GASB 74/75 ACTUARIAL VALUATION Fiscal Year Ending June 30, 2018 LAKELAND SCHOOL SYSTEM CONTACT Suraj M. Datta, ASA, MAAA suraj.datta@nyhart.com ADDRESS Nyhart 8415 Allison Pointe Blvd. Suite 300 Indianapolis, IN 46250 PHONE General (317) 845-3500 Toll-Free (800) 428-7106 Fax (317) 845-3654
Table of Contents Page Certification 1 Executive Summary 3 GASB Disclosures Schedule of Changes in Net OPEB Liability and Related Ratios 5 Schedule of Employer Contribution 6 OPEB Expense 7 Deferred Outflows / (Inflows) of Resources 8 Sensitivity Results 10 Asset Information 11 Actuarially Determined Contribution 13 Projection of GASB Disclosures 14 Cash Flow Projection 15 Discussion of Discount Rates 16 Summary of Plan Participants 17 Substantive Plan Provisions 19 Actuarial Methods and Assumptions 21 Appendix 26 Comparison of Participant Demographic Information 27 Detailed Actuary s Notes 28 Summary of Medical Benefits 29 Glossary 30 Decrements Exhibit 31 Retirement Rates Exhibit 32 Definitions 33
July 9, 2018 Dr. Ted Horrell Lakeland School System 10050 Oakseed Ln. Lakeland, TN 38002 This report summarizes the GASB actuarial valuation for the Lakeland School System 2017/18 fiscal year. To the best of our knowledge, the report presents a fair position of the funded status of the plan in accordance with GASB Statement No. 74 (Financial Reporting for Post-Employment Benefit Plans Other Than Pension Plans) and GASB Statement No. 75 (Accounting and Financial Reporting by Employers for Post-Employment Benefits Other Than Pensions). The information presented herein is based on the actuarial assumptions and substantive plan provisions summarized in this report and participant information furnished to us by the Plan Sponsor. We have reviewed the employee census provided by the Plan Sponsor for reasonableness when compared to the prior information provided but have not audited the information at the source, and therefore do not accept responsibility for the accuracy or the completeness of the data on which the information is based. When relevant data may be missing, we may have made assumptions we feel are neutral or conservative to the purpose of the measurement. We are not aware of any significant issues with and have relied on the data provided. The discount rate, other economic assumptions, and demographic assumptions have been selected by the Plan Sponsor with the concurrence of Nyhart. In our opinion, the actuarial assumptions are individually reasonable and in combination represent our estimate of anticipated experience of the Plan. All calculations have been made in accordance with generally accepted actuarial principles and practice. Future actuarial measurements may differ significantly from the current measurements presented in this report due to such factors as the following: plan experience differing from that anticipated by the economic or demographic assumptions; changes in economic or demographic assumptions; increases or decreases expected as part of the natural operation of the methodology used for these measurements (such as the end of an amortization period); and changes in plan provisions or applicable law. We did not perform an analysis of the potential range of future measurements due to the limited scope of our engagement. To our knowledge, there have been no significant events prior to the current year's measurement date or as of the date of this report that could materially affect the results contained herein. Page 1
Neither Nyhart nor any of its employees has any relationship with the plan or its sponsor that could impair or appear to impair the objectivity of this report. Our professional work is in full compliance with the American Academy of Actuaries Code of Professional Conduct Precept 7 regarding conflict of interest. The undersigned meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein. Should you have any questions please do not hesitate to contact us. Randy Gomez, FSA, MAAA Consulting Actuary Suraj M. Datta, ASA, MAAA Valuation Actuary Page 2
Executive Summary Summary of Results Presented below is the summary of GASB 75 results for the fiscal year ending June 30, 2018 compared to the prior fiscal years as shown in the System s Notes to Financial Statements. As of June 30, 2017 As of June 30, 2018 Total OPEB Liability $ 2,571,273 $ 3,334,008 Plan Fiduciary Net Position $ 286,306 $ 663,998 Net OPEB Liability $ 2,284,967 $ 2,670,010 Funded Ratio 11.1% 19.9% FY 2016/17 FY 2017/18 OPEB Expense $ 253,576 $ 509,226 Annual Employer Contribution $ 161,149 $ 377,156 As of June 30, 2017 As of June 30, 2018 Discount Rate 8.00% 7.50% Expected Return on Assets 8.00% 7.50% As of June 30, 2017 As of June 30, 2018 Total Active Participants 59 88 Total Retiree Participants 2 4 The active participants number above may include active employees who currently have no health care coverage. Refer to Summary of Participants section for an accurate breakdown of active employees with and without coverage. Page 3
Millions Executive Summary Below is a breakdown of total GASB 75 liabilities allocated to past and current service compared to the prior year. The table below also provides a breakdown of the Total OPEB Liability allocated to pre and post Medicare eligibility. The liability shown below includes explicit (if any) and implicit subsidies. Refer to the Substantive Plan Provisions section for complete information on the Plan Sponsor s GASB subsidies. Present Value of Future Benefits As of June 30, 2017 As of June 30, 2018 Active Employees $ 3,421,439 $ 4,832,995 $4.0 $3.5 $3.0 $2.5 $2.0 Changes in Total OPEB Liability $0.4 $0.2 Retired Employees 190,346 382,540 Total Present Value of Future Benefits $ 3,611,785 $ 5,215,535 $1.5 $1.0 $3.0 $2.4 Total OPEB Liability As of June 30, 2017 As of June 30, 2018 Active Pre-Medicare $ 1,277,253 $ 1,459,285 Active Post-Medicare 1,103,674 1,492,183 Active Liability $ 2,380,927 $ 2,951,468 $0.5 $0.0 As of 06/30/2018 As of 06/30/2017 Active Retirees Retiree Pre-Medicare $ 19,943 $ 78,025 Retiree Post-Medicare 170,403 304,515 Retiree Liability $ 190,346 $ 382,540 Total OPEB Liability $ 2,571,273 $ 3,334,008 As of June 30, 2017 As of June 30, 2018 Present Value of Future Benefits (PVFB) is the amount needed as of June 30, 2017 and 2018, to fully fund the System s retiree health care subsidies for existing and future retirees and their dependents assuming all actuarial assumptions are met. Total OPEB Liability is the portion of PVFB considered to be accrued or earned as of June 30, 2017 and 2018. This amount is a required disclosure in the Required Supplementary Information section. Discount Rate 8.00% 7.50% Page 4
