Georgia Association of Public Pension Trustees

1. Georgia Association of Public Pension Trustees Understanding an Actuarial Valuation Report

2. Panelist • Ed Koebel, Principal and Senior Actuary, Cavanaugh Macdonald Consulting, LLC. Kennesaw, GA • Over 15 years of public sector actuarial experience • Consult with many GA plans • ERS • TRS • Bibb County

3. Table of Contents • Actuarial Jargon • Main Purposes of the Valuation Report • Funding Requirements • Assets • Gain/Loss • GASB Accounting • Assumptions

4. Actuarial Jargon • PVFB • EAN • PUC • AAL • NC • UAAL • MVA • AVA • ARC • NPO • GASB • OPEB

5. Main Purposes of Valuation Report Provide a summary of the funded status of the Pension Plan. Recommend rates of contribution. Provide accounting information under GASB 25 and 27 (43 and 45 for OPEB) for Plan’s Comprehensive Annual Financial Reports (CAFR).

6. Main Purposes of Valuation Report • Provide summary of participant data as of snapshot valuation date. • List all Assumptions and Methods that went into developing liabilities. • Provide summary of Plan Provisions.

7. Funding Valuation Process Present Value of Future Benefits (PVFB) Actuarial Accrued Liability (AAL) Future Normal Costs (NC) Assets (AVA, MVA) Unfunded Accrued Liability (UAL) Member Portion Employer Portion

8. Present Value The present value of an amount of money payable in the future is the amount of money that, if we had it today, would accumulate to the amount that will be payable considering: • Investment return • Probability that money will be paid

9. Present Value Example 1: You owe $1,000 to a financial institution payable one year from now. You estimate you can invest money for a 7% return. What is the present value of the debt? $1,000 / 1.07 = $934.58

10. Present Value Example 2: You owe $1,000 to a person payable one year from now. The person is 70 years old and has no heirs. You estimate you can invest money for a 7% return. You estimate that the chance the person is still alive one year from now is 98%. What is the present value of the debt? $1,000 / 1.07 x 98% = $915.89 Observation: If the person dies, you will have money left over. If the person lives, you won’t have enough money to pay the debt.

11. Normal Cost

12. Actuarial Accrued Liability The portion of the present value of pension plan benefits not provided for by future normal costs.

13. Asset Valuation Methods • Market Value of Assets (MVA) • Smoothed Market – Actuarial Value of Assets (AVA)

14. Smoothing Methods Recognize some portion of market return each year Can be straight line or weighted Most commonly used is straight line, 5-year smoothing Can be with or without corridor, i.e., actuarial value cannot be less than x% or more than x% of market value Most common corridor is 80%-120% of market value

15. Actuarial Value vs. Market Value • Actuarial Value of Assets is expected to be: • Higher than Market Value when market is doing poorly • Lower than Market Value when market is doing well

16. Unfunded Accrued Liability Contribution Rate

17. Unfunded Accrued Liability Amortization Level $ Level % of payroll Closed period Open or rolling period Maximum 30 years (GASB requirement)

18. Level $ Amortization Same as paying a home mortgage on a fixed interest rate. Payments remain constant in dollar amount over the amortization period, but decline as a percent of a (presumably) growing payroll. UAL declines in nominal (total dollar) value every year.

19. Level $ Amortization

20. Level % Amortization Developed to help better achieve the goal of level contributions as a percent of payroll. Requires an assumption regarding annual total payroll growth. GASB permits this method as long as growth in the active membership is not reflected in the payroll growth assumption. However expected declines in membership (e.g., closed plans) should be reflected. This results in the use of the wage inflation assumption for ongoing plans.

21. Level % Amortization

22. Closed vs. Open Periods Closed period means a one-year drop in the amortization period each year until you reach zero. Open period means the amortization period fluctuates up or down, or stays the same from year to year. Open period with level % amortization can result in never paying off the UAL, although it does decline as a percent of payroll.

23. Open PeriodUAL Dollar Amount

24. Open PeriodUAL as % of Payroll

25. Funding Ratio Comparison

26. Annual Required Contributions (ARC)

27. Causes of Unfunded Accrued Liabilities • Granting initial benefits or granting benefit increases for service already rendered. • Actual experience which is less favorable than assumed. Examples follow: • Higher salary increases • Earlier retirement date(s) • Lower death rates • Lower rates of investment earnings • Lower rates of non-death terminations

28. Changes in Major AssumptionsEffect on Liabilities and Contributions

29. GASB Accounting Information • Disclosure for GASB 25 and 27 (43 and 45 for OPEB Valuations) • Distribution of Number of Employees by Type of Membership • Schedule of Funding Progress • Schedule of Employer Contributions • Calculation of Net Pension Obligation • Solvency Test

30. Schedule of Funding Progress • Six-year history of the following: • Actuarial Value of Assets • Actuarial Accrued Liability • Unfunded Accrued Liability (UAL) • Funded Ratio • Covered Payroll • UAL as a Percent of Covered Payroll

31. Schedule of Employer Contributions • Six-year history of the following: • Annual Required Contributions (ARC) • Percent of ARC Contributed

32. Net Pension Obligations (NPO) • If the ARC is not contributed each year by the Employer, the Plan must disclose a liability on the financial statements to recognize this obligation.

33. Solvency Test • Displays the Portion of the Accrued Liabilities that are covered by the Assets in Percentage Form • Liabilities broken down into 3 components: • Active Member Contributions • Retirees, Survivors and Inactive Liabilities • Active Members (Employer Provided Benefits)

34. Selecting Assumptions Demographic Economic

35. Demographic • Withdrawal • Death in active service • Disability • Retirement • Death after retirement • Special Terminations (e.g. Shutdowns) • Spouse Assumptions

36. Demographic Adjustments • Experience Investigations • Compares actual plan experience with actuarial assumptions used in the valuation • Performed every 5 years • Follow experience • Watch trends (e.g. Improving Mortality) • Factor in special events (e.g. re-employment legislation)

37. Economic Assumptions • Inflation should be consistently applied • Asset return • Salary increases • COLAs • Real returns should reflect asset mix

38. UnderstandingEconomic Assumptions Interest Rate - Inflation Rate = Real Rate of Return Interest rate determines how much money we think we'll have. Inflation rate tells us what we think it will buy.

39. Other Economic Assumptions • Salary increases • Current & anticipated practice • Collective bargaining agreements • Single rate • Age- and/or service-related • Cost of Living Adjustments (COLAs) • Inflation-related • Percent determined by plan

40. Questions ??? Ed Koebel Cavanaugh Macdonald Consulting 678-388-1706 edk@cavmacconsulting.com