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HomeMy WebLinkAboutBid ResponseGII.S ConsuGabriel Roeltants&derActuaries Smith & Company CITY OF MIAMI, FLORIDA RFP NO.484326 -- PROPOSAL FOR ACTUARIAL AND ACTUARIAL RELATED CONSULTING SERVICES PROPOSAL CLOSING DATE: AUGUST 3, 2015, 3:00 P.M. Gabriel, Roeder, Smith & Company ♦ Federal Employer Identification Number: 38-1691268 Home Office Location: One Towne Square, Suite 800 ♦ Southfield, Michigan 48076 Southeast Region Office: One East Broward. Blvd., Suite 505 ♦ Fort Lauderdale, FL 33301 Firm's Liaison for the Contract: Theora P. Braccialarghe, FSA, MAAA Phone Number: (954) 527-1616 ♦ E-mail: Theora.Braccialarghe@gabrielroeder.com GRS Gabriel Roeder Smith & Company Consultants & Actuaries One East Broward Blvd. 954.527,161E phone Suite S05 954.525.0083 fax Ft. Lauderdale, FL 33301.-1804 wwwgabriel.roeder.con August 3, 2015 TO WHOM IT MAY CONCERN: Thank you for inviting Gabriel, Roeder, Smith & Company (GRS) to respond to the City of Miami's request for proposal. We appreciate being considered for this important assignment and are very interested in providing the requested services. GRS offers the City an actuarial firm, uniquely specializing in public sector pension and other postemployment benefit (OPEB) retirement systems, with a nationally recognized reputation, an excellent research center focused on public employee retirement issues, anda clear understanding of the national, state, and local political and legislative environments and processes. Our proposed client service team is highly capable and experienced in the public sector arena, and is already familiar with the City's pension and OPEB programs. It is not every day that you are called upon to select an Actuary. You might even feel at a loss to know what. really matters. There are significant differences, even among leading national actuarial firms. We excel in the areas that matter the most to the City of Miami, as described in Tab 1 — Executive Summary. If retained as the City Actuary, GRS will perform all requested work in a timely and professional manner. We have assigned. James J. Rizzo as your Lead Actuary, and Peter N. Strong as your co -Lead Actuary. They are among the best in actuarial consulting, nationally and in Florida. We trust that the City will find our proposal attractive, and we look forwardto further discussions, and negotiating contract terms and conditions in a mutually agreeable contract including terms, conditions and clarifications relating to the scope and price proposal schedule and format. GRS would be honored to have the City of Miami as a client and to put our expertise and resources to work for you. We are excited about working with. the City of Miami to address its pension needs. Thank you for considering how we may be of service to you. Sincerely, Gabriel, Roeder, Smith & Company 9J4z4k1.4, Theora P. Braccialarghe, FSA, MAAA Southeast Regional Director Corporate Executive Vice President Certification Statement Please quote on this form, if applicable, net prices for the item(s) listed. Return signed original and retain a copy for your files. Prices should include all costs, including transportation to destination. The City reserves the right to accept or reject all or any part of this submission. Prices should be firm for a minimum of 180 days following the time set for closing of the submissions. In the event of errors in extension of totals, the unit prices shall govern in determining the quoted prices. We (I) certify that we have read your solicitation, completed the necessary documents, and propose to furnish and deliver, F.O.B. DESTINATION, the items or services specified herein. The undersigned hereby certifies that neither the contractual party nor any of its principal owners or personnel have been convicted of any of the violations, or debarred or suspended_as-set-in-section 18-107 or Ordinance No. 12271. All exceptions to this submission have been documented in the section below (refer to paragraph and section). EXCEPTIONS: We acknowledge that the RFP's General Terms & Conditions and the attached Sample PSA are examples of the standard agreement used in conjunction with the services related to this solicitation. Pursuant to the responses in Addendum 10, we trust that the City will find our proposal attractive, and we look forward to further discussion, and negotiating contract terms and conditions in a mutually agreeable contract including, terms, conditions, and clarifications relating to the scope and price proposal schedule and format. We (I) certify that any and all information contained in this submission is true; and we (I) further certify that this submission is made without prior understanding, agreement, or connection with any corporation, firm, or person submitting a submission for the same materials, supplies, equipment, or service, and is in all respects fair and without collusion or fraud. We (I) agree to abide by all terms and conditions of this solicitation and certify that I am authorized to sign this submission for the submitter. Please print the following and sign your name: SUPPLIER NAME: Gabriel, Roeder, Smith & Company ADDRESS: 1 East Broward Blvd., Suite 505, Ft. Lauderdale, FL 33301 PHONE: 954-527-1616 theora.braccialarghe@ EMAIL: gabrielroeder.com SIGNED BY:` FAX' 954-525-0083 BEEPER: N/A TITLE. Executive Vice President DATE. August 3, 2015 FAILURE TO COMPLETE, SIGN. AND RETURN THIS FORM SHALL DISQUALIFY THIS BID. Page 2 of 44 Certifications Legal Name of Firm: Gabriel, Roeder, Smith & Company Contact Name, Phone Number, Fax and Email Address: James Rizzo. 954-527-1616 (ph). 954-527-0083(fax). jim.rizzq@a gabrielroeder.com Entity Type: Partnership, Sole Proprietorship, Corporation, etc Corporation Year Established: 1938, Incorporated 1962. Office Location: City of Miami, Miami -Dade County, or Other One East Broward Blvd., Suite 505, Ft. Lauderdale, FL 33301-1804 and 6 other offices: Detroit, MI (headquarters), Chicago, IL, Dallas, TX, Denver, CO, Grand Rapids,MI, and Minneapolis, MN. Occupational License Number: Broward County Business Tax Receipt #327-12527; no occupational license required. Occupational License Issuing Agency: Broward County Occupational License Expiration Date: 09/30/2015 Will Subcontractor(s) be used? (Yes or No) No. Please list and acknowledge all addendum/addenda received. List the addendum/addenda number and date of receipt (Le. Addendum No. 1, 7/1/07). If no addendum/addenda was/were issued, please insert N/A. Addendum 1, 05/26/2015; Addendum 2 05/27/2015; Addendum 3, 06/02/2015; Addendum 4, 06/18/2015; Addendum 5, 06/30/2015; Addendum 6, 07/13/2015; Addendum 7, 07/15/2015; Addendum 8, 07/16/2015; Addendum 9, 07/21/2015; Addendum 10, 07/23/2015; Addendum 11, 07/27/2015, Addendum 12, 07/27/2015 If Proposer has a Local Office, as defined under Chapter 18/Articlle III, Section 18-73 of the City Code, has Proposer filled out, notarized, andincluded with its RFP response the "City of Miami Local Office Certification" form? YES OR NO? (The City of Miami Local Office Certification form is located in the Oracle Sourcing system ("iSupplier"), under the Header/Notes and Attachments Section of this solicitation). No, Has Proposer reviewed the attached Sample Professional Services Agreement (PSA)? Yes. Page 3 of 44 Does Proposer acknowledge that the attached Sample PSA is an example of the standard Agreement used in conjunction with the services related tot his solicitation, and shall not be amended? We acknowledge that the attached Sample PSA is an example of the standard Agreement used in conjunction with the services related to this solicitation. Pursuant to the responses in Addendum 10, we trust that the City will find our proposal attractive, and we look forward to further discussion, and negotiating contract terms and conditions in a mutually agreeable contract including terms, conditions, and clarifications relating to the scope and price proposal schedule and format. Page 4 of 44 Line: 1 Description: Please refer to Attachment B, Price Proposal Schedule, Attached on the Header Section of this solicitation. GRS Response: Please see the Revised Appendix A. Category: 91869-00 Unit of Measure: Dollar Unit Price: $See Appendix A Number of Units: 1 Total: $ See Appendix A Page 5 of 44 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services TABLE OF CONTENTS TAB 1— EXECUTIVE SUMMARY PAGES 1-2 TAB 2 — MINIMUM Q UALIFICATIONREQUIREMENTS TAB 3 — PROPOSER INFORMATION-- PROPOSERS' EXPERIENCE AND PAST PERFORMANCE TAB 4— PROPOSER. INFORMATION-- KEY PERSONNEL AND SUBCONTRACTORS PERFORMING SERVICES TAB 5 — PROPOSER INFORMATION-- PROPOSED APPROACH AND METHODOLOGY TO PROVIDING THE SERVICES TAB 6 — REVISED APPENDIX A -- PRICE PROPOSAL SCHEDULE APPENDICES PAGES 3 PAGES 4-13 PAGES 14-18 PAGES 19-24 PAGES 25-27 A. SAMPLE FIRM -WIDE PENSION CLIENT LIST B. SAMPLE FIRM -WIDE OPEB CLIENT LIST C. FLORIDA PENSION CLIENT LIST D. FLORIDA OPEB CLIENT LIST E. RECENT PRESENTATIONS REQUESTED El. NATIONAL ENROLLED ACTUARIES MEETING (ON DISCOUNT RATES) E2. CLIENT PRESENTATION OF SPECIAL STUDY WORK F. TEAM RESUMES G. RECENT SAMPLE PENSION ACTUARIAL STUDY REPORTS REQUESTED G1. TYPICAL PENSION REFORM SCENARIOS G2. UNUSUAL ACTUARIAL STUDY CONCERNING PROPOSED EXIT OF UNION MEMBERS G3. COMPLEX GAIN -SHARING COLA STUDY H. CONFERENCE OF CONSULTING ACTUARIES' White Paper on "Actuarial Funding .Policies and Practices for Public Pension Plans" I. SAMPLE OF GRS PUBLICATIONS GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services TAB 1 EXECUTIVE SUMMARY Gabriel, Roeder, Smith & Company (GRS) is pleased to propose actuarial and actuarial -related services to the City of Miami (COM) with respect to retirement -related benefits. This proposal submission includes and satisfies the requirements of the Request for Proposal (RFP) No. 0076-14- RWT-RCActuarial and Actuarial Related Consulting Services. COM's City Actuary should have a large national public sector practice As a major U.S. city with a high national profile, the City of Miami should be working with a nationally recognized firm. A firm with a large public sector practice gives clients access to national trends and approaches to plan management and design, and a depth of knowledge that can only be gainedby years of successful and broad experience in this area. GRS has the largest public retirement plan actuarial practice in the country. The City Actuary should have a national reputation in actuarial leadership COM would benefit from a firm with a national leadership role in shaping public sector actuarial practice. GRS Consultants serve on key committees of the national actuarial bodies: ASB, CCA and AAA and serve as nationally -recognized subject matter experts, authors and frequent speakers at national actuarial conferences. For example, GRS Consultants, including Mr. Rizzo, participated in drafting a new comprehensive White Paper issued by the CCA on public pension funding policies (refer. to .Appendix H). It is the definitive piece on funding policies for public sector pension plans. The City Actuary should have extensive Florida knowledge and experience COM management and elected officials need advisors with extensive Florida knowledge and experience. GRS and its predecessor in Florida have maintained an office in Fort Lauderdale since the 1960s, currently with nearly 250 Pension and OPEB clients in the state of Florida and a deep knowledge and experience with Chapters 175, 185, and 112, F.S. and related Rules. GRS also serves the Florida Auditor General by auditing the actuarial work of the Florida Retirement System (FRS). The City Actuary should have experience in Florida collective bargaining on pensions COM Management, its in-house legal Staff, and its outside labor/pension attorneys need to have confidence in the City Actuary. GRS Consultants have Florida experience with executive sessions and shade meetings, one-on-one meetings with elected officials, bargaining planning sessions, special magistrate hearings, etc. The City Actuary should have a broad knowledge of government finance and benefits COM would benefit from an actuarial advisor who is more than just an actuary. GRS Consultants serve as advisors, speakers, authors and committee members of numerous national professional and trade organizations, such as the national GFOA, GASB, IFEBP, P2F2, PRIMA and others that reflect the interests of the City of Miami. At the state level, GRS Consultants serve as advisors, speakers, authors and committee members of numerous Florida professional and trade organizations, such as FPPTA, FGOA, FPELRA, FPHRA and others that reflect the interests of the City of Miami. GRS has been at the forefront of GASB Statement Nos. 67 and 68, including Mr. Rizzo having been deeply GRS One East Broward Blvd, Suite 505, Ft, Lauderdale, FL 33301, Phone Number: (954) 5271616 1 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services involved in the GASB's pension project from the very beginning — influencing, commenting, testifying, writing, speaking, and now implementing GASB Statement No. 67 and 68. With GASB Statement No. 68 being implemented at the City for the year ending September 30, 2015, COM needs an actuarial advisor with extensive experience in that accounting standard. GRS is that firm. The City Actuary should exercise creative thinking COM needs an actuarial advisor who thinks outside the box when necessary. GRS has created actuarial models to measure the cost of complex gain -sharing COLA provisions more accurately, using stochastic Monte Carlo simulation techniques. Traditional techniques obscure the true cost of complex COLAs. There are implications for COM (gain -sharing COLA for police officers) from the new so- called Hollywood Letters from the Florida Division of retirement concerning COLA funding. Also, GRS has designed variable benefit formulas that adjust the multipliers (and other plan provisions) automatically, depending on the investment experience of the fund. Defined benefit pension plans can be designed with risk -sharing features (hybrid plans), instead of the plan sponsor and taxpayers bearing all the risks. COM has a few challenges that may need some creative solutions. GRS can help. The City Actuary should be able to see the big picture COM needs an actuarial advisor who can step back from the minutiae of actuarial formulas, and see the big picture. GRS is prepared to address issues such as (a) the balance between budget affordability/sustainability vs. benefit competitiveness/adequacy, (b) how the pension fund's risk profile should reflect the risk appetite of the party bearing the risk — the taxpayers, (c) the adoption of a formal funding policy, (d) exotic design and financing arrangements that are proposed now and then and (e) the effect of the City's pension burden and management on the its bond ratings. The City Actuary should advocate for reasonable, mainstream and defensible actuarial assumptions COM needs a strong advocate for reasonable actuarial assumptions and methods that lie within the mainstream of expert opinions. They should not be outliers. They should be defensible to all the relevant audiences, including auditors (internal and external), the press, employee and retiree organizations, State and Federal agencies, elected officials, constituents and others. The City Actuary should be able to communicate effectively GRS clients frequently comment on how our Consultants speak plain jargon -free language. We take pride in being able to explain complex themes in simple terms. GRS Consultants, including the COM Team Leaders, frequently speak at meetings of City and County Commissions, State legislative committees and agencies, pension boards, and trade conferences. COM's top management would be comfortable with GRS presenting before its City Commission. The City Actuary should be accessible COM is likely to require numerous meetings over time. The GRS office which would serve COM is in Fort Lauderdale, usually less than an hour's drive to MRC or City Hall. Summary We believe GRS is the perfect match for COM's needs. We would be honored to serve COM and look forward to working with you. <J,Itzotk. '71/15 GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (54) 5271616 2 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services TAB 2 MINIMUM QUALIFICATION REQUIREMENTS The Proposer must clearly demonstrate achievement of the minimum qualifications for the Proposer's proposal to be considered. A) The Proposer shall have at least five (5) years of experience providing actuarial and actuarial related consulting services to other United States public pension fund clients similar to services requested in this Solicitation. Gabriel, Roeder, Smith & Company (GRS) is a national actuarial and benefits consulting services leader for the public sector, with its history dating back to 1938. GRS was incorporated in 1962 from a merger of A. G. Gabriel & Company, a sole proprietorship that was established in 1938, and another younger sole proprietorship, Roeder & Company. In 1995, GRS merged with Kruse, O'Connor & Ling, a Florida -based consulting firm. Our client base is national in scope the firm's growth tends to be steady and constant. GRS is an actuarial and benefits consulting firm focused on providing services to public sector benefit plans, which include pension, health & welfare, OPEB, and plan technology services. These services encourage sound financing, sensible benefit design, efficient administration, and effective communication in employee benefit plans. GRS has an exceptional reputation for quality work and commitment to the public sector pension community, having served over 1,000 public sector clients with services similar to this solicitation. B) The Proposer's lead Actuary must have at least ten (10) years of experience with major public employee retirement systems, or designation as a Fellow in the American Academy of Actuaries. The lead Actuary must provide direct supervision over all services provided to the City, and be an employee of the selected Proposer, regularly engaged in the business of providing actuarial services. The GRS Service Team for COM. will be led jointly by James J. Rizzo and Peter N. Strong. James J. Rizzo (Senior Consultant) has over 35 years of public sector pension experience andis a Fellow of the Conference of Consulting Actuaries, serves as pension and OPEB actuary for retirement systems and plan sponsors (in Florida and nationally). Peter N. Strong (Senior Consultant) is a Fellow in the Society of Actuaries, a Fellow in the Conference of Consulting Actuaries and has also been a consulting actuary for 19 years. They continue to be regularly engagedin the business of providing actuarial services on pension and OPEB programs, and will have direct supervision of all pensions and OPEB services provided to the City. GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 3 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services TAB 3 -- PROPOSER INFORMATION — Proposer's Experience and Past Performance 1. Describe the Proposer's past performance and experience and state the number of years that the Proposer has been in existence, the current number of employees, and the primary markets served. HISTORY OF FIRM Gabriel, Roeder, Smith & Company (GRS) is a national actuarial and benefits consulting services leader for the public sector, with its history dating back to 1938. GRS was incorporated in 1962 from a merger of A. G. Gabriel & Company, a sole proprietorship that was established in 1938, and another younger sole proprietorship, Roeder & Company. In 1995, Kruse, O'Connor & Ling, a Florida -based consulting firm founded in 1965 with client relationships in Florida dating back the late 1950s, merged with GRS. Our client base is national in scope —the firm's growth tends to be steady and constant. OWNERSHIP Entities that have an ownership stake in GRS: • GRS Employees, as individuals, • GRS Employee Stock Ownership Plan, with pass -through voting rights to employees and • One Outside Director No single shareholder owns more than 10% of the firm. The owners of GR.S understand our business, because we are owned by ourselves. This is not always true of actuarial services. Some firms are owned by insurance -related entities, by accounting firms, or by companies wholly unrelated to the actuarial consulting business. We are employees and we are owners. Broad employee ownership (as opposed to ownership concentrated in a few employees or distant ownership) infuses a greater sense of mission among all of us serving our clients. DECRIPTION OF THE FIRM Gabriel, Roeder, Smith & Company (GRS) is a national actuarial and benefits consulting firm that focuses on services for the public sector. Our public sector work is not confined to a small specialty unit in a larger diverse organization. Public sector benefits is essentially all we do. That single- mindedness ensures that the resources needed for public sector services are not crowded out by other corporate interests. We are dedicated to governmental actuarial and benefits consulting. Our reputation for providing independent advice and quality consulting services has remained unmatched for more than 75 years. Our actuarial experience, technology solutions, and nationally GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 4 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services recognized research, help our clients develop fiscally sustainable programs and preserve financial security for millions of Americans. GRS has approximately 128 associates, all of whom work almost exclusively for public sector clients. We serve more than 1,000 public sector clients throughout the country. Since GRS has served clients in nearly every state, we have experience with virtually every benefit plan design. A Firm with a National Perspective States where GRS currently provides retained consulting services to statewide systems CLIENT SATISFACTION States where GRS has provided actuarial and benefits consulting services GRS is our nation's largest provider of actuarial and consulting services to the public sector retirement community. • For a sample of pension clients (nationally), please refer to Appendix A. • For a sample of OPEB clients (nationally), please refer to Appendix B. • For a list of Pension clients served by the Fort Lauderdale Office, please refer to Appendix C. • For a list of OPEB clients served by the Fort Lauderdale Office, please refer to Appendix D. Our long history and tenure with so many clients is a testimony and demonstration of our commitment to our clients and their needs. Decades of stability attest to our "past experience and demonstrated ability" to serve our clients and plan members in meaningful ways. GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 5 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services The far-ranging locations of our clients, and the long associations we have enjoyed with them, attest to the quality of our services. Our broad experience in diverse geographical and political environments is a substantial asset to our clients because it means we have successfully negotiated a wide variety of technically challenging situations at all levels of government in locations across the country. Whatever the client relationship brings to the table, chances are we have dealt with a similar situation before and will be comfortable navigating the intricacies client situations often present —and we are more than capable of making the process simpler and smoother for everyone involved. LOCATION OF OFFICES Corporate Headquarters One Towne Square, Suite 800 Southfield, Michigan 48076 Dallas (Irving) 5605 N. MacArthur Blvd,, Suite 870 Irving, Texas 75038 Detroit (Southfield) One Towne Square, Suite 800 Southfield, Michigan 48076 Ft. Lauderdale One East Broward Blvd., Suite 505 Ft, Lauderdale, Florida 33301 OUR PEOPLE Chicago 20 North Clark Street, Suite 2400 Chicago, Illinois 60602 Denver 7900 East Union Avenue, Suite 650 Denver, Colorado 80237 Grand Rapids (Rockford) 8 East Bridge Street, Suite A2 Rockford, Michigan 49341 Minneapolis 100 South Fifth Street, Suite 1900 Minneapolis, Minnesota 55402 We have approximately 128 employees, including approximately 50 credential.ed actuaries. All of our employees, from Consultants to administrative staff, are involved in serving public sector agencies. Our employees can be categorized approximately as follows: Pension / OPEB Practice 85 Health & Welfare Practice 6 Technology Services '7 Defined. Benefit Plan Administration 5 IT Support 2 Corporate & Administrative Support 23 Total 128 GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 6 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services 2. Describe the Proposer's past performance and experience providing actuarial and actuarial related consulting services to three (3) public pension fund clients within the United States, similar to those described herein. The description should identify, for each project: (z) client, (ii) description of work, (iii) total dollar value of the contract, (iv) contract duration, (v) customer contact person and phone number for reference, (vi) statement of whether Proposer is/was the prime contractor or subcontractor or sub -consultant, and (vii) the results of the project. Where possible, list and describe those projects performed for government clients or similar size. We are listing four such public clients here. ,,,.,,r,f: (ii) 4 r?;lLoci � ri t §C iz3 t �S 1. t 1IS $k 5 k A i ^, - ,+a„e k a� al s t L✓`{ 7 rC r?, Fry,l : Sys - .} r rf? t�,'f s i` y ry - ', r- k .._, ,. ,N On behalf of the Louisiana Legislative Auditor (LLA), essentially similar functions as the State Auditor General and OPPAGA in Florida: we provide replicated actuarial valuations for three large state retirement systems to determine if the work performed by the pension system's actuary is materially accurate; we serve as advisor to the LLA and his actuarial staff on legislative matters, actuarial matters, strategies, auditing and financial reporting matters; we participated in meeting involving senior executives of the state retirement systems We prepared comprehensive reports concerning the reasonableness of the retirement systems' investment return assumptions; we prepared comprehensive reports on measuring the true cost of a complex gain -sharing COLA provisions for two large state retirement systems; negotiated with retirement system's actuaries on the reasonableness of certain assumptions. We also reviewed and reported in detail on the OPEB actuarial valuation reports prepared by the administration's actuary and prepared by LSD's actuary. A litigation issue arose from the Legislature's adoption of a cash balance feature that went all the way to the State Supreme Court. GRS assisted in advising the LLA, his in-house actuary and attorneys on technical matters. (iii) Total dollar value to date: averaged. $201,000 per year, over a four-year period (iv) Initially engaged in YE 2012 (v) Mr. Paul Richmond, Manager of Actuarial Services: (225) 339-3897 (vi) GRS was the prime contractor, including Team Members assigned to COM (vii) Client satisfaction GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 7 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services i 4 5 (� w,,.. = rpx {� t t i r is p :7 t 7 t x sfi ti; C ( G7f t :5, `' h n a 1 P e e s S 3 '� { 4 ' t i (�.. 1;i Yi x - t' 7 - 1 "3�S £ �� i . �x7t. , �. `� �, ..,,.. u ' f t ...,.. ,.a.. L �..,.,c } i a sk w.. ,. S � �... „. st 1,. (ii) The State of Tennessee manages four health plans which offer coverage to employees and retirees of the State and hundreds of local school districts and municipalities. We performed the actuarial valuations :for. the Other Post -Employment Benefits (OPEB) programs pursuant to GASB Statement No. 45, for the State and for each of the participating districts and cities. An interesting fact about this engagement is our primary contact serves as the Vice Chair of the Governmental Accounting Standards Board (GASB). This speaks well of GRS's quality and reputation, that GASB's Vice Chair would hire GRS to perform the OPEB valuations for her State and for so many local governments. During the most recent Legislative Session, a bill was passed to pre -fund the State's OPEB obligation. GRS is currently assisting management in developing a funding policy and structural/governance matters. (iii) Total dollar value to date: $130,000 for the first year of a multi -year engagement (iv) Initially engaged in 2013 for the 6/30/14 CAFR Disclosures (v) Ms. Jan I. Sylvis, Chief of Accounts — essentially, the State Controller: (615) 741-2382 (v) GRS was the prime contractor, including Team Members assigned to COM (vii) Client satisfaction 11) tb1� +. I '- - i' t l ..t r )' f k 1�: t�3 J Yr •','�� {t F �y f. y�♦ 1y"�yi . ty ♦ l {� 1(�7. ]� t' l { t VY ti' 9�tS, � �+�exnas An�11iy Ell®� Q l.Fl.l..�U-a�,lt t ��k § :fC (�}�� ii �4.��*.(Sx 4..r.lK.o:: (ii) GRS provides annual actuarial funding valuation in accordance with state statute, annual accounting valuation in accordance with GASB Statements Nos. 25, 27, 43, 45, 67, and 68, actuarial cost impact statements for changes in benefit and funding policies as requested by the FABF board, and experience studies and recommendations on actuarial assumptions performed every four years (iz�) Total dollar value to date: Historically, the fees range from $100,000 to $200,000 per year, depending on the number and type of special studies and cost impact statements are performed. (iv) 15 years (v) Mr. Kenneth E. Kaczmarz, Executive Director; (312) 726-5823 (vi) GRS was the prime contractor, including Team Members assigned to COM (vii) Client satisfaction GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 8 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services l: h .., ` r y t pq � !c x 1P;_:215 5 i{ 5 t .:.} ti 1 3 ` Q�b Y. ��� t}' 1;1 T4F dii 'ti if.ii 5{§}i, �ii fY ,z. ,. .,f.+i i., ..a..•,k w,, d4 .,.t,_ °,.f . -) i tr.3: .1 at, t _51 tf 1 ! .3 e� z (i) This was an initial project with follow-on work. GRS reviewed the City's retirement system, the assumptions and methods used by the board's actuary, and the benefit provisions. We developed a comprehensive list of options which could reduce the required contributions for the City, pricing of most options (City contribution requirements/savings) in the first year and over the next 30 years, and discussion of pros/cons of each option. () Our contract was for hourly charges. Our invoice for the initial work completed, which included 4 reports, was $64,854. (iv) Work was completed during 10/1/2014 to 12/31/2014 with follow-on work expected in 2015 (v) Ms. Ines F. Beecher, Office of Management and Budget Director; (303) 883-5931 (vi) GRS was the prime contractor, including Team Members assigned to COM (vii) Client satisfaction 3. Describe any other experiences related to the actuarial work or services described in the Scope of Services, and any other information which may be specific to the required services to be provided JEA (formerly Jacksonville Electric Authority) • GRS is serving as actuarial and advisory support to JEA's negotiations with the City of Jacksonville on JEA's participation in the City's General Employee Pension Plan (GEPP); included (a) replication of the GEPP actuary's regular valuation and proposal for spin-off for accuracy, reasonableness and for the implications to JEA for funding and financial reporting, (b) measurement of the costs and liabilities of various proposals for JEA's resulting pension benefits, (c) JEA strategic planning and (d) meeting between JEA and City Staff. This engagement is similar to the role we expect with the COM, in the sense of evaluating the actuarial reports prepared by the pension boards and their actuaries. • JEA has a division called St. Johns River Power Plant (SJRPP) with its own defined benefit pension plan, JEA and the plan's operating committee replaced the long-time actuary with a second firm approximately the time when it commenced pension reform and were advised to change the future benefits to a cash balance feature. GRS was engaged to replace the second firm a year later, and guided the implementation of the cash balance feature already set in motion. GRS worked closely with JEA and its legal counsel in collective bargaining process for the SJRPP pension benefits transition. GR.S has since served JEA and the plan's operating committee for four years as the plan's actuary. GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 9 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services • GRS has provided the actuarial and consulting work for JEA's pre -funded OPEB plan since 2009. • GRS is currently working with JEA on implementing the new financial reporting requirements of GASB Statement Nos. 67 and 68. City of Coral Gables • The City of Coral Gables sponsors a pension program covering police officers, firefighters and general employees managed by a single pension board of trustees. The City determined that the Internal Revenue Code (IRC) Section 415(b) limits were not being calculated or disclosed properly by the pension board's actuary whenever individual benefit calculations were certified and disclosures were prepared, thereby creating a potential liability to the City. • That actuary was terminated and before a new permanent actuary was engaged, a temporary project of reviewing prior IR.0 Section 415(b) commenced with another actuary engaged for that purpose. The City determined that the second actuary was not calculating the limits correctly either. • GRS was engaged on a temporary basis to review all the calculations, and did so to the satisfaction of the City. • The combined police, fire and general employee pension board conducted a public RFP/search for a new permanent actuary. GRS was awarded that position and has served in that capacity to the satisfaction of the pension board and the City for two years. City of Hialeah • The final report described in the reference question above provided the current and projected costs associated with 17 different scenarios and 2 combination scenarios (showing the impact of combining several proposed options together). The City indicated its objective was to reduce the City's required contribution to the retirement system to a specific level, and it was shown that one of the combination scenarios would achieve that objective. As of the writing of this, the City is still in collective bargaining process. • Since the work was completed for the City of Hialeah Employees' Retirement System (in December 2014), the Florida Division of Retirement has challenged the board actuary's payroll growth assumption (considering the plan is closed to one of the two employee groups covered). We have provided advice to the City concerning appropriate ways in which th.e City and board might respond. City of Miami Beach • As the Board actuary, GRS prepares the annual Actuarial Valuation Reports, IRC Sec. 415 calculations, Actuarial. Impact Statements, Supplemental Actuarial Valuation Reports, and Experience Study Reports for the City of Miami Beach pension plans. • Our annual Actuarial Valuation Reports for these plans include 20-year projections of costs to assist the Boards in collaborating with the City for long-range planning. • Recently, we prepared studies supporting a lower investment return assumption for the pension plans. The Boards of Trustees accepted the change and by doing so (a) moved the return GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 10 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services assumption more toward the mainstream of forecasters and (b) lowered the probability of the plans generating future actuarial losses which push the current costs out to future taxpayers. • Throughout our long tenure as the Board actuary for the General Employees' plan, we have provided actuarial analysis for the City with the Board's authorization. These studies projected the financial impact of potential plan changes to assist in the collective bargaining process from a neutral position and allow for informed decisions to be made by all. Louisiana Legislative Auditor (LLA) • Several of the state and state-wide pension plans in Louisiana have statutory provisions, adopted by the State Legislature, that provide cost of living adjustments (COLAs) to certain eligible retirees depending on the investment performance of the respective pension funds. This is sometimes called gain -sharing. The rules are very complex, compared to most other plan's gain -sharing provisions, including timing lags, multiple thresholds, caps and contingencies; even the list of eligible retirees has certain conditions. • Rather than a simplistic and arguably non -compliant method to estimate the costs and liabilities employed by the systems' actuaries, GRS prepared a stochastic actuarial model using Monte Carlo simulations to obtain a much better measure of the COLA provisions' costs and liabilities. This approach was enlightening to the LLA's Office and substantively helped in assessing the reasonableness of the system's rough measurements. • We specifically mention this experience in light of the City of Miami's situation with its complex gain -sharing COLA provisions. GR.S is prepared to examine the COM's complex COLA provisions from a perspective of deep experience. • The LLA's Office wanted an independent and professional assessment of the reasonableness of the retirement systems' investment return assumptions. GRS maintains a library of capitalmarket assumptions of eight major national investment consulting/forecasting firms. This consensus of mainstream investment forecasters demonstrated a reasonable range of returns much lower than the assumption which the retirement systems' board adopted and which their actuary used. This information was enlightening to the LLA's Office and substantively helped in assessing the reasonableness of the system's return assumptions. Chicago Firemen's Annuity & Benefit Fund • GRS is the actuary for FABF and serves all board members and fund staff. Our primary objective is to provide analysis and consulting advice to Board members and staff so that they are able to make well informed decisions on a timely basis. GRS provides unbiased analysis and consulting advice to board members that may serve multiple stakeholders including plan members, management, labor, and taxpayers. • GRS understands the political sensitivity and the impact plan design and funding may have on multiple stakeholders. One example is the recent reform to the FABF which improved future plan funding and adjusted benefits for members hired after 2010 • Before the reform, the plan was projected to run out of assets by 2025; after the reform, the plan is projected to be 90% funded by 2040. GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 11 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services 4. Describe Proposer's experience in providing presentations and public testimony on actuarial reports/issues. Provide a sample presentation given within the past three years. Presentations GRS Consultants frequently are recruited to speak at major state and national conferences on various Pension and OPEB topics. During the 2012-2014 Mr. Rizzo has spoken approximately 40 times at conferences and webcasts for national, state and local GFOA, CCA, SCTR, Florida DOR, NCPERS, and various investment and accounting firms, etc. So far this year, Mr. Rizzo spoke (a) at three sessions of the Enrolled Actuaries Meeting in Washington, DC on Discount Rate of Return Assumptions, on GASB 67 and 68 Implementation, and on the new Actuarial Standard of Practice, ASOP No. 6 on OPEB Valuations, which he helped write, (b) for a web cast to senior executives of large state-wide retirement systems for the National Council of Teachers Retirement, (c) at the national Government Finance Officers Association (GFOA) Annual Conference in Philadelphia on the topic of GASB 68 Implementation and (d) at the Florida GFOA Annual Conference in Hollywood also on the topic of GASB 68 Implementation. For Florida clients, Mr. Rizzo has presented to various types of clients - Florida County Commissions, Florida School Boards, Florida City Councils and Commissions, Florida Pension Boards of Trustees on various matters relating to their Pension and OPEB programs. Mr. Strong also is also a frequent speaker at trade conferences and before governing bodies (City Councils and Pension Boards), as well as experienced in special magistrate hearings. Refer to Appendix E for a copy of two recent presentations: (a) to the annual Enrolled Actuaries Meeting in Washington, DC, as requested in the RFP and (2) to a City Council. Public Testimony Mr. Rizzo has given live testimony (a) to the Governmental Accounting Standards Board (several times), (b) to the Society of Actuaries' Blue Ribbon Panel in New York. City on public sector pension funding, (c) to State Legislative Committees in South Carolina and Florida, (d) inspecial magistrate hearings in Florida and (e) to the Actuarial Standards Board in Washington DC on Actuarial Standards of Practice relate to public sector pension plans. 5. Provide information concerning any prior or pending litigation, either civil or criminal, involving a governmental agency or which may affect the performance of the services to be rendered herein, in which the Proposer, any of its employees or subcontractors is or has been involved within the last three years On September 9, 2014 three very similar lawsuits were filed against Gabriel, Roeder, Smith & Company (GRS), all by the same law firm, but related to three different retirement systems. The GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 12 City of Miami, Florida. RFP No.484326 Proposal for Actuarial and. Actuarial Related Consulting Services plaintiffs in the lawsuits are plan participants. Neither our clients, nor the plan sponsors, nor any government agency are party to these suits. GRS denies all of the allegations made in the participants' complaints, as they are based upon a misunderstanding of our role in serving our clients. GRS intends to vigorously defend against these meritless claims and is confident that it will prevail. These lawsuits will not affect the performance of the services to be rendered herein. Otherwise, GRS has had no claims filed against it in the past three years. The experience, qualifications, and past performance of the firm as a whole should bode well for the assignment of maximum points, with a significant point -spread for GRS in this category. GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 13 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services TAB 4 — PROPOSER INFORMATION -- Key Personnel and Subcontractors Performing Services 6) Provide a list showing all key personnel (including lead Actuary), including their titles, to be assigned to this project. This list must clearly identify the Proposer's employees and shall include the functions to be performed by the key personnel. All key personnel includes all partners, managers, seniors and other professional staff that will perform work and/or services in this project. The following is the GRS Client Service Team proposed for managing the services outlined in the proposal. #1i h ul of �t � �r r��C}�lh 1 F� {I"' i _ t r P unary 1 ea e i ers a d R4 1 3 )es for fj t' c f Y a n� }a u nt }� } yr1) P t" _Z'C is 'l 4fis- ]S( 71t-t.e I l- { 1 '._ td.. rf E -Ah ?4 3f -'.- T IY'9 � rl li t .,:'�ad, ,�#x�S`r'.xts-„wr � ki�'�i.�Gr ��.,1 �"a�..i���rtcNt....�i}i.��i �€ fi'Y, t _', Lead Pension (and OPEB) Actuary James J. Rizzo, ASA, EA, FCA, MAAA Senior Consultant and Actuary Co -Lead Pension Actuary: Pete Strong, FSA, EA, FCA, MAAA Senior Consultant and Actuary Peer Review and Resource Actuary: Alex Riviera, FSA, EA, FCA, MAAA Senior Consultant and Actuary Managing Actuary Piotr Krekora, PhD, ASA, FCA, MAAA Consultant and. Actuary i ip ',` {}3 i "i� f d14 frL 's'� a1-��,r� f�L.k� r:� Jix ti (.Sry; �d.){ 14 -_ , 'ai"}Fya �lY t• F Yt S'l. ,'i '}'•_. a� aPl �F• i #Act .1a S :ort;4 eaifl a mbe Ir {� ..:F h-.i'�><:..t Y1 N 1� } 1` .:', {1,1} i t'1� 'er r" sy r \ 7"€. h� K!7 1 ,• y :�f.'f 4 i t ds L tsd t s' .y`-�eg..ytx �. ;�vae{ta�r'r`. r��"i t> ?i��5\t ' t!