) Schedule of Contributions (Multiyear) Notes to Schedule of Contributions Schedule of Investment Returns (Multiyear) Notes to Financial Statements Long-Term Expected Return on Plan Assets Sensitivity of Net Pension Liability to the Single Discount Rate Assumption Reconciliation of DROP Accounts 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 Miscellaneous and Technical Assumptions 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 Arkansas Public Employees Retirement System

5 SECTION A EXECUTIVE SUMMARY 0

6 Executive Summary as of June 30, 2017 Actuarial Valuation Date June 30, 2017 Measurement Date of the Net Pension Liability and Pension Expense June 30, 2017 Membership Number of - Retirees and Beneficiaries 36,434 - Inactive, Nonretired Members 14,974 - Active Members 46,121 - Total 97,529 Covered Payroll $ 1,788,074,570 Net Pension Liability Total Pension Liability $ 10,612,937,270 Plan Fiduciary Net Position 8,028,796,790 Net Pension Liability $ 2,584,140,480 Plan Fiduciary Net Position as a Percentage of Total Pension Liability 75.65% Net Pension Liability as a Percentage of Covered Payroll % Development of the Single Discount Rate Single Discount Rate 7.15% Long-Term Expected Rate of Investment Return 7.15% Long-Term Municipal Bond Rate* 3.56% Last year ending June 30 in the 2018 to 2117 projection period for which projected benefit payments are fully funded 2117 Total Pension Expense $ 448,027,419 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 $ 50,094,772 $ 50,824,302 Changes in assumptions 415,784,241 - Net difference between projected and actual earnings on pension plan investments 501,951, ,668,604 Total $ 967,830,888 $ 444,492,906 * Source: Fixed-income municipal bonds with 20 years to maturity that include only federally tax-exempt municipal bonds as reported in Fidelity Index's "20-Year Municipal GO AA Index" as of June 30, In describing this index, Fidelity notes that the municipal curves are constructed using optionadjusted analytics of a diverse population of over 10,000 tax-exempt securities. Arkansas Public Employees Retirement System 1

7 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 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 the Arkansas Public Employees Retirement System 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. Arkansas Public Employees Retirement System 2

8 Notes to Financial Statements GASB Statement No. 68 requires the notes of the employer s financial statements to disclose the total pension expense, the pension plan s liabilities and assets, and deferred outflows and inflows of resources related to pensions. GASB Statement Nos. 67 and 68 require the notes of the financial statements for the employers and pension plans, to include certain additional information. 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, net pension liability, and the pension plan s fiduciary net position as a percentage of the total pension liability; the net pension liability using a discount rate that is 1% higher and 1% lower than 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; and a description of the terms of the plan s deferred retirement option program (DROP) and the total DROP balance for those members currently participating in the DROP. Arkansas Public Employees Retirement System 3

9 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. 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, 2017 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) taxexempt municipal bond rate based on an index of 20-year general obligation bonds with an average AA credit rating 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 7.15%; the municipal bond rate is 3.56% (based on the weekly rate closest to but not later than the measurement date of the Fidelity 20-Year Municipal GO AA Index ; and the resulting Single Discount Rate is 7.15%. Arkansas Public Employees Retirement System 4

10 SECTION B FINANCIAL STATEMENTS 5

11 Pension Expense Under GASB Statement No. 68 Fiscal Year Ended June 30, Service Cost $ 174,663, Interest on the Total Pension Liability 719,134, Current-Period Benefit Changes 0 4. Employee Contributions (made negative for addition here) (57,711,427) 5. Projected Earnings on Plan Investments (made negative for addition here) (545,127,384) 6. Pension Plan Administrative Expense 9,495, Other Changes in Plan Fiduciary Net Position (7,626,374) 8. Recognition of Outflow (Inflow) of Resources due to Liabilities 163,668, Recognition of Outflow (Inflow) of Resources due to Assets (8,470,021) 10. Total Pension Expense $ 448,027,419 Arkansas Public Employees Retirement System 5

