Educational Employees Supplementary Retirement System of Fairfax County (ERFC) GASB Statement Nos. 67 and 68 Accounting and Financial Reporting for

Transcription

1 Educational Employees Supplementary Retirement System of Fairfax County (ERFC) GASB Statement Nos. 67 and 68 Accounting and Financial Reporting for Pensions June 30, 2017

2 October 10, 2017 Board of Trustees Educational Employees Supplementary Retirement System of Fairfax County (ERFC) Fairfax, Virginia Re: GASB Statement Nos. 67 and 68 Measured at June 30, 2017 Dear Board Members: This report contains accounting schedules prepared in connection with and required by GASB Statements No. 67 and No. 68. The 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. This report should not be relied on for any purpose other than compliance with GASB Statements No. 67 and No. 68. It is intended for use by the Retirement System and those designated or approved by the Board. It may be provided to other parties only in its entirety and only with the permission of the Board of Trustees. GRS is not responsible for unauthorized use of this report. The report is based upon information furnished by the Executive Director and staff in connection with the December 31, 2016 valuation and certain supplemental information on financial activity during Fiscal Their efforts in furnishing this material are acknowledged with appreciation. We checked the information for internal and year-to-year consistency, but did not perform an audit. We are not responsible for the accuracy or completeness of such information. Since the measurement date for purposes of accounting (June 30, 2017) is not the same as the valuation date (December 31, 2016), we applied actuarial techniques to Roll-Forward the Total Pension Liability from December 31, 2016 to June 30, While we are not aware of any significant events that would affect the accuracy of the roll-forward techniques that we used, we caution users that an actuarial valuation performed as of June 30, 2017 would produce results somewhat different, and potentially materially different, from those shown herein. The Net Pension Liability is not an appropriate measure for measuring the sufficiency of plan assets to cover the estimated cost of settling the employer s benefit obligation. The Net Pension Liability is not an appropriate measure for assessing the need for or amount of future employer contributions. A calculation of the plan s liability for purposes other than satisfying the requirements of GASB Statement No. 67 or No. 68 may produce significantly different results.

3 Board of Trustees Educational Employees Supplementary Retirement System of Fairfax County (ERFC) October 10, 2017 Page 2 To the best of our knowledge, the information contained with this report is accurate and fairly represents the accounting position of the Educational Employees' Supplemental Retirement System of Fairfax County (ERFC) on the measurement date for purposes of GASB Statements No. 67 and No. 68. All calculations have been made in conformity with generally accepted actuarial principles and practices as well as with the Actuarial Standards of Practice issued by the Actuarial Standards Board. Judith A. Kermans, Brian B. Murphy and Heidi G. Barry are Members of the American Academy of Actuaries (MAAA) and meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinions contained herein. The signing actuaries are independent of the plan sponsor. This information is intended to assist in preparation of the financial statements of the ERFC. Financial statements are the responsibility of management, subject to the auditor s review. Please let us know if the auditor recommends any changes. This communication shall not be construed to provide tax advice, legal advice, accounting advice, or investment advice. Respectfully submitted, Brian B. Murphy, FSA, EA, FCA, MAAA, PhD Judith A. Kermans, EA, FCA, MAAA Heidi G. Barry, ASA, FCA, MAAA BBM/JAK/HGB:bd

4 Table of Contents Page Section A Section B Section C Section D Executive Summary Executive Summary... 1 Discussion... 2 Financial Statements Statement of Pension Expense... 7 Statement of Outflows and Inflows Arising from Current Reporting Period... 8 Statement of Outflows and Inflows Arising from Current and Prior Reporting Periods... 9 Statement of Fiduciary Net Position Statement of Changes in Fiduciary Net Position Required Supplementary Information Schedule of Roll-Forward of Total Pension Liability Schedule of Changes in Net Pension Liability and Related Ratios Current Reporting Period 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 Asset Allocation Sensitivity of Net Pension Liability to the Single Discount Rate Assumption Disclosure Regarding DROP Accounts Summary of Population Statistics Section E Summary of Benefits Section F Actuarial Cost Method and Actuarial Assumptions 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 Educational Employees Supplementary Retirement System of Fairfax County (ERFC)