` r. 'ri f� i,�i Senior Actuarial Analyst Travis Robinson, ASA, MAAA Senior Actuarial Analyst Dina Spektor, ASA Actuarial Analyst Jennifer Cagasan Actuarial Analyst Thaddeus Wasowicz James J. Rizzo, Senior Consultant and Actuary will serve as the Lead Actuary for Pensions (and for OPEBs as needed), together with Peter N. Strong as Co Lead Actuary for Pensions. As such, his functions include: • Primary GRS Consultant for City of Miami executives on all policy matters. • Primary GRS representative for Staff and City Commission meetings. • Primary supervisor of all services under this engagement. • Besides the front-line consulting role, Mr. Rizzo willalso be involved with Mr. Krekora in setting the direction of all Pension and OPEB projects so that all work starts off on the right foot. GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 14 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services Peter N. Strong (Pete), Senior Consultant and Actuary will serve as the Co -Lead Actuary for Pensions. As such his functions include: • The supplemental, back-up and co -lead position for each of the roles Mr. Rizzo fills above with respect to Pension matters. • He will join Mr. Rizzo in certain meetings at the City; and he may substitute for Mr. event of any conflicts in scheduling that cannot be resolved. Alex Rivera, Senior Consultant and Actuary will serve as Peer Review and Resource Actuary. functions include: as described Rizzo in the As such his • Peer Review role for all significant deliverables for both Pension and OPEB projects. GRS maintains a Doer — Checker— Reviewer - Peer Reviewer roles for all significant deliverable to clients. This ensures high quality control, compliance with accounting, actuarial and GRS internal standards, and ensures the end -product :is clearly written and presented and is useful to the intended audience. • A Resource Actuary is useful for a second or third set of eyes or opinions concerning certain challenges that arise. Tapping into Mr. Rivera's experience with the State of California, City of Chicago and with the State of Illinois would be useful for actuarial, policy or political issues that arise in the course of governmentalwork for COM. Piotr (Peter) Krekora, Consultant and Actuary will serve as the Managing Actuary for Pension and OPEB Projects and will serve as the CoLead Actuary for OPEB Projects, as needed. His functions include: • Sets the direction (with Mr. Rizzo) of all Pension and OPEB projects so that all work starts off on the right foot. • Managing his team of actuarial analysts through the Doer and Checker phases of all projects. • He serves as the Reviewer for all Pension and OPEB deliverables, before they go to Peer Review. • Essentially, Dr. Krekora is responsible for the heavy lifting. Actuarial Analysts will serve as the primary Doers and Checkers of all actuarial work. • We are assigning two credentialed Senior Actuarial Analysts (Travis Robinson and Dina Spektor) to the Checker roles. • We are assigning two Actuarial Analysts (Jennifer Cagasan and Thaddeus Wasocwicz) to the Doer roles, both of whom are successfully working toward their actuarial credentials. GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 15 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services 7) Describe the experience, qualifications and other vital information, including relevant experience on previous similar projects, of all key personnel, including lead actuary, and subcontractors or subconsultants who will be assigned to this project. Include resumes with job descriptions and other detailed qualification information. Provide proof of actuary title or certificate for key individual(s) primarily responsible for this actuarial study. Describe lead Actuary's related experience over the past ten (10) years providing actuarial services for major public employee retirement systems, including experience supervising actuarial services as the lead Actuary. Provide documentation that the lead Actuary is designated as a Fellow in the American Academy of Actuaries. James J. Rizzo, Senior Consultant and Actuary will serve as the Lead Actuary, together with Peter N. Strong as Co -Lead Actuary for Pensions. With over 35 years of public sector actuarial experience, Mr. Rizzo is one of the nation's leading pension experts, particularly in matters of funding, sustainability, GASB pension standards, actuarial assumptions, and other matters. He is also one of the nation's leading experts on OPEB programs as well. He serves onnumerous national actuarial professional committees of the American Academy of Actuaries (AAA) and the Conference of Consulting Actuaries (CCA), including the CCA Committee that drafted a major White Paper on public sector pension funding. Mr. Rizzo :is a national subject matter expert on the new GASB Pension accounting standards. He is on a first -name basis with the GASB board members and staff, who periodically consult him for input on their accounting standards. He has served as an advisor to the GASB on Pension matters Another area of his expertise is OPEBs. Mr. Rizzo served on the GASB's Task Force for the new OPEB accounting standard recently adopted with an effective date in 2018. Mr. Rizzo was also a key member of the Actuarial Standards Board committee that released the new Actuarial Standard of Practice (ASOP) No. 6 last year which guides all actuaries on how to prepare OPEB actuarial valuations. Mr. Rizzo serves as Lead Consultant for Louisiana Legislative Auditor, State of Tennessee, JEA, and others. In the past he has consulted to the State of North Carolina, South Carolina, City of Atlanta, and numerous others. Mr. Rizzo's client and leadership role will serve the City of Miami well in its Pension and OPEB needs. The COM needs a national expert, like Mr. Rizzo, for its dealings with its pensions bards and their actuaries. He brings a measure of gravitas for the City in its interactions on actuarial and other related matters with the pension boards and their actuaries. Mr. Rizzo is an Associate of the Society of Actuaries (ASA) and Member of its Investment, Pension, and Health sections; a Member of the American Academy of Actuaries (MAAA); an Enrolled Actuary under ERISA (EA.); and a Fellow of the Conference of Consulting Actuaries (FCA). Peter (Pete) N. Strong, Senior Consultant and Actuary, will serve as the Co -Lead Actuary for Pensions. Mr. Strong is a Consultant with. 19 years of professional pension actuarial and consulting experience, including over 7 years with GRS, GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 16 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services Pete is a well -respected consulting actuary as attested by the community of pension professionals, client representatives, and his peers throughout GRS. He is a frequent speaker at various conferences. Mr. Strong serves as the Lead Actuary for a recent pension reform project for the City of Hialeah, and in an ongoing role for the City of Coral Gables, City of Tallahassee, City of Clearwater, Orlando Utilities Commission, and several others. Pete is a Fellow of the Society of Actuaries (FSA), a Member of the American Academy of Actuaries (MAAA), a Fellow of the Conference of Consulting Actuaries (FCA), and an Enrolled Actuary (EA). He holds a Bachelor of Science degree in mathematical sciences from the University of North Carolina at Chapel Hill. Alex Rivera, Senior Consultant and Actuary will serve as Peer Review and Resource Actuary. Mr. Rivera is a seasoned veteran of pension actuarial consulting. Currently, his clients include: City of Chicago Annuity Benefit Fund for Fireman, Policemen and Laborers, Milwaukee Public Schools Retirement and. OPEB programs, State of California Department of Finance and State Controller's Office, and others. Alex is a Fellow of the Society of Actuaries (FSA), a Member of the American Academy of Actuaries (MAAA), a Fellow of the Conference of Consulting Actuaries (FCA), and an Enrolled Actuary (EA). Piotr (Peter) Krekora, Consultant and Actuary, will serve as the Managing Actuary for actuarial valuations and will serve as Co -Lead Actuary for OPEBs ("as needed"). Dr. Krekora has 8 years of experience with GRS performing hundreds of actuarial valuations for Pension and OPEB programs in the public sector. These include programs with multiple benefit structures, complex COLA and DROP provisions, and complex actuarial assumptions. . He is the principal architect of the stochastic actuarial model (using Monte Carlo simulations) that measures the very complex gain -sharing COLA program for the Louisiana Retirement Systems. He has applied simpler versions of the stochastic model to other simpler gain -sharing COLAs, such as for the City of Hollywood. Piotr holds a PhD in physics and is an Associate of the Society of Actuaries (ASA), a Member of the American Academy of Actuaries (MAAA), and a Fellow of the Conference of Consulting Actuaries (FCA). He has also been a speaker at various conferences on pension -related topics. Travis Robinson and Dina Spektor, Senior Actuarial Analysts, will serve as "Checkers" for all Pension and OPEB valuation work. Each one has several years of actuarial experience in a responsible support role, and has attained actuarial credentials as Associates in the Society of Actuaries. Travis is also a member of the American Academy of Actuaries. Jennifer Cagasan and Thaddeus Wasowicz, Actuarial Analysts, will serve as "Doers" for all Pension valuations (and OPEB valuations as needed). Both are successfully working toward attaining actuarial. credentials. GRS One East Broward Blvd, Suite 505, Ft, Lauderdale, FL 33301, Phone Number: (954) 5271616 17 City of Miami, Florida RFP No.484326 Proposal for. Actuarial and Actuarial Related Consulting Services The official documentation of actuarial credentials of the Primary Consultants can be found in Appendix F. Also refer to minimum requirements in Tab 2(B). No subcontractors are necessary for this engagement. The official documentation of actuarial credentials were downloaded from: https : //actuarial direct ory, org/S earchDirectory. aspx The experience, qualifications, ability and availability of the Team members assigned to COM should bode well for the assignment of maximum points, with a significant point -spread for GRS in this category. 8) Provide the names and addresses of all major first tier subcontractors or subconsultants, and describe the extent of work to be performed by each first tier subcontractor or subconsultant. Given the depth and "bench strength" GRS has among Consultants and Actuarial Analysts, we will not need to employ any subcontractors or subconsultants. GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 18 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services TAB 5 - PROPOSER INFORMATION Proposed Approach and Methodology to Providing the Services 9) Describe Pr^oposer's approach and methodology to provide the tasks and deliverables as specified herein. Provide a project schedule identifying specific key tasks and duration in order to meet deadlines. A. Consulting and Advisory Services As outlined in RFP Section 3.1(3)(A) For general consulting regarding benefit structures and benefit levels, we work closely with City management, including its legal counsel (in-house counsel and outside labor attorney and pension attorney). GRS has more to contribute to the dialogue and planning than merely actuarial calculations. Given the City's major pension reform efforts a few years ago, new pension reform efforts should be commenced with some degree of caution. New scenarios and proposals worthy of further consideration should be identified by these parties based on key objectives: • Expectations of improving affordability and sustainability — financial policy, • Determination of benefit competitiveness and benefit adequacy — benefit policy, • Degree of push -back expected from various corners and likelihood of moving through to completion without litigation -- if possible, • Articulated desires of elected officials and City management (budget target, benefit type, benefit provisions/levels), • Informed degree to which contribution predictability and risk -sharing is desired among the parties. We all await the decision of the Florida Supreme Court on the City's financial urgency case. A result unfavorable to the City may be cause for another fundamental re -visit of the benefits depending how that decisioncomes down. On the other hand, a result that is favorable to the City (coupled with recent favorable investment returns) may relieve some of the pension pressure, or possibly not. Our approach and methodology in these matters is a well -reasoned process, cautionary, and a collaborative effort with the team of City management and legal counsel. Advance consideration of the long-term implications and future risks of various scenarios is necessary for defensible recommendations. The City of Miami would be an important client of GRS, deserving the level of attention commensurate with its high profile. City management will be confidant and comfortable with GRS 's presentations to the City Commission, whether in on -on -one meetings, shade meetings or in public meetings. GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 19 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services GRS has educational presentations, which can be customized for any client retreats or workshops. GRS is not prone to quick, off-the-cuff recommendations. We prefer (as do our clients) to a reasoned, top -down, approach before we make recommendations. Our recommendations carry our reputation. Our recommendations are intended not to waste our client's valuable time and efforts chasing rabbits, but are judged worthy of pursuit. GR.S has seasoned professionals in its Research Department, led by Paul Zorn, (a nationally recognized expert in retirement matters). Mr. Zorn's Department publishes GRS Insight, GRS NewScan, Research Reports, and surveys. GRS AdvantageTM is a website available only to GRS clients which provides a wealth of information including benchmarking statistics (GRS Trendline' '), publications, educational training webcasts, and other useful information. Our approach and methodology to this category of services (consulting and advisory) is collaborative and cooperative. We know the lead actuaries serving the FIPO and GESE boards and there is a mutual respect. Those relationships will serve the City well in this engagement. Nevertheless, there are times when a more firm approach is necessary. While we are not attorneys and do not engage in the practice of law (tax or otherwise), we are familiar with key provisions of the Internal Revenue Code (IRC) applicable in the government sector for qualified plans. We canprovide research and informed opinion on a range of IRC issues. B. Studies and Valuations -- As outlined in Revised RFP Section 3.1(3)(B) Our approach and methodology to category of services (actuarial valuations) starts with replicating the work of the pension boards' actuaries with respect to their most recent funding valuation reports. This first step is essential to the City for a number of reasons: 1. City of Miami Code of Ordinances requires parallel Actuarial Aaluations by the City's Actuary, per Part II Section 40-196(b)(6) and Part II Section 40-246(b)(4) for FIPO and GSE, respectively. The Second Amended Final Judgment of Gates v. City of Miami, Case #77-9491 also calls for a certain amount of oversight by the City. 2. City management (including internal and external auditors) and elected officials need a level of confidence in the mathematical processes and results presented by the pension boards' actuaries. Replication valuations serve to either (a) validate their work or (b) point out areas for improvement or correction. The replication process focuses solely on the mathematical accuracy of the annual actuarial valuations performed by the pension board's actuaries. 3. A byproduct of the replication is our commentary on the appropriateness of the actuarial assumptions and methods employed by the pension boards' actuaries. GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 20 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services 4. Replications of the pension board actuaries' valuations serve as baselines for projecting future employer contributions, funded ratios, unfunded actuarial accrued liabilities and net pension liabilities, and for assessing the level of risk associated with the plans. 5. Replications of the board actuaries' valuations serve as baselines for comparing various scenario proposals to current and future cost of the status quo. There are three pension plans identified in the RFP (FIPO,, GESE and EORT). Our approach to replication work is for the City to request (a) the most recent complete census data set as used in the actuarial software valuation runs, (b) a detailed set of actuarial assumptions and (c) any other information required for replication. Many times, we need to contact the pension boards' actuaries to verify certain treatment not specified in the valuation reports, sometimes even exchanging sample life listings of actuarial details in order to ensure we can replicate their work to within a reasonable margin. We frequently do this type of replication and actuarial audit work in Florida and nationally; we seldom ever find resistance from the pension boards or their actuaries. Often these replications are undertaken in the midst of tense relations between labor and management, again, with little to no resistance. Following is a sample project schedule for basic replication work. e s 2 i 3 Tas �eseription ;far unding Reps ,cation Val ation o all Three F ans ° Y , J Rough y }4 y q 5�+�,.4�.Vta��V ni � Weeks 1-2 'ti. �r..ti� t�. � -� 5,.� � �s, �.r,, al {4i �SS1 4.5, do f'i� of i.� -,,. {� il'�;a F�v�. fn 1 .., �:. GRS reviews most recent actuarial valuations, City Code provisions, collective bargaining agreements, Gates documents, any other relevant court documents, plan financial statements, City's financial statements, and other documents 2 GRS prepares detailed data requests and submits them to the City. This involves: ... Census data from board and its actuary and ... Actuarial assumption and other information from the board's actuary Week 3 3 City collects and screens data for completeness, and submits all. data to GRS, along with City's rep letter Weeks 4-6 4 GRS reviews, verifies and performs various tests (not audits) on data Week 6** 5 GRS programs actuarial software modelling system Week 6** 6 GR.S replicates the full actuarial valuation for funding Week 7-8** 7 GRS prepares a draft version of the report for management's review Week 8-9** 8 GRS completes and issues final report Week 10** Actual. tiring depends on the City's overall timing needs and assumes complete and accurate data provided. ** Actual timing depends on length of time City is collecting and screening data (Step 3), whether we have difficulty matching the board actuary's results within tolerable margins, and other factors. GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 21 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services There have been times, of course, when we take exception to certain assumptions or methodologies employed by the pension boards' actuaries. Our approach in those situations requires care, diplomacy, persuasion and communication (especially with our client). For example, measuring the costs and liabilities associated with complex gain -sharing COLAs, such as in place for police officers at the City of Miami, requires non-traditional techniques. Depending on the current approach employed, there may be some differences of opinion. Of course, inflation and investment return assumptions are sometimes disputed among reasonable professionals. But actuarial methodologies in light of the recent Hollywood Letters may become an issue. The Hollywood Letters are correspondence from the State of Florida Division of Retirement on appropriate actuarial treatment of plan provisions involving gain -sharing benefits, such as in place for COM police officers. These letters constitute a strong opinion from an authoritative source on the appropriate actuarialtreatment for this type of benefit provision. We are not attorneys, but would expect to work with the City's legal counsel on these matters. C. Additional Miscellaneous Services - As outlined in RFP Section 3.1(3)(C) a) Individual Benefit Cases This is particularly important for IRC Section 415(b) calculations. Consider our role with the City of Coral Gables on the controversial matter relating to their IRC 415 calculations, as we have described in Tab 3 Question 3 of this Proposal. In any event, it may serve as a critical supplement to an auditor's work. The City's Auditor and the Plan's Auditors likely consider the pension boards' actuaries as "Management Specialists" and rely on their work as such and to the extent permitted under AICPA guidelines. However, given the technical nature of (a) benefit valuations and (b) actuarial valuations, the work we undertake in this engagement verifying individual benefit calculations and valuation replication should serve as another "Management Specialist". b) Cost Estimates of Ordinance/Legislative Changes Appendix G contains two samples of cost estimates of Ordinance/Legislative Changes, and one sample of a special study concerning the appropriate measurement methods to be applied to complex gain - sharing COLA provisions. Our approach and methodology to this type of engagement involves more than just the effect of a change on next year's contribution requirement. Benefit changes, especially benefit improvements, are nearly impossible to revoke (except for future benefit accruals). Once plan members have been granted benefit improvements, retroactive to prior service or applicable to prior years' benefit accruals, they generally cannot be revoked later. This is GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 22 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services related to "impairment of contracts" and other legal issues. Furthermore, even if not retroactively granted, if benefits are improved solely for future years of service, once those years of service have been rendered and the benefits earned thereby have accrued, they generally cannot be revoked later. Therefore, before City Commission adopts any benefit improvements, actuarial projections of contribution requirements for many years into the future should be presented and understood --- not just for the next one year. This projection should be made pursuant to two baselines: assuming (a) the pension board's actuarial assumptions come true and (b) alternative and possibly more mainstream and conservative forecasts of the future emerge. These are considered baselines. But other measures of risk should be examined — not just one set of deterministic forecasts. Stress -testing the plans and stochastic Monte Carlo simulations are useful and informative for City Management and Elected Official to digest before making any decisions to improve benefits. The State statutes for disclosures in an Actuarial Impact Statement prepared by the pension board's 1 actuaries only require a one year cost projection. A one-year forecast is inadequate and incomplete information for all stakeholders to understand the implications of any proposed benefit increases or decreases. Most such benefit studies can be completed in approximately one to four weeks, assuming the replication work has already been completed. c) Funding Policy Review and Recommendation This is a topic that is close to our heart. Mr. Rizzo is a member of the Public Plans Community's Steering Committee for the Conference of Consulting Actuaries (CCA). The Steering Committee and other members of the Public Plans Community developed a White Paper published by the CCA -- Actuarial Funding Policies and Practices for Public Pension Plans. Refer to Appendix H for a copy of this White Paper which Mr. Rizzo helped write. Properly developed, a Funding Policy takes significant time and effort. The current Funding Po [icy for the City and Plans may already be optimal. However, this White Paper sets forth a process for evaluating an existing Funding Policy and adopting improvements, based on a fair and full review of competing objectives. Our approach to this type of project involves assembling a working group to (a) read the White Paper, (b) be led through a discussion and decision -points on the various issues and (c) draft a formal Funding Policy for final consideration. Ideally, this may begin with City management (and possibly one City - appointed member of the pension board). A next iteration may or may not include pension board members. The exact process, however, would need to be worked out with City Management, legal counsel and GRS. GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 23 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services d) Oher Actuarial Related Studies Additional miscellaneous services, supplemental to the baseline replication may include: (a) support and recommendations for alternate actuarial assumptions and methods as necessary, (b) projection of future employer contributions, unfunded actuarial accrued liabilities and funded ratios over the next 30 years under the current actuarial assumptions and methods, under alternative actuarial assumptions and methods and under various stress tests or sensitivity tests, (c) comparison of the current programs future costs with various scenarios proposals that might be considered and (d) GASB-related evaluations of the work of the pension board actuaries. We would work with City management to evaluate the relative usefulness and timing of various supplemental projects, while mindful of the budget. 10) Provide a list of improvements to retirement plans for the three comparable contracts listed above, and the outcome. Describe how Proposer has applied the proposed project approach in comparable contracts to make recommendations to improve programs, and describe the net effect outcome of those recommendations. • Cash balance plan proposal evaluated; struck down by State Supreme Court on procedural grounds • Variable benefit plan implemented, maintained cost within pre-set budget corridor • Defined contribution plan implemented • Roll -back of benefits (of various provisions) evaluated and negotiated and implemented; immediate and long-term cost savings realized • Actuarial assumptions challenged; forced a change legislatively in one case, pressure in others; difficult for a city to force pension boards to change actuarial assumptions 11) Provide a sample of the summary of the studies listed in Section 3.1 (3) Scope of Services, that the Proposer has completed within the past, five years, for a client of similar size and cornplexity. The Revised RFP abbreviated the types of studies listed in Section 3.1 (3) Scope of Services to only one — an actuarial valuation. We routinely provide actuarial valuations of pension plans, with hundreds of clients all over the U.S. and over 100 in Florida. Supplemental studies are often provided as well. Refer to Appendix G for samples of such studies. Our demonstrated understanding and ability to address the City's needs and our approach and methodology should bode well for the assignment of maximum points in these two categories, with a significant point -spread between GRS and the runner-ups in these two categories. GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 24 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services TAB 6 REVISED APPENDIX A Price Proposal Schedule 12) Proposer shall state its price for providing all services as stated in this Solicitation. Proposer shall submit pricing stated as a flat, fixed price per year, which shall include all expenses necessary for the requested services. Proposer must use Appendix A, Price Proposal Schedule. Not -To -Exceed Prices for stated services are conditioned on: (a) receipt of all required data transmitted in electronically readable format, including data dump of census data and assumptions used by board actuaries for preparation of annual actuarial valuation or experience reports (b) reasonable assistance from board actuaries in resolving replication differences, (c) extraordinary efforts required by GRS to replicate the pension board actuaries' work within reasonable margins, requiring work that significantly exceeds the hours stated below, will be billed at rates provided below as per the RFP's Revised Appendix A, and (d) representation letters from City management that all data and documents provided are complete and accurate. Refer to following page for the RFP's Revised Appendix A Price Proposal Schedule. The RFP was changed, through Addenda, from a fixed list of services to an "as needed" list of services, We understand this to mean that the City will decide when, how often and what scope of actuarial services will be needed, and will do so on an "as needed" basis. Section A -- In the following page, the hours and not -to -exceed price columns relate to preparation of one actuarial valuation replication project for each of the three plans covered by this RFP during the period. The fee, therefore, covers three actuarial valuation replications (one for each plan) during the period. Because the RFP Addenda changed this RFP to request actuarial services on an "as -needed" basis, the following page is prepared on the basis of one set of "as -needed" actuarial valuation replication reports is needed for allthree plans. One such set of replications for each plan is shown for each row (i.e., rows 1, 2 and 3). If additional such replications are requested on an "as needed" basis for updating during the same designated period, the same fee will apply to another set of three. Section B — On the following page, the "Note" indicates that Section B hourly rates will apply if the work significantly exceeds the hours stated in Section A. We propose a 20% margin for. "significantly exceeds". We will absorb a loss of 20% before the Section B hourly rates start. GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 25 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services Actuarial and Actuarial Related Consulting Services RFP484326 REVISED APPENDIX A PRICE PROPOSAL SCHEDULE INSTRUCTIONS: The Proposer's price shall be submitted on this Form, "Price Proposal Schedule", and in the manner stated herein. Proposer is requested to fill in the applicable blanks on this form and to make no other marks. A. Actuarial Services and Actuarial Related Services The Proposer shall state the not -to -exceed price for providing all actuarial services and actuarial related services as stated in the Scope of Services, excluding the "Additional Miscellaneous Services", which is provided for in Section B, (below) are provided below. The price includes all costs associated to provide these services. The Proposer shall also include estimated hours for the Not to Exceed Price. Term Estimated Hours Not -To -Exceed Price 1 Initial Term (Years 1-3) 108 $ 29,116 2 First 2-year OTR Period 108 $ 26,745 3 Second 2-year OTR Period 108 $ 28,928 Note: The City will pay the selected Proposer at the hourly rate indicated below for any work involved to complete the City's request if the work significantly exceeds the hours stated. Similarly, the fee shall be reduced if there is significantly less work than anticipated. B. Breakdown of Not -to -Exceed Price The Proposer's should provide a breakdown of the proposed not -to -exceed price in the table below. The breakdown shall include the not -to -exceed hourly rates for the various key staff levels proposed to complete the actuarial and actuarial related services, as needed. At a minimum, the list should include the Proposer's Project Manager/Lead Individual, and its key personnel to be utilized. Breakdown of Not To Exceed Price Staff Position/ Classification Proposed Maximum Hourly Rates Initial Term Years 1 - 3 OTR 1 Years 4-5 OTR 1 Years 6- 7 Project Manager/Lead Individual $ $ $ Co -Lead for Pensions 1 $ 458 $ 515 $ 557 Co -Lead for Pensions 2 $ 385 $ 433 $ 468 Peer Review and Resource $ 458 $ 515 $ 557 Managing Actuary $ 310 $ 349 $ 377 Senior Analysts $ 235 $ 264 $ 286 Analysts $ 181 $ 204 $ 220 GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 26 City of Miami, Florida RFP No.484326 Proposal for Actuarial and Actuarial Related Consulting Services Actuarial and Actuarial Related Consulting Services RFP484326 B: Additional Miscellaneous Services The City, from time to time, may require the additional services listed herein. These additional services are related to, but not included in providing the Scope of Services in Section A, above. The hourly rates to perform such additional services are by classifications as noted below. Proposer should list, in the table below, not -to -exceed hourly rates for the various staff levels proposed to complete required tasks for additional miscellaneous services. Compensation for these services will be paid as needed, on an hourly basis. Proposed Maximum Hourly Rates for Additional Miscellaneous Services Staff Position/ Classification Proposed Maximum Hourly Rates Initial Term Years 1 - 3 OTR 1 Years 4-5 OTR 1 Years 6- 7 Project Manager/Lead Individual $ $ $ Co -Lead for Pensions 1 $ 458 $ 515 $ 557 Co -Lead for Pensions 2 $ 385 $ 433 $ 468 Peer Review and Resource $ 458 $ 515 $ 557 Managing Actuary $ 310 $ 349 $ 377 Senior Analysts $ 235 $ 264 $ 286 Analysts $ 175 $ 197 $ 213 Notes: 1) The not -to exceed price in Section A, and the hourly rates in Sections Band C, shall remain firm and fixed for the term of the Contract, including any renewals or extensions thereof. 2) The proposed hourly rates above include all costs to include normal administrative fees, such as telephone, mailing, faxes, duplication charges, overnight mail, and including all out of pocket expenses, such as travel incurred in connection with the services (refer to CH.112.061 of the Florida Statutes regarding travel expenses), per diem, and miscellaneous costs and fees, which shall be incorporated in this price schedule, as they will not be reimbursed separately by the City. 3) Notwithstanding the rates above, compensation to the selected Proposer shall be based on the miscellaneous work assigned. The selected Proposer shall not exceed the maximum hourly rates when calculating the not -to -exceed cost statement required for each assignment. The City reserves the right to negotiate the final pricing on a project by project basis, at the City's sole discretion, 4) The City anticipates an annual fee cap of no more than $100,000 for Additional Miscellaneous Services. 5) The positions identified in the table above, shall be the same as the key positions identified in the Proposer's proposal. The City expects that the key personnel, including the Lead Actuary, who will be performing the Actuarial Services and Actuarial Related Services, will also perform the Additional Miscellaneous Services, as needed. GRS One East Broward Blvd, Suite 505, Ft. Lauderdale, FL 33301, Phone Number: (954) 5271616 27 A P FN D I X. A SAMPLE FIRM -WIDE PENSION CLIENT LIST SAMPLE PUBLIC PENSION CLIENT LIST AL The Mobile Housing Board Northeast Alabama Regional Medical Center AID Alaska Retirement Board AR Arkansas Judicial Retirement System Arkansas Local Police and Fire Retirement System Arkansas Public Employees Retirement System Arkansas State Highway Employees Retirement System Arkansas State Police Retirement System Arkansas Teacher Retirement System AZ Arizona Public Safety Personnel Retirement System Tucson Arizona Supplemental Retirement System CA San Luis Obispo County Pension Trust CO Adams County Retirement Board Arapahoe County Board of Retirement Arvada Fire Protection District Aurora General Employees Retirement Plan Colorado Fire and. Police Pension Association (FPPA) Craig Rural Fire Protection District Denver Employees Retirement Plan Jefferson County School District No. R-1 Longmont FL Atlantic Beach Florida General Employees' Retirement System Atlantic Beach Police Officers' Retirement System Bal Harbour Village General Employees' Pension Plan Bay Medical Center Boynton Beach Municipal Firefighters Retirement Fund Boynton Beach Municipal Police Officers' Retirement Fund Boynton Beach Pension Plan for General Employees 7:adenton Police Officers' Retirement Plan City of Tallahassee Clearwater Employees Pension Fund Cooper City General Employees Retirement Plan Cooper City Officers Retirement Plan Cooper City Police Retirement Plan Coral Gables Retirement System Coral Springs General Employees' Retirement System Dania Beach General Employees' Retirement Plan Dania Beach Police & Firefighters' Retirement System Deerfield Beach Non -Uniformed Employees' Retirement Plan DeLand General Employees' Retirement Plan DeLand Municipal Police Officers' Retirement Plan Delray Beach General Employees' Retirement Plan Eustis Police Officers' Retirement System Florida City Elected Officials Retirement Plan Fort Lauderdale General Employees Retirement System Fort Pierce Police Officers Retirement Fund Fort Pierce Retirement and Benefit System Hialeah Elected Officers Retirement System Hialeah Gardens Police Pension Trust Fund Hollywood Employees Retirement System Homestead Elected Official Retirement System (Old Plan) Homestead Firefighters' Retirement System Homestead General Employees' Retirement System Homestead New Elected Officials and Sr. Management Ret. System (New Plan) Homestead Police Officers' Pension Plan. Indian River Shores Defined Benefit Plan Jacksonville Beach Firefighters' Retirement System Jacksonville Beach General Employees' Retirement System Jupiter Island OPEB Jupiter Island Retirement Plan Key Biscayne Police & Firefighters Retirement Plan Key West Employees' Retirement Plan Key West Housing Authority Employees' Retirement System Key West Utility Board General Employees Retirement System Kissimmee General Employees' Retirement Plan GRSGabriel Roeder Smith & Company SAMPLE PUBLIC PENSION CLIENT LIST Lake Mary Firefighters Pension Plan Lake Worth Firefighters Retirement System Lake Worth General Employees' Retirement System Lake Worth Police Officers' Pension Systems Lake Worth, City of Lakeland Employees Retirement System Lantana Firefighters' Pension Fund Lantana Police Relief & Pension Fund Largo Municipal Police Officers' & Firefighters' Retirement Plan Lauderdale by Sea Volunteer Firefighters' Retirement Plan Lauderhill General Employees Retirement System Maitland Municipal Police Officers' and Firefighters' Pension Plan Marco Island Firefighters' Pension Plan Martin County Sheriff Miami Beach Fire & Police Retirement System Miami Beach Retirement System for General Employees Miami Parking Authority Miami Shores Village General Employees' Pension Plan Miami Shores Village Police Officers' Retirement System Miami Springs Employees' Retirement System Miami Springs Police & Firefighters' Retirement System Miramar General. Employees Retirement System Miramar Management Retirement Plan Mount Dora Firefighters' Pension and Retirement System Mount Dora General Employees' Pension Plan Mount Dora Police Officers' Pension & Retirement System New Port Richey Police Officers' Retirement System North Miami Beach North Miami Beach General North Miami Beach General Employees' Retirement Plan North Miami Clair T. Singerman Employees' Retirement System North Miami Police Pension Plan North Palm Beach General Employees' Retirement Fund Office of Program Policy Analysis and Government Accountability Okeechobee General Employees' Retirement Plan Okeechobee Municipal Firefighters' Pension Fund Okeechobee Municipal Police Officers' Retirement System City of Oldsmar Orlando General Employees' Pension Fund Orlando Utilities Commission Pension Plan Palm Beach County Fire Employee Benefits Fund Palm Beach County Firefighters' Retirement Insurance Fund Palm Beach Gardens Police Officers' Pension Fund Palm Springs Village Hazardous Employees Pension Plan Pembroke Pines Fire & Police Pension Fund Pinellas Park Police Officers' Pension Fund Plantation General Employees Retirement System Plantation Police Officers' Retirement Fund Plantation Volunteers' Firefighters Retirement System Pompano Beach Police & Firefighters' Retirement System Riviera Beach General Employees' Retirement System Riviera Beach Municipal Firefighters' Retirement System Riviera Beach Police Pension Fund Sarasota Firefighters' Health Insurance Trust Fund Sarasota Firefighters' Pension Fund Sarasota General Employees Pension Fund Sarasota. Police Officers Pension Fund Sebring Police Officers' Retirement Fund South Miami Pension Plan St. Lucie County Fire District Firefighters' Pension Trust Fund St. Lucie County Fire District General Employees Retirement System St. Petersburg College Starke Firefighters' Retirement System Starke General Employees' Retirement System Starke Police Officers' Retirement System Sunrise General Employees' Retirement Plan Sunrise Police Officers' Retirement Plan GRSGabriel Roeder Smith & Company SAMPLE PUBLIC PENSION CLIENT LIST Sweetwater Police Officers Retirement Plan Sweetwater Elected Officers Retirement Plan Tamarac Police Pension Plan Trust Fund Tavares Firefighters' Pension Board of Trustees Tavares Police Officers' Pension Plan Tequesta General Employees' Pension Trust Fund Tequesta Public Safety Officers Pension Trust Fund Town of Palm Beach Firefighters Retirement System Town. of Palm Beach General Employees Retirement System Town of Palm Beach Police Officers Retirement System Town of Surfside Employees' Retirement Plan Volusia County Volunteer Firefighters' Pension System West Palm Beach Firefighters Benefit Fund West Palm Beach Police Pension Fund West Palm Beach Restated Employees Defined Benefit Retirement System Wilton Manors Pension Plan for General Employees & Police Wilton Manors Volunteer Firefighters' Retirement System Winter Garden Pension Plan for Firefighters and Police O:I:ficers Winter Park Firefighters' Retirement System Winter Park Police Officers' Retirement System Winter Springs Police and General Retirement System HI State of Hawaii Employees' Retirement System IL Chicago Firemens' Annuity & Benefit Fund Chicago Laborers' & Retirement Board Emp. Chicago Policemens Annuity & Ben. Fund City of Joliet East Peoria Police and Fire Pension Funds General Assembly Retirement System of Illinois Illinois Municipal Retirement Fund Illinois State .Employees Retirement System Judges Retirement System of Illinois Regional Transportation Authority Pension Plan tate Universities Retirement System of Illinois Village of Morton MD Maryland State Retirement and Pension Agency Montgomery County Prince George County MI Alpena Employees' Retirement System Battle Creek Police and Fire Retirement System -Act 345 Benton Township Policemen and Firemen Retirement System Berkley Public Safety Retirement System -Act 345 Berrien County Employees Retirement Plan Bessemer Police & Fire Retirement System Big Rapids Police & Fire Retirement System Birmingham Employees Retirement System Center. Line Police and Fire Pension System Charter Township of Harrison Charter Township of Meridian Charter Township of Shelby Fire and Police Retirement System Charter Township of West Bloomfield Employees Retirement Plan Charter Township of Ypsilanti Police and Firefighter's Retirement System Cobo Hall Authority Dearborn Chapter 21 Retirement System Dearborn Chapter 22 Retirement System Dearborn Chapter 23 Retirement System Dearborn Heights Police & Fire Retirement System Detroit General Retirement System Dickinson County Health Care System Escanaba Public Safety Retirement System - Act 345 Farmington Employees Retirement System Farmington Hills Employees' Retirement System Ferndale Employee Retirement System Ferndale Police and Fire Retirement System Fraser Pension Plan Gibraltar Public Safety Officers Retirement System - Act 345 Gogebic County Employees Retirement System Grand Rapids General Retirement System G iS Gabriel Roeder Smith & Company SAMPLE PUBLIC PENSION CLIENT LIST