HomeMy WebLinkAboutLetter 2 9-10-09- buckconsultants ��
an Acs company A c S,
May 23, 2008
Ms. Sandra Elenberg
Pension Administrator
City of Miami GESE Retirement Trust
2901 Bridgeport Avenue
Coconut Grove, Florida 33133
Updatinjz the Cost Impact of Changing Optional Allowances With Spouse
Beneficiary Using the 2007 Valuation
Dear Sandra:
You called and asked us to update the $103,000 cost of the improvement in the joint and survivor
optional forms of payment as described in Jim Donofrio's September 26, 2007 letter to you since
this improvement is currently being considered for adoption by the City. The original cost figure
was based on the 2006 valuation (the most recent valuation at the time) and now the 2007 valuation
has been completed, and the results of that valuation reflect some pav increases which have had a
bearing on the costs. There were no changes in assumptions or cost methods between the 2006 and
2007 valuation, only changes in census information and assets.
This change would increase the total contribution for the 2008/2009 fiscal year as a percentage of
pay from 28.26% to 28.40%.
You also asked us to explain why we did not assume that anyone took Option 3. Jim Donofrio's
work found that about 30% of the population chose either Option 2 or Option 3 (not 30% taking
each) naming their spouse as their beneficiary. The greater share of the cost increase would occur
from those electing Option 2 which is where the largest increase in benefit is occurring. It occurred
200 Galleria Parkway NW, Suite 1900 • Atlanta, GA 30339-5945
770.955.2488 - 770.933.8336 (fax)
Based on
Based on
Increase Under the Miami
2006
2007
GESE Retirement Trust
Valuation
Valuation
Accrued Liability
$691,000
$760,000
Normal Cost
41,000
44,000
30 -Year Amortization of
62,000
68,000
Increase in Unfunded Liability
Total Cost
$103,000
$112,000
This change would increase the total contribution for the 2008/2009 fiscal year as a percentage of
pay from 28.26% to 28.40%.
You also asked us to explain why we did not assume that anyone took Option 3. Jim Donofrio's
work found that about 30% of the population chose either Option 2 or Option 3 (not 30% taking
each) naming their spouse as their beneficiary. The greater share of the cost increase would occur
from those electing Option 2 which is where the largest increase in benefit is occurring. It occurred
200 Galleria Parkway NW, Suite 1900 • Atlanta, GA 30339-5945
770.955.2488 - 770.933.8336 (fax)
Ms. Sandra Elenberg
May 22, 2008
Page 2
to him that the percentage of participants taking Option 2 in the future could be larger while the
percentage electing Option 3 could be smaller than past experience would indicate, since Option 2
would be made much more attractive relative to Option 3 by this change. So, to hedge against a
movement of more persons into Option 2, he assumed that all persons which have elected Option 2
or 3 in the past would elect Option 2 in the future. While this is conservative, it is probably more
reasonable than assuming the percentages electing Option 2 and 3 would remain unchanged which
would likely understate the costs.
There are two issues which it makes good sense to bring to your attention. When a plan amendment
is made, a statement of impact is sent to the State Actuary. Under the Florida Code the impact study
is submitted to the State Actuary before a change is adopted. So, a question that could be raised is
whether the originally submitted impact study will suffice or do the new numbers require a new
impact filing before the amendment can be approved. Since the Code is silent on such an issue, it
seems that reasonable judgment should be used in deciding this issue. It would seem reasonable to
me that a new study need not be filed, but I am willing to do one if you like. As with any study that
is filed, any subsequent valuation will reflect a different cost. I would regard this new cost analysis
to be simply a confirmation that the earlier cost figures were reasonable.
There is a second issue. There is a provision in the Florida minimum funding standards that says
that the actuarial cost method will be any approved method under ERISA and acceptable under IRS
regulations. However, effective 1/1/2008 the IRS and ERISA under the Pension Protection Act
have modified the acceptable cost methods to only permit one method. I doubt seriously that the
State will let this code provision go unchanged. If the new method were used without a change in
assumptions, then it is likely that retirement systems could decrease plan costs which would likely
be against public policy. I only mention this in case there was an issue of whether any cost analysis
should be on the new funding method. I expect that the method being used currently is more
conservative than the new method that would apply if the Florida Code were not changed but
keeping current assumptions. I expect that the code will either be changed or something published
to say the State interprets the statute to continue use of current methods. We could not provide the
costs on the new basis without performing the entire plan valuation on this new basis. So, what I
am saying is that the costs I am showing are based on the current standard, not the new standard. I
think it is premature to make a filing on the new standard until we determine if the state will back
off on that issue_
Ms. Sandra Elenberg
May 22, 2008
Page 3
I hope this information meets your needs. Let me know if you need anything else.
Sincerely,
Kerry N. Schmidt
Principal, Consulting Actuary
KNS: ej