5 SECTION A EXECUTIVE SUMMARY 0

6 Executive Summary as of June 30, 2017 Actuarial Valuation Date December 31, 2016 Measurement Date of the Net Pension Liability June 30, 2017 Employer's Fiscal Year Ending Date (Reporting Date) June 30, 2017 Membership Number of Retirees and Beneficiaries 11,367 - Inactive, Nonretired Members 4,446 - Active Members 21,748 - Total 37,561 Covered Payroll $ 1,430,259,607 Net Pension Liability Total Pension Liability $ 3,094,309,317 Plan Fiduciary Net Position 2,304,281,654 Net Pension Liability $ 790,027,663 Plan Fiduciary Net Position as a Percentage of Total Pension Liability 74.47% Net Pension Liability as a Percentage of Covered Payroll 55.24% Development of the Single Discount Rate Single Discount Rate 7.25% Long-Term Expected Rate of Investment Return 7.25% 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 $ 113,393,168 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 $ 16,866,104 $ 24,149,434 Changes in assumptions 51,706,409 - Net difference between projected and actual earnings on pension plan investments 158,734, ,119,898 Total $ 227,306,907 $ 136,269,332 * 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 option-adjusted analytics of a diverse population of over 10,000 tax-exempt securities. Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 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 ERFC 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. Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 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 and the net 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; annual money-weighted rate of return; and if the plan has a Deferred Retirement Option ( DROP ) 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. Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 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. General Implications of Contribution Allocation Procedure or Funding Policy on Future Expected Plan Contributions and Funded Status Given the plan s contribution allocation procedure, 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 employer normal cost as a percentage of pay is expected to decrease as a percentage of payroll as new ERFC 2001 Tier 2 participants are hired. 2. The unfunded liability is expected to be paid off on June 30, 2040, which is the completion date of the unfunded liability amortization schedule. 3. The funded status of the plan is expected to reach a 100% funded ratio on June 30, This funding policy results in the expectation that the plan s assets will be able to fully pay for promised benefits through at least 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 December 31, 2016 and a measurement date of June 30, Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 4

10 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 7.25%; 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 7.25%. Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 5

11 SECTION B FINANCIAL STATEMENTS Auditor s Note This information is intended to assist in preparation of the financial statements of the Educational Employees' Supplemental Retirement System of Fairfax County (ERFC). Financial statements are the responsibility of management, subject to the auditor s review. Please let us know if the auditor recommends any changes. 6

12 Pension Expense Under GASB Statement No. 68 Fiscal Year Ended June 30, 2017 A. Expense 1. Service Cost $ 78,925, Interest Cost 209,515, Current-Period Benefit Changes (1,038,793) 4. Employee Contributions (made negative for addition here) (43,062,632) 5. Projected Earnings on Plan Investments (made negative for addition here) (150,832,175) 6. Pension Plan Administrative Expense 4,059, Other Changes in Plan Fiduciary Net Position - 8. Recognition of Outflow (Inflow) of Resources due to Liabilities 6,202, Recognition of Outflow (Inflow) of Resources due to Assets 9,623, Total Pension Expense $ 113,393,168 Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 7

13 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 $ 19,857, Assumption Changes (gains) or losses $ 23,334, 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)/(3) $ 2,991, Outflow (Inflow) of Resources to be recognized in the current pension expense for Assumption Changes: (2)/(3) $ 3,514, Outflow (Inflow) of Resources to be recognized in the current pension expense due to Liabilities: $ 6,506, 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: $ 16,866, Deferred Outflow (Inflow) of Resources to be recognized in future pension expenses for Assumption Changes: (2)-(5) $ 19,819, Deferred Outflow (Inflow) of Resources to be recognized in future pension expenses due to Liabilities: $ 36,685,319 B. Outflows (Inflows) of Resources due to Assets 1. Net difference between projected and actual earnings on pension plan investments (gains) or losses $ (100,149,602) 2. Recognition period for Assets {in years} Outflow (Inflow) of Resources to be recognized in the current pension expense due to Assets $ (20,029,920) 4. Deferred Outflow (Inflow) of Resources to be recognized in future pension expenses due to Assets: $ (80,119,682) Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 8