Grand Rapids Police and Fire Retirement System Harrison Township Firemen's Pension Fund Harrison Township General. Employees Retirement System Huron Clinton Metro Authority Iron Mountain Policemen and Firemen Retirement System. Ishpeming Policemen and Firemen Retirement System - Act 345 Jackson Act 345 Retirement System Jackson Employees Retirement System Jackson Policemen's and Firemen's Pension Fund Kalamazoo County Employees' Retirement System. Kalamazoo Employees Retirement System Kent County Employees Retirement Plan and Trust Kent Library District Employees' Retirement Plan Kingsford Policemen and Firemen Retirement System Lincoln Park Police Officers and Firefighters Retirement System Macomb County Employees Retirement System Madison Heights Policemen. and Firemen Retirement System Marine City Retirement System Marquette Policemen and Firemen Retirement System Melvindale Policemen and Firemen Retirement System Menominee Policemen and Firemen Retirement System Michigan Public School Employees Michigan State Employee Retirement System Michigan State Judges - Circuit and Recorders Michigan State Legislative Retirement System M:i.dland - Police and Fire Retirement System Midland County Employees Retirement System Midland County Retirement System Act 345 Monroe County Employees Retirement System Monroe County Road Commission Monroe Employees Retirement System Mount Clemens Employees Retirement System Mt. Pleasant Fire and Police Pension System Negaunee Policemen's Retirement System -Act 345 Niles City Retirement Systems Plan A & B Niles Township Police and Fire Department Retirement Plan Oakland County Employees Retirement System Owosso Employees Retirement System River Rouge Employee Retirement System River Rouge Policemen and Firemen Retirement System Riverview Retirement System Road Commission for Oakland County Retirement System Royal Oak Retirement System Saginaw Police and Fire Retirement System Sanilac County Employees Retirement System Sault Ste. Marie Firemen and Policemen Retirement System Southfield Employees Retirement System Southfield Fire and Police Retirement System Southgate Municipal Employees' Retirement System Southgate Policemen and Firemen Retirement System St. Clair Shores Police and Fire Retirement System St. Clair Shores General Employees Retirement System St. Joseph Employees Retirement Fund Sterling Heights Employees Retirement System Sturgis Employees Retirement System Taylor General Employees Retirement System Traverse City - Act 345 Police and Fire Retirement System Trenton - Fire and Police Retirement System Troy Employees Retirement System Troy Incentive Plan for Volunteer Firefighters Village of Beverly Hills Public Safety Retirement System Warren Firefighters Fund Association Waterford Township General Employees Retirement System Waterford Township Police and Fire Retirement System -Act 345 Wayne County Employees' Retirement System Wayne County Employees' Retirement System -Circuit Court Commissioners Bailiffs Division Westland Policemen and Firemen Retirement System Woodhaven Retirement Plan for Employees and Policemen GRSGabriel Roeder Smith 8c Company SAMPLE PUBLIC PENSION CLIENT LIST Wyandotte Employees Retirement System Wyoming Employees Retirement System Ypsilanti Fire and Police Retirement System MN Appleton Fire Luverne Minnesota State Retirement System Public Employees Retirement Association of Minnesota St. Paul Teachers' Retirement Fund Association Virginia Minnesota Fire White Bear Lake MO Columbia Police and Firemen's Retirement Fund Jefferson City Firemen's Retirement Fund Joplin, Missouri Policemen's and Firemen's Pension Plan Missouri Dept. of Transportation and Highway Patrol Employees' Retirement System Missouri Local Government Employees Retirement System Missouri State Employees Retirement System Richmond Heights Policemen & Firemen Retirement Fund St. Louis Fire NH Manchester Employees° Contributory Retirement System New Hampshire Retirement System New Hampshire Local Government Center Defined Benefit Pension Plan NM New Mexico Educational Retirement Board 011 Ohio Public Employees Retirement System Ohio State Highway Patrol Retirement System OK Metropolitan Tulsa Transit Authority O]I.dahoma City Employee Retirement System Oklahoma Teachers' Retirement System Tulsa Municipal Employees' Retirement Plan Board of trustees RI Employees' Retirement System of Rhode Island. Warwick SC South Carolina Retirement System Marion County Library SD Lead Firemen Pension Fund Sioux Falls Employee's Retirement System Sioux Falls Firefighters' Pension Fund TX Austin City of Copperas Cove Dallas / Fort Worth International Airport Board Dallas County Utility and Reclamation District Dallas Employee Retirement System Houston Municipal. Employees' Pension System Houston Police Officers' Pension System Irving Lamar Plano Texas Employees Retirement System Texas Municipal Retirement System Texas Teacher. Retirement System UT Utah Retirement System VA Educational Employees' Supplementary Retirement System of Fairfax County Fairfax Retirement Plan Virginia Joint Audit & Review Commission WA Port of Seattle WI Milwaukee Public Schools Employee Retirement System Wisconsin Retirement System GRS Gabriel Roeder Smith & Company SAMPLE PUBLIC PENSION CLIENT LIST WV City of Huntington City of Morgantown West Virginia Treasurer's Office WY Cheyenne Regional Medical Center Wyoming Retirement System GRS Gabriel Roeder Smith & Company APPEN DIX B SAMPLE FIRM -WIDE OPEB CLIENT LIST SAMPLE FIRM WIDE (WEB CLIENT LIS"L' AK Alaska Railroad Corporation Alaska Retirement Management Board CA California PERS City of Temecula Novato Fire Protection District Padre Dam Rincon Del Diablo Metro Water District State of California CO Adams County City of Englewood City of Federal Heights Colorado Mountain College Denver Employees Retirement Plan FL City of Arcadia City of Atlantic Beach Bal Harbour Village City of Biscayne Park City of Boynton Beach Boynton Beach Fire and Rescue City of Bradenton Brevard County School Board Broward County Professional Firefighters and Paramedics Broward County Public Schools Broward County Sheriffs Office Calhoun County School District Charlotte County & Sheriff's Office Charlotte County Schools City of Clearwater City of Cocoa City of Coral Gables City of Deerfield Beach City of Delray Beach City of Delray Beach Police, Fire Fighters & Paramedics DeSoto County School District Emerald Coast Utilities Authority Village of El Portal Flagler County Florida City Florida Keys Aqueduct Authority Florida Virtual Schools City of Fort Myers Franklin County Schools Gadsden County Schools Gulf County School District Hardee County Schools Hendry County School District Hernando County City of Hialeah Holmes County Schools Indian River County & Sheriff's Office Town of Indian River Shores Jackson County School District City of Jacksonville Beach JEA (CU of City of Jacksonville) Jefferson County School District Village of Key Biscayne City of Key West Key West Utility Board City of Kissimmee Lake County Schools City of Lake Worth Lee County School District Lee County Sheriff's Office Leon County Schools Levy County Schools Liberty County School District State of Louisiana (audit support) Louisiana State University (audit support) Madison County School District City of Maitland Marion County & Sheriff' s Office Marion County Public Schools Martin County Martin County School District Martin County Sheriff' s Office Miami Parking Authority Miami Shores Village City of Miami Springs City of Miramar City of Naples Nassau County & Sheriff's Office Nassau County School District City of New Port Richey SAMPLE :FIRM -WIDE OPEB CLIENT LIST City of North. Miami Okaloosa County Sheriff's Office Okeechobee County School District Orange County Library System Town of Orange County City of Orlando Orlando Utilities Commission Osceola County & Sheriff's Office Osceola County Schools City of Palm Beach Gardens Palm Beach County Fire Rescue Panhandle Area Educational Consortium Pasco County & Sheriff's Office Pasco County School District Pinellas County Pinellas County Sheriff's Office City of Plant City City of Plantation Polk County School District Pompano Beach Firefighters Local 1549 VEBA City of Riviera Beach Seacoast Utility Authority South Florida Water Management District City of South Miami City of Starke St. Johns County St, Johns County School District St. Lucie County St. Lucie County Fire District St. Lucie County Schools St. Lucie County Sheriff's Office City of Sunrise Town of Surfside Suwannee County District Schools Taylor County School District City of Tallahassee City of Tennessee TOHO Water Authority City of Vero Beach Virgin :Islands Water and Power Authority Volusia County Clerk of Circuit Court Wakulia. County District Schools Walton County School District Washington County School District City of West Park GA Athens Housing Authority City of Atlanta City of Macon IA City of Davenport IL Adlai Stevenson High School District 125 Aptakisic-Tripp Community Consolidated School District Barrington Community School District 220 Chicago Public Schools Board of Education City of Belleville City of Bloomington City of Chicago City of Collinsville City of Des Plaines City of Effingham City of Joliet City of Lockport Community Colleges Insurance Program Community High School District 128 East Peoria Police and Fire Pension Funds Glencoe School District 35 Hawthorn School District 73 Homewood, Village of Illinois Municipal Retirement Fund. Johnsburg Public School District 12 Libertyville Public School District 70 Lincolnshire Prairie View School District 103 IL Lincoln -Way High School Macomb Community Unit School District 185 Manhattan School District Mount Prospect Mundelein School District 75 New Trier High School District 203 Niles Township High School District Peoria County Rolling Meadows SAMPLE FIRM -WIDE CAPES CLIENT I. T State Employees' Insurance Program Teachers' Retirement Insurance Program Village of Bedford Park Village of Bloomingdale Village of Carol Stream Village of Carpentersville Village of Hanover Park Village of Hinsdale Village of Homewood Village of Lemont Village of Mokena Village of Morton Grove Village of New Lenox Village of Streamwood Village of Westmont Village of Wheeling Zion Elementary School District 6 MD State of Maryland MI 41B District Court Alger County Alpena General Hospital Ann Arbor Transit Authority Barry County Bay City Housing Commission Bay County Benzie County Road Commission Berkley Public Safety Retirement System -Act 345 Brandon Township Canton Public Library Canton Township Capital Region Airport Authority Charter Township of Mundy Chesterfield Township Chippewa County Chippewa County Road Commission City of Algonac City of Allen Park City of Alpena City of Battle Creek City of Bay City City of Belleville City of Berkley City of Boyne City City of Brighton City of Burton City of Charlotte City of Croswell City of Dearborn City of Dowagiac City of East Lansing City of Eastpointe City of Essexville City of Farmington City of Farmington Hills City of Fenton City of Ferndale City of Grand Blanc City of Grosse Pointe Park City of Howell City of Huntington Woods City of Iron Mountain City of Ironwood City of Jackson City of Kingsford City of Lapeer City of Lincoln Park City of Lowell City of Madison Heights City of Marquette City of Marshall City of Mason City of Melvindale City of Midland City of Montague City of Mt. Clemens City of Muskegon City of New Baltimore City of Norton Shores City of Novi City of Oak Park City of Petoskey City of Pleasant Ridge City of Port Huron City of Riverview City of Rochester City of Romulus SAMPLE FIRM -WIDE OPEB CLIENT LIST City of Saginaw City of Saline City of Southfield VEBA City of St. Clair Shores Health Care Plan City of Sterling Heights City of Sturgis City of Taylor City of Trenton City of Troy City of Vassar City of Wakefield City of Walled Lake City of Wayne City of Westland City of Wixom City of Woodhaven Clinton County Clinton County Road Commission Clinton -Eaton -Ingham Mental Health Davison Township Delhi Charter Township Delta Township Detroit Public Library East Grand Rapids Eastern U. P. Transportation Authority Eaton County Farmington Community Library Flint Mass Transportation Authority Frenchtown Township Gladwin County Gogebic County Grand Haven Grand Traverse County Grosse Isle Township Groveland Township Hazel Park Hurley Medical Center Huron Clinton Huron Clinton Metro Authority Huron County Huron County Health Department Huron County Mental Health Independence Township Ingham Country Road Commission Ingham County Ingham County MCF Jackson County Jackson Housing Commission Kalamazoo County Kent County Kent County Road Commission Lansing Leelanau County Livingston County Livingston County Road Commission Macomb County Madison Heights Policemen and Firemen Retirement System Manistee County Marquette Board of Light and Power Marquette County Marquette County Road Commission Mason County Metamora Township Michigan Municipal Risk Management Authority Michigan ORS Michigan Public School Employees Retirement System Michigan State Employee Retirement System Monroe County Monroe County Library System Monroe County Road Commission Monroe Housing Commission Montcalm County Road. Commission Mundy Township Muskegon County Muskegon County Road Commission Newaygo County Newaygo County Community Mental Health Authority Newaygo County Road Commission Oakland County Port Huron Housing Commission Road Commission for Oakland County Road Commission of Macomb County Romeo District Library Saginaw County Saginaw County Community Mental Health Authority SAMPLE FIRM-W:IDE OPEB CLIENT LIST Saginaw County :Road Commission Saginaw Midland. Mun Water Supply Corp Sanilac County Shiawassee County/MCF Southeastern Oakland County Resource Recovery Authority Southeastern Oakland County Water Authority Spring Lake District Library St. Clair County St. Clair County Community Mental Health Authority St. Clair Shores Housing Commission Suburban Mobility Authority for Regional Transportation (SMART) Summit Township Traverse City Village of Franklin Village of Holly Village of Milford Washtenaw County Road Commission Waterford Retiree Health System WTUA Ypsilanti Comm Utilities Authority MN Hennepin County MO Columbia School District Jefferson City Kansas City MO Missouri Local Government Employees Retirement System Staff Plan ND Job Service North Dakota NH Manchester Employees' Retirement System New Hampshire Retirement System OH Ohio Public Employees Retirement System Ohio State Highway Patrol Retirement System OK Fraternal Order of Police Tulsa Lodge 93 Health & Welfare Trust Oklahoma City Employees Retirement System Tulsa Firefighters RI Central Falls School District Rhode Island Board of Governors Rhode Island Housing State of Rhode Island SC Aiken County Council Anderson County Bluffton Township Fire District Charleston County Charleston County Parks & Recreation. Commission Chesterfield County Clarendon County Colleton County County of Darlington County of Hampton County of Lancaster County of Marlboro Dillon County Dorchester County Dorchester County Alcohol and Drug Commission Dorchester County and Disability & Special Needs -Board:--- - Dorchester County Library Florence County Gaffney Board of Public Works Greenwood County SC Harrison County Hilton Head Island Horry County Horry County Solid Waste Authority, Inc. Housing Authority of Florence James Island PSD - Charleston County Laurens County Marion County Marion County Library Oconee County Orangeburg County Disabilities and Special Needs Board Pickens County Renewable Water Resources Saluda County SAMPLE FIRMWIDE OPEB CLIENT LIST Santee Cooper South Carolina Employee Insurance South Carolina Health South Carolina Public Service Authority South Carolina Research Authority South Carolina State Port Authority Spartanburg County Spartanburg County Public Libraries Sumter County Western Carolina Regional Sewer Authority Williamsburg County Government SD Rapid City TX Aransas Austin Community College District Austin County Community College Bastrop City Bastrop County Brazos County Cherokee County City of Alvin. City of Arlington City of Azle City of Baytown City of Beaumont City of Bedford City of Bellaire City of Benbrook City of Boerne City of Brownsville City of Bryan City of Burleson City of Carrollton City of Cedar Hill City of Cedar Park City of Cleburne City of Conroe City of Converse City of Conway City of Coppell City of Copperas Cove City of Del Rio City of Denton City of DeSoto City of Duncanville City of El Campo City of Fort Stockton City of Friendswood City of Galveston City of Georgetown City of Granbury City of Grapevine City of Harlingen City of Harlingen Waterworks System City of Henderson City of Humble City of Hurst City of Jacksonville City of Keller City of Killeen City of La Porte City of Lancaster City of Leander City of Longview City of Lubbock City of McKinney City of Missouri City City of Nederland City of Orange City of Paris City of. Pasadena City of Pflugerville City of Plainview City of Port Neches City of Rockport City of Rowlett City of San Marcos City of Southlake City of Sugarland City of Taylor City of Temple City of the Colony City of Tomball City of Tyler City of Waco City of Waxahachie City of Weatherford SAMPLE 'I.R WIDE OI'EB CLIENT LIST City of West University Place City of Wichita Falls Comal County Community HealthCore Cooke County County of Galveston County of Lubbock Ector County El Paso County Ellis County Fort Worth Professional Firefighters Gatesville Gonzales County Grayson County Greenville Haltom City Harris County Appraisal District Hunt County Jasper County Johnson County Kaufman County Kerr County Lamar County Lavaca County League City Lee County Limestone County Llano County McClennan County McLennan County Navarro County Palo Pinto County Parker County Permian Basin Community Centers Randall County Sabine River Authority San Antonio River Authority San Antonio VIA Metropolitan Transit Tarrant Regional Water District Taylor County Texas County & District Retirement System Texas Teacher Retirement System Tom Green County Town of Addison Town of Flower Mound Town of Highland Park Trophy Club TX Teacher Retirement System Care Tyler County Walker County Waller County USVI U.S. Virgin Islands Water and Power Authority UT Salt Lake County Unified Fire Authority Unified Police Department Utah Retirement System Staff VA City of Fairfax Town of Leesburg WI City of Brookfield City of Milwaukee Housing Authority of the City of Milwaukee Madison Metropolitan School District APPENDIX C FLORIDA PENSION CLIENT LIST FLORIDA. PENSION CLIENT LIST Atlantic Beach Florida General Employees' Retirement System Atlantic Beach Police Officers' Retirement System Bal Harbour Village General Employees' Pension Plan Bay Medical Center Boynton Beach Municipal Firefighters Retirement Fund Boynton Beach Municipal Police Officers' Retirement Fund Boynton Beach Pension Plan for General Employees Bradenton Police Officers' Retirement Plan Clearwater Employees Pension Fund Cooper City General Employees Retirement Plan Cooper City Officers Retirement Plan Cooper City Police Retirement Plan Coral Gables Retirement System Coral Springs General Employees' Retirement System Dania Beach General Employees' Retirement Plan Dania Beach Police & Firefighters' Retirement System Deerfield Beach Non -Uniformed Employees' Retirement Plan DeLand General Employees' Retirement Plan DeLand Municipal Police Officers' Retirement Plan Delray Beach General Employees'. Retirement Plan Eustis Police Officers' Retirement System Florida City Elected Officials Retirement Plan Fort Lauderdale General Employees Retirement System Fort Pierce Police Officers Retirement Fund Fort Pierce Retirement and Benefit System Fort Walton Beach General Employees Retirement System Greater Orlando Aviation Authority Employees Retirement Plan Hialeah Elected Officers Retirement System Hialeah Gardens Police Pension Trust Fund Hollywood Employees Retirement System Homestead Elected Official Retirement System (Old Plan) Homestead Firefighters' Retirement System Homestead General Employees' Retirement System Homestead New Elected Officials and Sr. Management Ret. System (New Plan) Homestead Police Officers' Pension Plan Indian River Shores Defined Benefit Plan Jacksonville Beach Firefighters' Retirement System Jacksonville Beach General Employees' Retirement System Jupiter Island OPEB Jupiter Island Retirement Plan Key Biscayne Police & Firefighters Retirement Plan Key West Employees' Retirement Plan Key West Housing Authority Employees' Retirement System Key West Utility Board General Employees Retirement System Kissimmee General Employees' Retirement Plan Lake Mary Firefighters Pension Plan Lake Worth Firefighters Retirement System Lake Worth General Employees' Retirement System Lake Worth Police Officers' Pension Systems Lake Worth, City of Lakeland Employees Retirement System Lantana Firefighters' Pension Fund Lantana Police Relief & Pension Fund Largo Municipal Police Officers' & Firefighters' Retirement. Plan Lauderdale by Sea Volunteer Firefighters' Retirement Plan Lauderhill General Employees Retirement System Maitland Municipal Police Officers' and Firefighters' Pension Plan Marco Island Firefighters' Pension Plan Martin County Sheriff Miami Beach Fire & Police Retirement System Miami Beach Retirement System for General FLORIDA PENSION CLIENT LIST Employees Miami Parking Authority Miami Shores Village General Employees' Pension Plan Miami Shores Village Police Officers' Retirement System Miami Springs Employees' Retirement System Miami Springs Police & Firefighters' Retirement System Miramar General Employees Retirement System Miramar Management Retirement Plan Mount Dora Firefighters' Pension and Retirement System Mount Dora General Employees' Pension Plan Mount Dora Police Officers' Pension & Retirement System New Port Richey Police Officers' Retirement System North Miami Beach North Miami Beach General North Miami Beach General Employees' Retirement Plan North Miami Clair T. Singerman Employees' Retirement System North Miami Police Pension Plan North Palm Beach General Employees' Retirement Fund Office of Program Policy Analysis and Government Accountability Okeechobee General Employees' Retirement Plan Okeechobee Municipal Firefighters' Pension Fund Okeechobee Municipal Police Officers' Retirement System City of Oldsmar Orlando General Employees° Pension Fund Orlando Utilities Commission Pension Plan Palm Beach County Fire Employee Benefits Fund Palm Beach County Firefighters' Retirement Insurance Fund Palm Beach Gardens Police Officers' Pension Fund Palm Springs Village Hazardous Employees Pension Plan Pembroke Pines Fire & Police Pension Fund Pinellas Park Police Officers' Pension Fund Plantation General Employees Retirement System Plantation Police Officers' Retirement Fund Plantation Volunteers' Firefighters Retirement System Pompano Beach Police & Firefighters' Retirement System Riviera Beach General Employees' Retirement System Riviera Beach Municipal Firefighters' Retirement System Riviera Beach Police Pension Fund Sarasota Firefighters' Health Insurance Trust Fund Sarasota Firefighters' Pension Fund FL Sarasota General Employees Pension Fund Sarasota Police Officers Pension Fund Sebring Police Officers' Retirement Fund South Miami Pension Plan St. Lucie County Fire District Firefighters' Pension Trust Fund St. Lucie County Fire District General Employees Retirement System St. Petersburg College Starke Firefighters' Retirement System Starke General Employees' Retirement System Starke Police Officers' Retirement System Sunrise General Employees' Retirement Plan Sunrise Police Officers' Retirement Plan Sweetwater Police Officers Retirement Plan Sweetwater Elected Officers Retirement Plan Tamarac Police Pension. Plan Trust Fund Tavares Firefighters' Pension Board of Trustees Tavares Police Officers' Pension Plan Tequesta General Employees' Pension Trust Fund Tequesta Public Safety Officers Pension Trust Fund Town of Palm Beach Firefighters Retirement System Town of Palm Beach General Employees Retirement System Town of Palm Beach Police Officers Retirement System FLORIDA, PENSION CLIENT' LIST Town of Surfside Employees' Retirement Plan Volusia County Volunteer Firefighters' Pension System West Palm Beach Firefighters Benefit Fund West Palm Beach Police Pension Fund West Palm Beach Restated Employees Defined Benefit Retirement System Wilton Manors Pension Plan for General Employees & Police Wilton Manors Volunteer Firefighters' Retirement System Winter Garden Pension Plan for Firefighters and Police Officers Winter Park Firefighters' Retirement System Winter Park Police Officers' Retirement System Winter Springs Police and General Retirement System APPENDIX D FLORIDA OPEB CLIENT LIST FLORIDA OPEB CLIENT LIST 1. City of Arcadia 2. City of Atlantic Beach 3. Bal Harbour Village 4. City of Biscayne Park 5. City of Boynton Beach 6. Boynton Beach Fire and Rescue 7. City of Bradenton 8. Brevard County School Board 9. Broward County Professional Firefighters and Paramedics 10. Broward County Public Schools 11. Broward County Sheriffs Office 12. Calhoun County School District 13. Charlotte County & Sheriff's Office 14. Charlotte County Schools 15. City of Clearwater 16. City of Cocoa 17. City of Coral Gables 18. City of Deerfield Beach 19. City of Delray Beach 20. City of Delray Beach Police, Fire Fighters & Paramedics 21. DeSoto County School District 22. Village of El Portal 23. Flagler County 24. Florida City 25. Florida Keys Aqueduct Authority 26. Florida Virtual Schools 27. City of Fort Myers 28. Franklin County Schools 29. Gadsden County Schools 30. Gulf County School District 31. Hardee County Schools 32. Hendry County School District 33. Hernando County 34. City of Hialeah 35. Holmes County Schools 36. Indian River County & Sheriff's Office 37. Town of Indian River Shores 38. Jackson County School District 39. City of Jacksonville Beach 40. JEA (CU of City of Jacksonville) 41, Jefferson County School District 42. Village of Key Biscayne 43. City of Key West 44, Key West Utility Board 45. City of Kissimmee 46. Lake County Schools 47. City of Lake Worth 48, Lee County School District 49. Lee County Sheriff's Office 50. Leon County Schools 51. Levy County Schools 52. Liberty County School District 53. State of Louisiana (audit support) 54. Louisiana State University (audit support) 55. Madison County School District 56. City of Maitland 57. Marion County & Sheriff's Office 58. Marion County Public Schools 59. Martin County 60. Martin County School District 61. Martin County Sheriff's Office 62. Miami Parking Authority 63. Miami Shores Village 64. City of Miami Springs 65. City of Miramar 66. City of Naples 67. Nassau County & Sheriff's Office 68. Nassau County School District 69. City of New Port Richey 70. City of North Miami 71. Okaloosa County Sheriff's Office 72. Okeechobee County School District 73. Orange County Library System 74. Town of Orange County 75. City of Orlando 76. Orlando Utilities Commission 77. Osceola County & Sheriff's Office 78. Osceola County Schools 79. City of Palm Beach Gardens 80. Palm Beach County Fire Rescue 81. Panhandle Area Educational Consortium 82. Pasco County & Sheriff's Office 83. Pasco County School District 84. Pinellas County 85, Pinellas County Sheriff's Office 86. City of Plant City 87. City of Plantation 88. Polk County School District 89. Pompano Beach Firefighters Local 1549 VEBA 90. City of Riviera Beach 91. Seacoast Utility Authority 92. South Florida Water Management District 93. City of South Miami 94. City of Starke 95. St. Johns County 96. St. Johns County School District 97. St. Lucie County 98, St. Lucie County Fire District FLORIDA OPEB CLIENT LIST 99. St. Lucie County Schools 100, St. Lucie County Sheriff's Office 101. City of Sunrise 102. Town of Surfside 103. Suwannee County District Schools 104. Taylor County School District 105. City of Tallahassee 106. State of Tennessee 107. TOHO Water Authority 108. City of Vero Beach 109. Virgin Islands Water and Power Authority 110. Volusia County Clerk of Circuit Court 111, Wakulla County District Schools 112. Walton County School District 113. Washington County School District 114. City of West Park APPENDIX E RECENT PRESENTATION REQUESTED Session 305 Discount Rate James J. Rizzo Gabriel Roeder Smith Et Company Daniel J. White Gabriel Roeder Smith Et Company April 13, 2015 All sessions of the sponsoring organizations All be conducted In compliance vAth Federal and Slate antitrust laws and any discussion of anticolnpetltWo activities among participants Is strictly prohibited. The Clews expressed here are those of the presenter(s), and not necessarily those of the CCA or the Academy. Nothing In this presentation Is intended to be an Interpretation of actuarial standards of practice by the sponsoring organizations. Copyright © 2015 Conference of Consulting Actuaries All rights reserved by the Conference of Consulting Actuaries. Permission Is granted to make limited copies of Items for personal, Internal, classroom or other Instruottonel use, on the condition that the foregoing copyright notice Is Used to give reasonable notice of the CCA's copyright. Introduction With the new GASB Accounting Statements (GASB Nos. 67 and 68), public plans may need a different discount rates for funding and accounting. This session addresses the selection, validation, and disclosure of the discount rate used for measurements under different purposes for public plans. 1 Long-term Expected Rate of Return r WIIViwgi4nElit-we4 l-”py ; Aid, ="..1M5Y-Sit e-ft4F:4'4Vragr-44410'dbh'i 11111 AVIA' like Risks of Not Performing a Regular Review of the Return Assumption • Difficult (and maybe impossible) to provide rationale or defense of current assumptions and compliance with professional standards • Emerging trends may not be apparent • Work product may not be reliable • Actuarial liability and cost may be understated or overstated • Costs or savings from plan changes could be distorted 'grOi,10,4Vt9-qhM!,?it,VAP "'" 2'40004004Aiw ASIMPARNIL 4 Return Assumption Selection • There are Actuarial Standards of Practice (ASOP's) that govern the selection of economic assumptions for pension plans • ASOP No. 4 - Measuring Pension Obligations and Determining Pension Plan Costs or Contributions • ASOP No. 27 Selection of Economic Assumptions for Measuring Pension Obligations ASOP No. 4 • Revised ASOP 4 effective for measurement dates on or after December 31, 2014 • Addresses actuarial cost methods and provides guidance for coordinating and integrating other. elements • Refers to ASOP No. 27 for economic assumptions • Refers to ASOP No. 35 for demographic assumptions • Refers to ASOP No. 44 for asset methods • Additional references to ASOP Nos. 6, 35 and 41 3 ASOP No, 4 (cont.) • Prescribed. Assumptions and Methods, and Prescribed Cost and Contribution Allocation Procedures • Set by Another Party • Set by Law • Not Set by Another Party or By Law • Required disclosures may vary by categories above — Section 4.1.(s), 4.1(t), 4.2 and 4.3 tck av ASOP No. 27 • Provides guidance to actuaries in selecting economic assumptions • Revised ASOP 27 effective for measurement dates on or after September 30, 2014 • Economic assumption can be based either on actuary's estimate of future experience, or on the actuary's observations of market estimates • "Best -estimate" range or "more -likely -than -not" range are no longer part of the guidance • Requires disclosure of rationale of selection and change in assumptions (exception for prescribed assumptions and methods) 4 ASOP No. 27 (cont.) • Again -- Prescribed Assumptions and Methods, and Prescribed Cost and Contribution Allocation Procedures • Set by Another Party • Set by Law • Not Set by Another Party or By Law • Required disclosures may vary by categories above — Section 4.1.1, 4.1.2, 4.1.3, 4.2 and 4.3(a) 10 ASOP No. 27 (cont.) • Process for selection of investment return • Identify the components of the assumption, for example: • Inflation • Real rate of return • Investment -related expenses • Limited Alpha • Evaluate relevant data • Consider factors specific to the measurement • Consider other general factors • Select a reasonable assumption 5 ASOP No. 27 (cont.) • Review appropriate recent and long-term historical economic data • Do not give undue weight to recent experience • Historical data may not be appropriate for future assumptions due to change in underlying environment • Give due consideration to forward -looking expectations of professional investment forecasters as a resource for expert opinions • Actuary should consider the implications of arithmetic versus geometric returns when constructing an investment return assumption 12 ASOP No. 27 (cont.) • Definition of a reasonable assumption • Appropriate for purposes of the measurement • Reflects actuary's professional judgment • Takes into account economic data that is relevant as of the measurement date • Reflects estimates of future experience and/or observation of market experience • Has no significant bias (is not significantly optimistic or pessimistic) Most Common Approach to Select an Expected Rate of Return Assumption • Simplified Building Block Approach • Identify the expected real return for a portfolio based on the investment policy and capital market assumptions of experts • Add a price inflation assumption to determine the nominal return assumption • Reduction for investment (and administrative) expenses to the extent they are paid with plan assets and not explicitly assumed • Reflect limited Alpha for active management??? 13 Investment Manager Performance • Per section 3.8.3(d.) of ASOP No. 27 • "The actuary should not assume that superior or inferior returns willbe achieved, net of investment expenses, from an active investment management strategy compared to passive investment management strategy unless the actuary believes, based on relevant supporting data, that such superior or inferior returns represent reasonable expectation over the measurement period." 7 INEIN Selection of a Return Assumption • Guidance on the reasonability of an assumption has been changed from the "best -estimate range" standard • Greater emphasis on a point estimate • In practice, the reasonable range has been effectively narrowed to be from: • A low of the geometric return expectation to • A high of the arithmetic return expectations Arithmetic vs. Geometric Average • Arithmetic Average (i.e. Mean) • Results in the average accumulated value • Less than a 50% likelihood that average accumulated value will be attained over a multi -year period • Geometric Average (i.e. Median) • 50% likelihood of investment gains and losses in any given year, but the average experience over time will be a gain • SOA Blue Ribbon Plan suggests the median is the appropriate discount rate for the expected return Consulting Challenges in Current Environment We have Experienced a Historic Bond Bull Market 16,00% 14.00% 12,00% 10,00 % Historical Treasury Bond Yield Historical experience may not repeat because our starting point is different. 1980 1983 1986 1989 1992 1995 1998 2001 2004 21817 20111 2013 Year -- 10-Yr Treasury--30-Yr Treasury 18 9 Capital Market Assumptions Continually Evolve • Capital market assumptions developed by investment consultants often don't exactly fit an actuary's needs • Most capital market assumptions have a 7-20 year investment horizon; however, some actuaries consider a mid-term horizon a desirable goal • Short-term price inflation expectations based on market measures; consider synchronizing inflation horizon with return horizon • Low expectations in productivity growth in the near -term • Riding a 6-year bull equity market • Some investment consultants incorporate a possible "reversion to the mean" in their forward looking expectations 447 19 Historical Capital Market Assumptions Sample Investment Consultant Nominal Returns by Asset Class Nominal return expectations have generally been declining. 997 1999 2001 2003 2005 2007 2009 2011 2013 2015 ....Private Equity ....Equity....Equityafteal Estate ....Bonds 4,0% Inflation expectations have been relatively stable, with declines in the last few years. 3.0% 2.0% 1.0% Inflation Assumption 20 997 1999 2001 2003 2005 2007 2009 2011 2013 2015 ®Inflation Forecast Change in Return Expectations Based on Sample Capital .Market Assumptions 10.00% 8.00% 6.00 % 4.00% 2.00 % 0.00% Real Portfolio Return Expectations 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 ®Expected. Arithmetic Return -Expected Geometric Return Hypothetical Asset Allocation: 30% Domestic Equity, 20% International Equity, 30% Fixed Income, 10% Real Estate, 10%u Private Equity 21 Change in Return Expectations Based on Sample Capital Market Assumptions Nominal Portfolio Return Expectations 1997 1999 2001 2003 2005 2007 2009 2011 2013 ®Expected Arithmetic Return ®Expected Geometric Return 2015 Hypothetical Asset Allocation: 30% Domestic Equity, 20% International Equity, 30% Fixed Income, 10% Real Estate, 10% Private Equity 11 Discount Rate for Accounting Purposes GASB Statement Nos. 67 & 68 24 Single Discount Rate Determination Process ■ Steps for determining the single discount rate: 1. Project future benefit payouts 2. Project plan assets (similar to a closed plan runoff) 3. Identify the projected benefit payments that are expected to be "pre -funded" and those expected to be "unfunded", if any 4. Calculate the present value of projected "pre -funded" and "unfunded" benefits 5. Solve for the single discount rate 12 25 Single Discount Rate Determination Process Step 1. Project Future Benefit Payments • Based on benefit provisions as of the measurement date • Based on current active and inactive plan participants • Excludes future participants • Includes expectations of: • Salary increases and future service credit • A.utomatic postemployment benefit changes ■ Only mathematical and ministerial functions per plan terms; no approvals required ■ Includes ad hoc COLAs if considered to be substantively automatic (GASS 67, par. 39 and footnote 14) 26 Single Discount Rate Determination Process Step 1- Ad Hoc COLAs and Gain -Sharing Benefits • Is there discretion to grant or deny a COLA • Is th.e COLA considered part of the plan terms or employment exchange? • The past and the future ■ Plan's historical pattern of granting (or denying) ad hoc COLA's • Consistency in the amount and nature of the COLAs • Evidence indicating that the ad hoc COLA will not be granted in future years, despite historical pattern 13 Single Discount Rate Determination Process Step 2. Project plan assets (similar to a closed plan runoff) a. Projected benefits determined in Step 1. b. Project administrative expenses c. Project employer and nonemployer contributions intended to finance benefits of current members d. Project employee contributions from current members e. Project net investment earnings using LTeROR Single Discount Rate — Step 2c GASB's guidance for projecting expected employer and nonemployer contributions (par. 41-43 GASB 67) A Include contributions intended to finance benefits of current active and inactive members ■ Exclude contributions intended to finance the service cost of future plan members ® Each future year, contributions are to apply, first, to service costs of plan members and, second, to past service costs (unless plan terms say otherwise) ■ Similar to a closed plan (not a frozen plan) runoff forecast ■ Projecting using the right funding policy is the key Single Discount Rate — Step 2c GASB's guidance for projecting expected employer and nonemployer contributions (par. 41-43 GASB 67) ■ Based on statute or contract, or on a formal written funding policy, if they exist and are in place ■ Consider any failure to follow the statute, contract or formal written funding policy during the most recent five-year history as a key indicator of future contributions ■ Reflect all known events and conditions • Alternatives to developing separate projection of cash flows may be applied (facts and circumstances, unique circumstances such as over -funded plan with no actives, others?) 30 Single Discount Rate — Step 2c GASB's guidance for projecting expected employer and nonemployer contributions (par. 41-43 GASB 67) ■ When no statute, contract or formal written funding policy exists ■ Limit projected contributions to average contributions during most recent five-year period; may be modified based on consideration of "subsequent events" ▪ Projecting using the right funding policy is the key 15 Single Discount Rate - Step 2c GASB's guidance for projecting expected employee contributions from current members (par. 41 GASB 67) • Employee contributions are to apply to service costs before employer and nonemployer contributions • Exclude contributions expected from new hires ■ However, if contributions expected from new hires exceed their expected service costs, the excess may be included in projected employee contributions 3 2. Single Discount Rate - Step 2c Simple Employer Contribution Projection: • When the funding policy is to contribute the normal cost plus a straightforward amortization payment, under an individual actuarial cost method .. . ■ It can be known with clarity how :much of the future contributions are for current members • Approach: (a) closed group projection of the normal cost (in dollars) and (b) amortization payment schedule (in. dollars) 16 Single Discount Rate — Step 2c More Complex Employer Contribution Projection: ■ When the funding policy is to contribute based on a spread -gain method, a flat statutory method, complex multi -component funding policy .. . ■ It cannot be known with clarity how much of the future contributions are for current members vs. new hires, because the funding policy cannot be decomposed between members at th.e valuation and new hires ■ Approach: (a) an open group projection of future contributions (b) offset by the service cost of future hires Illustr°atioi of Steps 1 and 2 Projected Beginning Projected Fiduciary Net Benefit Year Position Pnymonts fa) @) fe) 1 $ 192,352 $ 17,618 2 202,474 19,340 3 211,882 20,938 4 220,390 22,460 5 228,025 24,095 6 234,608 25,630 7 240,172 27,140 8 244,664 28,706 9 247,942 30,176 10 250,031 31,572 30 43,571 38,140 31 25,653 37,212 32 - 36,162 33 35,001 34 33,739 76 41 77 28 78 19 79 13 80 - 8 Total, Projected benefit payments and fiduciary net position (columns b c) are both projected using the assumptions and methods prescribed by GASB Statement No. 67 and 68. 17 Illustration of Step 2 Projected Projected Beginning Contributions Fiduciary Net Current Year Position Participants (a) (Is) (e) 1 $ 192,352 $ 13,484 2 202,474 13,779 3 211,882 13,832 4 220,390 13,899 5 228,025 13,970 6 234,608 14,049 7 240,172 14,126 8 244,664 14,200 9 247,942 14,287 10 250,031 14,378 Projected Contributions Future Participants N9 Cash flows attributable to future employees should be included to the extent they exceed their service cost (including employee contributions in excess of the service cost). Projected Beginning Projected Projected Projected Fiduciary Net Benefit Adninistreticc Investment Position Payments Expense Earnings (b)+(c)-(d)-(e)-(f)+(g) (e) (f) (g) (h) $ 17,618 $ 250 $ 14,506 $ 202,474 19,340 245 15,214 211,882 20,938 235 15,849 220,390 22,460 225 16,421 228,025 24,095 215 16,923 234,608 25,630 207 17,352 240,172 27,140 197 17,703 244,664 28,706 188 17,972 247,942 30,176 179 18,157 250,031 31,572 170 18,252 250,919 35 GASB requires the explicit reflection of administrative expenses, rather than implicit recognition as net of the investment return assumption. 