GASB Disclosures Schedule of Changes in Net OPEB Liability and Related Ratios OPEB Liability FY 2017/18 FY 2016/17 FY 2015/16 Total OPEB Liability Total OPEB liability beginning of year $ 2,571,273 $ 2,315,596 $ 573,048 Service cost 112,708 104,359 12,471 Interest 204,813 183,967 45,368 Changes of benefit terms 219,591 0 1,910,502 Changes in assumptions 172,083 0 (113,700) Differences between expected and actual experience 76,196 0 (99,959) Benefit payments (22,656) (32,649) (12,134) Net change in total OPEB liability $ 762,735 $ 255,677 $ 1,742,548 Total OPEB liability end of year $ 3,334,008 $ 2,571,273 $ 2,315,596 Plan Fiduciary Net Position Plan fiduciary net position beginning of year $ 286,306 $ 132,552 $ 27,000 Contributions employer 377,156 161,149 112,003 Contributions active employees 0 0 0 Net investment income 24,583 25,907 5,683 Benefit payments (22,656) (32,649) (12,134) Trust administrative expenses (1,391) (653) 0 Net change in plan fiduciary net position $ 377,692 $ 153,754 $ 105,552 Plan fiduciary net position end of year $ 663,998 $ 286,306 $ 132,552 Net OPEB Liability end of year $ 2,670,010 $ 2,284,967 $ 2,183,044 Plan fiduciary net position as % of total OPEB liability 19.9% 11.1% 5.7% Covered employee payroll $ 5,184,986 $ 3,300,603 $ 3,204,469 Net OPEB liability as % of covered payroll 51.5% 69.2% 68.1% Page 5
GASB Disclosures Schedule of Employer Contributions The Actuarially Determined Contributions (ADC) shown below are based on the Annual Required Contribution (ARC) calculated in the prior GASB actuarial valuations as shown in the Plan Sponsor financial statements. FY 2017/18 FY 2016/17 FY 2015/16 FY 2014/15 Actuarially Determined Contribution (ADC) $ 257,746 $ 240,597 $ 67,209 $ 74,970 Contributions in relation to the ADC 377,156 1 128,500 99,869 27,000 Contribution deficiency / (excess) $ (119,410) $ 112,097 $ (32,660) $ 47,970 Covered employee payroll $ 5,184,986 $ 3,300,603 $ 3,204,469 $ N/A Contribution as a % of covered employee payroll 7.3% 3.9% 3.1% N/A 1 Includes employer contribution for pay-go cost paid from General Fund and pre-funding contributions deposited into the OPEB Trust. Page 6
GASB Disclosures OPEB Expense OPEB Expense FY 2016/17 FY 2017/18 Discount rate as of beginning of fiscal year 8.00% 8.00% Discount rate as of end of fiscal year 8.00% 7.50% Service cost $ 104,359 $ 112,708 Interest 183,967 204,813 Changes of benefit terms 0 219,591 Projected earnings on OPEB plan investments (15,620) (36,757) Reduction for contributions from active employees 0 0 OPEB plan administrative expenses 653 1,391 Current period recognition of deferred outflows / (inflows) of resources Differences between expected and actual experience $ (8,330) $ (710) Changes in assumptions (9,475) 7,733 Net difference between projected and actual earnings on OPEB plan investments (1,978) 457 Total current period recognition $ (19,783) $ 7,480 Total OPEB expense $ 253,576 $ 509,226 Page 7
GASB Disclosures Deferred Outflows / (Inflows) of Resources Deferred Outflows / (Inflows) of Resources represents the following items that have not been recognized in the OPEB Expense: 1. Differences between expected and actual experience of the OPEB plan 2. Changes of assumptions 3. Difference between projected an actual earnings in OPEB plan investments The initial amortization period for the first two items noted above is based on the average expected service lives while the difference between projected and actual earnings in OPEB plan investment is amortized over five years. All balances are amortized linearly on a principal only basis and new bases will be created annually for each of the item above. Differences between expected and actual experience for FYE Initial Balance Initial Amortization Period Annual Recognition Unamortized Balance as of June 30, 2018 June 30, 2016 $ (99,959) 12 $ (8,330) $ (74,969) June 30, 2017 $ 0 N/A $ 0 $ 0 June 30, 2018 $ 76,196 10 $ 7,620 $ 68,576 Changes in assumptions for FYE Initial Balance Initial Amortization Period Annual Recognition Unamortized Balance as of June 30, 2018 June 30, 2016 $ (113,700) 12 $ (9,475) $ (85,275) June 30, 2017 $ 0 N/A $ 0 $ 0 June 30, 2018 $ 172,083 10 $ 17,208 $ 154,875 Net difference between projected and actual earnings in OPEB plan investments for FYE Initial Balance Initial Amortization Period Annual Recognition Unamortized Balance as of June 30, 2018 June 30, 2016 $ 395 5 $ 79 $ 158 June 30, 2017 $ (10,287) 5 $ (2,057) $ (6,173) June 30, 2018 $ 12,174 5 $ 2,435 $ 9,739 Page 8
GASB Disclosures Deferred Outflows / (Inflows) of Resources Continued As of fiscal year ending June 30, 2018 Deferred Outflows Deferred Inflows Differences between expected and actual experience $ 0 $ (6,393) Changes in assumptions 69,600 0 Net difference between projected and actual earnings in OPEB plan investments 3,724 0 Total $ 73,324 $ (6,393) Annual Amortization of Deferred Outflows / (Inflows) The balances as of June 30, 2018 of the deferred outflows / (inflows) of resources will be recognized in OPEB expense in the future fiscal years as noted below. FYE Balance 2019 $ 7,480 2020 $ 7,480 2021 $ 7,399 2022 $ 9,457 2023 $ 7,023 Thereafter $ 28,092 Page 9
