psprs don’t stop thinking about tomorrow gfoaz conference august 7, 2014
TRANSCRIPT
PSPRSDon’t Stop Thinking
About TomorrowGFOAz Conference
August 7, 2014
Presentation Outline• PSPRS Overview
– Jared Smout, Deputy Administrator, PSPRS
• Rate Components and Funding Levels – Understanding the Actuarial Valuation– Mark Buis, Gabriel Roeder Smith & Co.
• PSPRS Investment Strategy– Mark Steed, Lead Portfolio Manager/Chief of Staff, PSPRS
• Town of Paradise Valley’s PD Pension Study– Scott McCarty, Finance Director, Town of Paradise Valley
PSPRS Overview
The Purpose of PSPRSArizona Revised Statutes § 38-841
Before the establishment of the public safety personnel retirement system, municipal firemen and policemen, employees of the Arizona highway patrol and other public safety personnel in the state of Arizona were covered under various local, municipal and state retirement programs. These heterogeneous programs provided for wide and significant differentials in employee contribution rates, benefit eligibility provisions, types of benefit protection and benefit formulas….In order to provide a uniform, consistent and equitable statewide program for public safety personnel who are regularly assigned hazardous duty in the employ of the state of Arizona or a political subdivision thereof, this retirement system was created effective as of July 1, 1968.
The Local Board System = Local Control
Arizona Revised Statutes § 38-847The administration of the system and responsibility for making the provisions of the system effective for each employer are vested in a local board. The department of public safety, the Arizona game and fish department, the department of emergency and military affairs, the University of Arizona, Arizona State University, Northern Arizona University, each county sheriff's office, each county attorney's office, each county parks department, each municipal fire department, each eligible fire district, each community college district, each municipal police department, the department of law, the department of liquor licenses and control, the Arizona department of agriculture, the Arizona state parks board, each Indian reservation police agency and each Indian reservation fire fighting agency shall have a local board.
The Structure of PSPRS
County Investigators
County Sheriffs
Fire Districts
Marshals
Municipal Fire
Municipal Police
State Agencies
Tribal Fire
Tribal Police
0 10 20 30 40 50 60 70 80
Distribution of Employers by Type
'69 '70 '71 '72 '73 '74 '75 '76 '77 '78 '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '140
50
100
150
200
250
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Growth of PSPRSEmployers Membership
PSPRS Annual AggregateActuarial Valuation
June 30, 2013 Employer Rate Funded StatusAverages 32.54% 57.1%
5% - 10% 10% - 15% 15% - 20% 20% - 25% 25% - 30% 30% - 35% 35% - 40% 40% - 45% 45% - 50% 50% - 55% 55% - 60% 60% - 65% 65% - 70% 70% - 75%+
# of ERs
8 68 45 35 18 16 18 4 8 4 5 2 3 2
5
15
25
35
45
55
65
75
ER Rate Distribution by # Employers
5% - 10%
10% - 15%
15% - 20%
20% - 25%
25% - 30%
30% - 35%
35% - 40%
40% - 45%
45% - 50%
50% - 55%
55% - 60%
60% - 65%
65% - 70%
70% - 75%+
5% - 10%
10% - 15%
15% - 20%
20% - 25%
25% - 30%
30% - 35%
35% - 40%
40% - 45%
45% - 50%
50% - 55%
55% - 60%
60% - 65%
65% - 70%
70% - 75%+
# of ERs
8 68 45 35 18 16 18 4 8 4 5 2 3 2
Membership
10 2262 2774 2505 2072 3822 11368 195 2146 1311 2552 90 335 77
515253545556575
1,000
3,000
5,000
7,000
9,000
11,000
ER Rate Distribution by # Employers and Membership
0% - 10% 10% - 20% 20% - 30% 30% - 40% 40% - 50% 50% - 60% 60% - 70% 70% - 80% 80% - 90% 90% - 100% >= 100%
# of ERs 6 2 1 12 25 30 35 41 25 20 39
2.5
7.5
12.5
17.5
22.5
27.5
32.5
37.5
42.5
Funding Level Distribution by # of Employers
0% - 10%
10% - 20%
20% - 30%
30% - 40%
40% - 50%
50% - 60%
60% - 70%
70% - 80%
80% - 90%
90% - 100%
>= 100% 0% - 10%
10% - 20%
20% - 30%
30% - 40%
40% - 50%
50% - 60%
60% - 70%
70% - 80%
80% - 90%
90% - 100%
>= 100%
# of ERs
6 2 1 12 25 30 35 41 25 20 39
Membership
39 47 29 903 7533 13247 3953 2665 1134 876 1093
2.57.5
12.517.522.527.532.537.542.5
1,000
3,000
5,000
7,000
9,000
11,000
13,000
Funding Level Distribution by # of Employers and Membership
Do you know where you stand and how you got there?
