pptx - 2.6 Mb

Report
PSPRS
Don’t Stop Thinking
About Tomorrow
GFOAz 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 PSPRS
Arizona 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 Structure of PSPRS
Arizona Revised Statutes § 38-847
The 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 Local Board System = Local Control
Distribution of Employers by Type
Tribal Police
Tribal Fire
State Agencies
Municipal Police
Municipal Fire
Marshals
Fire Districts
County Sheriffs
County Investigators
0
10
20
30
40
50
60
70
80
Growth of PSPRS
Employers
Membership
250
35,000
30,000
200
25,000
150
20,000
15,000
100
10,000
50
5,000
0
'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 '14
PSPRS Annual Aggregate
Actuarial Valuation
June 30, 2013
Averages
Employer Rate
32.54%
Funded Status
57.1%
ER Rate Distribution by # Employers
80
70
60
50
40
30
20
10
0
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%
# of ERs
8
68
45
35
18
16
18
4
8
4
5
2
3
70% 75%+
2
ER Rate Distribution by # Employers and Membership
80
12,000
70
10,000
60
8,000
50
40
6,000
30
4,000
20
2,000
10
0
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
2,262
2,774
2,505
2,072
3,822
11,368
195
2,146
1,311
2,552
90
335
77
-
Funding Level Distribution by # of Employers
45
40
35
30
25
20
15
10
5
0
# of ERs
0% - 10%
10% - 20%
20% - 30%
30% - 40%
40% - 50%
50% - 60%
60% - 70%
70% - 80%
80% - 90%
90% - 100%
>= 100%
6
2
1
12
25
30
35
41
25
20
39
Funding Level Distribution by # of Employers and Membership
45
14,000
40
12,000
35
10,000
30
25
8,000
20
6,000
15
4,000
10
2,000
5
0
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
7,533
13,247
3,953
2,665
1,134
876
1,093
0
Do you know where you stand and
how you got there?
Rate Components and Funding
Levels
Understanding the Actuarial
Valuation
Copyright © 2014 GRS – All rights reserved.
Components of the Actuarial Valuation

Present Value of Future Benefits - Present Value
of 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 of
PV of Future Benefits allocated to future years.
15
Present Value of Future
Benefits
Actuarial
Liability
Future
Normal
Cost
Normal
Cost
Components of the Actuarial Valuation
Actuarial Accrued Liability
- Actuarial Value of Assets
= Unfunded Actuarial Liability
Annual Contribution = Normal Cost + Amortization of the
Requirement
Unfunded Liability
16
Development of Funded Ratio
June 30,
2012
2013
$ 5,045,392,933
1,318,879,833
$ 5,262,215,315
1,390,054,474
22,200,487
25,997,914
a. Value of expected future benefit payments
b. Value of future normal costs
6,456,407,513
2,517,350,780
6,525,217,636
2,379,945,434
c. Active member accrued liability: (a) - (b)
3,939,056,733
4,145,272,202
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
13,132,786
16,068,231
$ 4,287,067,760
$ 4,654,534,525
58.6%
57.1%
A. Accrued Liability
1. For retirees and beneficiaries
2. For DROP members
3. For vested terminated members
4. For present active members
5. Total accrued liability
D. Stabilization Reserve
E. Net Unfunded Accrued Liability: (C) + (D)
F. Funding Ratio: (B) / (A.5)
17
Funding Ratio will be different for every employer.
Development of Employer Contribution
June 30,
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
18
2012
2014
2013
2015
17.28%
1.73
0.59
1.09
20.69%
16.65%
1.77
0.59
1.19
20.20%
10.35
2.70
7.65%
11.05
3.40
7.65%
13.04%
16.01%
29.05%
12.55%
18.48%
31.03%
0.33%
1.06%
1.39%
0.34%
1.17%
1.51%
30.44%
32.54%
Employer contribution rate will be different for every employer.
Understanding Asset Smoothing
Year Ended June 30:
A. Funding Value Beginning of Year (Including Future Benefit Increases)
2013
2014
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
E2. Amount for Immediate Recognition: (8.00%)
E3. Amount for Phased in Recognition: E1-E2
F. Phased
F1.
F2.
F3.
F4.
F5.
F6.
F7.
F8.
F9.
in Recognition of Investment Income
Current Year: E3 / 7
First Prior Year
Second Prior Year
Third Prior Year
Fourth Prior Year
Fifth Prior Year
Sixth Prior Year
Funding Value Corridor Adjustment
Total Recognized Investment Gain
G. Funding Value End of Year
G1. Preliminary Funding Value End of Year: (A+D+E2+F1:F7)
G2. Upper Corridor: (120% x B)
G3. Lower Corridor: (80% x B)
G4. End of Year: (G1 subject to max of G2 and min of G3)
H. Difference Between Market Value & Funding Value: (B-G4)
I. Market Rate of Return
J. Recognized Rate of Return
K. Ratio of Funding Value to Market Value
2015
2016
2017
2018
551,337,630
481,377,558
69,960,072
9,994,296
(75,653,848) $
9,994,296
42,476,982
(75,653,848) $
9,994,296
9,922,277
42,476,982
(75,653,848) $
(192,391,612)
9,922,277
42,476,982
(124,481,914)
(192,391,612)
9,922,277
50,985,946
(124,481,913)
(192,296,967)
0
(279,147,873)
(330,133,818)
(205,557,260)
9,994,296
(75,653,848) $
9,994,296
42,476,982
(75,653,848) $
9,994,296
9,922,277
42,476,985
(75,653,847) $
9,994,296
(13,260,293)
(23,182,567)
9,994,296
(78,847,822)
(55,665,255)
(65,659,551)
6,185,073,611
6,668,729,302
4,445,819,534
6,185,073,611
(627,799,193)
(297,665,375)
(92,108,115)
10.9%
3.4%
111.3%
Funding value for each employer is determined proportionately based on Market Value.
19
2019
$ 6,051,595,012
9,994,296
0
Understanding Asset Smoothing and
Amortization methods