12 Statement of Outflows and Inflows Arising from Current Reporting Period Fiscal Year Ended June 30, 2017 A. Outflows (Inflows) of Resources due to Liabilities 1. Difference between expected and actual experience of the Total Pension Liability (gains) or losses $ 62,849, Assumption Changes (gains) or losses $ 416,146, 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 $ 14,357, Outflow (Inflow) of Resources to be recognized in the current pension expense for Assumption Changes $ 95,067, Outflow (Inflow) of Resources to be recognized in the current pension expense due to Liabilities: $ 109,424, Deferred Outflow (Inflow) of Resources to be recognized in future pension expenses for difference between expected and actual experience of the Total Pension Liability: $ 48,491, Deferred Outflow (Inflow) of Resources to be recognized in future pension expenses for Assumption Changes: $ 321,079, Deferred Outflow (Inflow) of Resources to be recognized in future pension expenses due to Liabilities: $ 369,570,985 B. Outflows (Inflows) of Resources due to Assets 1. Net difference between projected and actual earnings on pension plan investments (gains) or losses $ (317,697,317) 2. Recognition period for Assets {in years} Outflow (Inflow) of Resources to be recognized in the current pension expense due to Assets $ (63,539,463) 4. Deferred Outflow (Inflow) of Resources to be recognized in future pension expenses due to Assets: $ (254,157,854) Arkansas Public Employees Retirement System 6

13 Statement of Outflows and Inflows Arising from Current and Prior Reporting Periods Fiscal Year Ended June 30, 2017 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 $ 198,627,287 $ 34,958,446 $ 163,668, Due to Assets 194,580, ,050,214 (8,470,021) 3. Total $ 393,207,480 $ 238,008,660 $ 155,198,820 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 $ 15,012,374 $ 34,958,446 $ (19,946,072) 2. Assumption Changes 183,614, ,614, Net Difference between projected and actual earnings on pension plan investments 194,580, ,050,214 (8,470,021) 4. Total $ 393,207,480 $ 238,008,660 $ 155,198,820 C. Deferred Outflows and Deferred Inflows of Resources by Source to be Recognized in Future Pension Expenses Deferred Net Deferred Outflows Deferred Inflows Outflows of Resources of Resources of Resources 1. Differences between expected and actual experience $ 50,094,772 $ 50,824,302 $ (729,530) 2. Assumption Changes 415,784, ,784, Net Difference between projected and actual earnings on pension plan investments 501,951, ,668, ,283, Total $ 967,830,888 $ 444,492,906 $ 523,337,982 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 2018 $ 138,397, ,213, ,970, (22,242,583) Thereafter 0 Total $ 523,337,982 Arkansas Public Employees Retirement System 7

14 Statement of Fiduciary Net Position as of June 30, 2017 To be provided by System Assets Cash and Deposits $ - Receivables Accounts Receivable - Sale of Investments $ - Accrued Interest and Other Dividends - Contributions - Accounts Receivable - Other - Total Receivables $ - Investments Fixed Income $ - Domestic Equities - International Equities - Real Estate - Other - Total Investments $ - Liabilities Total Assets $ - Payables Accounts Payable - Purchase of Investments $ - Accrued Expenses - Accounts Payable - Other - Total Liabilities $ - Net Position Restricted for Pensions $ 8,028,796,790 Arkansas Public Employees Retirement System 8

15 Statement of Changes in Fiduciary Net Position for Year Ended June 30, 2017 Additions Contributions Employer $ 261,334,560 Employee 57,711,427 Other 7,626,374 Total Contributions $ 326,672,361 Investment Income Net Appreciation in Fair Value of Investments $ 898,929,803 Interest and Dividends - Less Investment Expense (36,105,102) Net Investment Income $ 862,824,701 Other - Total Additions $ 1,189,497,062 Deductions Benefit Payments, Including Refunds of Employee Contributions $ 521,962,553 Pension Plan Administrative Expense 9,495,869 Other - Total Deductions $ 531,458,422 Net Increase in Net Position $ 658,038,640 Net Position Restricted for Pensions Beginning of Year $ 7,370,758,150 End of Year $ 8,028,796,790 Arkansas Public Employees Retirement System 9