36 Single Discount Rate Determination Process Step 3. Identify the projected benefit payments that are expected to be "pre -funded" and those expected to be "unfunded" • Projected benefits determined in Step 1. ■ Projected fiduciary net position determined in. Step 2. ■ Find the cross -over date, if any. 18 Illustration of Step 3 P6pjected Benefit Payments Plnlected "Funded "Unfunded Beginning Prolectcd Potion of Portion of - Fiduciary Net Benefit Benefit - Benefit. Year Position Payments Payments R„,)onls. (a) (b) (c) (d) (e) 1 $ 192,352 $ 17,618 6 17.618 6 2 202.474 19,340 19,340 3 211,882 20,938 20,938 4 220,390 22,460 22,460 - 5 228,025 24,095 24,095 6 234,608 25,630 25,630 7 240,172 27,140 27,140 8 244,664 28,706 28,706 9 247,942 30,176 30,176 - 10 250,031 31,572 31,572 30 43,571 38,140 31 25,653 37,212 32 - 36,162 33 - 35,001 34 • 35,739' 76 41 77 - 28 78 19 79 13 80 - 8 Total 38,140 25,653 • 11.559 36,162 35,001 33,739 41 28 19 13 8 Compare each year's projected benefit payment to the projected beginning fiduciary net position (columns b and c) and appropriately assign to one of the benefit payment streams (columns d and e). Single Discount Rate Determination Process Step 4. Calculate the present value of projected "pre - funded" and "unfunded" benefits A. Pre funded benefits: Long -Term Expected Rate of Return (LTeROR) on pension plan investments, to extent that: • Plan's Fiduciary Net Position (FNP), i.e., plan asset balance, is sufficient to make benefit payments • Plan assets expected to be invested using a strategy to achieve that return. B. Unfunded benefits: To the extent A, is not satisfied, yield or index rate for 20-year., tax-exempt general obligation municipal bonds with a average rating of AA/.Aa or higher 19 39 Single Discount Rate Determination Process • Possible sources of yield or index rate for high -quality, long-term, tax-exempt municipal bonds • 20-Year Bond Buyer's Index • Morgan Stanley Municipal Bond Monthly • S&P Muni Bond Index • Others Illustration of Step 4 Year (a) 1 2 3 4 6 8 9 10 30 31 32 33 34 76 77 78 79 80 Toml "Funded Portion of Benefit Payments 3 17,618 19,340 20,938 22,460 24,095 25,630 27,140 28,706 30,176 31,572 38,140 25,653 Pay PV ofPro octed Benefit P, 'mink $ PV of "funded" benefit payments are discounted using the LTeRoR. PV of "Funded" tPaymenf / (1 +,7.50%)r't rn 16,389 16,736 16,854 16,818 16,784 16,607 16,359 16,096 15,739 15,319 4,356 2,726 20 Illustration of Step 4 Year (o) 2 7 10 30 31 32 33 34 76 77 78 79 80 Total Projected Bt,crtruoo„„,rr PV of "unfunded" benefit payments are discounted using the municipal bond index rate. "Unfunded Portion of Benefit Payments" (c) 11,559 36,162 35,001 33,739 41 28 19 13 8 Actual -le 1,228 3,574 3,218 2,886 110,568 - nyments 42 Single Discount Rate — Accounting Purposes City of ABC Projection of Plan's Fiduciary Net Position (Plan Assets) Cross -over date (during year33) $160 $140 - $120 - $100 $80 - N c $60 $40 - $20 $0 Present value of benefits paid prior to cross -over date, using ILILejlaR Present value of benefits paid after cross -over date, using Municipal Bond Rate 1 6 11 16 21 26 31 36 41 46 51 56 Projection Year —a-Plan Assets Current Member Benefits 21 43 Single Discount Rate Determination Process Step 5. Solve for the single discount rate • Determine the single discount rate that, if applied to all projected benefit payments, will result in a present value equal to the sum of the present values determined in Step 4. 44 Single Discount Rate Determination Process • Plans that contribute: • Individual normal cost plus CLOSED amortization payments • Probably have a discount rates equal to LTeROR • Plans that contribute: • individual normal cost plus OPEN amortization payments • Probably have a discount rates less than LTeROR • Other plans: • A fixed statutory percent of pay, or • Pursuant to a more complex model • Might have discount rates less than LTeROR 22 Illustration of Step 5 Year 2 3 4 5 8 9 10 30 31 32 33 34 76 7/ 78 79 80 Total Projected Benefit Payments Actuarial PV of Projected Ben fit The PV of the total projected benefits based on the Single Discount Rate rnust equal the sum of the PV of the "pre -funded" and "unfunded" benefit payments. PV of Benefit Payments Using the SI lQ s Yzj4i}2�.�t� �Yt�tNf4na�ei 16,591 17,151 17,486 17,663 17,845 17,875 17,825 17,754 17,576 17,317 6,293 5,782 5,291 4,823 4,378 45 46 GASB Disclosures • Retirement Systems and Employers must Disclose: • Single Discount Rate applied to measure the Total Pension Liability • Long-term expected rate of return on plan assets with a description of how it was determined including the assumptions and methods used to determine it • If the Single Discount Rate incorporates a municipal bond rate • Disclose the bond rate used and the source • Periods to which the LTeROR is applied and, if used, the periods to which the municipal bond rate is applied to determine the single discount rate 23 GASS Disclosures (cont.) • Inflation rate • Assumed asset allocation of the investment portfolio • Provide the long-term expected net real rate of return for each major asset class • Disclose whether real rates of return are presented as arithmetic or geometric returns 48 ASOP No. 41 - Actuarial Communications • If the actuarial report includes documentation or support for the LTeRoR assumption or includes the disclosures above, remember the requirements of Section 3.4.3. - Responsibility for Assumptions and. Methods • The actuary assumes responsibility for the assumption except to the extent the actuary disclaims responsibility by stating the reliance on other sources. • If the communication makes use of any such reliance, should define the extent of reliance 24 49 Disclaimers • This presentation shall not be construed to provide tax advice, legal advice or investment advice. • Readers are cautioned to examine original source materials and to consult with subject matter experts before making decisions related to the subject matter of this presentation. • This presentation does not necessarily express the views of Gabriel, Roeder, Smith Et Company or the sponsoring organizations of the EA meeting, and may not even expresses the views of the presenters. Thank you to Lewis Ward who checked and peer reviewed this presentation 25 Questions? Thank you for your Participation PWWWIT*'NYNTAOr ?KW firViAir 51 ougarimagtwm-*rmins or JCJ1P P NOR smsom-trzwr'otaAmgmw REVS =.4iet,..,84-7-20,,Wtac*t.-MagagrIsivpNbA. •x, wirb; (11.'1v or (13 CI ierdi rnp s i on IN ot kshop May 29, 2013 fames J. Rizrzi) ASA MAAA SetUor Consultant and Adttaty I,rtl To 3r mutrante.4 C."‘i5an . , • • • •refrpOlvalociis.:-0,10,440e• Take a Step Back • Where we have been • How we got here • Why Cot cil embarked on pension reform 2 City Contribution Requirement by Fiscal Year --• City Coat-Intim Itsquitemant as a PeceatofCavarael Fay Take a Step Back Pension Fund Market Value Rates of Return (Above and Below the Current Assumed Rate as per Annual Actuarial Reports) 2 Take a Step Back • City Council Report excerpt from the Department of Business and Financial Services for the March 1, 2011 City Council Meeting "All across the Country, there is talk about the rising costs of pension plans. One of the main focuses of these news reports and articles is talk about the sustainability of lament pension plans. The City offers pension benefits to general employees, police officers and firefighters. However, the City has offered these benefits without the analysis of whether these pension benefits are sustainable." , "The results of the actuarial pension study will provide Council information on the sustainability of the City s three pension. plans and will provide recommendations that could reduce any future unfunded liabilities." "City Cotmcil would benefit from an independent third party analysis and recommendations regarding the City s three pension plans." 5 Take a Step Back • Two primary reasons for increased City contributions: 1. Benefit increases granted during the period of approximately 1999 through 2008 and 2. Investment returns which were lower than expected for the years ending September 30, 1998, 2000-2002, 2008-2009 and 2011, and which were not offset by years when they were better than expected. 6 3 Take a Step Back * We identified five Guiding Principles Articulated by Council members in numerous meetings since 2011 or Found in the tentative decisions made in the April 16, 2013 Council Meeting 7 Take a Step Back • Five Guiding Principles: 1. Employee retirement benefits are currently too expensive and unsustainable and need to be rolled back. 2. Retirement benefits for current employees should be reasonably competitive with the current level provided by the Florida Retirement System (FRS), without being tied to replicate whatever the State Legislature might do to FRS in the future. 3. Taxpayers should not bear all the risk (or reward) that is inherent in traditional defined benefit plans. 4. Taxpayer contributions for retirement benefits should be more predictable than in the past. 5. Retirement benefits for future employees should be portable. 4 Take a Step Back • Five Guiding Principles: 1. Employee retirement benefits are currently too expensive and unsustainable and need to be rolled back, 9 City Contribution Requirement by Fiscal Year 5 Principle 1 — Too Expensive Projected City Contributions Baseline Plan - Continuing With No Change • • .-* SC% = 40% 30ti : • - 'A II AREAACAAAAAR A FncalYear Fadiag Cobilwea. O.; 0,7 Am-rqn.. Principle 2 — Competitive with FRS • Five Guiding Principles: 1. Employee retirement benefits are currently too expensive and unsustainable and need to be rolled back. 2. Retuement benefits for current employees should be reasonably competitive with the current level provided by the Florida Retirement System (FRS), without being tied to replicate whatever the State Legislature might do to FRS in the future. 12 6 Principle 2 — Competitive with FRS • Tentative decision on April 16, 2013 to roll back benefits for current and new employees: Add a defined contribution plan (DC) for new hires after effective date with 8% baseline City contribution to' Close the defined benefit (DB) plan to new hires and make it resemble FRS for current employees in the future • Freeze the benefits earned to effective date, payable under current rules • Roll back the multiplier (from 2.55% to 1.6% baseline) and other provisions (final average comp, normal form, COLA) for service after effective date • Lower the employee contalmtions (from 8.18% to 3% of pay) • Grandfather employees within 5 years of normal retirement date • Add a variable benefit hybrid (Val) feature applicable to benefits earned after effective date 13 }1(itt"' 'ilalidai:,:',,'Rt1,1°*-''#°''Initir::1414f!6:!3412f), Retreat Accrual Bate 2.55% Multiplier 1.6%1% Average Final Compensation Period Highest 3 «Oaf the last 5 yeors Irigben g years Normal Rottenest Eligibility (1) Age 65 wiih yem servirc or (2) 30 yeses of seri*eregirdbms doge (1) Age 65 with S yens of service; or (2) 33 yeassof serticeregiudess of sge Early Retirement Eligibility (1) Age 55 orbit 5 yens of service; (2) 25 years of =eke regardless of age years of service Early Rearmost Reduction Racier (ERE) 3% paryosx 5% per year Normal Form ofBeriefit 10 years certain and life enmity Straight life zonally Employee Contribution Rote gilgeir cif pay 3% of pay Costa Living Ailjostmeat (EOIA) 3% yer yew COLA Worst Schedule 5 year riff vesting yearr diffrieiting 14 7 04144iii,:*$4*.ii-----;:t,iiii-iiiiit.-110-0*4iii4?.-:.:P.,::::.:.:"--, .- --,---,.,-, ----'--,:--,'--,,,...,;-.---,-,---.-,=-,--,.,--: :',..-,-'.-„,. -__-----•,,-------,:,-_-----:,',..:-.--.,.•.--.--_- : '.'---,-.r-oti.iiiiialeii-itittir4::---...- Past Service Bevefes Protected 255%Iftittip1ier (ato dame.) 1.6% Stall:10er Frozen using 2.5514per year of past serrice sad fro.en average pay Benefit Acctral P.m for Future Service 2.5511re. yeor 1.6%Ifolliplier 1.694Maltiplier Avreage Final Catcgeosation (AFC) Ifrere3 ore of the last 5 yews Ilighest S years Higbest 8 rare ore of the last 10 yeers 2LoroniRadreserent Eligibility (1) Age 65 with 5 years of service or (2) 30 years of service regardless of age (1) Age 65 with B years -riser -vice or (2) 33 years of service regardless ofage (1) Age 65 naith 5 years of serrAce or (2) 30 yews of sr:tyke repartees of age EarlfRetireined Eligibility (1) Age 55 with 5 years of service; (2)25 year-sof-service regal:ass ofage 8 years of service (I) Age 55 with 5 years of service; (2)25 years of service regardless of age Early Reftremett gerbactiortFector (ERF) 33'4 Per Ye. 53.iper year 31(e pa year NarrA1FoAcrof1Uvore 10 years certAirreod life sattunY Life Annuity lih Amenity Envloyee Contribution Rata 8.1314apay 3% awry 39i of pay Cost of 14,14 Adjostment (COLA) 32(1 per year No COLA No COLA Vesling Schedule 5 year clifif vrAting S year cliff Vesting 5 yearcliff vesting I ... . Any current employee may elect to transfer to a DC plan ist lieu of future DB accruals 1 16 Principles 1 & 2 - Too expensive 7 Off t e sots 4012 211% 000 • id. e Total Projected City Contributions ClosedDB Plan with Future BenefitsRolled Back to 1.6% With 8%DC Elan for New iftres c.r;:y.:E.1=t r yeera (ave L3. oft peryr), savings thereafter. F.: p.Ricm 1,11- Coolio.t1111., Auala, aka yozadua 8 T • Five Guiding Principles: 1. Employee retirement benefits are currently too expensive and unsustainable and need to be rolled back. 2. Retirement benefits for current employees should be reasonably competitive with the current level provided by the Florida Retirement System (FRS), without being tied to replicate whatever the. State Legislature might do to FRS in the fuhtre. 3. Taxpayers should not bear all the risk (orrewarct) that is inherent in traditional defined benefit plans. 4. Taxpayer contributions for retirement benefits should be more prediOable than in the past. 17 2 OY. 1O% 5% -5% ••• -15% Principle 3 & 4 — Risk -sharing and tr Pension Fund IVIarket Value Rate of Return (Plotted ag a hist the Current Assumed Rate as per Annual Actuarial Reports) •. - • ••," - • • • , * In traditional DB plans (even with rolled -back benefits): • The City/taxpayers bear 100% of the risk (and reward) — investment risk, longevity risk, etc. 40 The City/taxpayers have in -predictable contributions • The employees have guaranteed, fixed benefits for life * In DC plans: Y0 The employees bear 100% of the risk (and reward) — investment risk, longevity risk, etc. • The City/taxpayers' contributions are completely predictable • The employee has no guarantee of benefit levels; the ultimate benefit levels depend on the. markets 19 Principle 3 & 4 — Risk -sharing and o t tio dic • In traditional DB plans (even with rolled -back benefits): Principle 3 & 4 - Risk -sharing and Ldhiwtzbiliuj • With a Variable Benefit Hybrid (VBH) feature layered on top of the DB plan: 11 Principle 3 & 4 - Risk -sharing and Contxthitioedicabtht, • Without a VBH feature in the legacy DB plan -- It will take over 40 years to reach a 50-50 risk -sharing with employees; in 20 years City/taxpayers still bear 85% of investment risk Total Risk -sharing Comparison Clocest plus DC for New Hires With andWithout 113Hrentune 2022 2032 2042 2052 2062 welosed DB IV VEFfphaDC for New Pires ---ClosedDR Val phis DC far New Hires 2072 50% 0% Principle 3 & 4 - Risk -sharing and trib tion P Without a VBH feature: 24 Total Projected City Contributions ClosedDBPIanwith Future Benefits Rolled Rae kta 1.6% WM 8 % DC Man forIleri Hires Pasta; aad NegatIve Stresses a t year4 LAARARIFIARNUIRflRPRitiNAERg risralliar Ending • • ..• 5.1 Tat an Ci?Ahcansthe • .,` liethrdssaEspciaelAsutaabaz. City-Um:aim 2 1 2 Principle 3 & 4 - Risk -sharing and Contr Without a VBH feature: 25 Total Projected City Contributions Closed DB Plan with nature Benefits Rolled Bath. to 1.6% 'With DC Plan for New Hires Positive and Negative Stresses at year 11 1 1 • Fiscal Skar Fading Stolz Teat ca arly.iltanativo 2 ltd.= ork Alsamatitv Without a VBH feature: Total Projected City Contributions Close d DB Plan with Future Benefits Rolled B ac h. to 1.6% With 8 % D C Plan for New Hires Positis-e and Negative Stiesses atyear 20 City Aligualim SunicSdpaCirjaati'm &Ate U.4,014 AndrAms pa'ayelkEnsawl 13 Principle 3 & 4 — Risk -sharing and CO Without a VBH .4. feature: 5 8 27 ti ict t ~ - • f f Cone of 'hued-2;3)1y ClosedDBPlan with Future BenefitoRoliedBa eh to 1.6% With 8161)C Phin for New Rim Monte Carlo Shut& don% AMY ,A 301: 10% Parcantas '1.1111751131%rcamtlb • — g EAAA 'Aar Vniin weals 1-0111Pscenwill .EAA?,Ap, Principle 3 & 4 — Risk -sharing and With a VBH Feature: Budget Conidor 28 30% • lett noir*. Evan coneUBCi:lii,IdDB Pion Future,isl!edB:chito 1.6 'DePlanNewThres Bud:todor% manal .9 0hPon0t...17500arcto100 ,110,1/ 35th Por:41510o MOM 1111011artaane ....,Z./cpec% Basal:on *a Principle 3 & 4 - Risk -sharing and Nth) t With a VBH Feature: Budget Corridor 29 60% o SO• 41 a 203 • o% Withstresses atIiar 11 Outside Projected City Contributionsfet Total Bene s Rolled Back to 1. 0 Close d BB Plan nith Futures 8% DC Plan for Neiv,.e the VBH Collider Positive and Negative - 1,, kr I .7 01 t+9 r-• th N s SGSGVVZ6.81 ,•4•1 s e s s ""NNNNNN 0,1 N t`t N r4 NNNNNN NNNNN Fiscal liar Ending City Alternative 2 Stress Testa' Qty Alternative 2 Principle 3 & 4 - Risk -sharing and With a VBH Feature: Budget Corridor 311 0 Total Projected City Contributions Close.d013 Plan with Future Benefits Railed tick to 1.6% With 8e4DCI'lauferNewares NfrsseaatS3ar11 1.40Multiplier in 224va1andn• O4RintMuffipfler1ss 2025 valuation E 4011 "7.77-77.7777;;,'-• -.••• • • ;-' ;. • •• EALIEIII:101,01,1P1flfiERAFARIIIH • lar:EreSsig 000Corr0z *0.'01y Altaaviin 2 • .0., Strcsamkaa aty Ake= hrol VEMAInvdCtiotacci41 15 Principle 3 & 4 — Risk -sharing and _vItributio ilit With a VBH Feature: Budget Corridor 31 • Total Projected City Contributions Close dDB Plan with Future Benefits Rolled Back to Lb% With SNY C Plan for New Fires; Positive Stresses nt Yea r 11 LS% Benefit Multplier in 2023 valuation, 2.0% Benefit Multiplier in 2024 valuation, 2.4% Benelitafulliplier 3 0% a IC% • • , - • , • . risoltYeal.E.thug P.R. Co r C14/2110.041tiva 2 • .4.• Zatir 'dun Egadatlinathams. arplItaxetha 2 - VBE40,0,..te.4.41.iya • Variable Benefit Hybrid (VBH) feature added to DB plan: Lever 2 — The D13 pension multiplier starts out at 1.6% for years of service after effective date, but varies depending on City's actuarially determined contribution (retroactive to effective date) If City contribution would have been lower than the pre -determined budget corridor: - The pension multiplier is adjusted up (retro to effective date) • Pension multiplier can never go above 2.55% It City contribution wotitd have been lAglxr than the pre -determined budget corridor: • The pension multiplier is adjusted down (retro to effective date) • Pension multiplier can never go below a guaranteed floor of 1.0% Adjustments are not allowed to apply to frozen guaranteed benefits •earned prior to effective date Variable pensions extend into retirement (up or down 32 With everyone else) 16 Principle 3 & 4 — Risk-sha cb jay i it ng and • Optional Variable Benefit Hybrid (VBH) feature added to DB plan: Optional Lever 2 -- If the adjustments in. Lever 1 are not sufficient to bring the City's contribution back into the budget corridor, the DC employer contribution is adjusted; it starts out at 8% of pay If City contribution still would have been .lower than the pre- determined budget corridor (ttter multiplier asdju tenant): • The City DC contribution is raised • But never go above 10% of pay If City contribution still wouldhave been 11ii lser thin the pre- determined budget corridet;(after multiplier aclj ttsc rd): • The City DC contribution is lowered • But never go below a floor of 6% of pay Principle 3 & 4 — Risk -sharing and • Optional Variable Benefit Hybrid (VBH) feature added to DB plan: Optional Lever 3 -- If the adjustments hi. Levers 1 and 2 are still not sufficient to force the City's contribution back into the budget corridor, the DB employee contribution is adjusted; it starts out at 3%ofpay s If City contribution ;dill -would h« e been ltzw tla<rra the pre- determined budget corridor (after azttritl+l,er, adjustment): • The DB employee contribution is lowered from a previous level • DB employee contribution can never go below 3% of pay If City contribution still woukt have been hi tc;r than the lyre- cleterrrtitwd budget corvidot'(after multiplies adjttsfitxterat) • The DB employee contribution is raised • DB employee contribution can never go above 5% of pay 34 17 Principle 3 & 4- Risk -sharing and edicta il" • Five Guiding Principles: 1. Employee retirement benefits are currently too expensive and unsustainable and need to be rolled back. 2. Retirement benefits for current employees should be reasonably competitive with the current level provided by the Florida Retirement System (FRS), without being tied to replicate whatever the. State Legislature might do to FRS in the future. 3. Taxpayers should not bear all the risk (or reward) that is inherent in traditional defined benefit plans, 4. Taxpayer 4ontriNitions for retirement benefits should be more predtabk than in the tyast. Principle 3 & 4 - Risk -sharing and Con ti istaki t • Without a VBH feature in the legacy DB plan -- It will take over 40 years to reach a 50-50 risk -sharing with employees; in 20 years City/taxpayers still bear 85% of investment risk Total Risk -sharing Comparison awed DB plus DC for Nen. likes Willi and Iiithaut VIM Feature Beai SD% 2022 2032 2042 2052 2062 2072 6 1 .--,Closed 0B 0/ VBFiplus DC frir Mar Hire —Claitcl DB vao VBIT plus DC fatNew Hires 18 Conclusions • The draft ordinance was written in accordance with the five Guiding Principles I* Roll back DB benefits to be less expensive to- Roll back DB benefits to levels "similar" to FRS it• Share the risk with employees, ts- Making the contributions more predictable Include better portability for new hires * Without the hybrid feature: There will be no risk -sharing any time soon Contributions will continue to be unpredictable • Levers 2 and 3 are optional to the hybrid feature, but bring additional contribution predictability 37 • This presentation is intended to be used in conjunction with the actuarial Memorandum dated May 20, 2013. This presentation should not be relied on for any purpose other than the ptullose described in the Memorandum. • Circular 230 Notice: Pursuant to regulations issued by the IRS, to the extent this presentation concerns tax matters, it is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax -related penalties under the Internal Revenue Code or (ii) marketing or recommending to another party any tax -related matter addressed within. Each taxpayer should seek advice based on the individual's drcumstances from an independent tax advisor. • This presentation shall not he construed to provide tax advice, legal advice or investment advice. 35 1 9 Acknowledgement Thank you to Piotr Krekora and David Kausch who checked and peer reviewed this presentation and the associated Memorandum, 39 20 APPENDIX F TEAM RESUMES James J. Rizzo, ASA, EA, FCA, MAAA Senior Consultant ilm.rizzo@gabrielroeder.com Expertise James Rizzo is a Senior Consultant in GRS' Fort Lauderdale, Florida office. He has more than 35 years of public sector actuarial and consulting experience. Jim provides actuarial and consulting services to public sector retirements systems and OPEB plans. Jim's work for his clients includes: • Preparing, supervising, and presenting actuarial valuations ® Analyzing the actuarial implications of investments. • Conducting benefit redesign studies ® Helping clients with risk management 9 Calculating projections Jim is a national subject matter expert in all aspects of public sector pension and retiree health plans: investments, administration, regulatory compliance, actuarial, financial reporting and plan design. Professional Designations • Associate, Society of Actuaries • Enrolled Actuary • Fellow, Conference of Consulting Actuaries O Member,American Academy of Actuaries Professional Affiliations • Actuarial: American Academy of Actuaries' Pension Accounting Committee, Public Plans Subcommittee and Retiree Health Committee; Conference of Consulting Actuaries' Public Plans Community Steering Committee; Actuarial Standards Board, Retiree Group Benefits Subcommittee on Actuarial Standards of Practice (ASOPs) • Accounting: Governmental Accounting Standards Board Task Forces (current and past): Various advisory capacities for Pensions and OPEBs Presentations and Publications Jim is a frequent speaker at conferences for. the Government Finance Officers Association (GFOA), Florida Government Finance Officers Association (FGFOA), Conference of Consulting Actuaries (CCA), American Academy of Actuaries (AAA) and other organizations. He has authored articles for Contingencies, Government Finance Review and other publications and co-authored the paper, "Revisiting Pension Actuarial Science __ A Five -Part Series", published by the Society of Actuaries, Education Bachelor of Arts, Mathematics (with honors), University of South Florida Post -graduate work at Georgia State University James a 1Rizzo IPe;F Onin,ail Informatiioui lames J Rizzo Senior Consultant & Actu.ar' Gabriel Roeder Smith & Co. One East Brow ird Blvd Suite 505 Fort Lauderdale, FL 33 United States Tei: (954) 527-1616, EXT. 107 Fax: (.54) 525 O 3 Designations inns t4A.t''+,A 1982 EA 1982. ASA :1962 FCA 200; SOA Continuing Professional Development Requirement s :ornpliiantr;2.013-20i t i Acedemmik Degrees ees Ogler ProfessiomtaII Designations Industry Consulting Primary Area of Practice Retirement Specializations tiro Employee Health Benefits investments Public Sector - Pension Society 0f Actuaries :Sections Health Investment Pension Social insurance a, Public Finance Peter. N. Strong, FSA, EA, FCA, MAAA Consultant petestrong@gabrielroeder.com Expertise Pete Strong is a Consultant in GRS' Fort Lauderdale, Florida office. He has more than 18 years of actuarial and benefits consulting experience. His clients include cities, counties, hospitals, and public authorities. Pete provides actuarial and benefits consulting services to public employee retirement systems and OPEB plans. As such, he: O Prepares and presents actuarial valuations • Conducts and presents plan design studies • Performs modeling studies, including asset/liability studies using deterministic and stochastic approaches Pete has worked for both public sector and middle market private -sector plans. His pension plan experience includes defined benefit plans and hybrid arrangements, covering plan design features such as final average pay, career average pay, target benefit, and early retirement windows. Pete's regulatory and compliance knowledge includes the Pension Protection Act of 2006 and Internal Revenue Code Sections 401(a), 410, and. 415. He also has many years of experience with retiree health valuations related to GASB OPEB and FAS 106. Pete also has a strong background in the development of valuation liabilities and modeling techniques for long-term disability programs and life insurance reserve calculations. Pete's knowledge of actuarial software is an added strength. In addition to experience with GRS' internal actuarial software, he has many years of experience working with ProVal and other actuarial valuation systems. He also has experience converting actuarial valuations and models .from one valuation system to another. His valuation conversion expertise ensures an efficient and timely transition for new clients during the initial replication process. Professional Designations • Fellow, Society of Actuaries O Enrolled Actuary, ERISA O Fellow, Conference of Consulting Actuaries O Member, American Academy of Actuaries Education Bachelor of Science, Mathematical Sciences, University of North Carolina at Chapel Hill Peter Nicholas Strong Personal information Peter Nicholas Strong Consultant 84 Actuary Gabriel 'Roeder Smith & Co One East Broward EN'tid Suite 505 Fort Lauderdale, FL :33301 United States Tel: 454) 527-1616 EXT 2102 Fax: (954) 525-0083 oete.strorm@Qabriedroederxom Designations EA 2005 FCA 2008 MAAA 2008 FSA 2014 SOA Continuing Professional Development Requirement Com pita nt(20 13- 20 14) Academic Degrees Other ProfessionDesignations Industry Consulting Primary Area of Practice Retirement Specializations Society of Actuaries Sections Pension Alex Rivera, FSA, EA, MAAA Senior Consultant alex.rivera@gabrielroeder.com Expertise Alex Rivera is a Senior Consultant in GRS' Chicago, Illinois office. He has more than 20 years of actuarial and employee benefits consulting experience in the public sector and for corporate retirement programs. Alex's clients are located in California, Illinois, Iowa, Maryland, Minnesota, Missouri, Virginia, West Virginia, and Wisconsin. As an actuary, Alex: • Provides advice on the design and financing of defined benefit and defined contribution retirement programs • Calculates and advises on the pre -funding and accounting impact of retiree health care benefits • Provides actuarial services to §529 prepaid tuition plans Alex's work for financially distressed public pension plans involves plan redesign, funding policy strategies, asset/liabil.ity and projection studies, and compliance with state statutes. In addition, Alex has many years of experience with the valuation and operation of supplemental pension plans. Professional Designations • Fellow, Society of Actuaries • Enrolled Actuary • Fellow, Conference of Consulting Actuaries • Member, :American Academy of Actuaries Presentations Alex has spoken at various conferences held by professional organizations, including the Society of Actuaries, Conference of Consulting Actuaries, and Enrolled Actuaries meetings. Education Bachelor of Science, Mathematics, University of Illinois, Chicago Alex Rivera! Personal Information Alex, Rivera Senior 'Consultant Gabriel Roeder Smith b. CG 20 North• Clark Street Suite 2400 Chicago, it 60602 United States Tel 1(312)368-6613 Eniail.alexiniverftalciriielroeder.cpm Designations EA 1998 MAAA 1999 FSA 2005 FCA 2010 5OA Continuing Professional Development Requirement Co m pl i a nt(2013 -20 14) Academic Degrees Other Professional! Designation's Industry Consulting Primary Area of 1Practice Retirement Specializations Society of Actuaries Sections Health Inve-stment Pensi 0 n Piotr Krekora, ASA, MAAA, PhD Consultant piotr.krekora@gabrielroeder.com Expertise Piotr Krekora is a Consultant in GRS' Fort Lauderdale, Florida office. Piotr has more than 8 years of actuarial and consultant experience. As an actuary and consultant, Piotr prepares: ® Actuarial valuations ® OPEB studies ® Cost analyses of proposed plan changes • Population projections ® Asset simulation and cash flow studies Additionally, Piotr is experienced in designing and implementing cash balance plans as well as other alternative designs. He also has working knowledge of Florida Statutes, governing operations of municipal pension plans, andgroup insurance plans offered by public sector employees. Professional Designations • Associate, Society of Actuaries ® Member, American AcademyofActuaries Presentations & Publications Piotr's speaking engagements include national meetings of public sector and other employee benefits associations such as the National Conference of Public Employee Retirement Systems (NCPERS), the Florida GFOA and. FSFOA. He was also a co• -author of the paper Revisiting Pension Actuarial Science -A Five Part Series, by Rizzo, Ostaszewski, and Krekora published by the Society of Actuaries in 2009. Education Ph.D., Physics, Polish Academy of Sciences Piotr :Krekora Personal Information Pi otr Krekora Gabriel Roeder Smith & Co One East Brov4ard Blvd Suite 505 Fort Lauderda1e, FL 33301 United States Tel: (54)527-1616 Fax: (954)525-0083 DiCALFiZrek0faegabfielifOeder..CORT Designations ASA 2008 MAAA 2009 FCA 2015 SOA Continuing Professional Development Requirement Compl nt( 20 13-2014) Academic Degrees Ph Other Professiona Designations industry Consulting Primary Area of iPractice Retirement Specializations Employee H ealth Benefits Investments Society of Actuaries Sections Health Pension APPEN P IX G RECENT SAMPLE PENSION ACTUARIAL STUDY REPORTS REQUESTED GRS Gabriel Roeder Smith ik Company Consultants 8t .Actuaries One East 13toward Blvd. Suite 505 Fr, 1.a uderdale,11 .33301-1804 954.527.1.616 phone 954,525.0083 fax www.gabrielroeder.cont May 8, 2015 Ms. , CGFO, CPA Chief Financial Officer City of Re: Letter Report Regarding the City of Dear Ms. Police Officers' Retirement System The City of engaged Gabriel, Roeder, Smith and Company (GRS) to evaluate re -design options for the City of Police Officers' Retirement System (Plan). In _this Letter Report ,we are presenting the projection of the City's future contribution requirement developed for each proposal. As discussed, we are presenting two broad alternatives to the status quo: ansferring some or ail employees 111 the Florida Retirement System (FRS), or continue operation,Of the Plan With future accruals .subject to rolled back provisions. Many of the scenarios presented below include prospective changes to levels of future benefit accruals. For these scenarios, we refer to benefits accrued througlvie effective date as Part A benefits, and to benefits accrued after the effective date as Part,B benefits. Furtherintire, benefits accrued in the past (Part A) may be treated as fixed without any possibility fib:Change on account on additional service or salary increase. We refer to this approach as a hard freeze of past accrrialS44,part A were allowed to to reflect future salary increases (but not service), we refer to this approach aS4 Soft. freeze. Following is a brief description of scenarios we have examined: Baseline 0, Status Quo'ProjeCtion; A baseline'Prbjection of future contribution requirements under the current assumptioniiind curientplan provisions;-,asstuning all assumptions are met. Baseline 1, Current Provisions with Updated Assuniptions: .A baseline projection of thane contribution requirements under the Clurentlilanprovisions with revised assumptions: change investment return assumption to 7% (down from 7,756)04 lower the salary scale to 4.5% (down from 5%), and change the MortalitYtable to that which is used by the Florida Retirement System (FRS: as soon required by statine), and assuming these revised assumptions are met. This Baseline 1 is included to provide the deeision makers with a sense of t e contribution requirements under more mainstream assumptions. legeassumptions weretnot used 145 value the different scenarios that follow. All SCellariOS were evairiatedusing the currentplan assumptions set by the Board. Scenario 1, FRS for New Fines: projection of future contribution requirements assuming closure of the current plan to members effective October 1, 2015 and enrolling any future hires into FRS. Current menibers continueaCciiing benefits under the current plan provisions. Scenario 2 FRS for New Hires and Rolled Back Benefits for Current Members: projection of future contribution requirements assuming closure of the current plan to new members effective October I, 2015 and enrolling any future hires into FRS: in addition, benefit multiplier attributable to service after the effective date (Part B) will be reduced to 2,5% (down from 3.5%) with other benefits meeting the Chapter 185 Mini.11111111S. For this scenario, we are illustrating two approaches to Part A benefits: a. Scenario 2A: a soft freeze of Part A, benefit attributable to service rendered prior to the effective date will be calculated at the time of retirement using final average compensation determined as of the retirement date. Ms. lvlay 8, 2015 Page 2 b. Scenario 2B: a hard freeze of Part A, benefit attributable to service rendered prior to the effective date will be calculated at the effective date using average compensation determined as of that date. Scenario 3 Transfer all members to FRS: projection of future contribution requirements assuming closure of the current plan to new members with a freeze of future accruals for all members effective October 1, 2015 and enrolling all current and future members into FRS. This is assumed to result in a forfeiture of State contributions. Scenario 4 Chapter 185 minimum: projection of future contribution requirements assuming benefit accruals after the effective date (Part B) will be reduced to the Chapter 185 minimums. For this scenario, too, we are illustrating two approaches to Part A benefits: a. Scenario 2A: a soft freeze of Part A, b. Scenario 2B: a hard freeze of Part A. Actuarial assumptions, methods and data 1. We used the census file that was used in the October 1, 201.3nottlarial valuation. 2. Except for Baseline 1, all assumptions are the same as disefOSettin the October 1, 2014 actuarial valuation report dated January 12, 2015, including 7.75% asSinned rate of return on assets. 3. Amortization method is changed for scenarios involving plan crosiireto a level dollar method, all schedules are retained. , = 4. Amortization method is changed for a total plan freeze (Scenario 3) to a level dollar method, furthermore, all outstanding bases are consolidated nitaI:Single base determined as an excess of the Present Value of Accrued Benefits over the Actuarial Value OfASSets on the effective date. 5. In our projections weassinned a constant population of active employees in the fhture. 6. New entrant profieS:1iave beetiletermined by drawing from a pool of employees hired after September 30, 2011. 7. Starting salaries for future entrants are assumed to increase at an annual rate of 3%. 8. In preparing the projations we=assnmed no actuarial gains or losses other than asset gains from legacy smoothirig,Jt isexpect4 that the trust aSSetsperform exactly as assumed after October 1, 2014; for the year ending-SePteinber 30, 2014,, we assumed the actual retum of the find (11.54%). Future gams from legacy smoothitigaieassimied to be amortized over 10 years per current policy. 9. .fOr future FRS contribution regiMeinetits, we assumed the normal cost rate and scheduled rate of amortization paymenta'1,'VOidd remain :the same as reflected in the July 1, 2014 FRS actuarial valuation report 'and future gains from legacy asset smoothing Would be amortized over 30 years according to the culTeritpolicy.• Tables and graphs Please refer to tables and charts attached to this letter for preliminary results: 1. A comparison graph presenting actuarially determined contributions as a percent of payroll for the two Baselines; 2. Four comparison graphs presenting actuarially determined contributions as a percent of payroll for each of the proposals individually as compared to Baseline 0; 1 An overview comparison mph presenting actuarially determined contributions as a percent of payroll for all six proposed Scenarios as compared to Baseline 0; Gabriel Roeder Smith & Company Ms. May 8, 2015 Page 3 4. Summary table presenting 10-year and 30-year totals of the actuarially determined contributions for both Baselines and six proposed Scenarios; 5. Comparison table presenting a 30-year projection of actuarially determined contributions as dollar amounts for both Baselines and six proposed Scenarios; 6. Comparison table presenting a 30-year projection of actuarially determined contributions as a percent of payroll for both Baselines and six proposed Scenarios; All contribution amounts presented in the following pages represent City, Conhibutions, after netting out employee ,and State (if any) contributions. Projected contributions are developed in a manner intended to resemble the current actuarial process: employer portion of the Normal Cost .and the payment to amortize the Unfunded Actuarial Accrued Liability are first adjusted for frequency of payments and then projected to the contribution year using the assumed payroll growth increase. Caveats and Qualtfleations Results of Baseline and Scenario valuations presented herein are based on the plan provisions aS.deScribed in the appendix to this letter (and the Scenarios described herein) and 011 assOnptiogs and methods disclosed in the actuarial valuation report dated January 12, 2015 presenting valtiatiOnresults performed as of October 1, 2014 except as otherwise indicated. The calculations are based upon assumptions re4rim—g,futtire events, whiCh:may.or may not materialize. They are also based upon present and proposed plan bprOviSio If you have reaaoillO believe that the assumptions that were used are unreasonable, that the plan provisions are incorrectly described, that important plan provisions relevant to this proposal are not described or fitat conditions have changed since the calculations were made, you should contact the, author of this reportprior to relying on information in the report. This report rimy be distributed to other parties oiily iii its entirety. Future actuarial measurements may differ significantly from the cuirent measurements presented in this report due to various factors: plan ' experience differing from that anticipated by the economic or demographic assumptions; changes ni such assumptiOnS; increases or decreases expected as part of the natural operation of the methodologyngedfor these measurements; and changes in plan provisions or applicable law. The undersigned are Members of the American Academy of Actuaries (MAAA) and meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion herein All calculations have been made in conlbrmity with generally accepted actuarial principles and practices and with the Actuarial Standards of Practice issued by the_Attuarial Standards Board. We welcome your questions and comments. Sincerely yours, James J. Rizzo, ASA, MAAA, FCA Senior Consultant & Actuary JJR/tnr Enclosures Piotr Krekora, PhD, ASA. MAAA Consultant & Actuary Gabriel Roeder Smith & Company SUM • APPENDIX A ARY OF STUDY RESULTS Ms May 8, 2015 5_0% 0.0% City of Police Officers' Retirement System Projected City Contribution as a % of Payroll , 0 •,-. (-4 rn .4. kr, k..0 t-- C> .-4 N cn NI' In *4:> I-- 00 ....q If .-, 4-1 .-.1 r4 04 N N c4 4 N N N c-4 en tr. en In en rn rn en tr, rn ..i. c> G G G c> C> _ G G C> G G G C> 0 G r4 c4 (-4 e4 cl 04 (-4 N (-4 r4 e-4 N N (-4 c-4 r4 N t-4 (-4 r4 C4 N N N el "`"ltam Baseline 0- Cunt Assumptions Contributio-n Year -Htilib Baseline 1 - Mainstre.Arn Assumptions a ct Gabriel Roeder Smith & Company Appendix A - Ms. May 8, 2015 40.0'V° City .of Police Officers' Retirement System Projected City Contribution as a % of Payroll t-- cat, 0 0 4—, c On 41' v ,0 t-- 00 0 0 ---. rl on 'tl- '4,1 ,•,0 r^-• 00 Cr, —, — — —. N N N N N N el N r4 el el en re, en en tn en rn el on 0 0 0 Ca Ca Ca 0 0 C) Ca 0 Ca Ca 0 0 0 Ca Ca 0 Ca Ca 0 Ca Ca el cl el N el r4 el el el N c4 N N el el el N c4 c4 c4 el N el el el Contribution Year `umlOas`BaseIine 0 Scenario 1 FRS Close Gabriel Roeder slt & Company Appendix A - I_ 2 May 8, 2015 40.0% City of Police Officers' Retirement System Projected Cit3 Contribution as a °A) of Payroll r-• o0 Baseline 0 r4 es4 t-4 C4 ("4 e- el c) Cs CCF C`i (-4 cr) vZ+ rn en rn <7; 0 0 0 0 C4 4 (-4 Contribution Year Scenario FRS/Rollback Soft 00 „, C"I 0 0 0 8 S 8 S cl (-4 cs1C emi• Scenario 2B FRS/Rollback Hard Gabriel Roeder SmithCompany Appendix A - Page 3 Ms. May 8, 2015 City of Police Officers' Retirement System Projected Ci Contribution as a % of Payroll Baseline 0 Contribution Ye a r ,sastCaz, Srprtario 3 FRS/Freeze Ga Roeder s—th & Company Appendix A -1 1Vis_ May 8, 2015 City of Police Officers' Retirement System Projected City Contribution as a % of Payroll ••4112° Baseline 0 Contribution Year 'Scenatio 4A Rollback Soft l'ttrw2 Scenario 4B Rollback Hard Gabriel Roeder Smith & Company Appendix A - Page 5 Ms_ May 8, 2015 City of Police Officers' Retirement System Projected City Contribution as a % of Payroll Contribution Year ,Baseline 0 'Scenario 1 FRS Scenario 2A '11•"' Scenario 2B °""*"*Scenario 3 '',N"'• Scenario 4A •311"" Scenario 4B Rollback Soft Rollback Hard Close FRSiRollback Soft FRS/Rollback Hard FRS/Freeze Gabriel Roeder N.