VRS Overview. Presented to the IPMA-VA HR Director s Retreat. November 16, 2012 Robert P. Schultze, Director

VRS Overview Presented to the IPMA-VA HR Director s Retreat November 16, 2012 Robert P. Schultze, Director

VRS Overview

VRS Total Membership Teachers 146,690 Political Subdivisions 104,427 State Employees 79,030 State Police Officers Retirement System (SPORS) 1,886 Judicial Retirement System (JRS) 380 Virginia Law Officers Retirement System (VaLORS) 9,413 Total Active Members 341,826 Retirees/Beneficiaries 162,751 Inactive/Deferred Members 111,432 VRS Overall Impact 616,009 3 As of June 30, 2012

Benefit Comparison State Teachers Local Actives: Average Age 48.1 45.2 46.2 Average Service 12.8 11.9 11.0 Average Salary $48,681 $47,580 $39,683 Retirees: (in FY 2012) Avg. Age @ Retirement 62.9 61.5 62.1 Avg. Service @ Retirement 20.8 23.0 19.9 Avg. Benefit @ Retirement 35.4% 39.1% 33.8% Avg. Annual Benefit $18,324 $23,048 $15,135 Information above obtained from the June 30, 2012 Actuarial Valuation. 4

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 % Return VRS Fiscal Year Returns 25.0 20.0 15.0 10.0 5.0 0.0-5.0-10.0 Investment Return Assumption -15.0-20.0-25.0 5

Assets in Billions Net Assets Available for VRS Benefits $60 $50 $40 $35.7 $40.8 $37.7 $34.4 $34.7 $40.0 $44.1 $48.7 $58.3 $55.1 $42.9 $47.7 $54.6 $53.3 $30 $26.9 $31.7 $22.2 $20 $10 6 $0 1996 1998 2000 2002 2004 2006 2008 2010 2012 Fiscal Year

Pension Reform in Virginia

Pension Reform July 1, 2012 Pension Reform Passed by the 2012 General Assembly, effective July 1, 2012 Local governments and schools systems begin to impose the 5 percent member contribution with offsetting raises: 83 percent of local government employers opted to impose a 5 percent member contribution with a 5 percent offsetting salary increase 60 percent of school boards opted to impose a 5 percent member contribution with a 5 percent offsetting salary increase Local governments elected either the VRS-certified contribution rate or the alternate rate: 90 percent of local governments elected the VRS-certified contribution rate 8

Pension Reform January 1, 2013 Pension Reform Passed by the 2012 General Assembly, effective January 1, 2013 Non-vested Plan 1 members become VRS Plan 2 members Benefit multiplier is reduced for Plan 2 members from 1.7% to 1.65% Cost-of-Living Adjustment (COLA) No COLA until member who retires with less than 20 years of service has received an allowance for one full calendar year after reaching unreduced retirement age. All Plan 1 and Plan 2 members within 5 years of eligibility for an unreduced benefit as of 1/1/13 are grandfathered. COLA capped at 3% (first 2% of CPI-U plus one-half of the next 2%, for a maximum total of 3%) for Plan 2 members 9

Pension Reform January 1, 2014 Pension Reform Passed by the 2012 General Assembly, effective January 1, 2014 Hybrid plan becomes the retirement plan for all public employees hired on or after January 1, 2014 Hazardous duty members are exempt from the hybrid General Assembly proposes to phase-in contribution rates for the teacher and state plans to the VRS board-certified rates July 1, 2012 July 1, 2014 July 1, 2016 July 1, 2018 Teachers 69.53% 79.69% 89.84% 100% 10

Pension Reform January 1, 2014 Hybrid Plan Features Eligibility Disability Those that participate in regular VRS (state employees, JRS, teachers and local government employees) automatically enrolled in hybrid from date of hire Public safety employees without hazardous duty coverage enrolled in hybrid from the date of hire One-time election window for current employees ORP employees may elect the hybrid Current ORP employees not eligible to participate in new hybrid Public safety employees with hazardous duty coverage will not participate in the plan, but retain current plan provisions (VaLORS, SPORS, local enhanced hazardous duty coverage) Provides a new optional disability program for localities. The locality must choose either to join the VRS-administered program or provide a disability program with comparable coverage from another source Program cost: Teacher -.39% of payroll Local General Employees -.91% of payroll 11