16 SECTION C REQUIRED SUPPLEMENTARY INFORMATION 10

17 Schedules of Required Supplementary Information Schedule of Changes in Net Pension Liability and Related Ratios Current Period Fiscal Year Ended June 30, 2017 A. Total pension liability 1. Service cost $ 174,663, Interest on the total pension liability 719,134, Changes of benefit terms 0 4. Difference between expected and actual experience of the total pension liability 62,849, Changes of assumptions 416,146, Benefit payments, including refunds of employee contributions (521,962,553) 7. Net change in total pension liability $ 850,831, Total pension liability beginning 9,762,106, Total pension liability ending $ 10,612,937,270 B. Plan fiduciary net position 1. Contributions employer $ 261,334, Contributions employee 57,711, Net investment income 862,824, Benefit payments, including refunds of employee contributions (521,962,553) 5. Pension plan administrative expense (9,495,869) 6. Other 7,626, Net change in plan fiduciary net position $ 658,038, Plan fiduciary net position beginning 7,370,758, Plan fiduciary net position ending $ 8,028,796,790 C. Net pension liability $ 2,584,140,480 D. Plan fiduciary net position as a percentage of the total pension liability 75.65% E. Covered-employee payroll $ 1,788,074,570 F. Net pension liability as a percentage of covered-employee payroll % Arkansas Public Employees Retirement System 10

18 Schedules of Required Supplementary Information Schedule of Changes in Net Pension Liability and Related Ratios Ultimately 10 Fiscal Years will be Displayed Fiscal year ending June 30, Total Pension Liability Service Cost $ 174,663,657 $ 169,112,934 $ 168,811,990 $ 160,924,334 Interest on the Total Pension Liability 719,134, ,210, ,217, ,535,986 Benefit Changes Difference between Expected and Actual Experience 62,849,281 2,912,566 (137,672,890) (23,038,076) Assumption Changes 416,146, ,273, ,798,742 Benefit Payments (508,200,406) (480,913,495) (451,912,791) (414,548,645) Refunds (13,762,147) (13,192,436) (12,198,396) (9,455,347) Net Change in Total Pension Liability $ 850,831,048 $ 370,130,510 $ 441,519,056 $ 587,216,994 Total Pension Liability - Beginning $ 9,762,106,222 $ 9,391,975,712 $ 8,950,456,656 $ 8,363,239,662 Total Pension Liability - Ending (a) $ 10,612,937,270 $ 9,762,106,222 $ 9,391,975,712 $ 8,950,456,656 Plan Fiduciary Net Position Employer Contributions $ 261,334,560 $ 264,216,252 $ 263,332,831 $ 264,050,160 Employee Contributions 57,711,427 55,000,117 50,750,458 47,215,843 Pension Plan Net Investment Income 862,824,701 (4,260,175) 168,929,698 1,207,897,156 Benefit Payments (508,200,406) (480,913,495) (451,912,791) (414,548,645) Refunds (13,762,147) (13,192,436) (12,198,396) (9,455,347) Pension Plan Administrative Expense (9,495,869) (6,929,103) (6,949,282) (6,854,975) Other 7,626,374 6,594,649 6,745,403 8,302,355 Net Change in Plan Fiduciary Net Position $ 658,038,640 $ (179,484,191) $ 18,697,921 $ 1,096,606,547 Plan Fiduciary Net Position - Beginning $ 7,370,758,150 $ 7,550,242,341 $ 7,531,544,420 $ 6,434,937,873 Plan Fiduciary Net Position - Ending (b) $ 8,028,796,790 $ 7,370,758,150 $ 7,550,242,341 $ 7,531,544,420 Net Pension Liability - Ending (a) - (b) $ 2,584,140,480 $ 2,391,348,072 $ 1,841,733,371 $ 1,418,912,236 Plan Fiduciary Net Position as a Percentage of Total Pension Liability % % % % Covered-Employee Payroll $ 1,788,074,570 $ 1,795,174,463 $ 1,757,056,813 $ 1,748,350,136 Net Pension Liability as a Percentage of Covered-Employee Payroll % % % % Notes to Schedule: N/A N/A N/A N/A Arkansas Public Employees Retirement System 11