Copyright © 2014 GRS – All rights reserved.
Rate Components and Funding Levels
Understanding the Actuarial Valuation
15
Present Value of Future Benefits - Present Valueof all future benefits payable to current participants(active, retired, terminated vested).
Actuarial Liability - Portion of PV of Future Benefits allocated to prior years.
Normal Cost - Portion of PV of Future Benefits allocated to current year.
Future Normal Costs - Portion ofPV of Future Benefits allocated to future years.
Present Value of Future Benefits
ActuarialLiability
Future Normal
Cost
NormalCost
Components of the Actuarial Valuation
16
Actuarial Accrued Liability - Actuarial Value of Assets
= Unfunded Actuarial Liability
Annual Contribution = Normal Cost + Amortization of the Requirement Unfunded Liability
Components of the Actuarial Valuation
Development of Funded Ratio
17
2012 2013
A. Accrued Liability
1. For retirees and beneficiaries $ 5,045,392,933 $ 5,262,215,315
2. For DROP members 1,318,879,833 1,390,054,474
3. For vested terminated members 22,200,487 25,997,914
4. For present active members
a. Value of expected future benefit payments 6,456,407,513 6,525,217,636
b. Value of future normal costs 2,517,350,780 2,379,945,434
c. Active member accrued liability: (a) - (b) 3,939,056,733 4,145,272,202
5. Total accrued liability 10,325,529,986 10,823,539,905
B. Present Assets (Funding Value) 6,051,595,012 6,185,073,611
C. Unfunded Accrued Liability: (A.5) - (B) 4,273,934,974 4,638,466,294
D. Stabilization Reserve 13,132,786 16,068,231
E. Net Unfunded Accrued Liability: (C) + (D) $ 4,287,067,760 $ 4,654,534,525
F. Funding Ratio: (B) / (A.5) 58.6% 57.1%
June 30,
Funding Ratio will be different for every employer.
Development of Employer Contribution
Employer contribution rate will be different for every employer.18
Contribution for Fiscal Year
Pension Normal cost requirement Service pensions Disability pensions Survivors of active members Refunds of members' accumulated contributions Total normal cost requirement Employee Contributions Total employee rate Less portion not used to reduce employer's contribution Net employee rate
Employer normal cost requirement Amortization of unfunded liabilities Total pension contribution requirement
Health Normal cost requirement Amortization of unfunded liabilities Total health contribution requirement
Total contribution requirement
29.05% 31.03% 16.01% 18.48%
7.65% 7.65%
17.28% 16.65%1.73 1.770.59 0.591.09 1.19
20.69% 20.20%
10.35
June 30,2012 20132014 2015
11.05 2.70 3.40
13.04% 12.55%
30.44% 32.54%
0.33% 0.34% 1.06% 1.17% 1.39% 1.51%
Understanding Asset Smoothing
Funding value for each employer is determined proportionately based on Market Value.19
2013 2014 2015 2016 2017 2018 2019
A. Funding Value Beginning of Year (Including Future Benefit Increases) 6,051,595,012$
B. Market Value End of Year 5,557,274,418
C. Market Value Beginning of Year 5,074,687,874
D. Non Investment Net Cash Flow (68,751,086)
E. Investment Income E1. Total: B-C-D 551,337,630 E2. Amount for Immediate Recognition: (8.00%) 481,377,558 E3. Amount for Phased in Recognition: E1-E2 69,960,072