14 Statement of Outflows and Inflows Arising from Current and Prior Reporting Periods Fiscal Year Ended June 30 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 $ 13,438,671 $ 7,236,530 $ 6,202, Due to Assets 61,653,957 52,030,137 9,623, Total $ 75,092,628 $ 59,266,667 $ 15,825,961 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 $ 2,991,240 $ 7,236,530 $ (4,245,290) 2. Assumption Changes 10,447,431-10,447, Net Difference between projected and actual earnings on pension plan investments 61,653,957 52,030,137 9,623, Total $ 75,092,628 $ 59,266,667 $ 15,825,961 C. Deferred Outflows and Deferred Inflows of Resources by Source to be Recognized in Future Pension Expenses Deferred Deferred Net Deferred Outflows Inflows Outflows of Resources of Resources of Resources 1. Differences between expected and actual experience $ 16,866,104 $ 24,149,434 $ (7,283,330) 2. Assumption Changes 51,706,409-51,706, Net Difference between projected and actual earnings on pension plan investments 158,734, ,119,898 46,614, Total $ 227,306,907 $ 136,269,332 $ 91,037,575 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 Numbers on this page may not match due to rounding $ 15,825, $ 47,826, $ 23,016, $ (9,448,431) 2022 $ 9,662,985 Thereafter $ 4,154,221 Total $ 91,037,575 Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 9

15 Statement of Fiduciary Net Position as of June 30, 2017 Assets 2017 Cash and Deposits $ 206,189,936 Receivables Accounts Receivable - Sale of Investments $ 6,731,606 Accrued Interest and Other Dividends 2,963,524 Investments Contributions - Accounts Receivable - Other - Total Receivables $ 9,695,130 U.S. Government Obligations $ 18,415,390 Bonds and Mortgage Securities 107,303,732 Stocks 681,120,596 Real Estate 180,237,145 Global Asset Allocation 236,687,821 Better Beta 112,371,447 Hedge Fund of Funds 90,512,487 Private Equity 68,818,151 Commingled Fixed Income Funds 493,892,323 Commingled Equity Funds 280,770,081 Total Investments $ 2,270,129,173 Other 53,546 Total Assets $ 2,486,067,785 Liabilities Payables Accounts Payable and Securities Purchased $ 11,072,326 Accrued Expenses - Securities Lending Collateral 170,713,805 Total Liabilities $ 181,786,131 Net Position Restricted for Pensions $ 2,304,281,654 Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 10

16 Statement of Changes in Fiduciary Net Position For Year Ended June 30, 2017 Additions 2017 Contributions Employer $ 80,094,538 Employee 43,062,632 Other - Investment Income Total Contributions $ 123,157,170 Net Appreciation in Fair Value of Investments $ 223,619,057 Interest and dividends 33,416,321 Real estate income 6,580,592 Income from securities lending activities 863,823 Other - Less Investment Expense (13,498,016) Net Investment Income $ 250,981,777 Other $ - Total Additions $ 374,138,947 Deductions Benefit payments, including refunds of employee contributions $ 173,385,583 Pension Plan Administrative Expense 4,059,408 Other - Total Deductions $ 177,444,991 Net Increase in Net Position $ 196,693,956 Net Position Restricted for Pensions Beginning of Year $ 2,107,587,698 End of Year $ 2,304,281,654 Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 11

17 SECTION C REQUIRED SUPPLEMENTARY INFORMATION Auditor s Note This information is intended to assist in preparation of the financial statements of the Educational Employees' Supplemental Retirement System of Fairfax County (ERFC). Financial statements are the responsibility of management, subject to the auditor s review. Please let us know if the auditor recommends any changes. 12

18 Schedule of Roll-Forward of Total Pension Liability From December 31, 2016 to June 30, 2017 A. Prior December 31 Accrued Liability $ 3,032,503,491 B. Normal Cost $ $ 80,739,800 C. Expected Benefit Payments $ 171,535,245 D. Assumed Interest Rate 7.25% Total Pension Liability June 30, 2017 (A x(1+ D)^0.5) + (B-C) x(1+d)^0.25/2 $ 3,094,309,317 The actuarial (funding) valuation is performed each year as of December 31. If that were the measurement date, the accrued liability as of December 31 would be the Total Pension Liability. Instead, the accrued liability from the funding valuation must be rolled-forward 6 months to the measurement date (June 30). The normal cost and expected benefit payments shown above are for the calendar year beginning on the most recent actuarial valuation date. They are necessary components of the rollforward calculation, and are different from the service cost and actual benefit payments for the fiscal year, which are shown elsewhere in this report. Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 13