Year 1 - phase in 1/7 of asset loss



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


20
Step 1 – phase in 1/7 of asset loss
Step 2 – amortize UAL over 23 years
Step 1 – phase in final 1/7 of asset loss
Step 2 – amortize UAL over remaining years
Understanding Asset Smoothing and
Amortization methods
Example of How 30% Loss on Assets Impacts Contribution
High
1. Assets (in millions)
2. Payroll (in millions)
3. Ratio
4. 30% Asset Loss ( Item 1 x 30%)
5. Asset Loss as % of Payroll (Item 4 / Item 2)
YEAR 1
6. Smooth assset loss over 7 years (Item 5 / 7)
7. Amortize UAL over 23 years (Item 6/ 16.4)
YEAR 2
8. Smooth asset loss over 7 years (Item 5 / 7)
9. Amortize UAL over 22 years (Item 8/ 15.9)
10. Add to Year 1 results (Item 7 plus Item 9)
21
Low
Ratio
Total
5,557.0
1,370.0
4.1
Ratio
415.5
63.1
6.6
1,667.1
121.7%
124.7
197.5%
5.3
75.0%
17.4%
1.1%
28.2%
1.7%
10.7%
0.7%
17.4%
1.1%
2.2%
28.2%
1.8%
3.5%
10.7%
0.7%
1.4%
17.5
7.0
2.5
So Why Have Contribution Rates Been
Increasing?
PSPRS Contribution Rates
35.00
30.00
25.00
% of Pay
20.00
15.00
10.00
5.00
2004
2005
2006
2007
2008
2009
2010
2011
Year
Employer Normal Cost & Other
22
Asset Loss
Payroll decline
Assumptions & Methods
2012
2013
So Why Has the Contribution Rate Been
Increasing?