GASB Disclosures Sensitivity Results The following presents the net OPEB liability as of June 30, 2018, calculated using the discount rate assumed and what it would be using a 1% higher and 1% lower discount rate. The current discount rate is 7.50%. The 1% decrease in discount rate would be 6.50%. The 1% increase in discount rate would be 8.50%. As of June 30, 2018 Net OPEB Liability 1% Decrease $ 3,166,313 Current Discount Rate $ 2,670,010 1% Increase $ 2,259,624 The following presents the net OPEB liability as of June 30, 2018, using the health care trend rates assumed and what it would be using 1% higher and 1% lower health care trend rates. The current health care trend rate starts at an initial rate of 9.0%/7.0% (pre/post-65) decreasing by 0.5% annually to an ultimate rate of 5.0%. The 1% decrease in health care trend rates would assume an initial rate of 8.0%/6.0% (pre/post-65) decreasing by 0.5% annually to an ultimate rate of 4.0%. The 1% increase in health care trend rates would assume an initial rate of 10.0%/8.0% (pre/post-65) decreasing by 0.5% annually to an ultimate rate of 6.0%. As of June 30, 2018 Net OPEB Liability 1% Decrease $ 2,233,287 Current Health Care Trend Rates $ 2,670,010 1% Increase $ 3,210,844 Page 10
Asset Information Asset Breakdown FY 2016/17 FY 2017/18 Assets Cash and cash equivalents $ 3,436 $ 13,157 Securities lending cash collateral 0 0 Total cash $ 3,436 $ 13,157 Receivables Contributions $ 0 $ 0 Accrued interest 0 0 Total receivables $ 0 $ 0 Investments Fixed income $ 98,489 $ 237,622 Equities 184,381 413,219 Mutual Funds 0 0 Total investments $ 282,870 $ 650,841 Total assets $ 286,306 $ 663,998 Liabilities Payables Investment management fees $ 0 $ 0 Securities lending expense 0 0 Total liabilities $ 0 $ 0 Net position restricted to OPEB $ 286,306 $ 663,998 Page 11
Asset Information Reconciliation of Assets FY 2016/17 FY 2017/18 Additions Contributions received Employer pre-funding $ 128,500 $ 354,500 Employer pay-go 32,649 22,656 Employee 0 0 Total contributions $ 161,149 $ 377,156 Investment income Net increase in fair value of investments $ 22,193 $ 14,217 Interests and dividends 3,714 10,366 Investment expense, other than from securities lending 0 0 Securities lending income 0 0 Securities lending expense 0 0 Net investment income $ 25,907 $ 24,583 Total additions $ 187,056 $ 401,739 Deductions Benefit payments $ 32,649 $ 22,656 Administrative expenses 653 1,391 Other 0 0 Total deductions $ 33,302 $ 24,047 Net increase in net position $ 153,754 $ 377,692 Net position restricted to OPEB Beginning of year 132,552 286,306 End of year $ 286,306 $ 663,998 Page 12
Thousands Actuarially Determined Contributions The Actuarially Determined Contributions calculated below are recommended target contributions and assumes that the Plan Sponsor has the ability to contribute these amounts on an annual basis. The Plan Sponsor has the responsibility to decide how much it should contribute after considering its other needs and the OPEB participants needs. FY 2017/18 FY 2018/19 Discount rate 8.00% 7.50% Payroll growth factor used for amortization 3.50% 3.50% Actuarial cost method Entry Age Normal Level % of Salary Entry Age Normal Level % of Salary Amortization type Level % of Salary Level % of Salary Amortization period 29 years 28 years Actuarial accrued liability (AAL) beginning of year $ 2,571,273 $ 3,334,008 Actuarial value of assets beginning of year (286,306) (663,998) Unfunded AAL beginning of year $ 2,284,967 $ 2,670,010 $400 $350 $300 $250 $200 $150 $100 $50 $0 Cash vs Accrual Accounting $366.6 $257.7 $22.7 $43.2 FYE 2017/18 FY 2018/19 Pay-go ADC Normal Cost $ 104,359 $ 189,121 Amortization of UAAL 134,295 151,876 Total normal cost plus amortization $ 238,654 $ 340,997 Interest to the end of year 19,092 25,575 Actuarially Determined Contribution Preliminary $ 257,746 $ 366,572 Expected benefit payments 22,656 43,215 Actuarially Determined Contribution Final 2 $ 257,746 $ 366,572 Actuarially Determined Contribution (ADC) is the target or recommended contribution to a defined benefit OPEB plan, which if paid on an ongoing basis, will provide sufficient resources to fund future costs for services to be earned and liabilities attributed to past services. This is typically higher than the pay-as-you-go cost because it includes recognition of employer costs expected to be paid in future accounting periods. 2 Set to be the greater of the preliminary ADC and expected benefit payments. Page 13
Projection of GASB Disclosures The Total OPEB Liability (TOL) is expected to change on an annual basis as a result of expected and unexpected events. Under normal circumstances, it is generally expected to have a net increase each year. Below is a list of the most common events affecting the total OPEB liability and whether they increase or decrease the liability. Expected Events Increases in TOL due to additional benefit accruals as employees continue to earn service each year Increases in TOL due to interest as the employees and retirees age Decreases in TOL due to benefit payments Unexpected Events Increases in TOL when actual premium rates increase more than expected. A liability decrease occurs of the reverse happens. Increases in TOL when more new retirements occur than expected or fewer terminations occur than anticipated. Liability decreases occur when the opposite outcomes happen. Increases or decreases in TOL depending on whether benefits are improved or reduced. Projection of Total OPEB Liability (TOL) FY 2017/18 FY 2018/19 Projection of Actuarial Value of Assets (AVA) FY 2017/18 FY 2018/19 TOL as of beginning of year $ 2,571,273 $ 3,334,008 AVA as of beginning of year $ 286,306 $ 663,998 Normal cost as of beginning of year 104,359 189,121 Exp. employer contributions during the year 3 377,156 243,215 Exp. benefit payments during the year (22,656) (43,215) Exp. benefit payments during the year (22,656) (43,215) Interest adjustment to end of year 213,162 262,643 Exp. investment income 4 36,757 57,042 Exp. TOL as of end of year $ 2,866,138 $ 3,742,557 Exp. Trust administrative expenses (1,391) (3,320) Actuarial Loss/(Gain) 467,870 TBD Exp. AVA as of end of year $ 676,172 $ 917,720 Actual TOL as of end of year $ 3,334,008 $ TBD Differences between expected and actual experience (12,174) TBD AVA as of end of year $ 663,998 $ TBD Discount rate as of beginning of year 8.00% 7.50% Expected asset return as of beginning of year 8.00% 7.50% Discount rate as of end of year 7.50% 7.50% Expected asset return as of end of year 7.50% 7.50% 3 Expected employer contribution for 2018/19 is based on expected pay-go costs plus an expected pre-funding contribution of $200,000. FY 2017/18 expected employer contribution is based on the actual pre-funding contribution and benefit payments made during the year. 4 Fiscal years 2016/17 and 2017/18 expected investment income are calculated based on an 8.0% and 7.5% asset return respectively. Page 14