19 Schedule of Changes in Net Pension Liability and Related Ratios Current Reporting Period Fiscal Year Ended June 30, 2017 A. Total Pension Liability 1. Service Cost $ 78,925, Interest Cost 209,515, Changes of benefit terms (1,038,793) 4. Difference between expected and actual experience of the Total Pension Liability 19,857, Changes of assumptions 23,334, Benefit payments, including refunds of employee contributions (173,385,583) 7. Net change in Total Pension Liability $ 157,208, Total Pension Liability Beginning 2,937,100, Total Pension Liability Ending $ 3,094,309,317 B. Plan Fiduciary Net Position 1. Contributions Employer $ 80,094, Contributions Employee 43,062, Net investment income 250,981, Benefit payments, including refunds of employee contributions (173,385,583) 5. Pension Plan Administrative Expense (4,059,408) 6. Other - 7. Net change in Plan Fiduciary Net Position $ 196,693, Plan Fiduciary Net Position Beginning 2,107,587, Plan Fiduciary Net Position Ending $ 2,304,281,654 C. Net Pension Liability $ 790,027,663 D. Plan Fiduciary Net Position as a percentage of the Total Pension Liability 74.47% E. Covered-Employee payroll $ 1,430,259,607 F. Net Pension Liability as a percentage of Covered-Employee payroll 55.24% Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 14

20 Schedules of Required Supplementary Information Schedule of Changes in Net Pension Liability and Related Ratios Multiyear Fiscal year ending June 30, Total Pension Liability Service Cost $ 78,925,763 $ 77,760,915 $ 77,493,999 $ 75,787,752 Interest Cost 209,515, ,720, ,938, ,723,577 Benefit Changes (1,038,793) Difference between Expected and Actual Experience 19,857,344 (11,011,883) (17,051,192) (19,051,630) Assumption Changes 23,334,195 45,752, Benefit Payments (168,783,718) (165,721,790) (162,145,265) (161,276,831) Refunds (4,601,865) (4,626,057) (5,697,311) (5,772,959) Net Change in Total Pension Liability 157,208, ,873,327 91,538,806 82,409,909 Total Pension Liability - Beginning 2,937,100,755 2,789,227,428 2,697,688,622 2,615,278,713 Total Pension Liability - Ending (a) $ 3,094,309,317 $ 2,937,100,755 $ 2,789,227,428 $ 2,697,688,622 Plan Fiduciary Net Position Employer Contributions $ 80,094,538 $ 76,599,695 $ 74,324,396 $ 74,174,082 Employee Contributions 43,062,632 41,383,642 39,982,963 40,018,590 Pension Plan Net Investment Income 250,981,777 (15,766,967) 32,083, ,640,803 Benefit Payments (168,783,718) (165,721,790) (162,145,265) (161,276,831) Refunds (4,601,865) (4,626,057) (5,697,311) (5,772,959) Pension Plan Administrative Expense (4,059,408) (4,004,882) (3,751,825) (3,629,320) Net Change in Plan Fiduciary Net Position 196,693,956 (72,136,359) (25,203,134) 248,154,365 Plan Fiduciary Net Position - Beginning 2,107,587,698 2,179,724,057 2,204,927,191 1,956,772,826 Plan Fiduciary Net Position - Ending (b) $ 2,304,281,654 $ 2,107,587,698 $ 2,179,724,057 $ 2,204,927,191 Net Pension Liability - Ending (a) - (b) 790,027, ,513, ,503, ,761,431 Plan Fiduciary Net Position as a Percentage of Total Pension Liability % % % % Covered-Employee Payroll $ 1,430,259,607 $ 1,374,735,094 $ 1,366,029,848 $ 1,324,537,175 Net Pension Liability as a Percentage of Covered-Employee Payroll % % % % Notes to Schedule: None Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 15

21 Schedules of Required Supplementary Information Schedule of the Net Pension Liability Multiyear Plan Net Net Pension Total Position as a % Liability as a FY Ending Pension Plan Net Net Pension of Total Pension Covered % of Covered June 30, Liability Position Liability Liability Payroll Payroll 2014 $ 2,697,688,622 $ 2,204,927,191 $ 492,761, % $ 1,324,537, % ,789,227,428 2,179,724, ,503, % 1,366,029, % ,937,100,755 2,107,587, ,513, % 1,374,735, % ,094,309,317 2,304,281, ,027, % 1,430,259, % Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 16