23
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
So Why Has the Contribution Rate Been
Increasing?
Volatility
Measure
+/- 1.00%
+/- 2.00%
+/- 3.00%
+/- 4.00%
+/- 5.00%
+/- 6.00%
+/- 7.00%
+/- 8.00%
+/- 9.00%
+/- 10.00%
24
Low
Return
6.85%
5.85%
4.85%
3.85%
2.85%
1.85%
0.85%
-0.15%
-1.15%
-2.15%
High
Return
8.85%
9.85%
10.85%
11.85%
12.85%
13.85%
14.85%
15.85%
16.85%
17.85%
Average
Before PBI
7.85%
7.85%
7.85%
7.85%
7.85%
7.85%
7.85%
7.85%
7.85%
7.85%
PBI
0.00%
0.43%
0.93%
1.43%
1.93%
2.43%
2.93%
3.43%
3.93%
4.43%
Average
After PBI
7.85%
7.64%
7.39%
7.14%
6.89%
6.64%
6.39%
6.14%
5.89%
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 55
Tier 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 Reversal
Impact on Employer Contributions
Hypothetical Results as of June 30, 2013 - PSPRS
Assumed COLA for future retirees
Assumed COLA for current retirees
Valuation
Results
0.00%
0.00%
Fields
Lawsuit
Reversed
0.00%
2.00%
Fields and Hall
Lawsuits
Reversed
2.00%
2.00%
Actuarial Accrued Liability (millions)
- Future Retirees
- Current Retirees
- Total
$ 5,402
5,142
$10,544
$ 5,402
6,309
$11,711
$ 6,274
6,364
$12,638
Assets (millions)
$ 6,185
$ 6,185
$ 6,185
Unfunded Liability
$ 4,359
$ 5,526
$ 6,453
58.7%
52.8%
48.9%
12.55%
18.48%
31.03%
12.55%
23.62%
36.17%
14.96%
27.53%
42.49%
Funded Status
Contribution Rate
- Employer Normal Cost
- 23 year amort UAL payment
- Total
27
Note that contribution requirements for FY2016 are expected to increase due to
continued phase-in of assets losses from prior years.
SB1609 Reversal
Impact on Employer Contributions
Example of Impact of Fields Case Reversal
1. Retiree Liability (in millions)
2. Total Liability (in millions)
3. Ratio
4. Contribution rate before SB1609 reversal
5. Contribution rate after SB1609 reversal
6. Increase in Contribution rate
7. Optional phase-in plan
- Year 1
- Year 2
- Year 3
28
Total
5,142.0
10,544.0
49%
High
Ratio
3.6
4.9
73%
Low
31.0%
36.2%
5.1%
41.0%
49.2%
8.2%
17.6%
19.2%
1.6%
1.7%
3.4%
5.1%
2.7%
5.5%
8.2%
0.5%
1.1%
1.6%
Ratio
12.1
54.3
22%
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
29
5 years by actuary
Things employers CAN control

Managing funding levels


Managing workforce




30
Employers can contribute more than the minimum
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
PSPRS Investment Strategy
Towards a more resilient portfolio
Portfolio is managed according to a set
of investment beliefs
1.
2.
3.
4.
5.
6.
7.
Mandate to achieve assumed earnings rate of at least 7.85% over long-periods of
time
Markets are difficult to time so diversification offers the best chance to achieve
the assumed earnings rate
Investment universe should be as wide as possible so as to increase likelihood of
accomplishing diversification
Risk is defined as the potential for a loss of capital. It can be approximated using
statistical conventions but will never be exact
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 systems
Making sound decisions requires not only robust quantitative models but sound
human judgment. People make models better and models make people better
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?
League
Contribution of
Luck
Contribution of
Skill
Season
Ending
NBA
10%
90%
2013
What does the dispersion of
success look like? How would it
be different if the outcome
were completely dependent on
luck?
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 Management
There are numerous asset classes but they usually fit in one of four quadrants
Growth
Inflation
Rising
Equities
Commodities
Corporate Credit
EM Credit
Private Equity
IL Bonds
Commodities
EM Credit
Liquid Loans
Falling
Nominal Bonds
IL Bonds
Direct Lending
Equities
Nominal 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
100
90
Cash, 5
Real Estate, 3
Cash, 5
Absolute Return, 4
Real Estate, 11
80
Fixed Income, 22
Risk Parity, 3
Real Assets, 6
70
GTAA, 9
60
Credit Opportunities, 9
50
Fixed Income, 9
40
Total Equity, 70
Private Equity, 14
30
20
Total Equity, 30
10
0
6/30/2006
5/31/2014
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
26
19
16
14
14
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
Ratio of PSPRS Risk to 60/35/5
Risk
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.
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
POLICE PENSION STUDY
GFOAz
Conference
August 7, 2014
OUR KEY STATISTICS – PD ONLY
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
46
“NO ONE IS AVERAGE”
The Town’s Unfunded Liability is the Most Significant
Factor in Our Contribution Rate
PV
PSPRS
Average
Normal Cost Requirement
12.27%
12.89%
Amortization of Unfunded Liabilities
50.17%
19.65%
Contribution Rate
62.44%
32.54%
47
STUDY RESULTS: UNFUNDED LIABILIT Y
Actual Experience Has Not Matched
Projections in the Following Areas:
1.
2.
3.