Thousands Cash Flow Projections The below projections show the actuarially estimated employer-paid contributions for retiree health benefits for the next thirty years. Results are shown separately for a closed group of current / future retirees. These projections include explicit and implicit subsidies. FYE Current Retirees Future Retirees 5 Total FYE Current Retirees Future Retirees 3 Total FYE Current Retirees Future Retirees 3 Total 2019 $ 25,064 $ 18,151 $ 43,215 2029 $ 28,129 $ 317,106 $ 345,235 2039 $ 29,944 $ 717,270 $ 747,214 2020 $ 26,635 $ 37,388 $ 64,023 2030 $ 28,702 $ 365,447 $ 394,149 2040 $ 29,465 $ 741,576 $ 771,041 2021 $ 28,162 $ 57,907 $ 86,069 2031 $ 29,217 $ 399,049 $ 428,266 2041 $ 28,848 $ 761,898 $ 790,746 2022 $ 33,264 $ 81,186 $ 114,450 2032 $ 29,663 $ 440,646 $ 470,309 2042 $ 28,090 $ 815,564 $ 843,654 2023 $ 34,888 $ 116,149 $ 151,037 2033 $ 30,029 $ 485,427 $ 515,456 2043 $ 27,217 $ 781,825 $ 809,042 2024 $ 36,402 $ 137,942 $ 174,344 2034 $ 30,306 $ 558,919 $ 589,225 2044 $ 26,250 $ 783,729 $ 809,979 2025 $ 37,871 $ 171,579 $ 209,450 2035 $ 30,482 $ 611,746 $ 642,228 2045 $ 25,174 $ 838,072 $ 863,246 2026 $ 39,277 $ 209,229 $ 248,506 2036 $ 30,541 $ 635,956 $ 666,497 2046 $ 23,994 $ 827,299 $ 851,293 2027 $ 26,845 $ 238,757 $ 265,602 2037 $ 30,476 $ 642,844 $ 673,320 2047 $ 22,727 $ 833,421 $ 856,148 2028 $ 27,507 $ 261,333 $ 288,840 2038 $ 30,280 $ 690,664 $ 720,944 2048 $ 21,392 $ 833,696 $ 855,088 $1,000 Projected Employer Pay-go Cost $800 $600 $400 $200 $0 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 Current retirees Future retirees 5 Projections for future retirees do not take into account future new hires. Page 15
Discussion of Discount Rates Under GASB 74, the discount rate used in valuing OPEB liabilities for funded plans as of the Measurement Date must be based on the long-term expected rate of return on OPEB plan investments that are expected to be used to finance future benefit payments to the extent that (a) they are sufficient to pay for the projected benefit payments and (b) the OPEB plan assets are invested using a strategy that will achieve that return. When the OPEB plan investments are insufficient to cover future benefit payments, a yield for 20-year tax-exempt general obligation municipal bonds with an average rating of AA /Aa or higher (or equivalent quality on another rating scale) must be used. For the current valuation: 1. The long-term expected rate of return on OPEB plan investment is assumed to be 7.50%. This was determined using a building block method in which expected future rates of return are developed for each major asset class. These expected future rates of return are then combined to produce the long-term expected rate of return by weighting them based on the target asset allocation percentage. The best estimates of arithmetic real rates of return for each major asset class included in the OPEB Plan s target asset allocation as of June 30, 2018 are summarized in the following table. Asset Class Target Allocation L/T Expected ROR U.S. Large Equity 34.0% 9.2% U.S. Mid Equity 4.0% 9.8% U.S. Small Equity 4.0% 10.3% European Equity 13.0% 7.4% Japanese Equity 2.0% 7.4% Asian (Excl. Japan) Equity 3.0% 9.7% Emerging Market Equity 5.0% 11.4% Short Term Fixed Income 7.0% 3.6% U.S. Fixed Income 23.0% 4.8% International Fixed Income 1.0% 4.5% Inflation Protected Notes 3.0% 5.7% Emerging Market Fixed Income 1.0% 7.1% Total 100.00% 7.55% 2. The discount rate used when the OPEB plan investments are insufficient to pay for future benefit payments are selected from the range of indices as shown in the table below, where the range is given as the spread between the lowest and highest rate shown. Yield as of July 1, 2017 June 30, 2018 Bond Buyer Go 20-Bond Municipal Bond Index S&P Municipal Bond 20-Year High Grade Rate Index Fidelity 20-Year Go Municipal Bond Index 3.58% 3.87% 3.13% 2.97% 3.56% 3.62% Bond Index Range 3.13% - 3.58% 2.97% - 3.87% 3. The System s funding policy is to pay for the pay-go cost out of the General Fund and making pre-funding contributions of $200,000 per year. The final equivalent single discount rate used for this year s valuation is 7.50% with the assumption that the System will eventually pay the pay-go costs out of the OPEB Trust at the time when the Trust is expected to be sufficient to finance all future benefit payments. Page 16
Summary of Plan Participants Active Employees Actives with coverage Single Non-Single Total Avg. Age Avg. Svc Salary Basic 1 2 3 47.8 21.6 $ 216,801 EPO 1 2 3 48.4 15.4 $ 210,642 Copay 27 29 56 47.3 11.4 $ 3,170,948 Total actives with coverage 29 33 62 47.4 12.1 $ 3,598,391 Actives without coverage Total Avg. Age Avg. Svc Salary Total actives without coverage 26 46.0 8.1 $ 1,586,595 Additionally, there are 74 actives (40 currently with coverage) that are not eligible for retiree health benefits upon retirement. They have been excluded from this GASB valuation. Actives without coverage listed above have been excluded from this GASB valuation. Active Age-Service Distribution Years of Service Age < 1 1 to 4 5 to 9 10 to 14 15 to 19 20 to 24 25 to 29 30 to 34 35 to 39 40 & up Total Under 25 0 25 to 29 1 1 30 to 34 4 2 6 35 to 39 6 2 1 2 1 12 40 to 44 5 5 2 5 1 18 45 to 49 5 1 2 1 2 8 1 20 50 to 54 2 1 3 5 1 1 13 55 to 59 3 1 1 2 2 2 11 60 to 64 2 2 2 6 65 to 69 1 1 70 & up 0 Total 25 12 11 4 13 18 4 1 0 0 88 Page 17