19 Schedules of Required Supplementary Information Schedule of the Net Pension Liability Ultimately 10 Fiscal Years will be Displayed 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 $ 8,950,456,656 $7,531,544,420 $ 1,418,912, % $1,748,350, % ,391,975,712 7,550,242,341 1,841,733, % 1,757,056, % ,762,106,222 7,370,758,150 2,391,348, % 1,795,174, % ,612,937,270 8,028,796,790 2,584,140, % 1,788,074, % Arkansas Public Employees Retirement System 12

20 Schedule of Contributions ($ in millions) Actuarially Contribution Actual Contribution FY Ending Determined Actual Deficiency Covered as a % of June 30, Contribution Contribution* (Excess) Payroll Covered Payroll 2008 $ $ $ - $ 1, % , % , % , % , % , % , % , % , % , % * Actual contributions are based on covered payroll at the time of the contribution. This payroll is not reported to the actuary. The covered payroll shown on this page is the valuation payroll. Based upon the limitations of this schedule, the final column cannot be compared to the contribution rates actually charged to APERS participating employers. Arkansas Public Employees Retirement System 13

21 Notes to Schedule of Contributions Valuation Date: June 30, 2015 (excluding District Judges) June 30, 2016 (District Judges) Methods and Assumptions used to Determine Fiscal Year 2017 Contribution Rates: Actuarial Cost Method Entry Age Normal Amortization Method Remaining Amortization Period Asset Valuation Method Inflation Salary Increases Level Percentage of Payroll, Closed (Level Dollar, Closed for District Judges New Plan and Paid Off Old Plan and District Judges Still Paying Old Plan) 25 years (10.6 years for District Judges New Plan/Paid Off Old Plan and 19 years for District Judges Still Paying Old Plan) 4-Year smoothed market; 25% corridor (Market Value for Still Paying Old Plan) 3.25% wage inflation, 2.50% price inflation 3.25% to 9.85% including inflation (3.25% to 6.96% including inflation for District Judges) Investment Rate of Return 7.50% Retirement Age Mortality Experience-based table of rates that are specific to the type of eligibility condition Based on RP-2000 Combined Healthy mortality table, projected to 2020 using Projection Scale BB, set-forward 2 years for males and 1- year for females Other Information: Notes There were no benefit changes during the year Arkansas Public Employees Retirement System 14

22 Schedule of Investment Returns (Multiyear) To be provided by System FY Ending June 30, Annual Return Annual money-weighted rate of return, net of investment expenses. Arkansas Public Employees Retirement System 15

23 SECTION D NOTES TO FINANCIAL STATEMENTS 16

24 Long-Term Expected Return on Plan Assets The long-term expected rate of return on pension plan investments was determined using a buildingblock method in which best-estimate ranges of expected future real rates of return are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the current asset allocation percentage and by adding expected price inflation. Best estimates of arithmetic real rates of return for the 10-year period from 2017 to 2026 were based upon capital market assumptions provided by plan s investment consultant(s). For each major asset class that is included in the pension plan s current asset allocation as of June 30, 2017, these best estimates are summarized in the following table: Long-Term Target Expected Real Asset Class Allocation Rate of Return Broad Domestic Equity 37% 5.97% International Equity 24% 6.54% Real Assets 16% 4.59% Absolute Return 5% 3.15% Domestic Fixed 18% 0.83% Total 100% Total Real Rate of Return 4.82% Plus: Price Inflation - Actuary's Assumption 2.50% Less: Investment Expenses (Passive) 0.00% Net Expected Return 7.32% Arkansas Public Employees Retirement System 16

25 Single Discount Rate A single discount rate of 7.15% was used to measure the total pension liability. This single discount rate was based on the expected rate of return on pension plan investments of 7.15%. The projection of cash flows used to determine this single discount rate 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 difference between actuarially determined contribution rates and the member rate. Based on these assumptions, the pension plan s fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. 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 7.15%, as well as what the plan s net pension liability would be if it were calculated using a single discount rate that is 1- percentage-point lower or 1-percentage-point higher: SENSITIVITY OF NET PENSION LIABILITY TO THE SINGLE DISCOUNT RATE ASSUMPTION Current Single 1% Decrease Rate Assumption 1% Increase 6.15% 7.15% 8.15% Total Pension Liability $ 11,964,109,787 $ 10,612,937,270 $ 9,490,997,081 Plan Fiduciary Net Position 8,028,796,790 8,028,796,790 8,028,796,790 Net Pension Liability $ 3,935,312,997 $ 2,584,140,480 $ 1,462,200,291 Arkansas Public Employees Retirement System 17