Investment Earnings (Can’t Control)
Court Rulings (Can’t Control)
Retirees Outnumber Actives (CAN INFLUENCE)
Benefits Have Been Earned
48
PV VS. PSPRS IN FY 12-13
ACTIVES VS. RETIREES
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Retirees
Outnumber
Actives
32%
59%
Actives
Outnumber
Retirees
68%
41%
PV
PSPRS
49
STUDY RESULTS- WHY OUR RETIREES
OUTNUMBER EMPLOYEES
1. Relatively Constant Number of Active
Positions
2. Only Hire Laterals
3. Large Number of Disability Retirements
with Less Than 20 Years of Service
4. DROP Program
50
UNFUNDED LIABILIT Y
GROWS TO A PEAK OF $23M THEN DECLINES
$25.0
100.0%
$20.0
80.0%
Unfunded Liability
70.0%
$15.0
60.0%
50.0%
$10.0
40.0%
30.0%
$5.0
20.0%
10.0%
Plan Year
2038
2037
2036
2035
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
0.0%
2013
$-
51
Funded Status
Unfunded Liability ($million)
90.0%
E M PLOY E R C ON T RI BUTI ON ST E ADI LY I N C REASES A N D GROWS
TO 1 5 % OF OP E RAT ING RE VE NUES
$5.50
$4.50
$3.50
$2.50
$1.50
Plan Year
52
2038
2037
2036
2035
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
$0.50
2013
Contribution Amount ($million)
$6.50
Plan Year
53
2038
2037
2036
2035
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
Contribution Rate
CONTRIBUTION RATE STEADILY
INCREASES TO 80%
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
TOTAL CONTRIBUTION: NORMAL COST +
UNFUNDED LIABILIT Y
$6,000,000
Contribution Amount
$5,000,000
$53.5M
Total Cost
$4,000,000
$3,000,000
$2,000,000
Unfunded Liability
$1,000,000
Normal Cost
$0
Plan Year
54
What are We Doing About
It?
55
1. STARTED MAKING DROP MEMBER
CONTRIBUTIONS EFFECTIVE JULY 1 ST
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
56
2. PREPAID $2M CONTRIBUTIONS ON
JULY 1 ST
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
57
3. DEVELOPING A PENSION FUNDING
POLICY
What is a Pension Funding Policy?
 A Comprehensive Document with the
Objective of Ensuring Financial
Resources Exist to Fund Pension
Obligations
58
3. DEVELOPING A PENSION FUNDING
POLICY ( C ON C LUDED)
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
59
4. CONSIDERING ADDITIONAL PAYMENTS
TO DIRECTLY BUY-DOWN THE LIABILIT Y
 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
60
5. IMPLEMENTING BEST PRACTICES




Safety Programs
Wellness Programs
Role of Local PSPRS Board
Role of Council
61
6. EVALUATE LEGISLATIVE OPTIONS
 League Task Force
 Ability to Issue Pension Obligation Bonds
Bond Issue Example
Status Quo (7.85%)
$53.5M
Bonds (3.7%)
$31.3M
Estimated Savings
$22.2M
62
YOUR HOMEWORK
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
63
Questions
and
Comments
64
The following section is a placeholder re.
GASB and will be discussed if time permits
65
New GASB Standards
Copyright © 2014 GRS – All rights reserved.
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
28
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:
Funding Purposes
68
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)
69
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
70
on the long-term expected investment return to
the extent projected plan fiduciary net position
(assets) is sufficient to pay future benefits; and
Determining the Discount Rate – (GASB)
Illustrative Projected Benefits and Projected Plan Net Position
$2,500,000
Projected Benefit Payments
Projected Plan Net Position
$2,000,000
$1,500,000
This portion of projected
benefits is discounted using a
AA tax-exempt municipal
bond index rate
$1,000,000
This portion of projected benefits is
discounted using the long-term
expected rate of return.
$500,000
$0
71
5
10
15
20
25
30
35
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
72

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