Summary of Plan Participants Retirees Retirees with coverage Single Non-Single Total Avg. Age Basic Plan 1 1 65.0 EPO Plan 1 1 64.7 Copay Plan 1 1 57.3 Aetna (Post-65 Plan) 1 1 70.6 Total retirees with coverage 2 2 4 64.4 Retiree Age Distribution Age Retirees < 45 45 to 49 50 to 54 55 to 59 1 60 to 64 1 65 to 69 1 70 to 74 1 75 to 79 80 to 84 85 to 89 90 & up Total 4 Page 18
Substantive Plan Provisions Eligibility Legacy employees that qualify for retirement benefits under the Tennessee Consolidated Retirement System (TCRS) are eligible for post-retirement health benefits for life. Eligible employees must complete 15 years of service with the System and meet the requirements under TCRS. Those who are former employees of Shelby County School District or Memphis City Schools must have 15 years of continuous service with Lakeland, Shelby County, and/or Memphis City Schools prior to retirement. Non-Legacy Employees are not eligible for any post-retirement health benefits. It has been assumed that to qualify for any postretirement benefit, an active employee must also be enrolled in the System s plan immediately preceding retirement. Spouse Benefit Legacy Employees Non-Legacy Employees Employees who have attained at least three years of service as of July 1, 2016 from Lakeland School System, Shelby County School District or Memphis City Schools and were hired by Lakeland School System directly from any Shelby County school system prior to October 15, 2018. All other employees Surviving spouses of legacy retirees are able to stay on the plan at their own expense until eligible for Medicare. Explicit Subsidy Retiree Cost Sharing Legacy Employees Non-Legacy Employees Legacy retirees and their dependents may continue to participate in the System s plan options that are available to its active employees until Medicare eligibility. The System and retiree shall share the cost of the premium at the same rate as active employees. Upon Medicare eligibility, the retiree and covered dependents may continue to participate in the Medicare Advantage plan offered by the System and retiree shall share the cost of the premium at the same rate as active employees. No benefits are offered to non-legacy employees and future new hires. Retirees are required to contribute the portion of premiums not covered by the System s explicit subsidy. Page 19
Substantive Plan Provisions Medical Benefit Same benefit options are offered to retirees as active employees (Legacy employees only). The System participates in the Interlocal Health Benefit Trust. Premium rates are developed on the experience of several School Districts, the Town of Collierville, and City of Bartlett. The monthly premiums and active employee contribution percentages by plan effective July 1, 2017 and July 1, 2018 are shown below. Effective July 1, 2018, the Basic, EPO, and HRA plans will no longer be offered and all active employees and pre-65 retirees will be moved to the Copay plan. Eff. 7/1/2017 Eff. 7/1/2018 Pre-65 Plan Retiree Ret/Spouse Retiree Ret/Spouse Basic $ 574.15 $ 1,148.32 N/A N/A EPO $ 626.30 $ 1,252.60 N/A N/A HRA $ 507.33 $ 1,014.65 N/A N/A Copay $ 498.88 $ 997.77 $ 586.20 $ 1,172.40 Plan Retiree Pays Eff. 1/1/2017 Eff. 1/1/2018 Post-65 Plan Retiree Ret/Spouse Retiree Ret/Spouse Aetna $ 323.24 $ 646.48 $ 375.27 $ 750.54 Eff. 7/1/2017 Eff. 7/1/2018 Spouse Pays Retiree Pays Spouse Pays Basic 31% 42% N/A N/A EPO 34% 46% N/A N/A HRA 24% 40% N/A N/A Copay 24% 37% 24% 37% Aetna (post-65 plan) 6 34% 34% 32% 32% Life Insurance Retirees are eligible to receive District-paid life insurance equal to their final yearly salary up to a maximum of $50,000. 6 Premium rates shown for the Aetna post-65 Medicare Advantage plan are effective January 1, 2017 and January 1, 2018. Page 20
Actuarial Methods and Assumptions The actuarial assumptions used in this report represent a reasonable long-term expectation of future OPEB outcomes. As national economic and System experience change over time, the assumptions will be tested for ongoing reasonableness and, if necessary, updated. There are changes to the actuarial methods and assumptions since the last GASB valuation, which was for the fiscal year ending June 30, 2016. Refer to Actuary s Notes section for complete information on these changes. For the current year GASB valuation, we have also updated the per capita costs. We expect to update discount rate, health care trend rates, and per capita costs again in the next full GASB valuation, which will be for the fiscal year ending June 30, 2020. Measurement Date For fiscal year ending June 30, 2018, June 30, 2018 measurement date was used. Actuarial Valuation Date June 30, 2018 with no adjustments to get to the June 30, 2018 measurement date. Liabilities as of July 1, 2017 are based on an actuarial valuation date of June 30, 2016 projected to June 30, 2017 on a no loss / no gain basis. Discount Rate Payroll Growth 8.00% as of July 1, 2017 and 7.50% as of June 30, 2018 for accounting disclosure purposes 7.50% for funding disclosure purposes (in calculating the Actuarially Determined Contribution) Refer to the Discussion of Discount Rates section for more information on selection of the discount rate. 2016 TCRS Teacher Salary Growth Table. Sample rates are as shown below. Age Rate 25 7.5% 35 5.8% 45 4.5% 55 3.7% Inflation Rate Cost Method 3.0% per year Allocation of Actuarial Present Value of Future Benefits for services prior and after the Measurement Date was determined using Entry Age Normal Level % of Salary method where: Service Cost for each individual participant, payable from date of employment to date of retirement, is sufficient to pay for the participant s benefit at retirement; and annual Service Cost is a constant percentage of the participant s salary that is assumed to increase according to the Payroll Growth. Page 21