Pension Reform January 1, 2014 Hybrid Plan Features Multiplier Contributions DB component has a 1.0% multiplier to produce a nearly 30% replacement rate after 30 years of service Employee contributions automatically increased every three years by one-half a percentage point, unless the employee opts out or the employee is already at the maximum contribution of 5% to the DC component Employee contribution of 4% to the DB plan Employer contributions to the DB plan based on actuarial valuations Employer contributions to the DC component consist of mandatory 1% match, plus a 1% match on first percent elected by the employee, plus a one-half percent matching contribution on the next 3% elected by the employee. Total contributions as much as 5% from employee and 3.5% from employer 12

Contributions in the Hybrid Plan Employee Employer DB Plan Contribution 4% Actuarially Determined DC Plan Contributions: Mandatory Contribution 1% 1% Optional Contributions 1% 1% * Optional Contributions 1%.5% * Optional Contributions 1%.5% * Optional Contributions 1%.5% * Total Optional Contributions: 4% 2.5% Total Maximum 9% 3.5% + Actuarial 13 * Indicates the employer required match if the employee elects to make optional contributions.

Estimated Income Replacement Ratio Final Pay $40,000 Age 60 with 30 Years of Service Age 67 with 37 Years of Service 14 Assumptions & Methods: Replacement Ratios are equal to the annuity payable at selected retirement age divided by the compensation in final year before retirement. For purposes of calculating the social security replacement ratio at age 60, the replacement ratio is the expected benefit amount that will become payable at social security normal retirement date unadjusted. Salary increases are assumed to be 4% per year. Inflation/Cost-of-Living is assumed to be 2.5% per year. Mortality assumptions used to annuitize defined contribution balances are those prescribed by Internal Revenue Code 417e(3) for calculating minimum lump sum balances in 2011. Defined contribution plan balances assume 6% pre-retirement investment returns. Defined contribution plan balances are converted to annuity at retirement assuming a 4% investment return and a 2.5% benefit increase annually in retirement. It is unlikely that an individual could purchase an annuity that included the 2.5% increases, but in order to be comparable to the defined benefit annuity, we have included this feature. SB 498 Hybrid Minimum contributions assume 1% employee contribution and corresponding 1% employer match. Maximum contributions assumes 5% employee contribution and corresponding 3.5% employer match. Assumes member works entire career under one benefit formula. (No transition)

Estimated Income Replacement Ratio Final Pay $80,000 Age 60 with 30 Years of Service Age 67 with 37 Years of Service 15 Assumptions & Methods: Replacement Ratios are equal to the annuity payable at selected retirement age divided by the compensation in final year before retirement. For purposes of calculating the social security replacement ratio at age 60, the replacement ratio is the expected benefit amount that will become payable at social security normal retirement date unadjusted. Salary increases are assumed to be 4% per year. Inflation/Cost-of-Living is assumed to be 2.5% per year. Mortality assumptions used to annuitize defined contribution balances are those prescribed by Internal Revenue Code 417e(3) for calculating minimum lump sum balances in 2011. Defined contribution plan balances assume 6% pre-retirement investment returns. Defined contribution plan balances are converted to annuity at retirement assuming a 4% investment return and a 2.5% benefit increase annually in retirement. It is unlikely that an individual could purchase an annuity that included the 2.5% increases, but in order to be comparable to the defined benefit annuity, we have included this feature. SB 498 Hybrid Minimum contributions assume 1% employee contribution and corresponding 1% employer match. Maximum contributions assumes 5% employee contribution and corresponding 3.5% employer match. Assumes member works entire career under one benefit formula. (No transition)

2012 Actuarial Valuation Local Governments

17 Overview of Locals

Funded Status: Political Subdivisions 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2005 2006 2007 2008 2009 2010 2011 2012 18 Above data reflects actuarial value of assets drawn from political subdivision data as of June 30, 2012.

Funded Status: Teachers 120% 100% 80% 60% 40% 20% 19 0% 1994 1998 2000 2002 2004 2006 2008 2010 2012 Assumptions: Funded rations based on actuarial asset value. Annual discount rates 8% from 1994 2004; 7.5% from 2005 2009; 7% from 2010. Not data for fiscal years 1995 and 1997 since there were no valuations those years.