-1.h & Company Appendix A - Ms•-•4111111.. May 8, 2015 City of Table 1: Summary o Officer' Retirement System 30-Year Projection of Required Contributions Current Plan (Baseline 0) Current Plan: Mainsream Assumptions (13ase1ine 1) Scenario 1: Close Plan to Nev Hires (FRS) Scenario 2A: Close Plan to New Hires (FRS), 2.5% prospectively Scenario 2B: Close Plan to New Hires ("FRS) and Freeze accrued benefit, 2.5% prospectively Scenario 3: Freeze Plan, all active participants go to FRS Scenario 4A: Change benefits prospectively to Chapter Artuitnunis Scenario 4B: Freeze Accrued Benefit and change berteri, prospectively to Chapter Ivlininnuns Net City Contranition 10 Year 30 Year Present Total ' Total Value (30-yr) 13„367,174 42.010,022 15,700,884 15,833,542 52,988,155' , 21,112.337 13,469,794 41,815,333' - -15.821,047 11,451241 39,168,214 14,051,114 9,657;72.8' , 36,357_237 12158,724 12,032,212 44169,75 14,886,975 , 8,357_494 , 2:62o.746 8121,237 6,565,591 18,310,464 - 7,356,515 Cost/(Sayings) vs. Bas eline 0 10'Year 30 Year Total Total NIA N/A 2,466,368 10,978_132 102,620 (194,690) (1,915,933) (2,841,809) (4,309,446) (5.652,786) (1,334,962) (5,009,680) (6,801,583) Present Value (30-y4 NiA 5,411,452 120,163 (1,649,770) (3,542.160) 159,729 (813,909) (21,389,277) (6,879,648) (23,699,558) (8,344,370) Gabriel Roeder Smith & Company Appendix A - Page 7 City of Police Officers' Retirement System Table 2: 30-Year Projections of Payroll and Re quind City Contributions Baseline 0 - Current Assumptions Baseline 1 - Mainstream. Assinnptions Contribution Projected Projected % of Pay Year Payroll Contnbutions Projected Projected Payroll Contnbutions % of Pay 2015 5,662,391 1,973,209 34.8% 5,662,391 1,97410 34.8% 2016 5,500,078 1,744,186 31.7% 4,984,579 1,763261 . 35.4% 2017 5,497,867 1,598,925 29.1% 5,418,411 1,964,283 ' ,.36.3% 2018 5,713,766 1,512,420 26.5% 5,602,814 1,855,863 ,33.-1% 2019 5,916,479 1,455,079 24.6% , , . 5,772,558 1,818,280 314% 2020 6,031,845 1,098,360 18.2% -' - 5.857595 - 1,490,906 25.5% 2021 6,195,193 999,358 16.1% -,,9.87i.* 1,376,981 23.0% 2022 6,387,296 1,077,328 16.9% 6,14057 1429,929 23.3% 2023 6,589,842 938,178 14.2% 6,30063, 1,083,219 17.2% 2024 6,651,164 970,130 -: 14:6% 6,339,186 , ,, 1.077,609 17.0% ._,.,_..._ 2025 6,840,096 1,011,751 - - 14:8'14: 6,488;6091:267:626 19.5% . , 2026 7,003,221 1,214,477 17.3% : .6,612,185 . 1,535565 23.2% 2027 7,197,722 1,383,983 19.2% . „ 64764,612 1,722,486 25.5% 2028 7,369.791 , 1,591,740 21,6% .- - 6,893138,:1,958,384 28.4% 2029 7.538,926 _1;721.„317 22.8% 7,021,040 2,111,771 30.1% ” 2030 7;780,472 103,861 14.7% .:, 7,211,608 1,625,072 22.5% 2031 - 001,503 467,736 14.6% 7,381,682 1,654,074 22.4% 2032 8,20025 14186.229 14.5% 7,534,004 1,609,714 21.4% 2033 8.387248.-: : 1.232,-531:- 14.7% 7,669,486 1,64,5,958 21.5% .2034 . ' '8:599,339 .1,277,701 14.9% 7,827481 1,569,593 20. 1% 2035 '8,845,917 ' 1i336,664 15.1% 8,014561 1;797,002 22.4% 2036 9,133;761 1,399,038 _ 15.3% 8,235,944 1,861,323 22.6% • - . . 2037 9,465,945 1436,016 15.2% 8,493,601 1,901,161 22.4% 2038 9,772,652 1 516 6'76 15.5% 8,727,329 1,982,710 22.7% 2039 10,147,108. -: 1,533,916 15.1% 9,015,817 2,005,228 22.2% 1(144 10,454,271, 1,589,796 15.2% 9,245,409 2,064,525 22.3% 2041 10,763,589 1,650,541 15.3% 9,474,077 2,129,779 22.5% 2042 11416222 1,681,107 15.1% 9,735,458 2„165,045 22.2% 2043 11,424,805 1,755,546 15.4% 9,957,608 2,243,152 22.5% 2049 11,791,245 1,812,824 15.4% 10,225,846 2,304,447 22.5% Appendix A - Page 8 City of Police Officers' Retirement System Table 3: 30-Year Projections of Requind City Contributions Projected City Contribution Contribution Baseline 0 Year Scenario 1 FRS Close Scenario 2A Scenario 2B Scenario 4B Scenario 3 Scenario 4A FRS/Rollback FRS/Rollback Rollback FRS/Freeze Rollback Soft Soft Hard Hard 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 1,973,210 1,586,422 1,380,335 1,268,962 787,295 828,118 865,960 908,505 910,325 942,108 980,064 1,013,927 11 776 66629 5527: 0927:3 [7877: 4 4w50061 5°83°1 000: 9 275:1 4E5 03460 4 .2_:520 21 122! 555391 494267 034638 296 4 655 29611 26°°1 1,216,6471,14378558752:392865 894,08088479°995:588392- ,2'22'176297:'89256°9 555522324865,':45;7639- 935;454. 1'2'92'967 515011 977,468 1,328877 l'045'960 ,„1,50,645 ,3 1: 3,089 1,024,960 j 1:134,799 ,1,080,784 9 872 8*1:1, 79:395 1,436:467 1240,39:496234 1,186,229 1401362 1,253,916 1,253,916 1467882 1.22,531 1 '5;016 13397441500,701 1.277,701 I'3?,741,422,835 8351,538,650 1:36,664;9351,500,605 °5 1582769 1399003871:6925121:760:659 1780,458 1,824,704•1.516,076 1,780458 1,854,232 1,854,232 1,883,827 1,973,209 1,744,186 1,598,925 1,512,420 1,455,079 1,098,360 999,358 1,077,328 938,178 970,130 1,011,751 1,214,477 1,383,983 1,591,740 1,721,317 1,143,861 1,167,736 1,973,210 1,805,458 1,641,878 1,520,758 1,434,152 1,088,676 999,454 1,077,696 947,552 980,959 1,023,220 1,206,753 1,365,368 1,542,578 1,663,294 1,183,108 1,226,235 2039 1,533,916 1,854;232 1,950,731 2010 1,589,796 1,950,731 2,049,509 2041 1,650,541 1,187,612 1,241,682 2042 1,681,107 14241,682 1,276,151 1043 1,755,546 1,2/6„151 1,317,082 2044 1,812,824 1,317,082 1,359,887 1,950,731 1,956,009 2,049,509 2,015,219 1,241,682 1,202,293 1,276,151 1,241,682 1,317,082 1,276,151 1,359,887 1,317,082 511,052 532,649 535,997 535,273 529,794 544,343 559,599 586,610 616,904 629,719 671,377 673,019 702,093 728,818 741,203 779,632 807,196 1,973,210 995,859 460,597 471,832 425,184 444,324 459,260 473,725 426,439 435,161 449,471 450,973 447,351 453,166 479,342 489,198 497,062 501,530 524,518 546,467 577,096 608,633 624,715 666,386 670,552 701,565 728,818 741,203 779,632 807,196 Appendix A - Page 9 City of Police Officers' Retirement System Table 4: 30-Year Projections of Required City Contributions as a % of Payroll Projected City Contnbuion as a % of Projected Payroll Contribution Baseline 0 Year Scenario 1 Scenario 2A FRS FRS/Rollback Close Soft Scenario 2B FRS/Rollback Hard Scenario 3 Scenario 4A Scenario 4B FRS/Freeze Rollback Soft Rollback 2015 34.8% 34.8% 34.8{.N) 2016 31.7% 32.8% 26.4% 2017 29.1% 29.9% 23.9% 2018 26.5% 26.6% 21.1% 2019 24.6% 24.2% 12.4% 2020 18.2% 18.0% 13,0% 2021 16.1% 16.1% 13.3% 2022 16,9% 16.9% 13,5% 2023 14.2% 14.4% 12.8% 2024 14.6% 14,7% 13.3% 2025 14.8% 15.0% 13.5% 2026 17.3% 17.2% 13.6% 2027 19.2% 19.0% 13,7% 2028 21.6% 20.9% 134% 2029 22.8% 22.1% 14.4% 2030 14.7% 15.2% 14.4%.. 2031 14.6% 15.3% 14.7% 2032 14.50.4 nn 14.6% 14.4% 2033 14.7% 15.0%':' 15.1% 2034 14.9% - 15.6% : _ • 15.7% 2035 15.1% 16.1% 16.2% 2036 15.3% 17:7% -., nn 17.8% 2037 ,.15,2% 17.9% 17:0% ' 2038 15.5% . , 18.2% 183% 2039 15.1% , 18.3% - 18.3% 2040 - 15.2% ' 18.7% ' i -1g:7% 2041 ; 15.3% 11 0% : 11.0% 7-: 2042 ' 15.1% 11,2% 11.2% .-,- 2043 15.4% 11.2% 11.2% 2044 15.4% 11.2% 11.2% 34.8% 34.8% 34.8% 22.2% 18.5% 24.1% 10.7% 18.5% 20.9% 11,0% 18.5% 10.4% 10.5% 18.5% 9.2% 11.1% 18.5% 9.3% 11.5% 18.5% 9,2% 19.3% 19.3% 19.3% 18.3% 19.3% 18.7% 19,3% 11.0% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.8% 18..5% 11.4% 18.5% 40% 1&5% 12.6% 18,5°A 12.8% 13.1% 18.5% 18.5". 14.4% 15.1% -• 17.9% 15,7% 17.9% 17.9% 17.8% 17.9% 18.3% 9.2% 8.0% 7.9% 7.8% 7.5% 7.2% 6.9% 7.1% 6. 9°./0 6.7% 6.5% 6.5% 6.5% 6.6% 6.8% 6.7% 6.9% 6.6% 6. 7% 6.7% 6.8% 6.8% 34.8% 18.1% 8.4% 8.3% 7.2% 7.4% 7.4% 7.4% 6.5% 6.5% 6.6% 6.4% 6.2% 6.1% 6.4% 6.3% 6.2% 6.1% 6.3% 6.4% 6.5% 6.7% 6.6% 6.8% 6.6% 6. 7% 6.8% 6,7% 6.8% 6,8% Appendix A - Page 10 SU APPENDIX ARY :.;. CITY OF POLICE OFFICERS' RETIREMENT SYSTEM SUMMARY OF PLAN PROVISIONS A. Ordinances: Plan established under the Code of Ordinances for the City of Florida, Part II, Chapter 66, Article 11 and was most recently amended and restated under Ordinance No. 4297 passed and adopted on July 22, 2013. The Plan is also governed by certain provisions of Part VII, Chapter 112, Florida Statutes (F.S.), F. S. 185 and the Internal Revenue Code. B. Effective Date November 23, 1985 C. Plan Year October 1 through September 30 D. Type of Plan Qualified, governmental defined benefit retirement plan; for GASB purposes it is a single employer plan. E. Eligibility Requirements •., - All full-time Police Officers employed by the City on April 27, 1998 =dal' future Police Officers become members of the plan as a condition of employment F. Credited Set -vice Service is measured as the total munber of years and fractional parts of years of service as a Police Officer. No service will be credited for any periods of employment for which the member received a refinid of their member contributions. G. Compensation Base 134y- including Educational IncentiVepayments and plus all tax -deferred, tax sheltered or tax-exempt items of inconiederived from elective employee payroll deductions or salary reductions and otherwise includible in base -s pay. Base Pay is subject to Code 401(a) 17 compensation limit. H. Average Final Compensation Average monthly rate Of Compensation during the 5 best years out of the last 10 years preceding the date of termination or retirement. I. Normal Retirement Eligibility: A member may retire on the first day of the month coincident with or next following the earlier of (1) age 55 with 10 years of Credited Service, or (2) 25 years of Credited Service regardless of age. Gabriel Roeder Smith & Company Appendix B Page 1 Benefit: Normal Form of Benefit: COLA: Supplemental. Benefit: CITY OF POLICE OFFICERS' RETIREMENT SYSTEM SUMMARY OF PLAN PROVISIONS 3.5% .of Average Final Compensation times Credited Service. 10 Years Certain and Life thereafter; other options are also available. None. None J. Early Retirement Eligibility: Benefit: Normal Form of Benefit: COLA: Retirement date precedes the Normal Retirement date. A member may elect to retire earlier than the Normal Retirement Eligibility upon attainment of age 45 with 10 years of Credited Service. The Normal Retirement Benefit is reduced by 3.0% for each year by which the Early 10 Years Certain and Life thereafter; other options are also available. None Supplemental Benefit: None K. Delayed Retirement Same as Normal Retirement taking into account compensation earned and service credited until the date of actual retirement. L. Service Connected Disability Eligibility: Date of Employment Benefit; 3.5% of base pay on the date of disability times Credited Service, but guaranteed to be no less than 50% of the base pay on the date of disability. In the case of a disability that is found to be caused by a malicious or intentional act of Normal Form of Benefit: COLA: Violence toward the police officer, the minimum amount shall be 80% of the members Average Final Compensation, The disability benefit will be reduced if the total of disability pension, Workers' Compensation and other Disability Benefits provided by the City for the same disability exceeds 100% of the member's average monthly wage. 10 Years Certain and Life thereafter; other options are also available None Gabriel Roeder Smith & Company Appendix B — Page 2 Supplemental Benefit: None CITY OF POLICE OFFICERS' RETIREMENT SYSTEM SUMMARY OF PLAN PROVISIONS M. Non -Service Connected Disability Eligibility: Benefit: Normal Form of Benefit: COLA: Supplemental Benefit: Any member with at least 5 years of Credited Service 3.5% of base pay on the date of disability times Credited Service The pension benefit will be reduced if the total of disability pension, Workers' Compensation and other Disability Benefits provided by the City for the same disability exceeds 100% of the member's average monthly wage. 10 Years Certain and Life thereafter; other options are also available. None None N. Death 111 the Line of Duty Eligibility: Benefit: Normal Form of Benefit: Date of Employment. The greater of the Accrued Benefit and 40% of member's Average Final Compensation payable immediately 10 Years CertaM:: other options are also available when the beneficiary is the spouse. In lien of the benefit, any beneficialyean elect to take a refund of the deceased member's accumulated contributions. • COLA None Supplemental Benefit: None O. Other Pre -:Retirement Death. . . .. Eligibility: Date of Employment Benefit: Noii PeVed : Refund of Member Contributions without interest. Eligible for Early or NormalRetirement: Accrued Benefit payable at Normal Retirement Date or reduced early retirement benefit payable at Early Retirement Date, as elected by the spouse.. Vested but not eligible for Early or Noma! Retirement: Accrued Benefit payable at Normal Retirement Date, or reduced early retirement benefit payable at Early Retirement Date, as option of spouse. If elected, spouse can also have immediate benefit which is actuarial reduced to reflect the commencement of benefits Gabriel Roeder Smith & Company Appendix B — Page 3 Q. CITY OF POLICE Oki, ICERS RETIREMENT SYS I EM SUMMARY OF PLAN PROVISIONS prior to Early Retirement Date. Normal Form of Benefit: 10 Years Certain; other options are also available COLA: None Supplemental Benefit: None Optional Forms In lieu of electing the Nonnal Form of benefit, the optional forms of benefits available to all retirees are a Life Annuity, or Inc 50%. 66 2/3%. 75% or 100% Joint and Survivor options. A Social Security option is also available for members retiring prior to the time they are eligible for Social Security retirement benefits. Members who do not participate in the DROP have the option of electing a lump sum equal to 10%, 15%, 20% or 25% of their benefit with the remaining percentage ofthe 'benefit payable under the Normal Form or one of the elected Optional Forms. R. Vested Termination Eligibility: A. member has earned a non -forfeitable riglit toPlan benefits after the completion of 10 or more years. of Credited Service. Benefit: Accrued. Benefit payable at Normal Retirement Date or reduced early retirement benefit payable at Early Retirement Date. Refund of Member Contribution upon election. Normal Form of Benefit: 10 Years Certain and Life thereafter; other options are also available, COLA: None Supplemental Benefit: None. S. Refunds Eligibility: All members with less than 10 years of service. Benefit: Accumulated employee contributions without interest. This includes the amount contributed by the City. T. Member and Employer Contributions 5.1% of gross pay paid by member. hi addition, members electing to receive cc Inflated contributions in Gabriel Roeder Smith 8G Company Appendix B — Page 4 CITY Or POLICE OFFICERS' RETIREMENT SYS TEM SUMMARY OF PLAN PROVISIONS lieu of any benefits hereunder shall also receive an additional lump -sum amount equal to five percent of the member's base pay for all years of credited service since October 1, 1976. V. Cost of Living Increases Not applicable. W. Changes from Previous Valuation See the Discussion of Valuation Results Section of this report under the Revisions in Benefits heading. X. 1361 Check Not applicable. Y. Deferred Retirement Option Plan Eligibility: Plan members are eligible for the DROP utiontheattainnient of the earlier of: Benefit: maximum DROP Period: Maxiiinun 60 months (1) age 55 with 10 years of Credited Service, or (2) 25 years of Credited Service regardless of age. Members must make a written.electiontO participate in the DROP. Normal Retirement Benefit determined by the Average Final Compensation and the credited service AS of the DROP entry date. . , . Interest Credited: Nolinal Porn] of Benefit: The average (laity balance in the members DROP account is credited or debited with the actual quarterly net investment return realized by the Fund for that quarter. Lump Sum COLA: None Supplemental Benefit: None Z. Other Ancillary Benefits There are no ancillary benefits -retirement type benefits not required by statutes bit which might be deemed a Police Officers' Retirement System liability if continued beyond the availability of fimding by the current funding source. Gabriel Roeder Smith eg, Company Appendix B — Page 5 GRS Gabriel Roeder Smith & Company Consultants & Actuaries One East Broward Blvd. 954 5271616 phone Suite 505 954 525 0083 fax Ft. Lauderdale, FL 33301-1$72 www.gabrielroedercom March 24, 2015 Re: Dear Ms. Retirement System Special Study Letter Report Gabriel, Roeder, Smith & Company ("GRS") has been engaged by ("City") for independent advice concerning its three pension plans. This Letter Report concerning the Retirement System ("Plan") addresses implications of potential exit of members eligible to join a pension plan sponsored by the International Brotherhood of Electrical Workers (IBEW), and provides some background and explanation of how the Plan works. Background Mostly during 2012-2013 the City Council and Staff considered different approaches to modify the Retirement System. The Plan is a Defined Benefit (DB) pension plan that pays a lifetime pension to its participating members pursuant to a defined benefit formula based on final average compensation and years of service to the City. This Plan review process included the following four objectives or principles articulated by Council: A. Make the City's retirement contributions more predictable and controlled, B. Share the risks (and rewards) with members, rather than the City and taxpayers continuing to bear all the risks (and rewards), C. Roll back benefit provisions applicable to future service accruals to resemble those of the Florida Retirement System (FRS), as a benchmark, and D. Make the retirement benefits more portable. Ms. March 24, 2015 Page 2 Plan Changes Adopted Ordinance adopted on August 6, 2013 implemented the following changes: 1. The Plan was closed to new members effective October 1, 2013. All hired on or after this date participate in a new Defined Contribution (DC) plan in accordance with its eligibility conditions. 2. Future service benefit accruals in the DB Plan were modified to incorporate a Variable Benefit Hybrid design for active members. Certain groups of members were excluded from these changes and grandfathered to retain the previous fixed benefit provisions (e.g., the 2.55% multiplier and other rights). These groups included: a. All members who terminated, retired or entered the DROP program prior to October 1, 2013, b. All active members who were eligible for Normal Retirement under the terms of the plan as of October 1, 2013, and c. All active members who, as of October 1, 2013, were within five years of reaching eligibility for Normal Retirement. 3. For all other active members, the past service benefits accrued and earned under the fixed benefit provisions of the DB Plan prior to October 1, 2013were calculated, frozen (called Part A benefits) and paid in the future pursuant to the terms of the Plan in force prior to October 1, 2013. All future service benefits earned after October 1, 2013 (called Part B benefits) are subject to the rolled -back benefit provisions (e.g., starting at a 1.6% multiplier and other rights — nearly same as FRS) and the Variable Benefit Hybrid feature (further explained below). 4. All active members subject to future service accruals under the rolled -back Plan benefit provisions and the Variable Benefit Hybrid design (non-grandfathered employees) were offered a one-time opportunity to make an irrevocable election to participate in the City's new DC plan in lieu of future service benefit accruals under the rolled -back provisions and Variable Benefit Hybridfeature of the DB plan. Those active members who made that election retain their right to the Part A frozen benefits payable in the future, and began participation in the DC plan on October 1, 2013. 5. Active employees with less than five years of service who elected participation in the DC plan in lieu of future service benefit accruals under the DB plan were eligible to transfer the actuarial present value of the frozen Part A accrued benefit (or the balance of member's accumulated contributions if greater) from the DB plan to the DC plan as their starting balance. The City adopted a DC plan, established a .DC trust and hired a DC vendor to operate the new DC plan. GRS was not involved in that process. The City engaged a qualified pension -tax attorney to review the amended DB Plan for IRS qualification before it is submitted to the IRS for determination. Upon her recommendation, Ordinance was adopted July 15, 201.4 to make a technical correction. These two Ordinances set forth specific procedures to be followed by the Plan's pension board and its actuary to operate the Variable Benefit Hybrid feature of the DB Plan. We summarize the retirement benefit provisions in Table 1 attached to this letter. Gabriel Roeder Smith & Company Ms. March 24, 2015 Page 3 Variable Benefit Hybrid In addition to rolling back benefits earned for service after October 1, 2013 (e.g., the multiplier and other rights), the City adopted. a Variable Benefit Hybrid (VBH) feature in the DB plan, so that the multiplier for future years of service started out at 1.6%, but could go higher (up to 2.55%) or lower (down to 1.0%), depending on the experience of the Plan and its fund. The reasons for adding this VBH feature was to satisfy the first two City objectives described above: A. To make the total City retirement contributions (to DB and DC plans, but substantially comprised of DB contributions for many years) more predictable than they would be, to the DB Plan alone if no changes had been made. This was accomplished by adopting, in Ordinance form, a budget corridor (refer to Graph 1) that constrains the City's contribution to the DB Plan plus its contribution to the DC plan to fall within a pre-set corridor as a percent of pay. This forces the City's total retirement contributions to be more predictable and controlled. B. To share the total risk (and reward) with the employees, rather than the City and taxpayers continuing to bear all the risks (and rewards). To the extent the total retirement contribution (DB plus DC) falls within the pre-set budget corridor, the City and taxpayers bear the risk and reward — up and down within the corridor. Refer to Graphs 2 and 31. If the DB Plan's experience were to be unfavorable enough to cause the total retirement contribution (DB plus DC) to go above the top of the pre-set budget corridor, the DB Plan members' Part B benefit multiplier would automatically go down in an attempt to bring the total retirement contribution down to the top of the budget corridor (but the Part B benefit multiplier can never go below 1%). That is when the City shares the risk with the members. Refer to Graph 2. On the other hand, if the DB Plan's experience were to be favorable enough to cause the total retirement contribution to (DB plus DC) to go below the bottom of the pre-set budget corridor, the DB Plan member's Part B multiplier would automatically go up in an attempt to bring the total retirement contribution up to the bottom of the budget corridor (but the Part B benefit multiplier can never go over the original 2.55%). That is when the City shares the reward with the members. Refer to Graph 3. On Graph 2 attached to this letter, we illustrate projected total retirement contribution amounts resulting from an unfavorable stress test, simulating a negative 15% earning on assets (22% below expected 7%) - a loss similar to what the Plan experienced in 2008. If all assumptions are met for the subsequent years, a preliminary total retirement contribution for the year ending 9/30/2026 is projected to exceed the top of the budget corridor. This would trigger a VBH multiplier adjustment down to 1% (the lowest permitted level). We are also presenting a favorable stress test, with 29% rate of return for the year ending 9/30/2016, exceeding the assumed rate of 7% by 22%. In this scenario, the preliminary total retirement contribution is projected to decrease below the bottom of the pre-set budget corridor in the year ending 9/30/2020 (by a small margin), and go significantly lower for the year ending 9/30/2021. Increasing the VBH multiplier to 2.55% would not be sufficient to increase the contribution level above the bottom of the corridor and would remain outside the corridor for 8 more years. This apparent asymmetry is a consequence of the recent investment gains that are yet to be fully recognized. These gains created conditions conducive for upward VBH multiplier adjustments. Gabriel Roeder Smith & Company Ms. March 24, 2015 Page 4 The effectiveness of the VBH design and the magnitude of any benefit adjustments required (up or down) depend on the total size of benefits accruedand projected to accrue under the variable portion (Part B benefits expected to be accrued/earned after October 1, 2013) in relation to the total of benefits accrued under the legacy design (Part A benefits accrued prior to October 1, 2013 and frozen). From that perspective, the goal of stabilizing future contributions can be easier met with a larger number of members participating in this Part B VBH portion. Under the Ordinance ® new hires after October 1, 2013 all join the DC plan and do not earn any Part B benefits in the DB Plan. Also, a large number of employees took the opportunity to transfer to the DC plan and exit the DB Plan, thereby reducing the DB Plan's ability to manage the volatility of future contributions through the Part B portion subject to the Variable Benefit Hybrid design. IBEW Exit —Expected Projection In this letter report we are examining the implications of allowing another group of members (152 out of a total of 347 remaining active members) to exit the remaining DB Plan. There is a proposal to allow all employees eligible for participation in a multiemployer pension plan sponsored by the International Brotherhood of Electrical Workers (IBEW) to exit the City's DB Plan and begin accruing future service benefit under the IBEW plan. We were asked to examine the impact of such an exit on the remaining DB Plan's capacity to control contribution volatility and predictability and to assess the Plan's continued viability thereafter. The primary objective of this study is to determine the effect of permitting employees eligible for participation in the IBEW-sponsored pension plan to transfer from the Variable Benefit Hybrid plan to the IBEW plan for future service accruals. As requested, we are assuming that all 152 eligible employees would transfer to the IBEW plan. We are told that City contributions for each such member would be 3% of pay made to the IBEW plan and a matching contribution of up to 5% of pay to a defined contribution plan for a total of up to 8% o of pay. Furthermore, we are assuming that the transfer would occur on or shortly before September 30, 2015. As the first step of our analysis, we have examined the expected change in the total City's total retirement contributions resulting from the transfer of employees from the VBH plan to IBEW plan. We summarize 30 years of City total retirement contributions required to the various plans (City's DB Plan, IBEW and DC plans) in Table 2. As illustrated, we project an increase in the total contribution in the amount of approximately $4.5 million over a 30-year period. We call this an expected projection because we assume all actuarial assumptions, including the assumed 7.0% returnassumption, will be satisfied exactly as expected in each future year. Gabriel Roeder Smith Sc Company Ms. March 24, 2015 Page 5 IBEW Exit - Stress Test Projection As we mentioned, effectiveness of the Variable Benefit Hybrid feature depends on relative magnitude of benefits subject to adjustment (Part B) relative to the benefits accrued under the traditional design (Part A). Excessive actuarial losses or gains can only be compensated with benefit adjustments if Part B benefits constitute a threshold portion of all benefits under the plan. We illustrate these proportions on the following chart. Total Present Value of Future Benefits Traditional DB (Part A) non-IBEW VBH (Part B) IBEW VBH (Part B) As illustrated above, Part B benefits represent relatively small fraction of projected benefits under the plan. The ability to control the contribution levels has been limited by outflow of active employees. Two stress tests presented on Graphs 2 and 3 illustrate that the outflow of employees from the plan has limited ability to contain the City contributions within the corridor. Should the IBEW eligible members leave the plan too, the City contribution would stay outside the corridor in both of these tested scenarios, thereby exposing the City to a risk of contributing more than planned. Assumptions and Methods Projections presented in this letter have been performed using assumptions and methods disclosed in the October 1, 2013 valuation report dated February 5, 2014 and a letter dated April 28, 2014. It is assumed that all employees transferring to the DC plan or IBEW plan will maximize the City matching DC contribution resulting in 8% of pay City contribution for each such employee. We also reflected a 9.53% net investment rate of return on plan assets for the year ending September 30, 2014 as reported by the plan investment consultant at the November 10, 2014 pension board meeting. Contribution Development Approach Amounts required from the City to be contributed to the trust have been recently developed using a "percent - of -pay" approach. This approach was commonly accepted by actuaries and preferred by the Division of Retirement during the period of growing population and economy. Regulators justified their preference by referring to the legislative intent stated in Ch. 112.61, F.S. prohibiting the use of any procedure, Gabriel Roeder Smith & Company Ms, March 24, 2015 Page 6 methodology, or assumptions the effect of which is to transfer to future taxpayers any portion of the costs which may reasonably have been expected to be paid by the current taxpayers. This approach was commonly used to ensure that benefits for employees added to the ranks were adequately funded without any delay. As the IBEW exit will result in a significant drop in the DB covered payroll, the very same legislative intent is likely to be used as an argument for changing contribution development approach to determine contributions as a dollar amount to avoid underpayments on the amortization of the Unfunded Actuarial Accrued Liability. The recent closure of the DB Plan may be sufficient to require a change to the dollar approach rather than the current percent -of -pay approach used by the pension board's actuary. To avoid introducing additional sources of changes in contributions we prepared this study assuming the current approach will continue being used for the foreseeable future; but it would be advisable to consider transitioning to a "dollar" method before too long. We would be pleased to discuss these two approaches with the City Staff at a later time and when or if such a change might be implemented. Conclusion and Recommendations We recommend against allowing another exit of active members out of the DB Plan. The VBH feature of the Plan is already challenged to keep the City's total retirement contribution within the pre-set budget corridor, after the closure of the Plan to new hires and the exit of many then -current members to the DC plan. Removing another 152 active members would make it even more challenging. As it is, we expect (a) the Part B multiplier to go up and down to its upper and lower limits (2.55% and 1.0%) and (b) the City's total retirement contributions to remain outside the budget corridor, both more frequently than they would with a full complement of Plan members. Even fewer ongoing active members, caused by the IBEW exits, would increase that frequency and degrade the effectiveness of the VBH feature to achieve the first two objectives (predictability and risk/reward sharing). Caveats and Qualifications The projections herein are presented as if the members exit occurred on or before the valuation date of October 1, 2014. While changes actually adopted during the current plan year would have no or little impact on contribution requirements for the plan year ending. September 30, 2015, the effects presented herein should give decision makers a sense of the relative impact on future costs of providing retirement benefits. The calculations are basedupon assumptions regarding future events, which may or may not materialize. They are also based upon current Plan provisions. If you have reason to believe that the assumptions that were used are unreasonable, that the Plan provisions are incorrectly described, that important Plan provisions relevant to this engagement are not described, or that conditions have changed since the calculations were made, you should contact the author of this report prior to relying on information in the report. Future actuarial measurements may differ significantly from the current measurements presented in this report due to such factors as the following; plan experience differing from that which is anticipated by the economic or demographic assumptions; changes in economic or demographic assumptions; increases or decreases expected as part of the natural operation of the methodology used for these measurements; and changes in plan provisions or applicable law. Gabriel Roeder Smith & Company Ms. March 24, 2015 Page 7 If you have reason to believe that the information provided in this report is inaccurate, or is in any way incomplete, or if you need further information in order to make an informed decision on the subject matter of this report, please contact the author of the report prior to making such decision. The undersigned are Members of the American Academy of Actuaries (MAAA) and meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion herein. We welcome your questions and comments. Circular 230 Notice: Pursuant to regulations issued by the IRS, to the extent this communication (or any attachment) concerns tax matters, it is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax -related penalties under the Internal Revenue Code or (ii) marketing or recommending to another party any tax -related matter addressed within. Each taxpayer should seek advice based on the individual's circumstances from an independent tax advisor. This communication shall not be construed to provide tax advice, legal advice or investment advice. Sincerely, James J. Rizzo, ASA, MAAA, FCA Senior Consultant & Actuary Piotr Krekora, PhD, ASA, MAAA Consultant & Actuary Gabriel Roeder Smith & Company Table 1: Comparative Summary of Current Principal DB Plan Provisions Applicable lo: Terminated, retired an active Employees Eligible for Normal Retirement or within 5 Years From Normal Retirement Age Active Employees Not Eligible for Normal Retirement and Who Are Not Withiri 5 Years from Normal Retirement Age Accrual Period Before and After October 1, 2013 (no change) Before October 1' 2013 After September 30, 2013 Normal Retirement Eligibility (1) Age 65 with 10 years of service; (2) 30 years of service regardless of age (1) Age 65 with 10 years of service; (2) 30 years of service regardless of age (1) Age 65 with 10 years of service; (2) 30 years of service regardless of age Early Retirement Eligibility (1) Age 55 with 5 years of service; (2) 25 years of service regardless of age (1) Age 55 with 5 years of service; (2) 25 years of service regardless of age (1) Age 55 with 5 years of service; (2) 25 years of service regardless of age Early Retirement Reduction Factor 3% per year 3% per year 3% per year Number of Years in Average Final Compensation (AFC) 3 3 8 Period Include in Final Average Compensation 5 Years Prior to Retirement or Termination 5 Years Prior to the Effective Date 10 Years Prior to Retirement or Termination Compensation Total compensation reported on the W-2, but excluding accumulated sick leave and vacation pay and special bonuses, plus all tax deferred, tax sheltered, or tax exempt items of income. Total compensation reported on the W-2, but excluding accumulated sick leave and vacation pay and special bonuses, plus all tax deferred, tax sheltered, or tax exempt items of income Base wages, and overtime payments up to 300 hours per calendar year, including all tax deferred, tax sheltered or tax exempt items of income derived from elective employee payroll deductions or salary reductions. Multiplier 2.55% per year 2.55% per year 1.6% per year, subject to VBH feature Normal Form of Benefit 10 years certain and life annuity 10 years certain and life annuity Life Annuity Employee Contribution Rate 8.18% of pay 8.18% of pay, contributed prior to October 1, 2013 3% of pay contributed after October 1, 2013, subject to VBH feature Cost of Living Adjustment (COLA) 3% per year 3% per year No COLA Vesting Schedule 5 year cliff 5 year cliff 5 year cliff Gabriel Roeder Smith & Company Table 2: Total Retirement Contributions Contribution Year Total Contribution Total Contribution Increase/ Ending Without IBEW Exit with IBEW Exit (Deacrease) 2015 15,008,946 15,008,946 0 2016 14,942,779 14,996,076 53,297 2017 14,454,621 14,3 76,416 (78,206) 2018 13,605,500 13,333,115 (272,385) 2019 13,081,316 12,786,817 (294,499) 2020 11,917,629 11,956,726 39,098 2021 8,968,262 9,443,857 475,595 2022 8,686,194 9,255,634 569,440 2023 7,976,252 8,546,745 570,493 2024 6,680,189 7,184,172 503,983 2025 6,640,782 7,100,316 459,533 2026 6,975,395 7,389,271 413,876 2027 7,305,860 7,732,604 426,744 2028 7,427,926 8,072,058 644,133 2029 8,272,100 8,473,773 201,673 2030 7,438,959 7,953,906 514,947 2031 7,162,923 7,316,102 153,179 2032 7,605,322 7,321,543 (283,780) 2033 7,424,058 7,341,529 (82,529) 2034 7,488,761 7,298,459 (190,301) 2035 7,372,060 7,359,242 (12,818) 2036 5,890,396 6,088,469 198,073 2037 5,908,738 6,219,480 310,742 2038 6,168,429 6,360,748 192,318 2039 4,505,690 4,514,388 8,698 2040 4,198,034 4,208,567 10,532 2041 4,285,107 4,295,540 10,433 2042 4,401,609 4,410,039 8,430 2043 4,538,557 4,543,187 4,630 2044 4,657,992 4,657,992 0 10-Year Total 106,953,525 108,979,874 2,026,349 Present Value 84,755,004 85,903,816 1,148,811 30-year Total 240,990,385 245,545,715 4,555,330 Present Value 129,272,807 131,312,466 2,039,659 Assumptions No future non -investment gains or losses 7.0% investment return for FYE September 30, 2015 and thereafter Gabriel Roeder Smith & Company Projected City Contribution as a % of Pay 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0:0% tin VO l— 00 O O O O N N N N ON O N N Retirement System Graph 1: Projected City Contributions under Current Plan Population --� N cn 71' cV CV CV Cl N N N N ‘.0 N N O 00 O cc) cn O O N Fiscal Year Ending O N N 00 O V O —a—Current Projection (2013, 1.3% Multiplier) Original Projection (2012, 1.6% Multiplier) — Corridor Boundaries Gabriel Roeder Smo Lc. Company Projected City Contribution as a % of Pay 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% — 0 -- Current Projection Retirement System Graph 2: Projected City Contributions under -15% Negative Stress Test Scenario for YE 9/30/2016 -15% o Rate of Return on Plan Assets for the year ending 9/30/2016 (22% below the assuin,ed 7% o) causes increasesin the City Contributions beginning with the year ending 9/30/2018 Multplier reduced to 1.0% beginning with 10/1/2024 valuation-to:prevent contribution -going above the top of the budget corridor for the year ending 9/30/2026. Fiscal Year Ending Negative Stress Test with (2013, 1.3% Multiplier) Multiplier Adjusted to 1.0% Gabriel Roeder Smith & Company Corridor Boundaries Projected City Contribution as a % of Pay 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Retirement System Graph 3: Projected City Contributions under +29% Positive Stress Test Scenario for YE 9/30/2016 29% Rate of Returnon Plan Assets:, for the year ending 9/30/2016 (22% above the assumed 7%) causes decreases in the City Contributions beginning with the year ending 9/30/2018. vt \O t 00 01 O ▪ N M to 00 C NNNNNNNN O O O O O O O O O O O O O O N N N N N N N N N N N N N N Current Projection (2013, 1.3% Multiplier) Multplier increased to 2.55% beginning with 10/1/2019 valuation in the attempt of preventing contributions going below the bottom of the corridor for the year endin: 9/30/2021. O O Fiscal Year Ending Positive Stress Test with Multiplier Adjusted to 2.55% 00 Q1 O O .-r N O O N N — Corridor Boundaries Gabriel Roeder Smi Company GRS Gabriel Roeder Smith & Company Consultants & Actuaries One East Broward Blvd, 954 527.1616 phone Suite 505 954.525.0083 fax Ft. Lauderdale, FL 33301-1872 www.gabrielroeder.com June 30, 2015 Re: Measuring the Cost of Dear Current (2014) Gain -sharing COLA Benefit Under the Contract for Professional Services effective Jul 1, 2014, Gabriel, Roeder, Smith & Company (GRS) was requested by the Office of to measure the costs and liabilities associated with the •ain-sharint cost-of-livin_-adjustment (COLA) benefit provisions of the Previous reports issued by GRS last year on the cost of COLAs (dated February 25, 2014) and the reasonableness of the investment return assumption (dated February 20, 2014) should be consulted for further information and details concerning methodologies. Unless specifically indicated otherwise, all actuarial assumptions and methods emplo ed herein that relate directly to the annual actuarial valuations are the same as those em to ed in actuarial valuation report prepared as of June 30, 2014 by actuary, (dated September 26, 2014). An actuarial model was created to simulate the operation of gain -sharing COLA provisions over time and measure the cost. The model involves four computerized steps that are forecasted and operated sequentially - representing each of the next 30 years, chronologically linked; and the process is repeated. 500 times. This four -step process is, therefore, repeated 15,000 times (each starting with an investment return, randomly selected from a lognormal distribution curve, for the given year) to gain an understanding of the range and frequency of likely outcomes: 1. Simulate of the investment performance of ' pension fund based upon its investment policy and a mainstream consensus of investment consultants and forecasters, 2. Apply the statutory mechanism for determining (a) when funds are transferred from the core pension fund to the experience account and (b) how much the transfer amount is, 3. Apply the statutory mechanism for determining (a) when a permanent benefit increase (PBI) or cost of living adjustment (COLA) is triggered with funds in the experience account and (b) how much the COLA increase is, and 4. .Perform an actuarial valuation for funding purposes and apply the statutory mechanism for establishing amortization bases resulting from Steps 2 and 3 and from other investment and actuarial gains (losses). The first Step requires constructing a lognormal distribution used for stochastically simulating each year's future investment returns. The model relies on Monte Carlo simulation techniques, in which June 30, 2015 Page 2 the computer randomly selects net rates of return from a derived lognormal distribution reflective of mainstream forecasts of future investment performance. In the second, third and fourth Steps, the computer model applies the 2014 statutes to determine the range and average Permanent Benefit Increases (PBIs) that might be produced by the statutory mechanism over time under various investment conditions. Investment Return Forecasts The specific thresholds and re uirements for when and how much in COLA benefits are payable from MIN are set forth in Statutes. These are highly dependent on the investment performance of the pension fund each year. Measuring the cost of future COLA benefits from , therefore, depends on the development of a reasonable financial model forecasting future investment returns of the pension fund. Such a model and the final selection of the return assumptions are best (and most unbiased) when they are: • Based on a consensus of thinking rather than being an outlier as overly optimistic or overly pessimistic, • Based on a mainstream of subject -matter experts in the field of economics and investment forecasting, rather than one firm's or person's opinion, • Based on analytics rather than hope -so thinking, or budget considerations, or politics, and • Based on the best science available, even though no one can know for certain what the future will bring. Simply stated, a reasonable return assumption used in regular annual actuarial valuations (for funding and for GASB purposes) would be the expected future compound return of the plan's portfolio. Like mortality and other actuarial assumptions, the return assumption is not a lever to adjust up or down to accommodate the government's budget. The return assumption used in regular annual actuarial valuations should be a reasonable expectation of the future compounded return to be earned by the portfolio, usually net of investment -related expenses. The selection of the return assumption used in regular annual actuarial valuations is the purview of ® actuary, Board of Trustees, and the Actuarial Committee and is judged for reasonableness by the financial statement preparers and auditors. However, a reasonable return assumption to use in this simulation (for measuring the cost and liabilities associated with gain -sharing COLA benefits) would be the expected future return of the plan's portfolio, one year at a time, rather than an expected compound return. There is a significant difference between expected compound returns over time (appropriate for annual valuations) and expected one -year -at -a -time returns (appropriate for simulating each future year's own COLA benefits). Gabriel Roeder Smith & Company June 30, 2015 Page 3 Forward -looking forecasts Past performance is not a reliable indicator of future results. That is not merely a disclaimer to protect investment advisors or brokers from liability or to comply with securities laws. That is a truism. Past investment performance experienced by , or other plans, or by the broader markets has little relevance when selecting and defending investment return assumptions used in actuarial valuations of a pension plan's basic benefits or simulating future COLA benefits. Many factors at play in the economy and society of the past, which contributed to past investment performance, are not present today or expected to be present in the future. Forecasting the trajectory and intensity of a hurricane based mostly on its past would be foolish. Forecasting future investment performance requires forward -looking forecasts. Investment forecast horizon For the purpose of this project, a mid-term horizon should be considered for the investment return forecasts. Some argue that pension funding is a long-term proposition and, therefore, the return assumption for actuarial valuations should be selected with the long-term in mind. There is a lot of appeal and logic to that opinion. However, for the following reasons, we recommend that a mid- term horizon forecast be applied throughout the benefit period. 