26 Disclosure Regarding the Deferred Retirement Option Program To be Provided by the System Arkansas Public Employees Retirement System 18

27 SUMMARY OF POPULATION STATISTICS Inactive Plan Members or Beneficiaries Currently Receiving Benefits 36,434 Inactive Plan Members Entitled to But Not Yet Receiving Benefits 14,974 Active Plan Members 46,121 Total Plan Members 97,529 Arkansas Public Employees Retirement System 19

28 SECTION E SUMMARY OF BENEFITS 20

29 Summary of Provisions Evaluated (Excludes Special Provisions for General Assembly) (Last Changed as of 7/1/2009) The Old Contributory Plan is available to persons who became members of APERS before January l, The Non-Contributory Plan applies to all persons first hired after January l, 1978 and before July 1, 2005 in APERS-covered employment. The New Contributory Plan applies to all persons hired after July 1, 2005 in APERS-covered employment or Non-Contributory members who elected to participate in the New Contributory Plan. New Contributory Plan Non-Contributory Plan Voluntary Retirement With a full benefit, after either (a) age 65 with 5 years of service, or (b) 28 years of actual service, regardless of age. For sheriff and public safety members, the age 65 requirement is reduced 1 month for each 2 months of actual service, but not below age 55 (age 52 for sheriff members with a minimum of 10 years of actual service). With a reduced benefit, after age 55 with 5 years of service or any age with 25 years of service. The reduction is equal to ½ of 1% for each month retirement proceeds normal retirement age or 1% for each month below 28 years of actual service, whichever is less. With a full benefit, after either (a) age 65 with 5 years of service, or (b) 28 years of actual service, regardless of age. For sheriff and public safety members, the age 65 requirement is reduced 1 month for each 2 months of actual service, but not below age 55 (age 52 for sheriff members with a minimum of 10 years of actual service). With a reduced benefit, after age 55 with 5 years of service or any age with 25 years of service. The reduction is equal to ½ of 1% for each month retirement proceeds normal retirement age or 1% for each month below 28 years of actual service, whichever is less. Final Average Compensation (FAC) Average of highest 36 calendar months of covered compensation. Average of highest 36 calendar months of covered compensation. Full Age & Service Retirement Benefit 2.00% of FAC times years of service (2.03% for service prior to July 1, 2007), plus.5% of FAC times years of service over 28 years for service after July 1, The minimum monthly benefit is $150 minus any age and beneficiary option reductions. 1.72% of FAC times years and months of credited service (1.75% for service prior to July 1, 2007), plus.5% of FAC times years of service over 28 years for service after July 1, If retirement is prior to age 62, an additional.33% of FAC times years of service will be paid until age 62. The portion of the APERS benefit based on service before 1978 cannot be less than the amount provided by contributory provisions in effect at the time of retirement. The minimum monthly benefit is $150 minus any age and beneficiary option reductions. Arkansas Public Employees Retirement System 20

30 Summary of Provisions Evaluated New Contributory Plan Non-Contributory Plan Benefit Increases After Retirement Annually, there will be a cost-of-living adjustment equal to 3% of the current benefit. Annually, there will be a cost-of-living adjustment equal to 3% of the current benefit. Member Contribution Rates 5% of covered compensation (pre-tax). Member contributions are refundable if APERS-covered employment terminates before a monthly benefit is payable. Members will earn interest on the contributions at a rate of 4% annually. No employee contributions for service after January 1, If there is service before January 1, 1978, contributions for that period are refundable later in the same manner as under the Contributory Plan. Vested Retirement Benefits 5 years service, and leaving APERS-covered employment before full retirement age. Deferred full retirement benefit, based on service and pay at termination, begins at age 65. A death benefit is payable to surviving spouse of member who dies before benefit commencement. In place of deferred full benefit, at age 55 or older, a qualifying member can elect an immediate reduced benefit. 5 years service and leaving APERS-covered employment before full retirement age. Deferred full retirement benefit, based on service and pay at termination, begins at age 65. A death benefit is payable to surviving spouse of member who dies before benefit commencement. In place of deferred full benefit, at age 55 or older, a qualifying member can elect an immediate reduced benefit. Total and Permanent Disability Disabled after 5 years of service, including credit for 18 of the 24 months preceding disability. Amount is computed as an age & service benefit, based on service and pay at disability. Disabled after 5 years of service, including credit for 18 of the 24 months preceding disability. Amount is computed as an age & service benefit, based on service and compensation at disability. Arkansas Public Employees Retirement System 21