F. Phased in Recognition of Investment Income F1. Current Year: E3 / 7 9,994,296 F2. First Prior Year (75,653,848) 9,994,296$ F3. Second Prior Year 42,476,982 (75,653,848) 9,994,296$ F4. Third Prior Year 9,922,277 42,476,982 (75,653,848) 9,994,296$ F5. Fourth Prior Year (192,391,612) 9,922,277 42,476,982 (75,653,848) 9,994,296$ F6. Fifth Prior Year (124,481,914) (192,391,612) 9,922,277 42,476,982 (75,653,848) 9,994,296$ F7. Sixth Prior Year 50,985,946 (124,481,913) (192,296,967) 9,922,277 42,476,985 (75,653,847) 9,994,296$ F8. Funding Value Corridor Adjustment 0 F9. Total Recognized Investment Gain (279,147,873) (330,133,818) (205,557,260) (13,260,293) (23,182,567) (65,659,551) 9,994,296
G. Funding Value End of Year G1. Preliminary Funding Value End of Year: (A+D+E2+F1:F7) 6,185,073,611 G2. Upper Corridor: (120% x B) 6,668,729,302 G3. Lower Corridor: (80% x B) 4,445,819,534 G4. End of Year: (G1 subject to max of G2 and min of G3) 6,185,073,611
H. Difference Between Market Value & Funding Value: (B-G4) (627,799,193) (297,665,375) (92,108,115) (78,847,822) (55,665,255) 9,994,296 0
I. Market Rate of Return 10.9%
J. Recognized Rate of Return 3.4%
K. Ratio of Funding Value to Market Value 111.3%
Year Ended June 30:
Understanding Asset Smoothing and Amortization methods
Year 1 - phase in 1/7 of asset loss Step 1 – phase in 1/7 of asset loss Step 2 – amortize UAL over 23 years
Year 2 – Year 1 results PLUS Step 1 – phase in additional 1/7 of asset loss Step 2 – amortize UAL over 22 years
… Year 7 and beyond – Year 1 through 6 PLUS
Step 1 – phase in final 1/7 of asset loss Step 2 – amortize UAL over remaining years
20
Understanding Asset Smoothing and Amortization methods
21
Example of How 30% Loss on Assets Impacts ContributionHigh Low
Total Ratio Ratio
1. Assets (in millions) 5,557.0 415.5 17.5 2. Payroll (in millions) 1,370.0 63.1 7.0 3. Ratio 4.1 6.6 2.5
4. 30% Asset Loss ( Item 1 x 30%) 1,667.1 124.7 5.3 5. Asset Loss as % of Payroll (Item 4 / Item 2) 121.7% 197.5% 75.0%YEAR 16. Smooth assset loss over 7 years (Item 5 / 7) 17.4% 28.2% 10.7%7. Amortize UAL over 23 years (Item 6/ 16.4) 1.1% 1.7% 0.7%YEAR 28. Smooth asset loss over 7 years (Item 5 / 7) 17.4% 28.2% 10.7%9. Amortize UAL over 22 years (Item 8/ 15.9) 1.1% 1.8% 0.7%10. Add to Year 1 results (Item 7 plus Item 9) 2.2% 3.5% 1.4%
So Why Have Contribution Rates Been Increasing?
22
-
5.00
10.00
15.00
20.00
25.00
30.00
35.00
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
% o
f P
ay
Year
PSPRS Contribution Rates
Employer Normal Cost & Other Asset Loss Payroll decline Assumptions & Methods
So Why Has the Contribution Rate Been Increasing?
In most systems, assets losses and gains tend to offset each over time
In PSPRS, asset gains also fund the Permanent Benefit Increases (PBI)
The current return assumption is 7.85% One-half of excess return over 9% funds the PBI When markets are volatile, high returns will not
completely offset the low returns
23
So Why Has the Contribution Rate Been Increasing?