Actuarial Methods and Assumptions Employer Funding Policy Census Data Experience Study The System s intention is to fund $200,000 per year and pay for the pay-go costs from the General Fund until the Trust balance is sufficient to meet future benefit payments. The Trust ADC is determined each year as the sum of (a) the actuarial normal cost for benefits accruing during the year, (b) an amortization component of the unfunded actuarial liability amortized over a declining number of years (but not less than five years) and (c) an interest adjustment. For FYE 2018, a 29-year amortization period was used. The amortization amount is based the projected benefit duration of eligible participants and a 3.5% payroll growth assumption. Census information was provided by the System in March 2018. We have reviewed it for reasonableness and no material modifications were made to the census data. Best actuarial practices call for a periodic assumption review and Nyhart recommends the System to complete an actuarial assumption review in the future. Health Care Coverage Election Rate Active legacy employees with current coverage electing System coverage: 95% Active legacy employees with no coverage: 0% Active legacy employees electing System-paid life insurance: 100% Inactive employees with current coverage: 100% Inactive employees with no coverage: 0% Spousal Coverage Mortality Disability Based on actual coverage for current active employees and retirees. Husbands are assumed to be three years older than wives. RPH-2017 Total Dataset Mortality Table fully generational using Scale MP-2017 (RPH-2017 table is created based on RPH-2014 Total Dataset Mortality Table with 8 years of MP-2014 mortality improvement backed out, projected to 2017 using MP-2017 improvement.) None Page 22
Actuarial Methods and Assumptions Turnover Rate Assumption used to project terminations (voluntary and involuntary) prior to meeting minimum retirement eligibility for retiree health coverage. The rates represent the probability of termination in the next 12 months. The termination rates are based on the Tennessee Consolidated Retirement System Actuarial Valuation as of the year ending June 30, 2016. Sample annual turnover rates are as shown below. Male Female Age 0 YOS 1 YOS 2+ YOS Age 0 YOS 1 YOS 2+ YOS 25 18.0% 13.5% 8.5% 25 18.0% 13.5% 10.0% 30 18.0% 13.5% 6.0% 30 18.0% 13.5% 7.6% 35 18.0% 13.5% 3.6% 35 18.0% 13.5% 4.6% 40 18.0% 13.5% 2.0% 40 18.0% 13.5% 2.3% 45 18.4% 13.5% 1.5% 45 18.4% 13.5% 1.1% 50 19.7% 14.2% 2.0% 50 19.7% 14.2% 1.6% 55 22.1% 16.8% 3.1% 55 22.1% 16.8% 3.8% 60 25.5% 21.6% 4.7% 60 25.5% 21.6% 5.0% 65+ 28.0% 23.5% 0.0% 65+ 28.0% 23.5% 0.0% Retirement Rate Annual retirement rates are based on the Tennessee Consolidated Retirement System (TCRS) actuarial valuation as of the year ending June 30, 2016. Annual sample rates of retirement are as shown below. Male Female Age <15 YOS 15 29 YOS 30+ YOS Age <15 YOS 15 29 YOS 30+ YOS 50 6.50% 6.50% 7.31% 50 6.50% 6.50% 7.31% 55 10.00% 10.00% 11.25% 55 10.00% 10.00% 11.25% 58 13.00% 13.00% 14.63% 58 14.00% 14.00% 15.75% 60 15.00% 16.20% 16.20% 60 17.00% 18.36% 18.36% 62 22.00% 23.76% 23.76% 62 26.00% 28.08% 28.08% 64 18.00% 19.44% 19.44% 64 24.00% 25.92% 25.92% 65 35.00% 37.80% 37.80% 65 37.50% 40.50% 40.50% 70 16.00% 17.28% 17.28% 70 34.00% 36.72% 36.72% 75+ 100.00% 100.00% 100.00% 75+ 100.00% 100.00% 100.00% Page 23
Actuarial Methods and Assumptions Health Care Trend Rates Year Pre-65 Post-65 Year Pre-65 Post-65 2018 9.0% 7.0% 2023 6.5% 5.0% 2019 8.5% 6.5% 2024 6.0% 5.0% 2020 8.0% 6.0% 2025 5.5% 5.0% 2021 7.5% 5.5% 2026+ 5.0% 5.0% 2022 7.0% 5.0% The initial trend rate was based on a combination of employer history, national trend surveys, and professional judgment. The ultimate trend rate was selected based on historical medical CPI information. Retiree Contributions Per Capita Costs Retiree contributions are assumed to increase according to health care trend rates. Annual per capita costs were calculated based on the monthly premium rates for the Copay plan effective on July 1, 2018, actuarially increased using health index factors and current enrollment for the Interlocal Health Trust. Post-65 per capita costs are assumed to equal the post-65 premium rate. Sample annual per capita costs are as shown below: Age Copay <55 $ 7,900 55 59 $ 9,800 60 64 $ 12,700 The per capita costs represent the cost of coverage for a retiree-only population. Actuarial standards require the recognition of higher inherent costs for a retired population versus an active population. Explicit Subsidy The difference between (a) the premium rate and (b) the retiree contribution. Below is an example of the monthly explicit subsidies for a future retiree who is enrolled in the Copay plan. Premium Rate Retiree Contribution Explicit Subsidy A B C = A B Retiree $ 586.20 $ 140.69 $ 445.51 Spouse $ 586.20 $ 216.89 $ 369.31 Page 24
Actuarial Methods and Assumptions Implicit Subsidy The difference between (a) the per capita cost and (b) the premium rate. Below is an example of the monthly implicit subsidies for a retiree age 62 with spouse of the same age enrolled in the Copay plan. Per Capita Cost Premium Rate Implicit Subsidy A B C = A B Retiree $ 1,058.33 $ 586.20 $ 472.13 Spouse $ 1,058.33 $ 586.20 $ 472.13 All employers that utilize premium rates based on blended active/retiree claims experience will have an implicit subsidy. There is an exception for Medicare plans using a true community-rated premium rate. GASB Subsidy Breakdown Below is a breakdown of the GASB monthly total cost for a retiree age 62 with spouse of the same age enrolled in the Copay plan. Retiree Spouse Retiree contribution $ 140.69 $ 216.89 Explicit subsidy $ 445.51 $ 369.31 Implicit subsidy $ 472.13 $ 472.13 Total monthly cost $ 1,058.33 $ 1,058.33 $1,200 $800 GASB Subsidy Breakdown $472 $472 $400 $446 $369 $0 $141 Retiree $217 Spouse Retiree contribution Implicit subsidy Explicit subsidy Page 25
APPENDIX Page 26