31 Summary of Provisions Evaluated New Contributory Plan Non-Contributory Plan Death After Retirement If death occurs before total monthly benefit payments equal member s accumulated contributions, the difference is refunded. Member contributions before 1978 are protected in the same manner as under the Contributory Plan. A retiring member can also elect an optional form of benefit, which provides beneficiary protection paid for by reducing the retired member s benefit amount. Should the member elect a straight life benefit and decease within 12 months of the date of retirement, a benefit may be payable to the surviving spouse under certain conditions. A retiring member can also elect an optional form of benefit, which provides beneficiary protection paid for by reducing the retired member s benefit amount. Should the member elect a straight life benefit and decease within 12 months of the date of retirement, a benefit may be payable to the surviving spouse under certain conditions. Death While in APERS-Covered Employment Member s accumulated contributions are refundable. If the member had 5 years service, monthly benefits are payable instead. Surviving spouse receives a benefit computed as if member had retired and elected the Joint & 75% Survivor Option. Payment begins immediately. Each dependent child receives benefit of 10% of compensation (maximum of 25% for all children). Dependent parents benefits are payable if neither spouse nor children s benefits are payable. Member s accumulated contributions before 1978 are refundable. If the member had 5 years service, monthly benefits are payable instead. Surviving spouse receives a benefit computed as if member had retired and elected the Joint & 75% Survivor Option. Payment begins immediately. Each dependent child receives benefit of 10% of compensation (maximum of 25% for all children). Dependent parents benefits are payable if neither spouse nor children s benefits are payable. Arkansas Public Employees Retirement System 22

32 Summary of Provisions Evaluated Credited Service Membership Group Public Safety Members (including State Capitol Police and Wildlife Sub-Division members) hired before July 1, 1997 Governor (hired before July 1, 1999) Elected State Constitutional Officers (hired before July 1, 1999) General Assembly Other Elected Public Officials (municipal and county officials) All Other Members Service Credits 1-1/2 times regular rate with 5 years actual service required to meet benefit eligibility rules. 3 times regular rate with 5 years actual service required to meet death-in-service eligibility and 4 years actual service required for other benefit eligibility. 2-1/2 times regular rate with 5 years actual service required to meet benefit eligibility. Regular crediting rate with 5 years of actual service required to meet death-in-service eligibility and 10 years of actual service required for other benefit eligibility. 2 times regular rate with 5 years actual service required to meet benefit eligibility. Regular rate. Arkansas Public Employees Deferred Retirement Option Plan Members with 28 years of actual service in APERS or in combination with a reciprocal system are eligible to participate. Members, for a maximum of 7 years, may continue employment and have 75% of their accrued benefit (at date of participation with 30 or more years of service) paid into the Deferred Retirement Option Plan in lieu of any further benefit accruals. The payments into the Deferred Retirement Option Plan accumulate with interest at a rate established by the Board. The interest is paid on the mean balance and is paid to the member at termination of active membership in either a lump sum or as an annuity. Employer contributions continue for members participating in the DROP. Arkansas Public Employees Retirement System 23