1. Mid-term horizon forecasts are more readily available. Few investment consultants and forecasters publish capital market assumptions for a 30-year horizon. Therefore, there is scant data from major national experts for long-term forecasts for all relevant assets classes. There are not enough reputable firms preparing 30-year forecasts of all relevant asset classes to obtain a consensus spread of opinions. However, many reputable firms publish capital market assumptions that are intended to cover horizons that range from a low of 5-7 years to a high of 20 years. Mid-term horizon forecasts are more readily available. 2. Mid-term horizon forecasts are more reliable. As the horizon is extended further out, the reliability of the forecasts is more suspect. While the few published 30-year capital market assumptions are of interest, they rely heavily on a theory sometimes called "return (or reversion) to the mean" or RTM, which is heavily reliant on past performance. A mid-term horizon is more reliable. 3. Mid-term horizon forecasts are more defensible. Many parties sit in judgment of the operation and investments of public sector pension plans — elected officials, plan members, academics, rating agencies, the SEC, the press, the courts, etc. Those who select return assumptions (for actuarial measurements) are judged in the short and mid-term, not in the long term. A mid-term horizon is more defensible. We recommend including investment forecasters' capital market assumptions with mid-term horizons (5-7 years up to 20 years) to develop the consensus forecasts. Gabriel. Roeder Smith & Com ny June 30, 2015 Page 4 General inflation Forward -looking investment return forecasts are usually built on a base of inflation forecasts. Last year's report on reasonable investment returns prepared by GRS for the ® included significant back-up source data for a 2.5% mid-term horizon forecast of general inflation. That report cited various data sources including the Survey of Professional Forecasters maintained by the Federal Reserve Bank of Philadelphia, the Congressional Budget Office, Social Security Trustees, a survey of eight major national investment consultants and forecasters, and bond investors (as evidenced by comparing yields of inflation -indexed and non -indexed U.S. Treasury bonds). Inflation assumptions at or over 3.0% embraced by some plans and actuaries usually rely on the RTM theory. Forward -looking general inflation forecasts over mid-term horizons by a wide range of economists and investors are more reliable and defensible. Investment -related expenses Actuarial assumptions of future returns are usually expressed net of investment -related expenses, i.e., the assumed net return to the fund after removing the cost of obtaining the gross returns. The 5-year average of investment -related expenses for is approximately 0.66% of the beginning market value. Investment Expenses (for Year Ending June 30) 2000 2011 ' 2012 2013 Zola Average Investment Expenses for Alternatives Dollar Amount 27,148,022 36,758,019 34,592,332 33,397,818. 46,033,081 % of Beginning Market Value of Altematives 1.61% 2. I8% 1.81 % 1.63% 2.04% 1,86% % of Beginning Market Value of Total Fund 0.38% 0.46% 0,36% 0.35% 0.45% 0.40%. Other Investment Expenses Dollar Amount 19,610,752 22,828,686 22,249,730 24,887,907 28,801,658 % of Beginning Market Value of Other -Than -Alternatives 0.36%. 0.36% 0.29% 0.33% 0.36% 0.34% % of Beginning Market Value of Total Fund 0.28% 0.28% 0.23% 0.26% 0.28% 0.27% Total Ines tment-related Expenses Dollar Amount 46,758,774 59,586,705 56,842,062 58,285,725 74,834,739 % of Beginning Market Value of Total Fund 0.66% 0.74% 0.59% 0.61%. 0.72% 0.66% Beginning Market Value of Alternatives 1,684,067,211 1,689,645,211 1,907,805,968 2,043,609,429 2,254,383,368 Beginning Market Value of Other -Than -Alternatives 5,416,266,176 6,365,033,554 7,795,690,673 7,472,164,913 8,073,214,983 Beginning Market Value of Total Fond 7,100,333,387 8,054,678,765 9,703,496,641 9,515,774,342 10,327,598,351 Source: Comprehensive Annual Financial Reports Based on the current asset allocation, if the pension fund were passively invested in index funds for those readily index -able asset classes and actively invested for asset classes that are not readily index -able, the investment -related expenses might be approximately 0.20% per year. ending the additional 0.46% (excess of 0.66% over 0.20%) to pay for active management, Board expects its portfolio to earn at least 0.46% more than a passively invested portfolio would earn -- otherwise, they would stay with passive investing for all readily index -able asset Gabriel Roeder Smith & Company June 30, 2015 Page 5 classes. The Board and its staff and investment consultant likely expect to earn even more than that. However, absent compelling evidence that the pension fund will outperform a passively invested portfolio over time (and during up markets and down markets), we cannot assume alpha performance more than the cost of active management. Refer to Actuarial Standard of Practice (ASOP) No. 27. Mainstream of forecasters Experts differ in their expectations of future investment performance of each asset class. Reliance on just one investment consultant does not give a sense of the spread of opinions. Examining a range of opinions among reputable and experienced investment consultants and forecasters is useful in obtaining a consensus or average expectation. GRS maintains a library of the capital market assumptions of reputable and experienced investment consultants and forecasters. Relying on the average among various major national investment consultants ensures the results represent the mainstream of opinions. The use of outliers at either end of the forecasting spectrum (optimistic or pessimistic), whether they are known to be outliers or not, carries some defense risks and headline risk. Staying within the mainstream ensures a defensible best estimate of the costs and liabilities that fairly represent the pension obligation. For the ® purpose in this report, we recommend employing the average mean and standard deviation of the raid -term forecasts among the following eight major national investment consultants and forecasters. Eight -Major National Investment Consultants and Forecasters BNY/Mellon Mercer Hewitt Ennis Knupp NEPC J. P. Morgan Pension Consulting Alliance R.V. Kuhns & Associates Towers Watson Expected One-year Net Returns Following is the build-up of the mean (and standard deviation) for the lognormal distribution of the net returns for any given one year period for each investment consultant. This does not represent compound expected returns over time; but a one -year -at -a -time probability distribution. The average one year expected net return (7.88%) will serve as the mean of the lognormal distribution (with the standard deviation of 15.08%), from which the computer model will select each future year's net investment return of pension fund. These future returns are net of investment expenses and gross of administrative expenses, before any gain -sharing of excess earnings dedicated to COLAs. Gabriel .Roeder Smith & Company June 30, 2015 Page 6 Investment Consultant (1) Investment Consultant Investment Expected Consultant F peeled Normalized Nominal Inflation Real Return Inflation Return Assumption (2)-(3) Assumption O (4) (5) Expected Nominal Return (4)+(5) (6) • Investment and Active Management Expenses (7) Recognized Value for Active Management (8): One Year Expected Nominal Return Net of lnv-related Expenses (6)-(7)+(8) (9) One Year Standard Deviation of Expected_. Return (1-Year) (10) 6.51% 2.12% 4.39% 2.50% 6.89% 0,66% 0.46% 6,69% 14.00% 2 7.67% 3.00% 4,67% 2.50% 7.17% 0,66% 0.46% 6.97% 14.70% 3 7.65% 2.50% 5,15% 2.50% 7.65% 0.66% 0.46% 7.45% 15,80% 4 7.91% 2.26% 5.65% 2.50% 8.15% 0.66% 0.46% 7.94% 14.40% 5 8.09% 2.20% 5.89% 2.50% 8.39% 0.66% 0,46% 8.19% 14.40% 6 8.16% 2.11% 6.05% 2.50% 8.55% 0.66% 0, 46% 8.35% 15,20% 7 8:66% 2.50% 6.16% 2.50% 8.66% 0.66% 0.46% 8.45% 17.20% 8 8.95% 2.20% 6.75% 2.50% 9.25% 0.66% 0.46% 9.05% 14.90% Average 7,95% 2.36% 5.59°4, 2.50% 8.09% 0.66% 0.46% 7.88% 15.08% Percentiles of expected compound returns over time The purpose of this report is to measure the cost of gain -sharing COLA benefits; and the purpose of the development of the mean and standard deviation for the lognormal distribution of net returns is to simulate the expected future net returns experience, one year at a time in the future (for measuring how often and how much excess earnings are available for COLAs). The need for a one -year -at -a -time simulation of returns demands the "arithmetic" mean of a one- year -at -a -time probability distribution. This is different from the "geometric" mean or the 50th percentile of the compound return, chained over time. While not the subject of this study, annual actuarial valuations depend on the compounding of investment earnings over time to generate funds for the payment of promised benefits. Therefore, for the purpose of annual actuarial valuations (a different purpose from this letter report), a distribution of geometric returns is more meaningful to guide in the selection of an appropriate net actuarial return assumption for funding and GASB purposes. The 50t1i percentile of compound returns is always lower than the "arithmetic" mean because of a phenomenon called "volatility drag". This was explained in more detail in our previous report from last year. Gabriel Roeder Smith & Company June 30, 2015 Page 7 hivesttnent' Cons u[tatit' Distribution of 15-YearAverage Geometric Net Notnin l Return 40th 50th 60th Probability (tf exceeding 8.00°10 (1 (4) (5) 4.86% 5.76% 6.67% 26.7% 2 5.02% 5.96% 6.91% 29.4% 3 5.27% 6.28% 7.30% 33,5% 4 6.04% 6.97% 7.91% 39.0% 5 6.30% 7:22% 8.16% 41.7% 6 6.31 % 7.28% 8.26% 42.6% 7 5.99% 7.08% 8.19% 41.7% 8 7.06% 8.02% 8.98% 50.2% Average 5.85% 6 82% 7.80% 38.1% Over time, the mainstream's estimate of the compound investment rate of return is 6.82%, at the 50th percentile, net of investment -related expenses and before any transfers to the experience account or COLA costs. So after investment -related expenses and before any transfers to the experience account or COLA costs, the pension fund has a 50-50 chance of achieving at least 6.82% on a market return basis. A 50th percentile expectation of compound returns over time an appropriate return assumption for annual actuarial valuations. Notice also that according to the mainstream consensus of forecasters' opinions, there is only a 38.1% chance of achievin current 8.0% expectation on a compound market return basis over time. Recall, current 7.75% assumption is after its stated estimate of COLA costs (which its actuar sa s is estimated at 0.25% of assets). Therefore, to put the two forecasts (mainstream and ) on a com arable basis, the mainstream of forecasters' data indicates only a 38.1% chance of achieving 8.0% assumed rate of return on a compound market return basis over time. Now, back to the purpose of this letter report. Modelling the cost of COLA benefits Now that we have a reasonable basis (a lognormal distribution with mean of 7.88% and standard deviation of 15.08%) for simulating the future one -year -at -a -time net investment returns of pension fund, we move to the statutory mechanism in place since the 2014 Legislative Session (after the adoption of ). A endix A, attached to this letter report, is a summary of the current statutory provisions of gain -sharing COLA benefit provisions. Gabriel Roeder Smith & Company June 30, 2015 Page 8 Monte Carlo simulations The stochastic actuarial model employed to measure the cost and liabilities associated with gain -sharing COLA benefits simulates the operation of over the next 30 years, and does so 500 times. Each 30-year simulation is called a "trial". For any given year within a given trial, the computer model randomly selects a net investment return from a lognormal distribution derived from mainstream assumptions, and applies the statutory framework for determining if (and how much) a transfer is required. The statutory framework (template), as described in Steps two, three and four, as described on the first page of this report, is has numerous complex moving parts. It is only through the use of an actuarial computer model simulating the process that users can gain appropriately -placed confidence inactuarial estimates. It is only through the use of an actuarial computer model that Legislators can be given analytical answers to the question of whether and how much financial effect a particular proposed law change will have. Monte Carlo simulations do not provide exact answers. But they do provide more useful and reliable answers, in complex situations like this. Legislative approvals The model was run on two bases: 1. 100% approvals. The 100% approval basis assumes that all Permanent Benefit Increases (PBI) allowable under the statutor rules would be granted by various bodies requiring approval MEM actuary, Board, State Legislature and Governor). In other words, whenever the statutory rules permit a COLA to be granted, it would be approved. Each such COLA approval causes the experience account to be reduced by the value of the COLA granted, or depleted entirely, leaving more room thereafter for additional transfers to the experience account. This 100% approval basis expresses the longer -term reasonable cost of the program as a whole because of the history of granting COLAs whenever permitted by law. O% approvals. Even though, in any given year, the statutory rules would permit a COLA to be granted, this basis assumes no approval is granted. This causes the experience account to build up and reach its cap without any COLAs being granted. Rarely would any transfers occur because the experience account would be at or near its cap; but no COLAs granted. This 0% approval basis is useful to consider because the granting of a COLA by the Legislature, even if permitted under the terms of the statutory rules, requires a bill to be introduced and passed. That is a new bill, separate from what would already be on the books at the time. Each such new bill needs an actuarial fiscal note to advise the Legislature on the cost of that particular bill. Therefore, a baseline is needed for assessing the fiscal impact of a new bill, comparing it to no bill (i.e., the 0% approval basis). Gabriel Roeder Smith & Company June 30, 201.5 Page 9 Expected frequency of transfers to the experience account The cost of gain -sharing COLA provisions is driven by the frequency and amounts of the transfers to the experience account out of the core pension fund under the statutory rules. The following graph presents the expected probability of a transfer (after 500 trials) out of the core pension fund to the experience account, under a 100% approval basis and a 0% approval basis as described above. Transfers to the experience account represent the real cost of the gain -sharing provisions. For the 100% approval line, the likelihood levels off at approximately 30% to 40% chance of transfers each year. This estimated frequency is down from the 40% to 60% frequency expected from the 2013 legislative template in our last year's report. Some of the reasons are explained on page 15. Notice there is no clear pattern for even- or odd -numbered years that one might expect because of the skip -year provisions. The skip -year provisions apply to the approval (or not) by the Legislature of a PBI, not to the transfer; furthermore, there are a number of moving parts that might automatically shift the skip -years to and from even- or odd -numbered years. So there is a fairly level probability each year of a transfer of some amount (whether large or small). For the 0% approval line, as the pent-up investment gains are recognized out of smoothing over the next few years, the chances are improved for the funded ratio to reach the next step to open up opportunities for transfers; refer to the Appendix A for the statutory step rules. Consequently, there is a jump in the probability of transfer, even though there is a 0% a chance of approval. Mean Annual Frequency of a Transfer Among 500 Trials 80% 70% 60% 50% 40% 3 0% 20% to N rn O O O N N N h N \ O N kn N O N Percent of all Trials with Transfers Under 100% PBI Approval Percent of all Trials with Transfers Under 0% PBI Approval rn N O Gabriel Roeder Smith S Company June 30, 2015 Page 10 Expected transfer amounts The following graph presents the expected dollar amount of transfers (after 500 trials) out of the core fund to the experience account for each future year, under a 100% approval basis and 0% approval basis as described above. Under the model, many years do not have transfers (as indicated in the previous graph) for various reasons. These amounts below represent the average transfer amount including zeroes for the years when there is no transfer. Compared to the 2013 forecasters' expectations under the 2013 legislative template, these expected amounts are much lower, by more than one-half. Some of the reasons are explained on page 15. $70 $60 $50 $40 $30 $20 $10 $0 MeanAnnual Transfer Amount Among All 500 Trials Mean Transfer Amounts Under 100% PBI Approval Mean Transfer Amounts Under 0% PBI Approval Notice the continued transfer of substantial amounts under the 100% approval basis due to the granting of COLAs, which reduce or deplete the experience account leaving more room for new transfers. Again, transfers to the experience account represent the real cost of the gain -sharing COLA provisions. The graph above presents the average (mean) transfer amount expected for each year. So, on average, the 100% approval line settles in at about $40 million to $60 million each year. However, considering solely the years when there was a transfer, the amount is much different -- much larger. Gabriel Roeder Smith & Company June 30, 2015 Page 11 Simplified equivalencies Regular annual valuations are not stochastic, but deterministic, actuarial valuations. That is, they assume the pension fund earns exactly the same net rate of return every year. This, of course, is a simplification demanded by the nature of funding and financial reporting. This stochastic actuarial simulation approach (aka Monte Carlo simulations) cannot easily be integrated directly into annual actuarial valuations - not for funding purposes and not for GASB purposes. Therefore, regular annual actuarial valuations need a method of approximation that is consistent with regular valuation methods, in order for the regular valuation to measure the costs associated with gain -sharing COLA benefits. Certain information derived from this stochastic actuarial simulation provides the tools for incorporating a consistent approximation into the regular annual valuation process. Without using a stochastic actuarial simulation to model the gain -sharing COLA benefits, any approximation incorporated into a deterministic regular annual valuation would be an educated guess at best. For a gain -sharing COLA benefit structure as complex as this type of modelling is the most accurate way to inform the usual non -stochastic (deterministic) valuation methods that are required for funding and for GASB purposes. In other words, it is the most accurate way to obtain an approximation appropriate for use in annual actuarial valuations. There are two ways that we have seen to approximate the cost of gain -sharing COLAs in an annual actuarial valuation performed under the entry age normal cost method to determine the employer contribution requirement, funded ratios, unfunded actuarial accrued liabilities and other related actuarial information (such as required for GASB financial reporting purposes): 1. An explicit approximation of the cost assumes an annual fixed COLA of a single equivalent percentage in the regular annual valuation using the rate of return assumption (net of investment expenses, but without any reduction for gain -sharing). The single equivalent annual fixed percentage increase is derived by solving for the percentage increase under an annual fixed COLA that produces the same present value over a 30-year period from an open group valuation that equals the present value of the annual means of the expected distribution of transfers (illustrated in the graph above). This explicit approximation is the preferable approach for this plan for several reasons described below. 2. An implicit approximation of the cost lowers the otherwise expected net return assumption (discount rate) of the fund by a single equivalent number of basis points. actuary and board adopted this implicit approximation method, as disclosed in their June 30, 2013 and 2014 actuarial valuation reports. This method of approximation does not actually project the expected future gain -sharing benefit stream as part of the valuation process in a similar manner to projecting all other plan benefits. Under, this implicit approximation method, the cost of gain -sharing COLA benefits is implicitly built into the valuation results by lowering the net return assumption, and applying that lower assumption to all the regular core plan benefits alone. This causes Gabriel Roeder Smith & Company June 30, 2015 Page 12 the normal cost and actuarial accrued liabilities of the core benefits to increase by some margin, theoretically and implicitly representing the added cost of the gain -sharing COLA benefits. This is not the preferred approach for this plan for the reasons described below. Both of these approximation methods would require the same type of stochastic actuarial modelling approach to estimate the approximated single equivalencies (whether an equivalent annual fixed COLA or an equivalent basis point reduction of the net return assumed). Under either approximation method, a more scientific actuarial forward -looking simulation model is required to settle on the single equivalencies. Looking back at the past is inadequate and not representative of future expectations. Measuring the future costs and liabilities of complex gain -sharing provisions such as this requires the use of current actuarial modelling techniques, not merely looking at the one set of returns experienced in the past and imputing that to the future. In the June 30, 2013 actuarial valuation report, actuary used a 50 basis point reduction in the return assumption (an implicit approximation), derived from looking back at the past 21 years, to approximate the future costs of the gain -sharing COLA provisions. Our previous report from last year provided reasons as to why the historical look -back method employed was insufficient and inconsistent for obtaining a reasonable estimate of the future. For the June 30, 2014 actuarial valuation, actuary changed the estimate to 25 basis points. We were not provided backup or audit evidence for that new, lower estimate. That may or may not be an accurate estimation under an implicit approximation. Our previous report prepared last year concerning gain -sharing COLA benefits also provided a detailed explanation as to why the explicit approximation is far superior to the implicit approximation for this plan. Again, the explicit approximation uses this type of stochastic actuarial modelling method to approximate the equivalent single amount of and annual fixed COLA. The explicit approximation is preferable for the following six reasons. 1. The implicit approximation is inconsistent with the GASB standards. First, GASB requires the projection of benefits payable under the plan; refer to paragraphs 39 and 41 of GASB Statement No. 67 (and other similar and applicable paragraphs in Statement 68 and the Implementation Guides). Under the implicit approximation, projections of gain -sharing COLA benefits are not made (not even approximations of such). Second, the GASB requires the long-term expected net rate of return, used to measure the service cost and the total pensionliability, to be just that — a long-term expected net rate of return of the underlying portfolio; refer to paragraphs 31(b)(1)(c), 40(a) of GASB Statement No. 67 (and other similar and applicable paragraphs in Statement 68 and the Implementation Guides).. long-term expected net rate of return of the underlying portfolio is 8.0%, not 7.75%. However, 7.75% is used to measure the service cost and total pension liability, contrary to the GASB standards. Gabriel Roeder Smith & Company June 30, 2015 Page 13 2. The implicit approximation is not transparent. The actuarial report does not provide any separately identified measure of the ongoing future cost of the gain -sharing COLA provision. The annual actuarial report shows the normal cost and actuarial accrued liabilities separately for disability benefits, retirement benefits, voluntary termination benefits and death benefits. But it does not show any similar line items for the gain -sharing COLA benefits — because it is implicitly baked into these other numbers. 3. The implicit approximation lacks useful byproducts. The explicit approximation has the natural byproduct of giving Legislators, taxpayers, plan management or others an idea of how the current complex statutory framework compares to a regular annual fixed COLA. That is common sense approximation that is more easily grasped by the public. 4. The implicit approximation misleads the public. Users of financial statements and actuarial re oils should know what the underlying return assumption is. Users of these reports think expected portfolio return is 7.75%. It is not. It is 8.0%. stated return assumption (7.75%) is not comparable to other systems' stated return assumptions. The vast majority of other retirement systems do not have any implicit reduction of their return to account for gain -sharing benefits. The are reporting their true expectation of returns. For example, because of the way reports its return assumption, the recent NASRA survey put return assumption at 7.75%, instead of where it really belongs (8.0%). 40 35 - 30 25 20 15 10 6,50%-7.25% Number of Plans by Return Assumption 7.50%-7,65% 7.75%-7.90% 8.00% 8.10%+ RI Source: NASRA May 2015 Issue Brief on Public Pension Plan Investinent Return Assumptions (126 large member retirement systems) 5. The implicit approximation creates circular reasoning when ai it in. the statutes. The statute determines the gain -sharing benefits by reference to the return assumption. Yet the return assumption was determined by reference to the gain -sharing benefit amount. Gabriel Roeder Smith A; Company June 30, 2015 Page 14 6. The implicit approximation usurps the Legislature's authority. This is related to the circular reasoning. Because the statute says the hurdle return for gain -sharing is the valuation assumption, when the board and actuary lowers the basic net return assumption by 25 basis points (the implicit approximation method), it makes that hurdle lower. That decision makes it is easier to reach the hurdle, triggering larger transfers more often and providing more funds for gain -sharing COLA benefits. The 25 basis point difference may not create substantially higher costs. But setting the bar to hurdle is the job of the Legislature's, not the pension board or the actuary. This problem can also be solved by either (a) changing the statute to hard -wire a hurdle return or (b) use of the explicit approximation method, so that the bar is not set wherever the board and actuary decide. An explicit approximation takes the results of this stochastic model and solves for the single equivalent amount of a fixed annual COLA. complex gain -sharing COLA is approximately equivalent to a fixed annual COLA of 0.51% per year. This approximation is based on equivalent present values of (a) the mean expected transfer amounts over the next 30 years from this open group stochastic model and (b) the PBIs under a fixed annual COLA of 0.51% per year over the next 30 years from a traditional (but open group) deterministic valuation projection. This is down from the 1.33% per year single equivalent fixed annual COLA estimated previously under the 2013 legislative template. Again, the explicit approximation is a better approach for the following reasons: 1. An explicit approximation explicitly projects the expected future gain -sharing COLA benefit stream, as required by the GASB. 2. An explicit approximation can transparently and explicitly disclose the separate costs associated with gain -sharing COLA benefits in the actuarial reports. 3. The explicit approximation does not create any circular reasoning in the statutes. 4. The explicit approximation puts disclosure of its net return assumption on a comparable basis with other retirement systems, by leaving the expected returnas the discount rate. 5. The explicit approximation is simpler and has a more common sense interpretation by the general public. 6. The explicit approximation retains the benefit authority with the Legislature. Gabriel Roeder Smith & Company June 30, 2015 Page 15 Reasons for the reductions All the relevant metrics showed reductions from (a) the 2013 legislative template using the June 30, 2013 valuation data as set forthin our last year's report to (b) the 2014 legislative template using June 30, 2014 valuation data as set forth in this letter report. There were reductions in the expected frequency of transfers, expected average amount of transfer and the single equivalent fixed annual COLA percentage. Following are primary reasons for these reductions: A. Investment forecasters are now (in 2015) expecting even lower future returns than they were in 2013. Furthermore, their standard deviation is lower now, resulting in less expected volatility of returns. It is the up -side volatility that creates more gain -sharing transfers; and the up -side likelihood and magnitude came down. B. Our last year's letter report used a 7.25% assumed rate for the regular annual valuation in future years, while this letter report used the same assumption used by actuary and board, 7.75%. The previous 7.25% valuation rate was the 50th percentile of compound returns as expected by the consensus mainstream of the same eight major national investment consultants and forecasters; whereas, for this letter report, we were asked to apply the same assumption as used by (7.75%). This made the hurdle rate harder to achieve, thereby, lowering the estimated cost. C. The 2014 legislative template contains a skip -year provision on approvals. D. The 2014 legislative template contains provision to index the dollar amount threshold. E. The 2014 legislative template has experience account caps that are much lower. F. The 2014 legislative template's new funded ratio hurdles are more effective at limiting transfer amounts. Gabriel Roeder Smith & Company June 30, 2015 Page 16 Caveats and qualifications Forecasts of future inflation and investment returns by professional forecasters and investors involve assumptions regarding future events, which may or may not materialize. Future actual investment returns are certain to differ from forecasted or expected returns. Future actuarial measurements may differ significantly from the current measurements presented in this report due to such factors as the following: plan experience differing from that anticipated by the economic or demographic assumptions; changes in economic or demographic assumptions; increases or decreases expected as part of the natural operation of the methodology used for these measurements (such as the end of an amortization period or additional cost or contribution requirements based on the plan's funded status); and changes in plan provisions or applicable law. All calculations have been made in conformity with generally accepted actuarial principles and practices and with the Actuarial Standards of Practice issued by the Actuarial Standards Board. If you have reason to believe that any information provided in this report is inaccurate, or is in any way incomplete, please contact the author(s) of the report prior to making any decisions based on results presented in this report. We trust this report will be useful as you consider the current and future costs and liabilities of the gain -sharing provisions of the Plan. The undersigned are members of the American Academy of Actuaries and meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinions contained herein. This communication shall not be construed to provide tax advice, legal advice or investment advice. Sincerely, James J. Rizzo, ASA, MAAA Senior Consultant and Actuary Piotr, Krekora, PhD, ASA, MAAA Consultant and Actuary Gabriel Roeder Smith & Company Appendix A 2014 Legislative Template for Gain -sharing COLA Benefits Permanent Benefit Increases Act 399 amendedprovisions governing granting of Permanent Benefit Increases (PBIs). Amounts and frequency of increases depend on plan's funded status and on actuarial return on assets for the prior year, These rules are summarized in Table 1 describing the conditions that are tentatively necessary and sufficient for a PBI: Table 1 Funded . PBI Granted In Prior year? Preliminary P13I Rate* Actual ReR Lower Than Assumed ' (Currentlys7.`75%) Actual RoR Higher Than Assumed but Lower thnn-8.25%0 Actual RoR HigherRatio Than $.25% 85% or More Yes 2.0% 2.0% 3.0% No 2.0% 2.0% 3.0% 80%- 85% Yes 0.0% 0.0% 0.0% No 2.0% 2.0% 3.0% 75%- 80% Yes 0 0% 0.0% 0.0% No 2.0% 2.5% 65%- 75% Yes 0.0% 0,0% No 2.0% 2.0% 55%- 65% Yes 0.0% 0.0% No 1.5% 1.5% Less than 55% Yes 0.0% 0.0% No 0.0% 0,0% *PBI rate will always be limited by the prior year inflation (CPI-U) Eligibility for Permanent Benefit Increase: 1. Retirees age 60 or older who had been collecting benefits for at least a year 2. Disability retirees who had been collecting benefits for at least a year, regardless of age 3. Survivors of participants who would have been age 60 year or older had they survived with combined period of benefit (retiree and survivor) of at least one year To be eligible, members must meet conditions described above on the effective date of the increase. Amount of Permanent Benefit Increase: PBI will be granted on the first $60,000 of benefit in force on the valuation date. This amount will be indexed with CPI-U beginning with the year ending 6/30/2015 General Conditions: 1. A PBI can be granted only if funds in the Experience Account are sufficient to pay for the full PBI calculated in accordance with the above rules, A partial PBI is not permitted. 2. The legislature must approve a PBI grant after the all conditions necessary under template rules have been satisfied. 3. Any PBI granted by the legislature will require a bill :to be filed, a two-thirds (2/3) favorable vote in each chamber, and approval by the governor. Experience Account The following rules will apply to the Experience Account. 1. If the plan's funded ratio is less than 80%, the maximum balance in the Experience Account after any credits or transfers in a given year is equal to the maximum PBI that could be granted for that year; otherwise 6%, as illustrated in the following table: Table 2 Funded Ratio Maximum balance allowed 80% or more 75% - 80% 65%-75% 55% - 65% Less than 55% two times the cost of a full 3% PBI cost of one full 2.5% PBI cost of one full 2.0% PBI cost of one full 1.5% PBI N/A (no transfer allowed) 2. The Experience Account will be credited with interest but only up to the maximum limit. 3. The maximum amount that may be transferred to the Experience Account is determined after the account is credited/debited with interest and after it is debited in connection with PBI grants. 4. Credits may not result in the account balance to exceed the maximum described in Table 2. Allocation of Investment Gains 1. Amortization of Original Amortization Base (OAB) and Experience Account Amortization Base (EAAB): Hurdle A: The first $50 million of investment gains ($25 million for the June 30, 2014, valuation) will be used to reduce the OAB. The amortization schedule for the OAB will not be re -amortized. Hurdle B: The second $50 million of investment gains ($25 million for the June 30, 2014, valuation) will be used to reduce the EAAB. The amortization schedule for the OAB will not be re -amortized. For the June 30, 2014, valuation only, investment gains between $50 million and $100 million will be treated as an actuarial gain. Such gain will be amortized over a period of five years. Gabriel Roeder Smith & Company - Hurdle A and Hurdle B will be increased each valuation date by the ratio of the AVA as measured on the valuation date by the AVA on the previous valuation date. If the ratio is less than 1, Hurdles A and B will not change. 2. A portion of investment gains in excess of Hurdle B, if any, will be allocated to the Experience Account. The portion so allocated will be equal to the lesser of: i. 50% of investment gains in excess of Hurdle B, and ii. A highest amount that would not result in exceeding the maximum Experience Account balance allowable for the year according to conditions summarized in Table 2 (after taking into account PBI, debits and interest credits). 3. New Credit Base — Any remaining investment gains will be treated as a Credit Base. Generally, such ne credit case will be amortized with level credits over 30 years, with the following exceptions: For the June 30, 2014,.valuation such gain will be amortized over five years. Once the system has a funded level of 85% or more, such gain shall be amortized over 20 years. 4. If outstanding balance of the OAB is reduced to $0 before the EAAB is fully amortized, then investment gains that otherwise would have been used to reduce the outstanding balance of the OAB will be used to reduce the outstanding balance of the EAAB. 5. If outstanding balance of the EAAB is reduced to $0 before the OAB is fully amortized, then investment gains that otherwise would have been used to reduce the outstanding balance of the EAAB will be used to reduce the outstanding balance of the OAB. 6. Once the outstanding balance of both the EAAB and OAB have been reduced to $0, investment gains up to Hurdle B will be used to reduce the outstanding balance of the oldest charge base. The amortization schedule for that base will not be re -amortized unless the system is 85% funded. 7. As each change based is fully amortized, investment gains up to Hurdle B and employer contributions made in accordance with the original amortization schedule will be used to reduce the outstanding balance of each successive oldest charge base until the funded ratio of the system is 100%. 8. A charge base will be established whenever an amount is transferred to the Experience Account. This base will be amortized over a period of 30 years. Beginning with the June 30, 2019, valuation, such charge base will be amortized over a ten year period. 9. When the system becomes 85% funded, any new bases (charge bases or credit bases) will be amortized over 20 years rather than 30 years. The only exception to this rule will be for bases resulting from benefit increases or transfers to the Experience Account. These bases will continue to be amortized over ten years Gabriel Roeder Smith & Company Employer Contribution Requirements Employer contributions toward amortization of a given charge base will stop once a given charge base has been reduced to $O. Gabriel Roeder Smith & Company Appendix B Actuarial Assumptions and Methodologies Unless specifically indicated otherwise, all actuarial assumptions and methods employed herein that relate directly to the annual actuarial valuations are the same as those em to ed in actuarial valuationreport prepared as of June 30, 2014 by actuary, , and dated September 26, 2014. Even though the stochastic modelling of future net investment returns described in this report is based different expectations of the future than actuary employed, that is not inconsistent. adopted 7.75% as the actuarial assumption for the actuarial valuation that determined the contribution requirements. It is more reasonable and more realistic to assume for the purpose of this letter report that future employer contributions would be determined based on the same 7.75% net return assumption; similarly, all the other actuarial assumptions and methods used in most recent actuarial valuation were also carried forward in our simulations of future employer contribution requirements resulting from simulating future annual actuarial valuations. New hires entering the plan were assumed at the same rate as exiting members so that the total number of active employees as of each future valuation date (June 30) remains the same as the number covered on June 30, 2014. This is called an "open group forecast". The new hires for a given subgroup were assumed to have the same age -at -hire distribution as exhibited by that subgroup's active members hired within the past three years. In addition, the new hires were assumed to have the same average starting salary, adjusted for a wage inflation rate of 3.0% per year, as that same group of current members with less than three years of service. All such future new hires are treated as being covered under their respective subgroups for currently open tiers of benefit; so that as the population currently covered under older benefit tiers dwindles down over time, the population of active employees covered under the new benefit tiers increases. APPENDIX H CONFERENCE OF CONSULTING ACTUARIES' •WHITE PAPER ON "ACTUARIAL FUNDING POLICES AND PRACTICES FOR PUBLIC PENSION PLANS" Conference of Consulting Actuaries Public Plans Community (CCA PPC) Actuarial Funding Policies and Practices for Public Pension Plans October 2014 Advancing the Practice® onference of Public Plans Commur Contents An Open Letter 3 Introduction 5 Transition Policies 8 General Policy Objectives 9 Principal Elements of Actuarial Funding Policy 11 Actuarial Cost Method 12 Asset Smoothing Methods 17 Amortization Policy 21 Direct Rate Smoothing 28 Items for Future Discussion 30 2 Paul Angelo Tom Lowman An I pen Letter From: Paul Angelo, Chair and Tom Lowman, Vice Chair Conference of Consulting Actuaries Public Plans Community To: Interested Parties in the Public Pension Arena Re: Public Plans Community White Paper on Public Pension Funding Policy On behalf of the Conference of Consulting Actuaries' Public Plans Community (CCA PPC), the following "White Paper" is presented to provide guidance to policymakers and other interested parties on the development of actuarially based funding policies for public pension plans. The CCA PPC includes over 50 leading actuaries whose firms are responsible for the actuarial services provided to the majority of public -sector retirement systems in the US. All of the major actuarial firms serving the public sector are represented in the CCA PPC as well as in-house actuaries from several state plans. As a result, the CCA PPC represents a broad cross section of public -sector actuaries with extensive experience providing valuation and consulting services to public plans, and it is that experience that provides the knowledge base for this paper. The White Paper is based on over two years of extensive and detailed funding policy discussions among the members of the CCA PPC, and reflects the experience of those members in providing actuarial consulting services to state and local public pension plans throughout the US. While there were naturally disagreements and compromises during those discussions, the White Paper reflects the resulting majority opinions of the CCA PPC as developed through those discussions, We believe this White Paper reflects a substantial consensus among the actuaries who provide valuation and consulting services to public pension plans. This White Paper represents groundbreaking actuarial research in that it develops a principles based, empirically grounded Level Cost Allocation Model (LCAM) for use as a basis for funding policies for public pension plans throughout the US. In particular, we believe that the funding policies developed herein could serve as a rigorously defensible basis for an "actuarially determined contribution" under Statements 67 and 68 of the Governmental Accounting Standards Board, 3 AN OPEN LETTER The distinguishing feature of this approach is that it is begins with stated policy objectives and then develops specific policy guidance consistent with those objectives. One of the main results is that an effective funding policy often represents a balancing of policy objectives. Another is that adherence to the policy objectives may lead to a narrower range of acceptable practices than is sometimes found in current practice. The LCAM White Paper is intended to provide guidance not just in the evaluation of particular current policy practices but also in the development of actuarially based funding policies in a consistent and rational manner. For that reason, the reader is strongly encouraged to focus not only on the specific practice guidance but also on the detailed discussions and rationales that lead to that guidance. Also note that while this discussion is comprehensive it is not all- inclusive, There is a list of "items for future discussion" at the end of the paper. In addition, there may be other "level cost allocation models" that are appropriate in some circumstances. The CCA PPC would like to acknowledge and thank the California Actuarial Advisory Panel for their seminal work in developing the principles -based level cost allocation model on which this White Paper is based. We also thank all the members of the Conference of Consulting Actuaries Public Plans Community who helped in the development of this paper. 