Appendix Comparison of Participant Demographic Information The active participants number below may include active employees who currently have no health care coverage. Refer to Summary of Participants section for an accurate breakdown of active employees with and without coverage. As of June 30, 2016 As of June 30, 2018 Active Participants 59 88 Retired Participants 2 4 Averages for Active Age 48.8 47.0 Service 14.4 10.9 Averages for Inactive Age 62.9 64.4 Page 27
Appendix Detailed Actuary s Notes There has been the following plan provision change since the last full valuation, which was for the fiscal year ending June 30, 2016. 1. Retirees are eligible to receive District-paid life insurance equal to their final yearly salary, up to $50,000. This change has caused an increase in liabilities. Additionally, the following assumptions have been updated: 1. Mortality table has been updated from SOA RPH-2015 Total Dataset Mortality Table fully generational using Scale MP-2015 to SOA RPH-2017 Total Dataset Mortality Table fully generational using Scale MP-2017. The impact of this change is a decrease in liabilities. 2. The payroll growth assumption has been updated to follow the salary growth table used for Teachers in the 2016 TCRS actuarial valuation. This change has cause a slight increase in liabilities. 3. This discount rate has been updated to reflect the long-term expected rate of return for the TSBA OPEB Trust. The prior valuation used a discount rate of 8.0% as of June 30, 2017 and the current valuation uses a discount rate of 7.5% as of June 30, 2018. This change has caused an increase in the System s liabilities. Refer to the Discussion of Discount Rates section for more information on the selection of the discount rate. 4. Health care trend rates have been updated to an initial rate of 9.0% decreasing by 0.5% annually to an ultimate rate of 5.0% for pre-65 benefits and an initial rate of 7.0% decreasing to 0.5% annually to an ultimate rate of 5.0% for post-65 benefits as shown below. This update led to a slight decrease in liabilities. Year Pre-65 Post-65 Year Pre-65 Post-65 2018 9.0% 7.0% 2023 6.5% 5.0% 2019 8.5% 6.5% 2024 6.0% 5.0% 2020 8.0% 6.0% 2025 5.5% 5.0% 2021 7.5% 5.5% 2026+ 5.0% 5.0% 2022 7.0% 5.0% Page 28
Appendix Summary of Medical Benefits A brief summary of the pre-65 health plans offered by the District effective on July 1, 2017 is as shown below. The out-of-pocket maximum includes the deductible, coinsurance, and copayments. Effective July 1, 2018 the Basic, EPO, and HRA plans will no longer be offered and all active employees and pre-65 retirees will move the to the Copay plan. Pre-65 Plans Basic Plan EPO Plan HRA Plan Copay Plan Deductible (Indv / Indv + 1 / Family) $500 / $1,000 / $1,500 $500 / $750 / $1,000 $1,500 / $3,000 / $4,500 N/A Coinsurance 80% 100% 80% 100% Out-of-Pocket Maximum (Indv / Indv + 1 / Family) $4,000 / $8,000 / $12,000 $2,000 / $3,750 / $5,500 $5,000 / $10,000 / $13,700 $2,000 / $3,750 / $ 5,500 Co-pay / co-insurances for: Primary Care Physician Visit Specialist Visit Emergency Room Prescription drugs Generic Preferred Non-Preferred $25 $35 $150 then deductible $10 $25 $50 $20 $35 $150 then deductible $10 $25 $50 Deductible / Coinsurance $10 $25 $50 $20 $35 $150 $10 $25 $50 Page 29
GLOSSARY Page 30
Glossary Decrements Exhibit The table below illustrates how actuarial assumptions can affect a long-term projection of future liabilities. Starting with 100 employees at age 35, the illustrated actuarial assumptions show that 44.43 employees out of the original 100 are expected to retire and could elect retiree health benefits at age 55. Age # Remaining Employees # of Terminations per Year 7 # of Retirements per Year Total Decrements Age # Remaining Employees # of Terminations per Year # of Retirements per Year Total Decrements 35 100.000 6.276 0.000 6.276 46 55.938 2.085 0.000 2.085 36 93.724 5.677 0.000 5.677 47 53.853 1.866 0.000 1.866 37 88.047 5.136 0.000 5.136 48 51.987 1.656 0.000 1.656 38 82.911 4.648 0.000 4.648 49 50.331 1.452 0.000 1.452 39 78.262 4.209 0.000 4.209 50 48.880 1.253 0.000 1.253 40 74.053 3.814 0.000 3.814 51 47.627 1.060 0.000 1.060 41 70.239 3.456 0.000 3.456 52 46.567 0.877 0.000 0.877 42 66.783 3.131 0.000 3.131 53 45.690 0.707 0.000 0.707 43 63.652 2.835 0.000 2.835 54 44.983 0.553 0.000 0.553 44 60.817 2.564 0.000 2.564 55 44.430 0.000 44.430 44.430 45 58.253 2.316 0.000 2.316 100 Decrements Exhibit 80 60 40 20 0 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 Actives Total Terminations Total Retirements 7 The above rates are illustrative rates and are not used in our GASB calculations. Page 31
Glossary Retirement Rates Exhibit The table below illustrates how actuarial assumptions can affect a long-term projection of future liabilities. The illustrated retirement rates show the number of employees who are assumed to retire annually based on 100 employees age 55 who are eligible for retiree health care coverage. The average age at retirement is 62.0. Age Active Employees BOY Annual Retirement Rates* # Retirements per Year Active Employees EOY 55 100.000 5.0% 5.000 95.000 56 95.000 5.0% 4.750 90.250 57 90.250 5.0% 4.513 85.738 58 85.738 5.0% 4.287 81.451 59 81.451 5.0% 4.073 77.378 60 77.378 5.0% 3.869 73.509 61 73.509 5.0% 3.675 69.834 62 69.834 30.0% 20.950 48.884 63 48.884 15.0% 7.333 41.551 64 41.551 15.0% 6.233 35.318 65 35.318 100.0% 35.318 0.000 100 80 60 40 20 0 Retirement Rates Exhibit 55 56 57 58 59 60 61 62 63 64 65 Actives Total Retirements * The above rates are illustrative rates and are not used in our GASB calculations. Page 32