33 Voluntary Retirement Eligibility Summary of Provisions Evaluated General Assembly Division Additional Benefit Provisions Age 65 with 10 or more years of credited service, 28 years of actual service regardless of age, or age 55 with 12 or more years of actual service, 10 of which must be as a member of the General Assembly. In addition, a member of the General Assembly who was a member of the General Assembly on July 1, 1979, or holding any other Arkansas elective office on July 1, 1979, is eligible to retire with 17.5 years of actual service regardless of age. Vesting Termination of employment prior to normal retirement age after completing 10 or more years of credited service. Retirement Benefit $35.00 per month times years of General Assembly service. The amount is $40.00 per month per year of service for any member who served as Speaker of the House of Representatives or President Pro Tempore of the Senate. Disability Eligibility: 10 years of credited service. Amount: Accrued retirement benefit. Death-in-Service Eligibility: 5 years of service. Amount - Less than 10 years in General Assembly: Same as for regular members. Amount - 10 or more years in General Assembly: 100% of the benefit the member would have been entitled to had he or she been at retirement age payable to an eligible surviving spouse. Death-After-Retirement 100% of the benefit the member was receiving payable to an eligible surviving spouse. Participation A member of the General Assembly may, at any time, elect either (i) to be covered by regular benefit provisions, or (ii) to discontinue an APERS membership. Arkansas Public Employees Retirement System 24

34 District Judges Summary of Provisions Evaluated Voluntary Retirement With a full benefit, after either (a) age 50 with 20 years of eligibility service, (b) age 60 with 16 years of eligibility service, or (c) age 65 with 8 years of eligibility service. Final Average Compensation (FAC) Average of the final three calendar years of employment. Benefit Service Service performed on or after January 1, Eligibility Service Full Age & Service Retirement Benefit Benefit service plus service in Old Local District Judges Plan. 2.50% of FAC times actual service. Benefit Increases After Retirement Member Contribution Rates Vested Retirement Benefits Total and Permanent Disability Death After Retirement Annually, there will be a cost-of-living adjustment equal to 3% of the current benefit. Active members contribute 5% of their salaries. If a member leaves service before becoming eligible to retire, accumulated contributions may be refunded. 8 years of eligibility service. Deferred full retirement benefit, based on benefit service and pay at termination, begins when member would have been eligible for voluntary retirement. An active member with 3 or more consecutive years of eligibility service who becomes totally and permanently disabled may be retired and receive a disability annuity computed in the same manner as an age and service annuity. If the member was eligible for normal retirement at the time of death, an eligible beneficiary will begin receiving a 50% joint and survivor pension computed in the same manner as a service retirement pension as if the member had retired the last day of his life. Arkansas Public Employees Retirement System 25

35 SECTION F ACTUARIAL COST METHOD AND ACTUARIAL ASSUMPTIONS 26

36 Summary of Assumptions Used for APERS Actuarial Valuations Assumptions Adopted by Board of Trustees After Consulting with Actuary In accordance with Section of the Arkansas Code, the Board of Trustees adopts the actuarial assumptions used for actuarial valuation purposes. The actuarial assumptions used in the valuation are shown in this section. Assumptions were established based upon an Experience Study covering the period July 1, 2007 through June 30, 2012 (please see report dated February 13, 2013) and updated in conjunction with an Economic Assumption Review dated May 17, The actuarial assumptions represent estimates of future experience. Economic Assumptions The investment return rate used in making the valuation was 7.15% per year, compounded annually (net after investment expenses). This rate of return is not the assumed real rate of return. The real rate of return is the portion of investment return which is more than the wage inflation rate. Considering the assumed wage inflation rate of 3.25%, the 7.15% investment return rate translates to an assumed net real rate of return of 3.90%. The wage inflation assumption was first used for the June 30, 2015 valuation, including also the District Judges division. The investment return assumption was first used for the June 30, 2017 valuation, including also the District Judges division. Pay increase assumptions for individual active members are shown on pages 33 and 35. Part of the assumption for each age is for a merit and/or seniority increase, and the other 3.25% recognizes wage inflation. The wage inflation assumption consists of 2.50% for price inflation and 0.75% for real wage growth. These assumptions were first used for the June 30, 2015 valuation and for the District Judges division for the June 30, 2015 valuation. Total active member payroll is assumed to increase 3.25% a year, which is the portion of the individual pay increase assumptions attributable to wage inflation. This assumption was first used for the June 30, 2015 valuation and for the District Judges division for the June 30, 2015 valuation. The number of active members is assumed to continue at the present number. Non-Economic Assumptions The mortality table used to measure retired life mortality was the RP-2000 Combined Healthy mortality table, projected to 2020 using Projection Scale BB, set-forward 2 years for males and 1 year for females. Related values are shown on page 28. Based upon the experience observed during the most recent experience study, it appears that at the time of the study the current table provides for an approximate 15% margin for future mortality improvement. This assumption was first used for the June 30, 2013 valuation. Arkansas Public Employees Retirement System 26