22 Schedule of Contributions Multiyear Last 10 Fiscal Years Actuarially Contribution Actual Contribution FY Ending Determined Actual Deficiency Covered as a % of June 30, Contribution Contribution (Excess) Payroll Covered Payroll 2008 $38,334,140 $38,334,140 $ - $1,137,511, % ,281,658 40,012,480 (2,730,822) 1,187,313, % ,146,816 37,868,623 (2,721,807) 1,183,394, % ,118,111 47,118,111-1,166,289, % ,738,815 52,934,245 (2,195,430) 1,219,683, % ,242,010 67,734, ,376 1,268,438, % ,748,999 74,174,082 (1,425,083) 1,324,537, % ,791,177 74,324, ,781 1,366,029, % ,069,503 76,599,695 (530,192) 1,374,735, % ,305,269 80,094, ,731 1,430,259, % Covered payroll in 2016 and later is reported in accordance with GASB 82. The ratio in the last column cannot always be compared to contributions required by the ERFC Board's funding policy. Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 17

23 Notes to Schedule of Contributions Valuation Date: December 31, 2013 and 2014 Notes Actuarial valuations performed as of odd numbered years typically determine the contribution rate for the two year period beginning 18 months after the valuation date. The December 31, 2013 valuation was used to determine the funding policy contribution rates for Fiscal 2016 and Each actuarial valuation determines an ADEC for the period beginning 18 months after the valuation date. The December 31, 2014 valuation determined the ADEC for Fiscal Methods and Assumptions Used to Determine FY 2017 Actuarially Determined Employer Contribution Rates: Actuarial Cost Method Entry Age Normal Amortization Method Level Percentage of Payroll, Closed Remaining Amortization Period 24 years from July 1, 2016 Asset Valuation Method 5-Year smoothed market; 25% corridor Inflation 3% -- approximate; No explicit price inflation assumption is used in this valuation. Salary Increases 3.75% to 9.05% including inflation Investment Rate of Return 7.5% Retirement Age Experience-based table of rates that are specific to the type of eligibility condition. Last updated for the 2010 valuation pursuant to an experience study of the period Mortality Other Information: Notes 1994 Group Annuity Mortality table set back 3 years for both males and females. This table appeared to have an approximate 7% margin for future improvement at the time of adoption. There were no benefit changes during the year. An experience study was performed after the FY 2017 contribution rates were determined. The assumptions adopted in connection with that study will determine contribution rates beginning in FY Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 18

24 Schedule of Investment Returns Multiyear FY Ending June 30, Annual Return % % 2016 (0.63)% % 1 Annual money-weighted rate of return, net of investment expenses as supplied by ERFC Staff. Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 19

25 SECTION D NOTES TO FINANCIAL STATEMENTS Auditor s Note This information is intended to assist in preparation of the financial statements of the Educational Employees' Supplemental Retirement System of Fairfax County (ERFC). Financial statements are the responsibility of management, subject to the auditor s review. Please let us know if the auditor recommends any changes. 20

26 Long Term Expected Return on Assets The long-term expected rate of return on plan assets is 7.25%. It was developed in conjunction with a study of experience covering the period January 1, 2010 through December 31, 2014 and dated November 10, Estimates of arithmetic real rates of return as of the measurement date are summarized in the following table. Asset Allocation NEPC 30-Year Assumptions Asset Class Policy Allocation Arithmetic Real Return US Equity US Large Cap Equity 14.00% 5.92% US Small/Mid Cap Equity 6.00% 6.71% Non-US Equity International Equity (Unhedged) 14.00% 6.71% Emerging International Equity 3.00% 9.70% Fixed Income EMD (Local Currency) 3.00% 4.62% Core Bonds 4.00% 1.38% Diversified Fixed Income 16.00% 2.83% Absolute Return Fixed Income 6.00% 1.79% Real Estate Real Estate (Core) 4.00% 4.62% REITs 3.50% 5.75% Private Markets Private Equity 3.50% 8.73% Hedge Funds Hedge Funds 8.00% 3.95% GAA Pimco All Asset 5.00% 4.45% Wellington Opportunistic Investment 5.00% 5.38% Risk Parity BridgeWater All Weather 5.00% 4.47% Total % New England Pension Consultants (NEPC) supplied the information in the above table. It is included here for convenience. Gabriel, Roeder, Smith & Company does not provide investment advice. We are not registered municipal advisors with the SEC. We did not develop the figures in the table. Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 21

27 Single Discount Rate A Single Discount Rate of 7.25% 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 7.25%. 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 7.25%, 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 6.25% 7.25% 8.25% TPL $3,488,740,546 $3,094,309,317 $2,771,054,985 PNP 2,304,281,654 2,304,281,654 2,304,281,654 NPL $1,184,458,892 $ 790,027,663 $ 466,773,331 Users of this report should be aware that in the Actuary's judgment, a discount rate of 8.25% would not be a reasonable assumption for funding purposes. Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 22