24
Volatility Low High Average AverageMeasure Return Return Before PBI PBI After PBI+/- 1.00% 6.85% 8.85% 7.85% 0.00% 7.85%+/- 2.00% 5.85% 9.85% 7.85% 0.43% 7.64%+/- 3.00% 4.85% 10.85% 7.85% 0.93% 7.39%+/- 4.00% 3.85% 11.85% 7.85% 1.43% 7.14%+/- 5.00% 2.85% 12.85% 7.85% 1.93% 6.89%+/- 6.00% 1.85% 13.85% 7.85% 2.43% 6.64%+/- 7.00% 0.85% 14.85% 7.85% 2.93% 6.39%+/- 8.00% -0.15% 15.85% 7.85% 3.43% 6.14%+/- 9.00% -1.15% 16.85% 7.85% 3.93% 5.89%
+/- 10.00% -2.15% 17.85% 7.85% 4.43% 5.64%
Comparison of COLA Provisions
PSPRS Provisions Pre SB1609 Post SB1609
Investment Return Threshold 9% 10.5%
COLA Maximum 4% of Average PSPRS Benefit Prior Year
Varies from 2% to 4% Based on Funded Ratio
Funded Status Threshold None 60%
Reserve Accumulation Yes No
COLA Delay 2 Years or age 55 Tier 1: 2 Years or Age 55Tier 2: Age 55
25
SB1609 Reversal
Fields case – restores original PBI formula for members who were retired as of June 1, 2011
Hall case – would restore original PBI formula for current active members and reverse changes in the employee contribution rate
26
SB1609 ReversalImpact on Employer Contributions
27Note that contribution requirements for FY2016 are expected to increase due to continued phase-in of assets losses from prior years.
Fields Fields and HallValuation Lawsuit LawsuitsResults Reversed Reversed
Assumed COLA for future retirees 0.00% 0.00% 2.00%Assumed COLA for current retirees 0.00% 2.00% 2.00%
Actuarial Accrued Liability (millions) - Future Retirees $ 5,402 $ 5,402 $ 6,274 - Current Retirees 5,142 6,309 6,364 - Total $10,544 $11,711 $12,638
Assets (millions) $ 6,185 $ 6,185 $ 6,185
Unfunded Liability $ 4,359 $ 5,526 $ 6,453
Funded Status 58.7% 52.8% 48.9%
Contribution Rate - Employer Normal Cost 12.55% 12.55% 14.96% - 23 year amort UAL payment 18.48% 23.62% 27.53% - Total 31.03% 36.17% 42.49%
Hypothetical Results as of June 30, 2013 - PSPRS
SB1609 ReversalImpact on Employer Contributions
28
Example of Impact of Fields Case ReversalHigh Low
Total Ratio Ratio1. Retiree Liability (in millions) 5,142.0 3.6 12.1 2. Total Liability (in millions) 10,544.0 4.9 54.3 3. Ratio 49% 73% 22%
4. Contribution rate before SB1609 reversal 31.0% 41.0% 17.6%5. Contribution rate after SB1609 reversal 36.2% 49.2% 19.2%6. Increase in Contribution rate 5.1% 8.2% 1.6%
7. Optional phase-in plan - Year 1 1.7% 2.7% 0.5% - Year 2 3.4% 5.5% 1.1% - Year 3 5.1% 8.2% 1.6%
Things employers CAN’T control
Investment performance PSPRS has some control over this
Benefit Provisions Occasionally modified by statute
Actuarial assumptions and methods Reviewed every 5 years by actuary
29
Things employers CAN control
Managing funding levels Employers can contribute more than the minimum
Managing workforce Hiring members with prior PSPRS service increases cost Reducing workforce results in costs being spread over lower
payroll base increases cost as percentage of pay Disability approvals can increase cost if not managed
carefully Payroll management allowing pay spiking can increase
cost
30
PSPRS Investment Strategy
Towards a more resilient portfolio
Portfolio is managed according to a set of investment beliefs
1. Mandate to achieve assumed earnings rate of at least 7.85% over long-periods of time2. Markets are difficult to time so diversification offers the best chance to achieve the
assumed earnings rate 3. Investment universe should be as wide as possible so as to increase likelihood of
accomplishing diversification4. Risk is defined as the potential for a loss of capital. It can be approximated using
statistical conventions but will never be exact 5. The best results come from people who are empowered to make decisions. Human and
cognitive diversity are the best tools for solving novel problems in complex systems6. Making sound decisions requires not only robust quantitative models but sound human
judgment. People make models better and models make people better 7. Success depends, in part, on recognizing the role that “randomness”, or chance, plays in
any particular market
Portfolio returns are derived from a simple equation
Total Return = Risk Free Rate (Cash) + Asset Allocation + Active Management
Since 1970, traditional portfolios averaged the following:
10.0% = 5.6% (Historical Risk Free Rate) + 4.4% (Asset Allocation) + 0% (Active Management)
However, the reduction in the risk-free rate due to monetary stimulus puts the burden of total return on asset allocation and active management
6.1% = 1.7% + 4.4% + 0%
This reality leads to two distinct strategic initiatives
1. Improve returns from asset allocation Passively holding more or less of certain asset classes
Problem: The low-rate environment incentivizes investors to purchase riskier assets with higher returns, thus bidding up bond and stock prices and bidding down future returns. Also, markets can behave erratically creating the appearance of randomness.Solution: Focus on a strategic mix of assets that offer the highest probability of success in the aggregate, regardless of the business cycle. Focus on odds.