Glossary Definitions GASB 75 defines several unique terms not commonly employed in the funding of pension and retiree health plans. The definitions of the terms used in the GASB actuarial valuations are noted below. 1. Actuarial Assumptions Assumptions as to the occurrence of future events affecting health care costs, such as: mortality, withdrawal, disablement and retirement; changes in compensation and Government provided health care benefits; rates of investment earnings and asset appreciation or depreciation; procedures used to determine the Actuarial Value of Assets; characteristics of future entrants for Open Group Actuarial Cost Methods; and other relevant items. 2. Actuarial Cost Method A procedure for determining the Actuarial Present Value of Future Benefits and expenses and for developing an actuarially equivalent allocation of such value to time periods, usually in the form of a Service Cost and a Total OPEB Liability. 3. Actuarially Determined Contribution - A target or recommended contribution to a defined benefit OPEB plan for the reporting period, determined in accordance with the parameters and in conformity with Actuarial Standards of Practice. 4. Actuarial Present Value The value of an amount or series of amounts payable or receivable at various times, determined as of a given date by the application of a particular set of Actuarial Assumptions. For purposes of this standard, each such amount or series of amounts is: a. adjusted for the probable financial effect of certain intervening events (such as changes in compensation levels, Social Security, marital status, etc.); b. multiplied by the probability of the occurrence of an event (such as survival, death, disability, termination of employment, etc.) on which the payment is conditioned; and c. discounted according to an assumed rate (or rates) of return to reflect the time value of money. 5. Deferred Outflow / (Inflow) of Resources represents the following items that have not been recognized in the OPEB Expense: a. Differences between expected and actual experience of the OPEB plan b. Changes in assumptions c. Differences between projected and actual earnings in OPEB plan investments (for funded plans only) 6. Explicit Subsidy The difference between (a) the amounts required to be contributed by the retirees based on the premium rates and (b) actual cash contribution made by the employer. 7. Funded Ratio The actuarial value of assets expressed as a percentage of the Total OPEB Liability. Page 33
Glossary Definitions 8. Healthcare Cost Trend Rate The rate of change in the per capita health claims costs over time as a result of factors such as medical inflation, utilization of healthcare services, plan design, and technological developments. 9. Implicit Subsidy In an experience-rated healthcare plan that includes both active employees and retirees with blended premium rates for all plan members, the difference between (a) the age-adjusted premiums approximating claim costs for retirees in the group (which, because of the effect of age on claim costs, generally will be higher than the blended premium rates for all group members) and (b) the amounts required to be contributed by the retirees. 10. OPEB Benefits (such as death benefits, life insurance, disability, and long-term care) that are paid in the period after employment and that are provided separately from a pension plan, as well as healthcare benefits paid in the period after employment, regardless of the manner in which they are provided. OPEB does not include termination benefits or termination payments for sick leave. 11. OPEB Expense Changes in the Net OPEB Liability in the current reporting period, which includes Service Cost, interest cost, changes of benefit terms, expected earnings on OPEB Plan investments, reduction of active employees contributions, OPEB plan administrative expenses, and current period recognition of Deferred Outflows / (Inflows) of Resources. 12. Pay-as-you-go A method of financing a benefit plan under which the contributions to the plan are generally made at about the same time and in about the same amount as benefit payments and expenses becoming due. 13. Per Capita Costs The current cost of providing postretirement health care benefits for one year at each age from the youngest age to the oldest age at which plan participants are expected to receive benefits under the plan. 14. Present Value of Future Benefits Total projected benefits include all benefits estimated to be payable to plan members (retirees and beneficiaries, terminated employees entitled to benefits but not yet receiving them, and current active members) as a result of their service through the valuation date and their expected future service. The actuarial present value of total projected benefits as of the valuation date is the present value of the cost to finance benefits payable in the future, discounted to reflect the expected effects of the time value (present value) of money and the probabilities of payment. Expressed another way, it is the amount that would have to be invested on the valuation date so that the amount invested plus investment earnings will provide sufficient assets to pay total projected benefits when due. 15. Real Rate of Return the rate of return on an investment after adjustment to eliminate inflation. Page 34
Glossary Definitions 16. Select and Ultimate Rates Actuarial assumptions that contemplate different rates for successive years. Instead of a single assumed rate with respect to, for example, the investment return assumption, the actuary may apply different rates for the early years of a projection and a single rate for all subsequent years. For example, if an actuary applies an assumed investment return of 8% for year 20W0, then 7.5% for 20W1, and 7% for 20W2 and thereafter, then 8% and 7.5% select rates, and 7% is the ultimate rate. 17. Service Cost The portion of the Actuarial Present Value of projected benefit payments that are attributed to a valuation year by the Actuarial Cost Method. 18. Substantive Plan The terms of an OPEB plan as understood by the employer(s) and plan members. 19. Total OPEB Liability That portion, as determined by a particular Actuarial Cost Method, of the Actuarial Present Value of Future Benefits which is attributed to past periods of employee service (or not provided for by the future Service Costs). Page 35