4 Introduction This "white paper" is based on funding policy discussions among the members of the Conference of Consulting Actuaries Public Plans Community (CCA PPC) and reflects the majority opinions the CCA PPC members'. Those discussions relied heavily upon and generally concurred with the funding policy white paper prepared by the California Actuarial Advisory Panel (CAAP) and the level cost allocation model developed therein2. For that reason, the CCA PPC has chosen to build directly on the CAAP document in developing its own funding policy guidance. The CCA PPC wishes to express its sincere appreciation to the CAAP for its seminal work in preparing a principles -based funding policy development. However, while much of the text of this CCA PPC white paper comes directly from the CAAP document, this white paper is presented solely as the majority opinions of the CCA PPC. This CCA PPC white paper is intended for a national audience, as part of a nation-wide review and discussion of funding policies for public pension plans. Our hope is that the principles and policies developed herein may provide an actuarial basis for others developing funding practices and that legislative, regulatory and other industry groups may build these concepts into their guidance. This white paper develops the principal elements and parameters of an actuarial funding policy3 for US public pension plans. It includes the development of a Level Cost Allocation Model (LOAM) as a basis for setting funding policies. This white paper does not address policy issues related to benefit plans where a member's benefits are not funded during the member's 1 These comments were developed through the coordinated efforts of the Confer- ence of Consulting Actuaries' (CCA) Public Plans Steering Committee. However, these comments do not necessarily reflect the views of the CCA, the CCA's members, or any employers of CCA members, and should not be construed as being endorsed by any of those parties. 2 See 'Actuarial Funding Policies and Practices for Public Pension and OPEB Plans and Level Cost Allocation Model" at http://www.sco.ca.gov/caapresources.html 3 As used in this paper, an "actuarial funding policy" has the same meaning as a "Con- tribution Allocation Procedure" as defined in the Actuarial Standards of Practice (ASOPs). We further note that the actuarial policies that determine the level and timing of contri- butions must also include policies related to setting the actuarial assumptions. As noted at the end of this section, this paper does not address policies and practices related to setting actuarial assumptions. INTRODUCTION working career, e.g., plans receiving "pay-as-you-go" funding or "terminal" funding. While this white paper develops guidance primarily for pension plans, we believe the general policy objectives presented here are applicable to the funding of OPEB plans as well. However, application of those policy objectives to OPEB plans may result in different specific funding policies based on plan design, legal status and other features distinctive to OPEB plans. We encourage those involved in the valuation and funding of OPEB plans to consider the applicability to those plans of the policy guidance developed here, Some pension plans have contributions rates that are set on a fixed basis, rather than being regularly reset to a specific, actuarially determined rate, The CCA PPC believes that such plans should develop an actuarially determined contribution rate for comparison to the fixed rate. However, this white paper does not address procedures for evaluating that comparison, or for determining whether the fixed rate is sufficient or when and how the fixed rate should be changed. The CCA PPC intends to prepare a separate white paper on fixed rate plans including these considerations. As developed here the LCAM is a level cost actuarial methodology'', which is consistent with well -established actuarial practice. The LOAM is a principles -based mathematical model of pension cost. The model policy elements are developed in a logical sequence based on stated general policy objectives, and in a manner consistent with primary factors that affect the cost of the pension obligation. The particular model that we develop is based on a combination of policy objectives and policy elements that has been tested over many years and, we believe, is well understood and broadly applicable. However, there are other models and policy objectives that 4 Here a "level cost actuarial methodology" is characterized by economic assumptions based on the long term expect- ed experience of the plan and a cost allocation designed to produce a level cost over an employee's active service. This is in contrast to a "market -consistent" actuarial methodology where economic assumptions are based on observations of current market interest rates, and costs are allocated based on the (non -level) present value of an employee's accrued benefit. practitioners may use that are internally consistent and may be as appropriate in some circumstances as the model that is developed herein, and it is not our intention to discourage consideration of such other policies5. Furthermore, there are situations where the policy parameters developed herein may require additional analysis to establish the appropriate parameters for each such situation6. It is up to the actuary to apply professional judgment to the particulars of the situation and recommend the most appropriate policies for that situation, including considerations of materiality. Our approach begins with identifying the policy objectives of such a funding policy, and then evaluating the structure and parameters for each of the particular policy elements in a manner consistent with those objectives, as well as with current and emerging actuarial science and governing actuarial standards of practice. This white paper is intended as advice to actuaries and retirement boards' in the setting of funding policy, While the analysis is somewhat restrictive in the categorizatio of practices, this guidance is not intended to supplant or r�p` replace the applicable Actuarial Standards of Practice (ASOPs). Like all opinions of the CCA PPC, this guidance is nonbinding and advisory only. Furthermore, it is not intended as a basis for litigation, and should not be referenced in a litigation context. Given the wide range of such policies currently in practice in the U.S., this development also acknowledges that plan sponsors and retirement boards may require some level of policy flexibility 5 In particular, the LCAM developed here incorporates the widely prevalent practice of managing asset volatility directly through the use of an asset smoothing policy element. Some practitioners are developing direct contribution rate smooth- ing techniques as an alternative to asset smoothing. The CCA PPC is considering development of a separate white paper on direct smoothing as an alternative to asset smoothing. 6 For example, plans that are closed to new entrants may re- quire additional analyses and forecasts to determine whether the policy parameters herein provide for adequate funding. 7 Here "retirement boards" is meant to refer generally to whatever governing bodies have authority to set funding policy for public sector plans. 6 INTRODUCTION to reflect both their specific policy objectives and their individual circumstances. To accommodate that need for reasonable flexibility and yet also provide substantive guidance, this development evaluates various policy element structures and parameters or ranges according to the following categories: • LCAM Model practices (Le., practices most consistent with the LCAM developed herein) • Acceptable practices • Acceptable practices, with conditions • Non -recommended practices • Unacceptable practices. These categories are best understood in the context of the different elements that comprise an actuarial funding policy and the various policy alternatives for each of those policy elements. They are intended to assist in the evaluation of specific policy elements and parameters relative to the general policy objectives stated herein, and are developed separately for each of the three principal policy elements discussed In this white paper (cost methods, asset smoothing methods L_ and amortization policy), They are not intended as a grading or scoring mechanism for a system's overall actuarial funding policy, Generally, throughout this discussion, "model practices" means those practices most consistent with general policy objectives and the LCAM as developed here based on those policy objectives8. Acceptable practices are generally those that while not fully consistent with the LOAM as developed here, are well established in practice and typically do not require additional analysis to demonstrate their consistency with the general policy objectives, Practices that are acceptable with conditions may be acceptable in some circumstances, on the basis of additional analysis to show consistency with the general policy objectives or to address risks or concerns associated with the practices. Systems that adopt practices that under this 8 Some commentators have interpreted 'model practices" as synonymous with 'best practices." That is not the intent of this categorization of practices. Given their circumstances retirement boards may find that other practices, particu- larly those categorized and acceptable or acceptable with conditions, are considered both appropriate and reasonably consistent with the policy objectives stated herein. model analysis are not recommended should consider doing so with the understanding that they reflect policy objectives different from those on which this LCAM is based or should consider the policy concerns identified herein. This evaluation of practice elements and parameters was developed in relation to the LCAM and its general policy objectives, based on experience with the many independent public plans sponsored by states, counties, cities and other local public employers in the US, and is intended to have general applicability to such plans. However, for some plans, special circumstances or situations may apply. The specific applicability of the results developed here should be evaluated by their governing boards based on the advice of their actuaries, Note that while the selection of actuarial assumptions is an essential part of actuarial policy for a public sector pension plan, the selection of actuarial assumptions is outside the scope of this discussion. For example, a pension plan should perform a comprehensive review of both economic and demographic assumptions on a regular basis as part of its actuarial policies. Another important consideration in determining a plan's funding requirements is the plan's investment policy and related investment portfolio risks, While actuarial assumptions, plan investments and even benefit design are all elements that affect funding requirements, they are beyond the scope of this paper. This white paper is also not intended to address the measurement of liabilities for purposes other than funding, e.g., settlement obligations or other market - consistent measures°. Finally note that some retirement systems have features that may require funding policy provisions and analyses that are not specifically addressed herein, One example is systems with "gain sharing" provisions whereby favorable investment experience is used as the basis for increasing member benefits and/or reducing employer and/or member contributions. The policies developed here should not be interpreted as being adequate to address these plan features without additional analysis specific to those features. 9 See footnote 4 7 Transition Policies In order to avoid undue disruption to a sponsor's budget, it may not be feasible to adopt policies consistent with this white paper without some sort of transition from current policies. For example, a plan using longer than model amortization periods could adopt model periods for future unfunded liabilities while continuing the current (declining) periods for the current unfunded liabilities. Such transition policies should be developed with the advice of the actuary in a manner consistent with the principles developed herein. We have included in our discussion transition policies appropriate to each of the principal policy elements. 8 General Policy bjectives The following are policy objectives that apply generally to all elements of the funding policy. Objectives specific to each principal policy element are identified in the discussion of that policy element. 1, The principal goal of a funding policy is that future contributions and current plan assets should be sufficient to provide for all benefits expected to be paid to members and their beneficiaries when due. 2, The funding policy should seek a reasonable allocation of the cost of benefits and the required funding to the years of service (i.e. demographic matching). This includes the goal that annual contributions should, to the extent reasonably possible, maintain a close relationship to the both the expected cost of each year of service and to variations around that expected cost. 3. The funding policy should seek to manage and control future contribution volatility (Le„ have costs emerge as a level percentage of payroll) to the extent reasonably possible, consistent with other policy goals. 4. The funding policy should support the general public policy goals of accountability and transparency. While these terms can be difficult to define in general, here the meaning includes that each element of the funding policy should be clear both as to intent and effect, and that each should allow an assessment of whether, how and when the plan sponsor is expected to meet the funding requirements of the plan. 5. The funding policy should take into consideration the nature of public sector pension plans and their governance. These governance issues include (1) agency risk issues associated with the desire of interested parties (agents) to influence the cost calculations in directions viewed as consistent with their particular interests, and (2) the need for a sustained budgeting commitment from plan sponsors. Policy objective 1 means that contributions should include the cost of current service plus a series of amortization payments or credits to fully fund or recognize any unfunded or overfunded past service costs (note that the latter is often described as "Surplus"). Policy objectives 2 and 3 reflect two aspects of the general policy objective of interperiod equity (IPE), The "demographic matching" goal of policy objective 2 promotes intergenerational IPE, which seeks to have each generation of taxpayers incur the cost of benefits for the employees who provide services 9 GENERAL. POLICY OBJECTIVES to those taxpayers, rather than deferring those costs to future taxpayers. The "volatility management" goal of policy objective 3 promotes period -to -period IPE, which seeks to have the cost incurred by taxpayers in any period compare equitably to the cost for just before and after. These two aspects of IPE will tend to move funding policy in opposite directions. Thus the combined effect of policy objectives 2 and 3 is to seek an appropriate balance between intergenerational and period -to - period IPE, that is, between demographic matching and volatility management. Policy objective 3 (and the resulting objective of balancing policy objectives 2 and 3) depends on the presumed ongoing status of the public sector plan and its sponsors. The level of volatility management appropriate to a funding policy may be less for plans where this presumption does not apply, e.g., plans that are closed to new entrants, Policy objective 4 will generally favor policies that allow a clear identification and understanding of the distinct role of each policy component in managing both the expected cost of current service and any unexpected variations in those costs, as measured by any unfunded or overfunded past service costs. Such policies can enhance the credibility and objectivity of the cost calculations, which is also supportive of policy objective 5. Policy objective 5 seeks to enhance a retirement board's ability to resist and defend against efforts to influence the determination of plan costs in a manner or direction inconsistent with the other policy objectives. This favors policies based on a cost model where the parameters are set in reference to factors that affect costs rather than the particular cost result. This separation between the selection of model parameters and the resulting costs enhances the objectivity of the cost results. As a result, any attempt to influence those results must address the objective parameters rather than the cost result itself. A common example of agency risk is that, because plan sponsors may be more aware of and responsive to the interests of current versus future taxpayers, there may be incentives to defer necessary contributions to future periods. This may be countered by avoiding policy changes that selectively reduce contributions. For plans with an ongoing service cost for active members, policy objective 5 also reflects a policy objective to avoid encumbering for other uses the budgetary resources necessary to support that ongoing service cost. This introduces an asymmetry between funding policies for unfunded liabilities versus surpluses, which is discussed in the policy development for surplus amortization. Note that the model funding policies developed here are substantially driven by these policy objectives. In some situations other plan features or policies (e.g., investment policy, reserving requirements, and plan maturity) may also be a consideration in setting funding policy. Such considerations are not addressed in this analysis. 10 Principal Elements of Actuarial Funding P licy The type of comprehensive actuarial funding policy developed here is made up of three components: 1, An actuarial cost method, which allocates the total present value of future benefits to each year (Normal Cost) including all past years (Actuarial Accrued Liability or AAL). 2. An asset smoothing method, which reduces the effect of short term market volatility while still tracking the overall movement of the market value of plan assets, 3. An amortization policy, which determines the length of time and the structure of the increase or decrease in contributions required to systematically (1) fund any Unfunded Actuarial Accrued Liability or UAAL, or (2) recognize any Surplus, i,e., any assets in excess of the AAL, An actuarial funding policy can also include some form of "direct rate smoothing" in addition to both asset smoothing and UAAL/Surplus amortization. Two types of this form of direct rate smoothing policies were evaluated for this development: 1. Phase -in of certain extraordinary changes in contribution rates, e.g., phasing -in the effect of assumption changes element over a three year period. 2. Contribution "collar" where contribution rate changes are limited to a specified amount or percentage from year to year. As noted earlier, it is also possible to use direct contribution rate smoothing techniques as an alternative to asset smoothing, rather than in addition to asset smoothing. While that approach is outside the scope of this discussion, the CCA PPC is considering development of a separate white paper on direct rate smoothing as an alternative to asset smoothing. 11 Actuarial Cost Method The Actuarial Cost Method allocates the total present value of future benefits to each year (Normal Cost) including all past years (Actuarial Accrued Liability' or AAL). Specific policy objectives and considerations 1. Each participants benefit should be funded under a reasonable allocation method by the expected retirement date(s), assuming all assumptions are met. 2. Pay -related benefit costs should reflect anticipated pay at anticipated decrement. 3. The expected cost of each year of service (generally known as the Normal Cost or service cost) for each active member should be reasonably related to the expected cost of that member's benefit. 4. The member's Normal Cost should emerge as a level percentage of member compensation2, 5. No gains or losses should occur if all assumptions are met, except for: a. Investment gains and losses deferred under an asset smoothing method consistent with these model practices, or b. Contribution losses or gains due to a routine lag between the actuarial valuation date and the date that any new contributions rates are implemented, or c. Contribution losses or gains due to the phase -in of a contribution increase or decrease. 6. The cost method should allow for a comparison between plan assets and the accumulated value of past Normal Costs for current participants, generally known as the Actuarial Accrued Liability (AAL). 1 Here "liability" indicates that this is a measure of the accrued (normal) cost while "actuarial" distinguishes this from other possible measures of liability: legal, accounting, etc. 2 This objective applies most clearly to benefits (like, for example, most public pension benefits) that are determined and budgeted for as a percentage of individual and aggre- gate salary, respectively, For benefits that are not pay related it maybe appropriate to modify this objective and the resulting policies accordingly. 12 ACTUARIAL COST METHOD Discussion 1. Any actuarial cost model for retirement benefits begins with construction of a series or array of Normal Costs that, if funded each year, under certain stability conditions will be sufficient to fund all projected benefits for current active members. The following considerations serve to specify the cost model developed here. a. The usual stability conditions are that the current benefit structures and actuarial assumptions have always been in effect, the benefit structures will rernain in effect, and future experience will match the actuarial assumptions. Special considerations apply if in the past the benefit structure has been changed for current active members changing the benefits for members with service after some fixed date. b. Consistent with Cost Method policy objective #3 and with the general policy objective of transparency, the Normal Cost for each member is based on the benefit structure for that member, This means that a separate Normal Cost array is developed for each tier of benefits within a plan. This argues against Ultimate Entry Age, where Normal Cost is based on an open tier of benefits even for members not in that open tier. c. Consistent with Cost Method policy objective #4, the Normal Cost is developed as a level percentage of pay for each member, so that the Normal Cost rate for each member (as a percentage of pay) is designed to be the same for all years of service. This provides for a more stable Normal Cost rate for the benefit tier in case of changing active member demographics. This argues against Projected Unit Credit. d. Also consistent with Cost Method policy objective #4, the Normal Cost for all types of benefits incurred at all ages is developed as a level percentage of the member's career compensation. This argues against funding to decrement, For plans with a DROP (Deferred Retirement Option Program) this also argues for allocating Normal Cost over all years of employment, including those after a member enters a DROP. e. Consistent with Cost Method policy objective #6, the Normal Cost is developed independent of plan assets, and the Actuarial Accrued Liability (and so also the UAAL) is based on the Normal Costs developed for past years. This argues against Aggregate and FL as model practices. i. These methods should be considered as a fundamentally different approach to the determination and funding of variations from Normal Cost, ii. Plans using these methods should also measure and disclose costs and liabilities under the Entry Age method, similar to the requirements of current accounting standards. f. Historical practice includes the use of a variation of the Entry Age method (an "Aggregated" Entry Age method) where the Normal Cost and AAL are first determined for each member in a tier of benefits under the usual Entry Age method. However, the actual Normal Cost for the tier is then determined as the Normal Cost rate for the tier applied to the compensation for the tier, where the Normal Cost rate for the tier of benefits is determined as the present value of future Normal Costs for all active members in the tier, divided by the present value of compensation for all members in the tier. i. This variation introduces an inconsistency between the Normal Cost that is funded and the Normal Cost on which the AAL is based. II. This inconsistency can be shown to produce small but systematic gains or losses, generally losses. 13 ACTUARIAL COST METHOD 2. Consistent with all the above, under the cost model developed here the Normal Cost rate would change only when the projected benefits for the tier change either in amounts or in present value. a, The Normal Cost rate (both in total and by member) will vary from valuation to valuation due to demographic experience and assumption changes. b. The Normal Cost rate will not change when an individual member reaches an age or service where, under the consistent benefit structure for the member's tier, the member's benefit eligibility or accrual rate changes, This is because that event was anticipated In the projected benefits for the tier, so that the projected benefits are substantially unaffected by such predictable changes in eligibility or benefit accrual, c. Similarly the Normal Cost rate for a member should be unaffected by the closing of the member's tier and the creation of a new tier for future hires, as discussed under item 1.b above. d. However, if the benefit structure of a continuing, open tier is changed for members with service after some fixed date, then the Normal Cost rate should change to reflect the unanticipated change in projected benefits for members in the tier3. This calls for an extension or variation of the Entry Age method in order to value this type of benefit change. i. There are two methods in practice to adjust the Normal Cost rate for this type of plan change. While a detailed analysis of these two variations is beyond the scope of this discussion, our summary conclusions are: 3 Note that, as of this writing, for public sector pension plans this is relatively uncommon because of legal protec- tions that are understood to apply both to accrued benefits and to future benefit accruals for current members. A. The "replacement life" Entry Age method would base the Normal Cost on the new benefit structure as though it had always been in place, thereby producing a consistent Normal Cost rate for all members in the tier. This has the advantages of a change in Normal Cost (both individual and total) more consistent with what would be expected for a change in future benefit accruals, a stable future Normal Cost rate for the tier and a relatively smaller (compared to the alternative) change in Actuarial Accrued Liability. Its disadvantages are that it may be more complicated to explain and to implement. B. The "averaged" Entry Age method would base each member's Normal Cost on the new projected benefit for that member, thereby producing a different Normal Cost rate for different members in the tier, based generally on their service at the time of the change in benefit structure. The advantages and disadvantages are essentially the reverse of those for the replacement life version of Entry Age. The change in Normal Cost is less than what would be expected for a change in future benefit accruals, the future Normal Cost rate for the tier will be unstable (as it eventually reaches the same rate as under the replacement life variation) and there is a relatively larger (compared to the alternative) change in Actuarial Accrued Liability. Its advantages are that it may be less complicated to explain and to implement (where the latter may depend on the valuation software used). 3. While not recommended for funding, the Normal Cost under the Ultimate Entry Age method discussed above may nonetheless be useful when a new open tier is adopted for future hires. The combined normal cost rate for the open and closed tiers (as determined under the LCAM Entry Age method) will change over time as members of the closed tier are replaced by members in the new tier. This will result in an increasing or decreasing, 14 ACTUARIAL COST METHOD combined normal cost rate (depending on whether the new tier has higher or lower benefits), consistent with the transition of the workforce over time to the new benefit level. However, the Ultimate EntryAge method Normal Cost for the combined tiers will reflect the expected long term Normal Cost for the entire workforce (unlike the LCAM Normal Cost which reflects only the recent hires in the new tier). For that reason, Normal Cost under Ultimate Entry Age may be useful for projecting longer -term costs or for evaluating a fixed contribution rate. Practices Based on the above discussion, and consistent with the policy objectives, actuarial cost methods and parameters are categorized as follows: LCAM Model Practices • Entry Age cost method with level percentage of pay Normal Cost. Normal Costs are level even if benefit accrual or eligibility changes with age or service. All types and incidences of benefits are funded over a single measure of expected future service4. The Normal Cost for a tier of benefits is the sum of the individually determined Normal Costs for all members in that tier. Exception: for plans with benefits unrelated to compensation the Entry Age method with level dollar Normal Cost may be more appropriate. • For multiple tiers: - Normal Cost is based on each member's benefit. • For benefit formula or structure changes within a tier (generally after a fixed date): 4 Under the LCAM model practice, Normal Cost is allocated over service that continues until the member is no longer working. For active members in or expected to enter a DROP (Deferred Retirement Option Program) this includes service through the expected end of the DROP period, This is not the method adopted by GASB in Statements 67 and 68, where service cost is allocated only through the beginning of the DROP period. The GASB method for DROPs is categorized as an Acceptable Practice for funding. - Normal Cost is based on current benefit structure (replacement life Entry Age6). Acceptable Practices • Aggregate cost method: Plans using the Aggregate method should disclose costs and liabilities determined under the Entry Age method. - Calculate Normal Cost and UAAL under Entry Age method. - Determine single amortization period for the Entry Age UAAL that, combined with the Entry Age Normal Cost, is equivalent to Aggregate method Normal Cost. • Frozen Initial Liability cost method: This method should disclose costs and liabilities under the Entry Age method. - Calculate Normal Cost and UAAL under Entry Age method. Deduct the FIL amortization bases from the Entry Age UAAL. - Determine single amortization period for the remaining Entry Age UAAL that, combined with the Entry Age Normal Cost, is equivalent to FIL method Normal Cost. • Funding to Decrement Entry Age method, where each type and incidence of benefit is funded to each age at decrement. - This method may be appropriate for some plan designs or for plans closed to new entrants6. • For benefit formula or structure changes within a tier (generally after a fixed date): 5 Note that this is not the method used in GASB's State- ments 67 and 68. The GASB method is categorized as an Acceptable Practice. 6 For example, a Plan that provides very valuable early career -benefits (such as heavily subsidized early retirement or disability benefits) may prefer to have the higher early -ca- reer Normal Costs associated with the Funding to Decrement EntryAge method. 15 ACTUARIAL COST METHOD - Normal Cost is based on each member's composite projected benefit (averaged Entry Age'). Acceptable Practices, with Conditions • Projected Unit Credit cost method. • Entry Age method variation ("Aggregated" Entry Age method) where the Normal Cost for a tier of benefits is determined as the Normal Cost rate for the tier applied to the compensation for the tier, and where the Normal Cost rate for the tier of benefits is determined as the present value of future Normal Costs for all active members in the tier, divided by the present value of compensation for all members in the tier. • Aggregate or Frozen Initial Liability methods without the disclosures of costs and liabilities determined under the Entry Age method discussed above. Non -recommended Practices • Normal Cost based on open tier of benefits even for members not in that open tier (Ultimate Entry Age). - Ultimate Entry Age Normal Cost may be useful to illustrate the longer -term Normal Cost for combined tiers or to evaluate fixed contribution rates. Unacceptable Practices • Traditional (non -Projected) Unit Credit cost method for plans with pay -related benefits as the primary benefit. • Note that while this white paper does not address policy issues related to pay-as-you-go funding or terminal funding, such practices would be unacceptable if the policy intent is to fund the members' benefits during the members' working careers. 7 Note that this is the version of the Entry Age method re- quired for financial reporting under GASB Statements 67 and 68 for plans with benefit formula or structure changes within a tier. Transition Policies • There are no transition policies that apply to funding methods. For substantial method changes (e.g., changing from Projected Unit Credit to Entry Age) special amortization periods could apply. These are discussed in the section on Amortization Policy. 16 Asset S oothing Methods An asset smoothing method reduces the effect of short term market volatility while still tracking the overall movement of the market value of plan assets, Specific policy objectives and considerations 1. The funding policy should specify all components of asset smoothing method: a. Amount of return subject to deferred recognition (smoothing), b. The smoothing period or periods. c. The range constraints on smoothed value (market value corridor), if any. d. The method of recognizing deferred amounts: fixed or rolling smoothing periods. 2. The asset smoothing method should be unbiased relative to market, a. The same smoothing period should be used for gains and for losses. b. Any market value corridor should be symmetrical around market value, 3. The asset smoothing method should not be selectively reset at market value only when market value is greater than actuarial value. a. Bases may be combined but solely to reduce future, non -level recognition of relatively small net unrecognized past gains and losses (Le., when the smoothed and market values are already relatively close together). 4. The asset smoothing method should be unbiased relative to realized vs unrealized gain Toss. a. Base deferrals on total return gain/loss relative to assumed earnings rate. 5. The asset smoothing method should incorporate the ASOP 44 concepts of: a. Likely to return to market in a reasonable period and likely to stay within a reasonable range of market, or b. Sufficiently short period to return to market or sufficiently narrow range around market. 6. The policy parameters should reflect empirical experience from historical market volatility. 7. The asset smoothing method should support the policy goal of 17 ASSET SMOOTHING METHODS demographic matching (the intergenerational aspect of interperiod equity) described in general policy objective 2. This leads to a preference for smoothing methods that provide for full recognition of deferred gains and losses in the UAAL by some date certain. a. Note that this objective is also consistent with the accountability and transparency goals described in general policy objective 4. Discussion 1. Longer smoothing periods generally reduce contribution volatility. A discussion of smoothing periods could include the following considerations: a, To the extent that smoothing periods are considered as being tied to economic or market cycles, those cycles may be believed to be longer or shorter than in past years. b. If markets are more volatile, then longer smoothing would be needed even if only to maintain former levels of contribution stability. c. Better funded plans, more mature plans and higher benefit plans (Le., plans with a higher "volatility index") have inherently more volatile contribution rates, so may justify longer smoothing. d. Sponsors may be more sensitive to contribution volatility. 2. However, ASOP 44 implies that longer smoothing periods call for narrower market value corridors. a. In effect, the corridor imposes a demographic matching style constraint on the use of longer smoothing periods which otherwise would obtain greater volatility management. 3, The model interpretation is that five year smoothing is "sufficiently short" under ASOP 44. a. This reflects long and consistent industry practice, as well as GASB Statement 68. b. This implies that five year smoothing with no market value corridor is ASOP compliant. c. It still may be useful to have a market value corridor as part of the asset smoothing policy. I, This avoids having to introduce the corridor structure in reaction to some future discussion of longer smoothing periods. 4. Consider the extensive data available on the impact of smoothing periods and market value corridors after large market downturn (such as occurred in 2008), a. The smoothing method manages the transition from periods of lower cost to periods of higher cost. i. The level of those higher costs is determined primarily by size of the market loss and UAAL amortization period, not the asset smoothing policy. b. The smoothing period determines length of the transition period. c. The market value corridor determines cost pattern during the transition. i'. A wide corridor or no corridor produces a straight line transition. ii. "Hitting the corridor" accelerates the cost increases or decreases in early years of transition. A. In effect the corridor inhibits the smoothing method after years of large losses (or gains). iii. There are various possible policy justifications for such an accelerated transition. A. Market timing: get more contributions in while the market is down. B. Cash flow management: low market values may impair plan liquidity. C. Employer solvency: if the employer eventually is going to default on making contributions, then get as much contribution income as possible before that happens. D. Employer preference: employers may prefer to have the higher costs in their rates as soon as possible. 18 ASSET SMOOTHING METHODS iv. Following the 2008 market decline, these justifications were generally not found to be compelling. A. The normal lag in implementing new contributions rates defeats iii. A and B. B, Employers are presumed solvent and if not, accelerating contributions would make things worse. C. Many employers clearly preferred more time to absorb the contribution increases. v. Absent these considerations, 2008 experience argues for permitting a wide corridor with a five year smoothing period, based on the fact that five year smoothing produced actuarial value to market value ratios that exceeded 140%. A. Projections in early 2009 actually showed these ratios could have been as high as 150% if markets had not recovered some before the June 30, 2009 valuations. 5. Other industry indicators for market corridor selection with long smoothing periods a. CalPERS 2005 policy: 15 year rolling smoothing with 20% corridor. 