28 Disclosure Regarding the Deferred Retirement Option Program This plan does not include a Deferred Retirement Option Program ( DROP ). Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 23

29 Summary of Population Statistics December 31, 2016 Inactive Plan Members or Beneficiaries Currently Receiving Benefits 11,367 Inactive Plan Members Entitled to But Not Yet Receiving Benefits 4,446 Active Plan Members 21,748 Total Plan Members 37,561 Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 24

30 SECTION E SUMMARY OF BENEFITS 25

31 Summary of Provisions as of December 31, 2016 Members Hired After July 1, 1988 but Before July 1, 2001 ERFC 1. Service Retirement Eligibility. A member may retire any time after reaching the service retirement date, which is either (i) age 65 with 5 years of service or (ii) age 55 with 25 years of service. 2. Reduced Service Retirement Eligibility. A member with 25 years of service but younger than age 55 may retire after age 45. A member with less than 25 years of service and younger than age 65 may retire after age Deferred Retirement Eligibility. An inactive member with 5 or more years of service will be entitled to a pension with payments beginning at age 55, provided she/he does not withdraw accumulated member contributions. 4. Death-in-Service Benefit Eligibility. An active member with 5 or more years of service who dies will have benefits payable to the surviving spouse or other eligible beneficiary. The 5-year service requirement is waived if the death is service-connected. 5. Disability Retirement Eligibility. An active member with 5 or more years of service who becomes totally and permanently disabled may be retired and receive a disability pension. The 5-year service requirement is waived if the disability is service-connected. 6. Final Average Compensation (FAC). A member s final average compensation is the average of the 3 highest consecutive years of salary during eligible employment. 7. Service Retirement Amount. For payment periods during the retired member s lifetime 103% times (i) minus (ii) where: (i) means 1.85 percent of the FAC multiplied by years of credited service, and (ii) means 1.65 percent of the portion of VRS FAC in excess of $1,200, multiplied by applicable years of creditable Virginia service; provided if the member is younger than age 65 and if creditable Virginia service is less than 30 years, the result of such multiplication shall be reduced for each month before the earlier of: (1) attainment of age 65; and (2) the date when 30 years of service would have been completed. The reduction shall be one-half of 1% for each of the first 60 months and four-tenths of one percent for each month beyond 60 months, if any. For payment periods, if any, before the age the member becomes eligible for full Social Security benefits, an additional temporary benefit equal to 1.00 percent of the FAC multiplied by years of credited service. Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 26

32 Summary of Provisions as of December 31, 2016 Members Hired After July 1, 1988 but Before July 1, 2001 ERFC 8. Reduced Service Retirement Amount after 25 Years of Service. Service Retirement amount reduced to reflect retirement age younger than age Reduced Service Retirement Amount after 5-24 Years of Service. For payment periods during the retired member s lifetime, the Service Retirement amount payable at age 65 reduced to reflect retirement age younger than age 65. For payment periods before the age the member becomes eligible for full Social Security benefits, an additional temporary benefit equal to the Service Retirement temporary benefit reduced to reflect retirement age younger than age Deferred Retirement Amount. Calculated in the same manner as reduced service retirement. 11. Death-in-Service Benefit Amount. If the member is eligible for a service or reduced service retirement then an eligible named beneficiary will receive such benefits reduced based upon an Option A (in the case of a spouse or an ex-spouse subject to a DRO) or Option B (in case of another eligible beneficiary) election. If not, the eligible named beneficiary will receive an amount equal to 103% times a lifetime pension equal of 0.25% of the FAC multiplied by years of credited service, and also reduced in connection with an Option A or Option B election. Credited service shall be increased by the time period from the date of death to the date when the member would have reached service retirement with a minimum of 10 years of service used, provided the death was service-connected. If a named beneficiary is not eligible for either of these types of benefits, the named beneficiary will receive a refund of the member s accumulated contributions. 12. Disability Retirement Amount. The amount is 103% times a lifetime pension equal to 0.25 percent of the FAC multiplied by years of credited service. Credited service shall be increased by the time period from disability retirement to the date when the member would have reached the service retirement date. The minimum pension payable is 2.5 percent of FAC. 13. Post-Retirement Increases. The amount of the monthly benefit is adjusted each March 31st, by 3% compounded annually, beginning with the March 31st which is more than three full months after the member s effective retirement date. Pensions of members that retire in the immediately preceding calendar year are increased by 1.489% (one-half a year s increase). 14. Member Contributions. Effective July 1, 2012, members contribute 3% of their salaries. Interest credits are 5% annually through June 30, 2017, and 4% annually thereafter. If a member leaves covered employment before becoming eligible to retire, accumulated contributions are returned upon request. Members who receive a refund of contributions and are later rehired become members of ERFC 2001 Tier 2. Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 27