2. Improve active management decisions Making relative value decisions within asset classes
Problem: This is a zero-sum game, if we win, someone loses. Therefore, opportunities are fleeting because information travels quickly.Solution: Do not assume the rules of the game are fixed. By focusing on the Trust’s competitive advantages (liquidity, time horizon and size), we can make active decisions in opaque markets where informational asymmetry can be exploited
Sidebar: What drives outcomes, skill or luck? Strategies should be different depending on what drives the outcome.
To what extent does luck or skill determine success for sports teams?
What does the dispersion of success look like? How would it be different if the outcome were completely dependent on luck?
League Contribution of Luck
Contribution of Skill
Season Ending
NBA 10% 90% 2013
Premier League
31% 69% 2011
MLB 34% 66% 2011
NFL 53% 47% 2012
2013 NBA season calculated by author using “True Score Theory”. All other statistics are for the five seasons ending in the designated year and are taken from Mauboussin, M. The Success Equation. 2012. Harvard Business Review Press.
Initiative #1 Total Return = Risk Free Rate (Cash) + Asset Allocation + Active ManagementThere are numerous asset classes but they usually fit in one of four quadrants
Growth Inflation
Rising EquitiesCommodities
Corporate CreditEM Credit
Private Equity
IL BondsCommodities
EM CreditLiquid Loans
Falling Nominal BondsIL Bonds
Direct Lending
EquitiesNominal Bonds
*The key to having a more resilient portfolio is ensuring you hold assets that will perform during any business cycle. Portfolio construction is about balance.**Allocating equal capital to each of the four quadrants will not work (balance will not be achieved) because some assets are more volatile than others. If one asset is twice as volatile as another, it should receive half the capital.
With this in mind, the Investment Team has pursued a path that better diversifies the portfolio against macro risks
6/30/2006 5/31/20140
10
20
30
40
50
60
70
80
90
100
Total Equity, 70
Total Equity, 30
Fixed Income, 22
Fixed Income, 9
Real Estate, 3
Real Estate, 11
Cash, 5 Cash, 5
Private Equity, 14
Credit Opportunities, 9
GTAA, 9
Real Assets, 6Risk Parity, 3
Absolute Return, 4
While forecasts and simulations are far from certain we are at least able to say today’s portfolio is better insulated from known macro-economic shocks than has been the case historically.
Today’s Portfolio PSPRS Trust Actual
Stock Market Crash of 2002 -4.5% -21.1%
Credit Crunch 2008 -8.2% -23.1%
Crisis 2009 (Jan – Feb) -4.9% -12.9%
Initiative #2 Total Return = Risk Free Rate (Cash) + Asset Allocation + Active Management
As markets approach efficiency, returns are driven less by skill and more by luck
If you are an underdog, make rules of the game as flexible as possible
Nassim Taleb author of Outliers likes to use the example of David and Goliath
Over the last five years, the PSPRS Trust has negotiated strategic relationships with key research institutions and asset managers to build a best-in-class information network
57
16 14
26
19
14
Results PSPRS maintains one of the most superior risk-adjusted (as measured by the sharpe ratio) portfolios in the nation, placing ahead of 90% of their peers over the last three years.