Average Contribution Rates Plans LEOS/No Leos 20

2012 Aggregate Pension Gain/Loss for Localities 21

Upcoming Changes to GASB and Moody s

Changes Are Coming Reporting of net pension liability Liabilities stated directly on employer s financial statements Assets marked to market will cause volatility Blended discount rate if VRS rates are not fully funded Teacher plan liabilities apportioned back to localities Reporting of accrued expense Pension expense calculation accelerates recognition of unfunded liabilities Expense calculation will be volatile Teacher plan expense will be apportioned back to localities Funding policy and accounting policy are separated 23

Let s Review VRS GASB Moody s Discount Rate 7% Blended 5.5% Amortization Period 30 years decreasing to 20 Some expensed immediately, some over future working lifetimes, investment returns over 5 years Asset Value 5-year smoothing FMV FMV Annual Cost Normal Cost + amortization of unfunded over 30 years (decreasing to 20) Normal Cost + interest on pension liability + amortization with varying periods 17 years Normal Cost at new discount rate plus 17-year amortization of unfunded liability 24

GASB Net Pension Liability (NPL) School Board Fairfax County Prince William County Loudoun County Virginia Beach Chesterfield Henrico County Arlington County Chesapeake Norfolk Newport News Total Estimated NPL $ 2,658,222,600 967,109,900 885,260,500 816,243,600 543,905,600 507,381,000 490,038,900 450,935,900 431,111,600 328,252,800 Percent of Total Payroll 17.52% 6.37% 5.83% 5.37% 3.59% 3.35% 3.23% 2.97% 2.84% 2.17% FY 2012 Creditable Compensation $ 1,227,329,600 446,524,900 408,734,200 376,868,300 251,127,000 234,263,200 226,256,200 208,201,900 199,048,800 151,557,800 Total Teachers Plan $ 15,160,259,000 $ 6,999,652,800 25

Impact of Changes 26 Significant liability will be brought onto the face of the financial statements Funded ratios will be impacted, particularly by Moody s proposed changes Marked-to-market will increase volatility of accounting expense and liabilities Impact to local governments: Higher unfunded liabilities will be added to long-term debt Apportionment of teacher cost-sharing plan liabilities will add even more to local liabilities Accrued pension expenses will increase significantly due to shorter amortization and unfunded liabilities GASB changes will become effective for local governments for fiscal year 2015 Moody s changes may be effective sooner

Modernization Multi-year, multi-phase project Introduces a web-based system Gives employers immediate access to member data Increases customer service and convenience to members Requires employers report only new or changed data Replaces 20-year-old technology infrastructure

Transition Process

Launch Timeline October 26 Data conversion began November 13 Employer transition began November 5 myvrs Navigator launched 30

Employer Transition STEP 1 Weeks of November 12 and 19 Security Register Administrator Other Contacts Log in Register Set up contacts Log in Access myvrs from myvrs Navigator Wait to submit data in myvrs Navigator

Employer Transition STEP 2 Mid-November through mid-december Receive Enter Confirm Submit Receive notice from VRS to begin submitting transactions Enter data for new hires and changes for employees Confirm October contribution snapshot Submit October payment

Employer Transition STEP 2 myvrs Navigator calculates contributions using new business rules in effect Do not send a payment to VRS until you have completed Step 2 This may result in a different contribution amount than you anticipate

Contribution Payment Transition For contributions owed for September 2012 and earlier October 2012 and later Use the existing lockbox Use ACH debit (preferred) or ACH credit 34 Lockbox will remain open for a short period of time

Electronic Payment Options ACH DEBIT Secure Convenient Automatic allocation of funds ACH CREDIT Secure Extra steps to allocate funds

Employer Support Employer Transition Team Customer service by phone and e-mail Practice Environment A training version of myvrs Navigator Transition Webinars Step-by-step assistance through new processes 36

Employer Support For myvrs Navigator support, contact the Employer Transition Team Telephone 1-855-291-2285 (after November 12) E-mail modernization@varetire.org vrstrain@varetire.org (for training questions) Web Secure Message http://www.varetire.org/contactmodteam Available in myvrs Navigator after you receive access 37

Employer Support For benefit-related questions, continue to contact the Employer Advisor Team Telephone 1-888-VARETIR (1-888-827-3847) E-mail employer-info@varetire.org Web http://www.varetire.org/ 38

Thank you!