33 Summary of Provisions as of December 31, 2016 Members Hired After July 1, 1988 but Before July 1, 2001 ERFC 15. Lifetime Level Benefit (for Retirements after July 1, 2004). Members are eligible for a Lifetime Level Benefit (LLB) that is calculated by determining the annuitized value of the greater of their accumulated contribution balance or the present value of the currently provided benefit. 16. Optional Forms of Payment. Option A: 100% Joint and Survivor benefit. Benefit is 85% of the straight life amount adjusted for the difference in age between the retiree and beneficiary. The maximum benefit is 94% of the straight life amount. Option B: 50% Joint and Survivor benefit. Benefit is 91% of the straight life amount adjusted for the difference in age between the retiree and beneficiary. The maximum benefit is 97% of the straight life amount. Option C: 10 years Certain and Life. Benefit is 96% of the straight life amount. Option D: Single sum payment not exceeding member s accumulated contribution balance, plus a single life annuity actuarially reduced from the pension amount otherwise payable. Actuarial equivalent factors are described on page 42. Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 28

34 Summary of Provisions as of December 31, 2016 Alternate Benefits Available to Members with Some Service Before July 1, 1988 Service Retirement: Alternate Amount After Full Social Security Age. A member with service before 7/1/1988 may elect, at time of retirement, to receive an alternate benefit amount for payment periods after full Social Security age. The Alternative Guarantee amount is the amount that would have been received after the individual reached eligibility for full Social Security benefits under the Old Plan (pre July 1, 1988) formulas. The amount is 103% of the total of: (i) (ii) the amount payable under June 30, 1987 benefit provisions, plus, if the retiring member is younger than full Social Security age and if creditable Virginia service is less than 30 years, 1.65 percent of VRS average final compensation in excess of $1,200, multiplied by years of creditable Virginia service, and further multiplied by a certain percent based upon the number of months that retirement occurs before reaching the earlier of the above two conditions; such percent is one half of one percent for each of the first 60 such months and four-tenths of one percent for each of the next 60 such months, if any. Reduced Service Retirement: Alternate Amount with 25 Years or more Years of Service. By election at time of retirement, such a member may elect to receive 103% of the following combination of benefits: To age 55, 2.85 percent of the 3-year average annual salary multiplied by years of credited service, then actuarially reduced to reflect retirement age younger than age 55; From age 55 to 65, the amount to age 55 reduced by: 1.65 percent of the portion of VRS average final compensation in excess of $1,200, multiplied by applicable years of creditable Virginia service; provided if creditable Virginia service is less than 30 years, the result of such multiplication shall be actuarially reduced for each month before the earlier of (1) attainment of age 65; and (2) the date when 30 years service would have been completed; and From age 65 for life, the amount payable at age 65 according to June 30, 1987 provisions or the amount payable at age 65 according to July 1, 1988 provisions. Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 29

35 Summary of Provisions as of December 31, 2016 Members Hired On/After July 1, 2001 but Before July 1, 2017 ERFC 2001 Tier 1 1. Service Retirement Eligibility. A member may retire at age 60 with 5 or more years of credited service, or after 30 years of credited service regardless of age. 2. Deferred Retirement Eligibility. Any member with 5 or more years of credited service who terminates employment prior to the service retirement date, will be eligible to receive a deferred vested pension commencing at age 60, provided accumulated contributions are left on deposit with the Plan. 3. Death Benefit Eligibility. Any member with 5 or more years of credited service who dies before beginning to receive a pension will have benefits payable to the named beneficiary. 4. Final Average Compensation (FAC). A member s Final Average Compensation is the average of the 3 highest years of salary during eligible employment. 5. Service Retirement Pension. The amount is a lifetime pension equal to 0.8% (eight-tenths of one percent) of FAC at retirement multiplied by years of credited service. If necessary, the pension will be increased to make the reserve value of the pension equal to the member s accumulated contributions as of the retirement effective date. 6. Deferred Retirement Pension. The amount is a lifetime pension equal to 0.8% (eight-tenths of one percent) of FAC at termination multiplied by years of credited service. If necessary, the pension will be increased to make the reserve value of the pension equal to the member s accumulated contributions as of the effective retirement date. 7. Survivor Death Benefit. The amount is a lifetime pension equal to 0.8% (eight-tenths of one percent) of FAC multiplied by years of credited service at the date of death. If necessary, the pension will be increased to make the reserve value of the pension equal to the member s accumulated contributions as of the date of death. The pension will be adjusted in accordance with an Option A (in the case of a spouse or an ex-spouse subject to a DRO) or Option B (in case of another eligible beneficiary) election payable immediately unless the member did not reach the service retirement eligibility prior to death, in which case the pension is reduced for each month that the member was younger than age 60 on the date of death in the following manner: a. One-half of 1% for each of the first 60 months and four-tenths of one percent for each month beyond 60 months (the number of months used for reduction is not to exceed the difference between the member s credited service at death and 30 years). Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 30