Risk
Ratio of PSPRS Risk to 60/35/5
Chart taken from “Modern Pension Fund Diversification”. Figure 4. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2426593. To be published in the Journal of Asset Management
Historical Returns (through 5/31/2014, Gross of Fees)
Month Ending Fiscal YTD Calendar YTD 1 Year 3 Years 5 Years 10 Years
PSPRS Trust 1.98% 12.94% 4.86% 12.01% 7.48% 10.94% 6.02%
Benchmark 1.19% 12.38% 3.57% 10.99% 8.12% 10.90% 4.79%
Excluding legacy Real
Estate
2.08% 14.78% 5.07% 13.35% 8.54% 12.65% N/A
Accolades• 2013, Nominee, Innovator Award. Asset
International Chief Investment Officers• 2011, Recipient, Mid-Size Fund of the Year.
Money Management Magazine• 2011, Nominee, Small Public Fund of the Year.
Institutional Investor Magazine
GFOAz Conference
August 7, 2014
POLICE PENSION STUDY
46
Contribution Rate ~63%
Contribution Amount $1.7M
Contribution Amount as % of Operating Budget
8%
Percent Funded 30%
Unfunded Liability $19.7M
Active Employees 23
Retirees/DROP Members 37
OUR KEY STATISTICS – PD ONLY
47
PVPSPRS Average
Normal Cost Requirement 12.27% 12.89%
Amortization of Unfunded Liabilities
50.17% 19.65%
Contribution Rate 62.44% 32.54%
“NO ONE IS AVERAGE”
The Town’s Unfunded Liability is the Most Significant Factor in Our Contribution Rate
48
Actual Experience Has Not Matched Projections in the Following Areas:1. Investment Earnings (Can’t Control)2. Court Rulings (Can’t Control)3. Retirees Outnumber Actives (CAN
INFLUENCE) Benefits Have Been Earned
STUDY RESULTS: UNFUNDED LIABILITY
49
PV VS. PSPRS IN FY 12-13ACTIVES VS. RETIREES
PV PSPRS0%
10%20%30%40%50%60%70%80%90%
100%
41%
68%
59%
32%
RetireesOutnumber
Actives
ActivesOutnumber
Retirees
50
1. Relatively Constant Number of Active Positions
2. Only Hire Laterals3. Large Number of Disability
Retirements with Less Than 20 Years of Service
4. DROP Program
STUDY RESULTS- WHY OUR RETIREES OUTNUMBER EMPLOYEES
51
UNFUNDED LIABILITYGROWS TO A PEAK OF $23M THEN
DECLINES20
13
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
$-
$5.0
$10.0
$15.0
$20.0
$25.0
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Plan Year
Unf
unde
d L
iabi
lity
($m
illio
n)
Fun
ded
Sta
tus
Unfunded Liability
52
EMPLOYER CONTRIBUTION STEADILY INCREASES AND GROWS TO 15% OF OPERATING REVENUES
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
$0.50
$1.50
$2.50
$3.50
$4.50
$5.50
$6.50
Plan Year
Con
trib
utio
n A
mou
nt (
$mill
ion)
53
CONTRIBUTION RATE STEADILY INCREASES TO 80%
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
Plan Year
Con
trib
utio
n R
ate
54
TOTAL CONTRIBUTION: NORMAL COST + UNFUNDED LIABILITY
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
Plan Year
Contr
ibuti
on A
mount
Normal Cost
Unfunded Liability
$53.5MTotal Cost
55
What are We Doing About It?