37 The probabilities of retirement for members eligible to retire are shown on pages 29 through 32. These probabilities were first used for the June 30, 2013 valuation and for the June 30, 2007 valuation for the District Judges division. The probabilities of withdrawal from service, death-in-service and disability are shown for sample ages on pages 33 through 35. These probabilities were first used for the June 30, 2013 valuation and for the District Judges division for the June 30, 2013 valuation. The individual entry-age normal actuarial cost method of the valuation was used in determining liabilities and normal cost. For calculating actuarially determined contributions, for members who are assumed to enter the DROP, normal costs are assumed to be collected until the ultimate date of retirement. For GASB Statement No. 67 purposes for members who are assumed to enter the DROP, the date of entry into the DROP was considered to be the plan member s retirement date. Differences in the past between assumed experience and actual experience (actuarial gains and losses) become part of actuarial accrued liabilities. Unfunded actuarial accrued liabilities are amortized to produce contribution amounts (principal and interest) which are level percent-of-payroll contributions. Recognizing the special circumstances of the General Assembly division, modifications of the above assumptions were made where appropriate. Present assets (cash & investments) were valued on a market related basis in which differences between actual and assumed returns are phased-in over a four-year period. The funding value of assets may not deviate from the market value of assets by more than 25%. District Judges Still Paying Old Plan present assets (cash & investments) were valued on a market value basis. The data about persons now covered and about present assets were furnished by the System s administrative staff. Although examined for general reasonableness, the data was not audited by the Actuary. The actuarial valuation computations were made by or under the supervision of a Member of the American Academy of Actuaries (MAAA). Arkansas Public Employees Retirement System 27

38 Single Life Retirement Values Based on RP-2000 Combined, Projected to % Interest June 30, 2017 Sample Attained Ages Present Value of Present Value of $1.00 Monthly for Life $1.00 Monthly for Life Increasing 3% Annually Men Women Men Women Future Life Expectancy (Years) Men Women 40 $ $ $ $ Sample Attained Ages Benefit Increasing Portion of Age 60 Lives Still Alive 3.0% Yearly Men Women 60 $ % 100 % The mortality table was set forward 10 years for disabilities. Based on RP-2000 Combined Healthy mortality table, projected to 2020 using Projection Scale BB, set forward 2 years for males and 1 year for females. Arkansas Public Employees Retirement System 28

39 State and Local Government Division Age-Based Retirement June 30, 2017 Retirement Ages (with less than 28 years of service) Percent of Eligible Active Members Retiring Within Next Year Unreduced Reduced 55 2 % % & Over 100 A member was assumed eligible for unreduced retirement after attaining age 65 with 5 years of service or 28 years regardless of age. A member was assumed eligible for reduced retirement after attaining age 55 with 10 or more years of service. These rates represent the point at which members ultimately terminate employment (after participating in the DROP, for those that do). Arkansas Public Employees Retirement System 29

40 State and Local Government Division Service Based Retirement June 30, 2017 Service Percent of Eligible Active Members Retiring Within Next Year % & Over 100 Arkansas Public Employees Retirement System 30

41 General Assembly Division Probabilities of Retirement for Members Eligible to Retire June 30, 2017 Retirement Ages Percent of Eligible Active Members Retiring Within Next Year % & Over 100 Member may retire at age 50 with 20 or more years of service, age 60 with 16 or more years of service, or age 65 with 8 or more years of service. Arkansas Public Employees Retirement System 31

42 District Judges Division Age-Based Retirement June 30, 2017 Retirement Ages Percent of Eligible Active Members Retiring Within Next Year % & Over 100 Members may retire at age 50 with 20 or more years of service, age 60 with 16 or more years of service, or age 65 with 8 or more years of service. Arkansas Public Employees Retirement System 32