36 Summary of Provisions as of December 31, 2016 Members Hired On/After July 1, 2001 but Before July 1, 2017 ERFC 2001 Tier 1 8. Cost-of-Living Adjustments. The amount of the monthly benefit is adjusted each March 31st, by 3% compounded annually, beginning with the March 31st which is more than three full months after the member s effective retirement date. Pensions of members that retire in the immediately preceding calendar year are increased by 1.489% (one-half a year s increase). 9. Members Contributions. Effective July 1, 2012, members contribute 3% of their salaries. Interest credits are 5% annually through June 30, 2017, and 4% annually thereafter. If a member leaves covered employment before becoming eligible to retire, accumulated contributions are returned upon request. Members who receive a refund of contributions and are later rehired become members of ERFC 2001 Tier Optional Methods of Payment. Before the effective retirement date, a retiring member may elect one of the following options: Option A: 100% Joint and Survivor benefit. Benefit is 85% of the straight life amount adjusted for the difference in age between the retiree and beneficiary. The maximum benefit is 94% of the straight life amount. Option B: 50% Joint and Survivor benefit. Benefit is 91% of the straight life amount adjusted for the difference in age between the retiree and beneficiary. The maximum benefit is 97% of the straight life amount. Option C: 10 years Certain and Life. Benefit is 96% of the straight life amount. Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 31

37 Summary of Provisions as of December 31, 2016 Members Hired On/After July 1, 2017 ERFC 2001 Tier 2 1. Service Retirement Eligibility. A member may retire at Full Social Security Age (FSSA) with 5 or more years of credited service, or when the sum of age plus service is greater than or equal to 90 (i.e., Rule of 90 ). 2. Deferred Retirement Eligibility. Any member with 5 or more years of credited service who terminates employment prior to the service retirement date, will be eligible to receive a deferred vested pension commencing at FSSA, provided accumulated contributions are left on deposit with the Plan. 3. Death Benefit Eligibility. Any member with 5 or more years of credited service who dies before beginning to receive a pension will have benefits payable to the named beneficiary. 4. Final Average Compensation (FAC). A member s Final Average Compensation is the average of the 5 highest years of salary during eligible employment. 5. Service Retirement Pension. The amount is a lifetime pension equal to 0.8% (eight-tenths of one percent) of FAC at retirement multiplied by years of credited service. If necessary, the pension will be increased to make the reserve value of the pension equal to the member s accumulated contributions as of the retirement effective date. 6. Deferred Retirement Pension. The amount is a lifetime pension equal to 0.8% (eight-tenths of one percent) of FAC at termination multiplied by years of credited service. If necessary, the pension will be increased to make the reserve value of the pension equal to the member s accumulated contributions as of the effective retirement date. 7. Survivor Death Benefit. The amount is a lifetime pension equal to 0.8% (eight-tenths of one percent) of FAC multiplied by years of credited service at the date of death. If necessary, the pension will be increased to make the reserve value of the pension equal to the member s accumulated contributions as of the date of death. The pension will be adjusted in accordance with an Option A (in the case of a spouse or an ex-spouse subject to a DRO) or Option B (in case of another eligible beneficiary) election payable immediately unless the member did not reach the service retirement eligibility prior to death, in which case the pension is reduced for each month that the member was younger than service retirement eligibility on the date of death in the following manner: a. One-half of 1% for each of the first 60 months and four-tenths of one percent for each month beyond 60 months (the number of months used for reduction is based on the lesser of FSSA or the age the member would have attained Rule of 90 ). Educational Employees Supplementary Retirement System of Fairfax County (ERFC) 32