56
DROP has an Adverse Financial Impact per Actuary Study
FY 14-15 Budget Includes Contributions for All Authorized PSPRS Positions (33)
Added $235k for 4 DROP Members
1. STARTED MAKING DROP MEMBER CONTRIBUTIONS
EFFECTIVE JULY 1ST
57
Expected Results $90k Additional Interest Income 3 Percentage Point Rate Reduction
Investment Income is Based on the Town’s Average Balance
Average Balance = Beginning Balance + 50% of Annual Changes
2. PREPAID $2M CONTRIBUTIONS ON JULY 1ST
58
What is a Pension Funding Policy? A Comprehensive Document with
the Objective of Ensuring Financial Resources Exist to Fund Pension Obligations
3. DEVELOPING A PENSION FUNDING POLICY
59
Components of the Policy Defines Funding Levels Defines Contribution Rates & Amounts Avoids “Kicking the Can Down the Road” Defines Actuary Assumptions Identifies Roles of Responsible Parties
3. DEVELOPING A PENSION FUNDING POLICY (CONCLUDED)
60
Focusing on Addressing $14.3M Unfunded Retiree Liability (Not Total $19.7M Unfunded Liability)
Limited Capacity Under State’s Annual Expenditure Limitation
Reserve is an Interim Option
4. CONSIDERING ADDITIONAL PAYMENTS TO DIRECTLY BUY-DOWN
THE LIABILITY
61
Safety Programs Wellness Programs Role of Local PSPRS Board Role of Council
5. IMPLEMENTING BEST PRACTICES
62
League Task Force Ability to Issue Pension Obligation
Bonds
6. EVALUATE LEGISLATIVE OPTIONS
Bond Issue Example
Status Quo (7.85%) $53.5M
Bonds (3.7%) $31.3M
Estimated Savings $22.2M
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1. Do a Study What Percent of Your Operating
Budget Goes to PSPRS? We’re Extreme, Are You? “No One is Average”
2. Create a Pension Funding Policy Don’t Wait Until It’s Too Late
YOUR HOMEWORK
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Questionsand
Comments
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The following section is a placeholder re. GASB and will be discussed if time permits
Copyright © 2014 GRS – All rights reserved.
New GASB Standards
GASB Changes - Overview
New GASB Accounting Standards Statements No. 67 and No. 68 will create accounting results separate from funding results Funding calculations are not impacted GASB created a new Net Pension Liability (NPL)
and Pension Expense Statement No. 67 replaces Statement No. 25 Statement No. 68 replaces Statement No. 27
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Summary of Key Changes Under the GASB’s current standards, there is a
close link between the accounting and funding measures. Under the new statements, the two are disconnected:
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Funding Purposes Accounting Purposes
Discount Rate Long-term rate of investment return
Long-term investment return and potentially a municipal bond rate
Asset Valuation May be smoothed Fair (market) value
Amortization Considerable flexibility Strict requirements and likely shorter periods
Actuarial Cost Method Considerable flexibility Traditional entry age normal
GASB Changes – Overview
Key differences for employer accounting New GASB rules do not allow smoothing of assets New GASB rules may require lower (or blended)
discount rate to value liabilities Key takeaways
New GASB rules do NOT change the funding contribution rate
New GASB rules do provide a second set of actuarial numbers (may lead to confusion)
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Single Discount Rate The NPL is similar to the Unfunded
Actuarial Accrued Liability (UAAL) that many state and local governments use for funding purposes (based on Market Value of Assets)
However, a key difference is the “Single Discount Rate” which is: Based on the long-term expected investment
return to the extent projected plan fiduciary net position (assets) is sufficient to pay future benefits; and
Based on a tax-exempt municipal bond index rate to the extent projected plan fiduciary net position (assets) is not sufficient to pay future benefits
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Determining the Discount Rate – (GASB)
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$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
0 5 10 15 20 25 30 35
Illustrative Projected Benefits and Projected Plan Net Position
Projected Benefit Payments
Projected Plan Net Position
This portion of projected benefits is discounted using a AA tax-exempt municipal bond index rate
This portion of projected benefits is discounted using the long-term expected rate of return.
GASB Overview
GASB Statement No. 67 is effective for fiscal years beginning after June 15, 2013 PSPRS will receive plan results this fall
GASB Statement No. 68 is effective for fiscal years beginning after June 15, 2014 Employers will receive separate GASB report next
spring based on June 30, 2014 measurement date This will allow auditors to receive information prior
to June 30, 2015 fiscal year end
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