6. Structural issue: Fixed, separate smoothing periods vs. a single, rolling smoothing period a. Fixed, separate smoothing periods for each year of market gain or loss insure that all deferred gains and losses are included in the UAAL (and so in the contribution rates) by a known date. This is consistent with accountability and with demographic matching. b. A single rolling smoothing period avoids "tail volatility" where contributions are volatile not only when gains and losses first occur but also when (under a layered approach) each year's gain or loss is fully recognized. i. Rolling smoothing is consistent with volatility management but substantially extends the recognition period for deferred investment gains and losses. A. This will extend the time when the actuarial value of assets is consistently above or below the market value of assets. B. That argues for narrower corridors than are appropriate for fixed (layered) smoothing periods. ii. In effect, rolling smoothing recognized a fixed percentage of deferred investment gains and losses each year. A. For example, 5 year rolling amortization recognizes 20% of the deferred amount, B. Base corridors on this deferral recognition percentage. c. With fixed, separate smoothing periods, tail volatility due to alternating periods of market gains and losses can be controlled by limited active management of the separate deferral amounts. i. One such adjustment involves combining the separate deferral amounts when the net deferral amount is relatively small (1,e., the smoothed and market values are very close together) but the recognition pattern of that net deferral is markedly non -level. A. The net deferral amount is unchanged as of the date of the adjustment. B. The period over which the net deferral amount is fully recognized is unchanged as of the date of the adjustment. ii. Other uses of active management of the deferral amounts may add complexity to the application of the policy and may reduce transparency, iii. Restarts of fixed, separate smoothing periods should not be used: A. Too frequently, as this would produce a de facto rolling smoothing period, or 19 ASSET SMOOTHING METHODS B. To selectively restart smoothing at market value only when market value is greater than smoothed value. This would violate General Policy Objective 5, since it would selectively change the policy only when the effect is to reduce contributions. Practices Based on the above discussion, and consistent with the policy objectives, asset smoothing methods and parameters are categorized as follows: LCAM Model Practices • Deferrals based on total return gain/loss relative to assumed earnings rate. • Deferrals recognized in smoothed value over fixed smoothing periods not less than 3 years. • Maximum market value corridors for various smoothing periods: - 5 or fewer years, 50%/150% corridor. - 7 years, 6000/140% corridor. • Combine smoothing periods or restart smoothing only to manage tail volatility. - Appropriate when the net deferral amount is relatively small (i.e., the actuarial and market values are very close together). - The net deferral amount is unchanged as of the date of the adjustment. - The period over which the net deferral amount is fully recognized is unchanged as of the date of the adjustment. Avoid using frequent restart of smoothing to achieve de facto rolling smoothing. Avoid restarting smoothing only accelerate recognition of deferred gains, i.e., only when market value is greater than actuarial value. • Additional analysis, such as solvency projections, is likely to be appropriate for closed plans. Acceptable Practices • Maximum market value corridors for various smoothing periods: - 10 years, 70%/130% corridor. • Five year (or shorter) smoothing with no corridor (including use of market value of assets without smoothing), • Rolling smoothing periods with the following maximum market value corridors for various smoothing periods: Express rolling smoothing period as a percentage recognition of deferred amount and set corridor at that same percentage. For example: 3 year rolling smoothing means 33% recognition, with a 33% corridor. 4 year rolling smoothing means25% recognition, with a 25% corridor. - 5 year rolling smoothing means 20% recognition, with a 20% corridor, 10 year rolling smoothing means 10%0 recognition, with a 10% corridor. - Perform additional analysis including projections of when the actuarial value is expected to return to within some narrow range of market value, Acceptable Practices, with. Conditions • Maximum market value corridors for various smoothing periods: - 15 years, 80%/120% corridor. Non -recommended Practices • Longer than 5 year smoothing with no corridor. • 15 years or shorter smoothing with corridors wider than shown above. Unacceptable Practices • Smoothing periods longer than 15 years Transition Policies Generally, transition policies for asset smoothing would allow current layered smoothing to continue subject to the appropriate model corridors (as determined by the future smoothing periods, if changed from the past/ current layers). Transition from rolling asset smoothing would fix the rolling layer at its current period. 20 ortization Policy An amortization policy determinesthe length of time and the structure of the increase or decrease in contributions required to systematically (1) fund any Unfunded Actuarial Accrued Liability or UAAL, or (2) recognize any Surplus, i.e., any assets in excess of the AAL. Specific policy objectives and considerations 1. Variations in contribution requirements from simply funding the Normal Cost will generally arise from gains or losses, method or assumption changes or benefit changes and will emerge as a UAAL or Surplus. As discussed in the general policy objectives, such variations should be funded over periods consistent with an appropriate balance between the policy objectives of demographic matching and volatility management. 2. As with the Normal Cost, the cost for changes in UAAL should emerge as a level percentage of member compensation8. 3. The amortization policy should reflect explicit consideration of these different sources of change in UAAL, even if the resulting policy treats different changes in the same way: a. Experience gains and losses, b. Changes in assumptions and methods. c. Benefit or plan changes. 4. The amortization policy should reflect explicit consideration of the level and duration of negative amortization, if any. a. This consideration should not necessarily preclude some negative amortization that may occur under an amortization policy that is otherwise consistent with the policy objectives. b. Amortization periods developed in consideration of negative amortization (along with other policy goals) may be relevant for level dollar amortization (where negative amortization does not occur). 5. The amortization policy should support the general policy objectives of 8 As with the Normal Cost, this amortization policy objective applies most clearly to benefits (like, for example, most public pension benefits) that are determined and bud- geted for as a percentage of individual and aggregate salary, respectively, For benefits that are not pay related, or when costs are budgeted on a basis other than compensa- tion it may be appropriate to modify this objective and the resulting policies accordingly. 21 AMORTIZATION POLICY accountability and transparency. This leads to a preference for: a. Amortization policies that reflect a history of the sources and treatment of UAAL. b. Amortization policies that provide for a full amortization date for UAAL. i. Note that this objective is also consistent with the demographic matching aspect of general policy objective 2. 6. The amortization of Surplus requires special consideration, consistent with general policy objective 5 (nature of public plan governance). a. Amortization of Surplus should be considered as part of a broader discussion of Surplus management techniques, including: i. Excluding some level of Surplus from. amortization. 11. "Derisking" some portion of plan liabilities by changing asset allocation. Discussion 1. The policy objectives lead to a general preference for level percentage of pay amortization. a. Consistent with policy objectives and with the Normal Cost under the Model Actuarial Cost Method. b, This discussion of amortization periods presumes level percentage amortization. Level dollar amortization is discussed separately as an alternative to level percentage amortization. 2. The policy objectives lead to a general preference for multiple, fixed amortization layers. a. Fixed period amortization is clearly better for accountability, since UAAL is funded as of a date certain. b. Single layer, fixed period amortization is not a stable policy, since period would have to be restarted when remaining period gets too short. c. Multiple layer amortization is also more transparent, since it tracks the UAAL by source. However, layered amortization is more complicated and can require additional policy actions to achieve stable contribution rates (including active management of the bases). d. Discussion of periods will assume multiple, fixed amortization and then revisit the use of rolling periods to manage volatility. 3. For gains and losses, balancing demographic matching and volatility control leads to an ideal amortization period range of 15 to 20 years. a. Lesson learned from the 1990s is that less than 15 years gives too little "volatility control", especially for gains. i. Short amortization of gains led to partial contribution holidays (contributions less than Normal Cost) and even full contribution holidays (no contribution required). ii. This is inconsistent with general policy objective 5, in that it led to insufficient budgeting for ongoing pension costs and to 1 pressure for benefit increases. b. Longer than 20 years becomes difficult to reconcile with demographic matching, the intergenerational aspect of interperiod equity described in general policy objective 2. i. 20 years is substantially longer than either average future service for actives or average life expectancy for retirees. c. Periods longer than 20 years also entail negative amortization (which starts at around 16 to 18 years for many current combinations of assumptions)9. i, Here negative amortization is an indicator for not enough demographic matching but based on economic rather than demographic assumptions. 9 Note that for emerging lower investment return and salary increase assumptions even twenty year amortization may entail no negative amortization. 22 AMORTIZATION POLICY ii. Consider observed consistency between the period of onset of negative amortization and the periods related to member demographics. As discussed later in this section, negative amortization is a much greater concern when using open or rolling amortization periods. d, Two case studies — CalPERS and GASB: i. CalPERS 2005 analysis focused on volatility management. Resulting funding policy uses exceptionally long periods for gain and loss amortization (as well as for asset smoothing.) ii. GASB Statements 67 and 68 focus on demographic matching. Resulting expensing policy uses very short recognition periods. (This is cited for comparison only, as the GASB statements govern financial reporting and not funding.) iii. Our general policy objectives indicate a balance between these two extremes. 4. For assumption changes, while the amortization periods could be the same, a case can be made for longer amortization than for gain/loss, since liabilities are remeasured to anticipate multiple years of future gains or losses. a. A similar or even stronger case for longer periods could be made for changing cost method (such as from Projected Unit Credit to Entry Age), or for the initial liability for a newly funded plan, b. However longer than 25 years entails substantial (arguably too much) negative amortization. 5. For plan amendments that increase liabilities, volatility management is not an issue, only demographic matching. a. Use actual remaining active future service or retiree life expectancy. b. Could use up to 15 years as an approximation for actives. i. Any period that would entail negative amortization is inconsistent with general policy goals 2 (demographic matching) and 5 (nature of public plan governance). Could use up to 10 years as an approximation for inactives. i. Particularly for retiree benefit increases, amortization period should control for negative cash flow where additional amortization payments are less than additional benefit payments. d. For Early Retirement incentive Programs use a period corresponding to the period of economic savings to the employer. i. Shorter than other plan amendments, typically no more than five years10 e. For benefit improvements with accelerated payments (e.g. one time "13th check" or other lump sum payments) amortization may not be appropriate as any amortization will result in negative cash flows. 6, Plan amendments that reduce liabilities require separate considerations so as to avoid taking credit for the reduction over periods shorter than the remaining amortization of the original liabilities. a. Reductions in liability due to such benefit reductions should not be amortized more rapidly than the pre-existing unfunded liabilities, as measured by the average or the longest current amortization period. b. Benefit "restorations11" should similarly be amortized on a basis consistent with the pre-existing unfunded liabilities or with the "credit" amortization base established when the benefits were reduced. 7. For Surplus, similar to short amortization of 10 For example, a Government Finance Officers Association (GFOA) 2004 recommended practice states that "the incre- mental costs of an early retirement incentive program should be amortized over a short-term payback period, such as three to five years. This payback period should match the period in which the savings are realized." 11 A benefit restoration occurs when a previous benefit reduction has been fully or partially restored for a group of members who were subject to the earlier benefit reduction. 23 AMORTIZATION POLICY gains, the lesson from the 1990s is that short amortization of surplus leads to partial or full contribution holidays (contributions less than Normal Cost, or even zero). a. This is inconsistent with general policy objective 5, and led to insufficient budgeting for ongoing pension costs and to pressure for benefit increases. b. General consensus is that this is not good public policy. . See for example Recommendation 7 by California's 2007 Public Employee Post- Employment Benefits Commission, and also CaIPERS 2005 funding policy. c. Because of both the ongoing nature of the Normal Cost and the nature of public plan governance, amortization of UAAL and Surplus should not be symmetrical. 1. It may be appropriate to amortize surplus over a period longer than would be acceptable for UAAL. ii. Such an asymmetric policy would reduce the magnitude and/or likelihood of partial or full contribution holidays. iii. One approach would be to disregard the Surplus and always contribute at least the Normal Cost. However if Surplus becomes sufficiently large then some form of Surplus management may be called for. d. Note that long amortization of Surplus does not preclude other approaches to Surplus management that are beyond the scope of this discussion, including; 1. Treating some level of Surplus as a non - valuation asset. ii. Changing asset allocation to reflect Surplus condition. 8. Separate Surplus related issue: When plan first goes into Surplus; should existing UAAL amortization layers be maintain or eliminated? a. Could maintain amortization layers and have minimum contribution of Normal Cost less 30 year amortization of Surplus. b. However, maintaining layers can result in net amortization charge even though overall plan is in Surplus. c, Alternative is to restart amortization of initial surplus, and any successive Surpluses. i. In effect, this is 30 year rolling amortization of current and future Surpluses. ii. Restart amortization layers when plan next has a UAAL. 9. Level dollar amortization is fundamentally different from level percent of pay amortization. a. No level dollar amortization period is exactly equivalent to a level percent period. b. Level dollar is generally faster amortization than level percent of pay, so longer periods may be reasonable. c. Plan and/or sponsor circumstances could determine appropriateness of level dollar method. I. Level dollar would be appropriate for plans where benefits are not pay related and could. be appropriate if the plan is closed to new entrants. 1. Level dollar could be appropriate for sponsors and plans that are particularly averse to future cost increases, e.g., utilities setting rates for current rate payers. iii. Level dollar could be appropriate for sponsors and plans that want an extra measure of conservatism or protection against low or no future payroll growth. iv. Level dollar could be useful as a step in developing amortization payments in proportion to some basis other than payroll. 10. Multiple, fixed period layers vs. single, rolling period layer for gains and losses. a. Multiple, fixed amortization periods for each year's gain or loss ensures that all gains and losses are funded by a known date. This is consistent with accountability and with demographic matching. 24 AMORTIZATION POLICY b, A single rolling smoothing period avoids tail volatility where contributions are volatile not only when gains and losses occur but also when each year's gain or loss is fully amortized. This is consistent with volatility management. c. With fixed, separate smoothing periods, tail volatility can be controlled by limited active management of the amortization layers, including combining consecutive gain and loss layers as necessary to reduce tail volatility. As with asset smoothing, active management should be used to manage the pattern of future UAAL funding and not to accomplish a short-term manipulation of contributions. In particular the net remaining amortization period should be relatively unaffected by any combination of offsetting UAAL amortization layers, iii. The use of active management of the amortization layers may add complexity to the application of the policy and may reduce transparency. 11. Plans with layered amortization of an unfunded liability should consider actions to achieve a minimum net amortization charge that is not less than the payment required under a single 25 year amortization layer. This may be accomplished through active management of the amortization layers or through other means. 12, Rolling amortization periods for a single layer of gains and losses or for the entire UAAL. a. Similar to level dollar, acknowledge that rolling amortization is fundamentally different from fixed period amortization. i. Rolling amortization will have a substantial unamortized UAAL at the end of the nominal amortization period. b. Argument can be made for a single, rolling amortization layer for gains and losses if the actuarial valuation assumptions are expected to be unbiased so that there is an equal likelihood of future gains and losses that will offset each other. 1. Such rolling amortization also requires that there are no systematic sources of future actuarial losses from plan design features, such as a subsidized service purchase option. i1. Extraordinarily large gains or losses that are not reasonably expected to be offset by future losses or gains should be isolated from the single rolling gain/loss amortization layer and amortized over separate, fixed periods. iii. Plans with a significant single rolling gain/ loss amortization layer should affirmatively show that policy objectives will be achieved, without substantial violation of intergenerational equity. c. This argument is substantially weaker for rolling amortization for assumption changes (especially if consistently in a single direction, such as mortality assumption adjustments or recent changes in investment earnings assumptions.) i. Inconsistent with policy objective of intergenerational equity, as well as accountability and transparency. ii. Similar concerns for rolling amortization of gains and losses in the presence of biased assumptions or other systematic sources of actuarial losses. d. It is very difficult to reconcile rolling amortization of plan amendments with intergenerational equity, as well as with accountability and transparency objectives. e. Specific exception for rolling, lengthy amortization of Surplus, since as described earlier this helps meet general policy objective 5 13. Rolling amortization and the Aggregate cost method, a. The Aggregate cost method produces contribution levels and patterns similar to using the Entry Age method with a single rolling level percent of pay amortization layer for the entire UAAL and a relatively short rolling amortization period. 25 AMORTIZATION POLICY i. Effective rolling amortization period reflects average future service of active members. b. However, the Aggregate cost method is fundamentally different from Entry Age (and from Projected Unit Credit) in that Aggregate does not measure an AAL or a UAAL. i. Aggregate combines a high level of tail volatility management (policy objective #3) with high levels of demographic matching and accountability (policy objectives 2 and 4). ii. Aggregate also provides no policy flexibility in the selection of an amortization period (since no UAAL is calculated) which provides protection from some agency risk issues, consistent with policy objective #5. c. Retirement boards desirous of the high level of tail volatility management and computational simplicity associated with rolling amortization of the entire Entry Age UAAL should consider adopting the Aggregate cost method. i, If a UAAL is measured (as under the Entry Age or Projected Unit Credit cost methods) then, as discussed above, the policy objectives indicate layered amortization with the possible exception of a single rolling amortization layer for gains and losses. Practices Based on the above discussion, and consistent with the policy objectives, amortization methods and parameters are categorized as follows: LCAM Model Practices • Layered fixed period amortization by source of UAAL • Level percent of pay amortization • Amortization periods Inactive Plan Amendments Assumption or Method Changes14 EarlyRetirement, Incentives Lesser ofactive! demggraphcs'3 Lesser of inactive demographics93, or 10 years 15 to 25 years • 30 year amortization of surplus (for plans with ongoing Normal Cost and/or plan expenses) - Eliminate all prior UAAL layers upon going into Surplus • Combine gain/loss (and other) layers or restart amortization only to avoid tail volatility. - Combining layers should result in substantially the same current amortization payment. - Avoid using restart of amortization to achieve de facto rolling amortization. Restart amortization layers when moving from Surplus to UAAL condition. • Additional analysis, such as solvency projections, is likely to be appropriate for closed plans. 12 The effect of assumption changes integral to the mea- surement of the cost of plan amendments (e.g., change in rates of retirement to anticipate the effect of new benefit levels) should be included in the UAAL change associated with the plan amendment. 13 Demographics based periods include remaining active future service or retiree life expectancy. Amortization period should also control for negative cash flow where additional amortization payments are less than additional benefit pay- ments. 14 Method change includes the initial liability for a newly funded plan. 26 AMORTIZATION POLICY Acceptable Practices • Up to 15 years for inactive plan amendments. • Level dollar fixed period layered amortization by source of UAAL, using the same model amortization periods as above. - Ideally, some rationale should be given if used with pay related benefits, Acceptable Practices, with Conditions • Up to 25 year layered fixed period amortization by source, for all sources of UAAL. - Ideally with some rationale given for using periods outside the model ranges. • Rolling amortization of a single combined gain/loss layer with an amortization period that does not entail any negative amortization. With model periods for other sources of UAAL. Use separate, fixed period layers for extraordinary gain or loss events, - Plans with a significant single rolling gain/loss amortization layer should demonstrate that policy objectives will be achieved. • Up to 30 year fixed amortization of change in funding method (e.g, from PUC to Entry Age) or initial liability for a newly funded plan (Le. an existing plan previously funded on a pay-as-you-go basis but not a new plan creating new past service benefits.) - Ideally some rationale should be given for using periods outside the model ranges. Non -recommended Practices • Fixed period amortization of the entire UAAL as a single combined layer, with periodic reamortization over a new (longer) starting amortization period. • Layered fixed period amortization by source of UAAL over longer than 25 years (Le., 26 to 30 years). • Rolling amortization of a single combined gain/loss layer with an amortization period that does entail any negative amortization, but no longer than 25 years. - Same three conditions that apply to Acceptable with Conditions rolling gain/loss amortization. • Rolling/open amortization of entire UAAL as a single combined layer (exclusive of plan amendments but inclusive of gain/loss, assumption and method changes) even where the amortization period does not entail negative amortization. Unacceptable Practices • Layered fixed period amortization by source of UAAL over longer than 30 years. • Rolling/open amortization over longer than 25 years of a single combined gain/loss layer. • Rolling/open amortization of entire UAAL as a single combined layer (exclusive of plan amendments) where the amortization period entails negative amortization. • Rolling/open amortization of entire UAAL as a single combined layer (including plan amendments) even where the amortization period does not entail negative amortization. Transition Policies Transition policies are particularly applicable to amortization policy. Generally, transition policies for amortization would allow current fixed period amortization layers (with periods not to exceed 30 years) to continue, with new amortization layers subject to these guidelines. Transition from rolling amortization would fix any rolling layer at its current period, with future liability changes amortized in accordance with these guidelines, During the transition (i.e., as long as the remaining period for the formerly rolling base is longer than model or acceptable periods) any new credit layers (e.g., due to actuarial gains or less conservative assumptions) should be amortized over no longer than that same remaining period. 27 Direct '; ate Smoothing An actuarial funding policy may include some form of direct rate smoothing, where the contribution rates that result from applying the three principal elements of funding policy (including asset smoothing) are then directly modified. As noted in the Introduction, some practitioners are developing direct contribution rate smoothing techniques as an alternative to asset smoothing. At this time, there are no widely accepted practices established for this type of direct rate smoothing. This discussion does not address the use of direct rate smoothing techniques as an alternative to asset smoothing. The CCA PPC is considering development of a separate white paper on direct rate smoothing as an alternative to asset smoothing. The balance of this discussion pertains only to direct rate smoothing when used in conjunction with asset smoothing. Two types of such direct rate srnoothing policies that are known to be in current practice were evaluated for this development: 1. Phase -in of certain changes in contribution rates, specifically, phasing -in the effect of assumption changes element over short period, consistent with the frequency of experience analyses. 2. Contribution collar where contribution rate changes are limited to a specified amount or percentage from year to year. Discussion 1. Contribution rate phase -in can be an effective and reasonable way to address the contribution rate impact of assumption changes. a, Ideally the phase -in period should be no longer than the time period until the next review of assumptions (experience analysis). i. This approach is most appropriate when experience analyses are performed on a regular schedule. ii, For systems with no regular schedule for experience analyses, the phase -in period would ideally be chosen so as to avoid overlapping phase -in periods. 28 DIRECT RATE SMOOTHING a, The plan and its sponsors should be clearly aware of the additional time value of money cost (or savings) of the phase -in, due to the plan receiving less (or more) than the actuarially determined contributions during the phase -in. b. Any ongoing policy to phase -in the effect of assumption changes should be applied symmetrically to both increases and decreases in contribution rates. c. d. Ongoing policy may be to phase -in only significant cost increases or decreases. Note that the phase -in of the contribution rate impact of an assumption change is clearly preferable to phasing in the assumption change itself. While a detailed discussion is outside the scope of this discussion, phasing in an assumption change may be difficult to reconcile with the governing actuarial standards of practice. 2. Contribution collars have the policy drawback that the collar parameters arbitrarily override the contribution results produced by the other funding policy parameters (including asset smoothing), each of which have a well -developed rationale, a. If contribution collars are used they should be supported by analysis and projections to show the effect on future funded status and future policy based contribution requirements (prior to the application of the contribution collar), b. There may also need to be a mechanism to ensure adequate funding following extraordinary actuarial losses, 3. Using either form of direct rate smoothing for other than assumption changes (Le., for actuarial experience or plan amendments) appears inconsistent with the development of parameter ranges for the other elements of the funding policy. Practices Based on the above discussion, and consistent with the policy objectives, parameters are categorized as follows: LCAM Model Practices • None Acceptable Practices • For systems that review actuarial assumptions on a regularly scheduled basis, phase -in of the cost impact of assumption changes over a period no longer than the shorter of the time period until the next scheduled review of assumptions (experience analysis) or five years, - Phase -in should be accompanied by discussion and illustration of the impact of the phase -in on future contribution rates. - Phase -in may be applied only to cost impacts deemed material, but should be applied consistently to both cost increases and decreases. Acceptable Practices, with Conditions • For systems that do not review actuarial assumptions on a regularly scheduled basis, phase - in of the cost impact of assumption changes over a period of up to five years. Phase -in of the cost impact of any prior assumption changes must be completed before commencing another phase -in period. Phase -in should be accompanied by discussion and illustration of the impact of the phase -in on future contribution rates. - Phase -in may be applied only to cost impacts deemed material, but should be applied consistently to both cost increases and decreases. Non -recommended Practices • Phase -in of the cost impact of assumption changes over a period greater than five years. • Phase -in of the cost impact of actuarial experience, in conjunction with model or acceptable practices for asset smoothing and UAAL amortization. • Contribution collars in conjunction with model or acceptable practices for asset smoothing and UAAL amortization. • Phase -in or contribution collars for the cost impact of plan amendments. 29 Items for Future Discussion This white paper is intended to address the principal elements of an actuarial funding policy as applicable in most but not all situations. Other issues related to funding policy that may be of varying significance are listed in this section, including some of a more technical nature. These items may be the subjects of future guidance. Impact of Risk/Employer ability to pay/Level of benefit protection These are three considerations that could affect the development of an actuarial funding policy. While this white paper notes that these factors should be considered, it does not develop policies or procedures for doing so. This paper also does not address appropriate disclosure items, including disclosures related to risk. These considerations (and interrelationships) are outside of our current scope but are important items for future discussion. OPEB Plans - As noted earlier, while we believe the general policy objectives developed here apply to OPEB plans as well, application of those policy objectives to OPEB plans may result in different specific funding policies based on plan design, legal status and other features distinctive to OPEB plans. Many of the actuaries who participated in developing this paperwork on both pension and OPEB funding. We may address funding policiesspecific to OPEB plans in a later document. That process would also draw on experts in the design, underwriting and valuation of OPEB plans. Self Adjusting System -We expect that an increasing number of plans will have self adjusting provisions (in this context we are referring to benefit adjustments). These provisions could impact the selection of funding methods. Transfers of Service Credit -New entrants (or even current member) are sometimes eligible to transfer service credit for employment prior to plan membership. This generally creates actuarial losses, which is inconsistent with our policy objectives. Later we may discuss whether and how this should be anticipated in the valuation. Purchase of Service This can raise the same type of issues as Transfers of Service Credit since unfunded actuarial liabilities often increase when employees purchase service credit. Actuarially determined contribution as a dollar amount or percentage of pay -Sometimes the contribution requirement is determined prior to the year it is due and shown as a dollar amount or a percentage of payroll. Either can be 30 used to determine the contribution amount required, Role for Open/Stochastic Valuations and risk disclosures -Our guidelines are developed in the context of a closed group, deterministic valuation. This is in part due to the belief that such a valuation best achieves our policy objectives. However, there are also advantages associated with other valuation practices. Lag time between valuation date and fiscal year - Because of the time needed to produce the valuation and to budget for rate changes, the contribution made for a given fiscal year is often based on an earlier valuation date. This will generate contribution gains or losses when rates decrease or increase, respectively. Some systems adjust for these gains or losses in setting the rates but many do not. 31 APPENDIX I SAMPLE OF GRS PUBLICATIONS abriel Roeder Smith & Company To.'register on GRS AdvartageTM visit www.gabrielroeder.com At the site, go to the GRS AdvantageTM page and dick the login button and corrpletethe short re.istratton form Corporate.;Office Jne ToWne Square Suite 800 Southfield, MI 48075 hone. (800) 521 0498 GRS AdvantageTM is our client services web site that provides access to client software, research, publications, and training resources. ➢ GRS TrendLineTM, our public sector benefit benchmarking application, provides public employee retirement systems with a variety of statistical information related to assumptions, benefit design, and funding. Common uses of the survey results include benefit redesign studies, benchmarking, and contract negotiations. Because GRS has over 400 public pension actuarial clients, which includes more than 40 states, we have access to the most comprehensive and up-to-date library of information available on state and municipal pension plans in our industry. > GRS publication archives include GRS Insight, Perspectives from the Chief Actuary, GRS News Scan, Research Reports, and GRS Journal. > Secure data transfer for GRS clients. ➢ Clients can use their benefit related software in a hosted environment: • Defined Benefit Plan Administration. Our software provides benefit calculations, data housing, and access to forms and plan documents. • Minute Master. A plan administration tool for public employee retirement systems that uses imaging technology to store, categorize, and query policy and administrative decisions contained in meeting minutes, legal opinions, bargaining agreements and other supporting documents. Minute Master offers fast, comprehensive access to this institutional memory. • Social Security Death Check Service. Our service gives you the information you need on retirees, beneficiaries and deferred members to improve plan administration. Our single social security number search is free and our multiple social security number search using a batch file can be purchased for a nominal fee. > See our education and training videos on current topics. Gabrie[ Roeder Smith & Company Research Report 2014 Survey of GASB Accounting Measures for Public Pension Plans By Paul Zorn' In June 2012, the Governmental Accounting Standards Board (GASB) made significant changes to the ac- counting and financial reporting standards for state and local government pension plans, as well as for their sponsoring governments. Prior to the GASB's changes, a public pension plan's measures of the actuarial accrued liability, actuarial value of assets, and the unfunded pension liability were essentially the same for both funding and accounting purposes. However, under the GASB's recent changes, the accounting measures will be different from the funding measures.2 For public pension plans, the new measures under GASB Statement No. 67 are effective for plan fiscal years beginning after June 15, 2013. As a result, the new measures are available in the financial reports of state and local government pension plans for fiscal years ending on June 30, 2014 and thereafter. To obtain a bet- ter sense of the new measures and what they mean, this research report surveys the June 30, 2014 financial reports of 44 large public pension plans covering general employees and teachers. The GASB's New Accounting Measures The GASB's new pension accounting measures include the "total pension liability," the plan's "fiduciary net position," and the "net pension liability." The total pension liability (TPL) is the present value of pension benefits attributed to prior service that has accrued to active employees and retirees who are currently cov- ered by the plan. The TPL is determined using the Entry Age Normal actuarial cost method and includes benefits related to projected salary and service, as well as cost -of -living adjustments that are deemed to be automatic. The plan's fiduciary net position (FNP) is the fair (market) value of the pension plan's assets that are availa- ble to pay benefits, including accumulated employer and employee contributions to the plan, and investment earnings. The net pension liability (NPL) is the difference between the total pension liability and the plan's fiduciary net position. In many ways, the GASB's total pension liability is similar to the actuarial accrued liability (AAL) that is used to determine the ongoing contributions needed to fund the promised benefits. However, there are sev- eral key differences between the accounting and funding measures: • For funding purposes, the discount rate used to determine the present value of pension benefits is the long-term expected rate of return on plan assets. For accounting purposes, the discount rate is based on: 1) the long-term expected rate of return on plan assets, to the extent the plan's fiduciary net posi- tion is projected to pay benefits for current members; and 2) a tax-exempt, general obligation munic- ipal bond rate, to the extent the projected FNP is not sufficient to pay projected benefits. Conse- quently, if the projected FNP is not sufficient, the discount rate for accounting purposes would in- clude a portion based on the municipal bond rate. At times when municipal bond rates are lower The author. thanks Mark Randall, David Kausch, James Rizzo and Mary Ann Vitale at GRS for their thoughtful comments and as- sistance with this research report; however, he retains full responsibility for the accuracy of the information. 2 For a detailed summaryof the GASB's changes, see "The GASB's New Pension Accounting and Financial Reporting Standards," in the October 2012 issue of GRS Insight, available on the GRS website at www.gabrielroeder.com. 2/25/2015 © 2015 - Gabriel Roeder Smith & Company -1- than the long-term expected return (as is currently the case), the accounting discount rate will be lower than the funding discount rate and the TPL will be higher than the AAL. • Even if the discount rates for accounting and funding are the same, the TPL and. AAL will differ if the actuarial cost method for funding purposes is not Entry Age or if it is a variation of Entry Age which differs from the GASB' s parameters. • Another important difference between the accounting and funding measures relates to the way plan assets are valued. For funding purposes, the actuarial value of assets (AVA) often "smoothes" in- vestment gains and losses into the value of assets over time, typically 5 years. This is done to reduce the volatility in contribution rates. However, for accounting purposes, the fair (market) value of as- sets is used to determine the net pension liability, making the NPL more volatile than the unfunded actuarial accrued liability (UAAL). Survey Results The survey was developed to examine the GASB's new accounting measures under GASB Statement No. 67 and compare them with the measures used for pension funding. The survey results are based on 44 large statewide plans with fiscal years ending June 30, 2014 and covering general employees and teachers.3 The surveyed plans represent about one-third of the large public plans in the United States.` As shown in Chart 1, the total pension liability for the surveyed plans grew from $1,427.7 billion as of June 30, 2013 to $1,487.5 billion as of June 30, 2014, an increase of $59.8 billion, or 4.2% of the TPL as of June 30, 2013.5 The surveyed plans' fidu- ciary net position grew from $942.7 billion as of June 30, 2013 to $1,070.0 billion as of June 30, 2014, an increase of $127.3 billion, or 13.5% of the FNP as of June 30, 2013. Chart 1 Total Pension Liability, Fiduciary Net Position, and Net Pension Liability for the Surveyed Plans Tool Pen Uahftlty k Iduciu As will be discussed later, much of the increase in the FNP was due to strong investment earnings during the fiscal year, as well as employer and employee contributions. The FNP was also reduced, in part, as a result of the retirement benefits paid during the year. The overall net pension liability for the surveyed plans actually fell from $485.0 billion as of June 30, 2013 to $417.5 billion as of June 30, 2014, a decline of $67.5 billion, which reduced the surveyed plans' overall 3 Other plans covering public safety, legislatures, and judges have somewhat different characteristics and so are not included in this study. Future studies may include them as a greater number of financial reports become available. 4 The Public Fund Survey, sponsored by the National Association of State Retirement Administrators and the National Council on Teacher Retirement, provides information on 126 large public plans. 5 Note: the numbers may not add due to rounding. 2/25/2015 © 2015 - Gabriel Roeder Smith & Company -2- NPL by 13.9%. Again, this reduction is largely attributable to strong investment earnings over the fiscal year. Changes in the Total Pension Liability As discussed above, the total pension lia- bility is the account- ing measure of the accrued pension lia- bility for active em- ployees and retirees who are currently covered by the pen- sion plan. For the surveyed plans over- all, the TPL increased by $59.8 billion (or 4.2%) over the fiscal year ending June 30, 2014. The increase resulted from changes in the components of the TPL, as shown in Table 1. in t d Gha g it ti e TPllr' } : h$., illio Service Cost $ 28.8 2.0% ;interest on TPL 105.1 7.4% Changes of Benefit Terms 0.3 0.0% Difference Between Expected and Actual Experience 1.5 0.1% Changes of Assumptions 4.8 0.3% Benefit Payments and Refunds (80.7) -5.7% Net Change in the Plans' TPL Over the Fiscal Year 59.8 4.2% Note: Numbers may not add due to rounding. • Service Cost: The service cost represents the cost of benefits that have accrued to active employees over the fiscal year. As shown in Table 1, the service cost for the surveyed plans amounted to $28.8 billion, increasing the TPL by 2.0 percentage points over the fiscal year. • Interest on TPL: This component reflects the amount of interest charged to the TPL over the year based on the plan's discount rate.6 For the surveyed plans, interest was the largest component of the change in the TPL, amounting to $105.1 billion and increasing the TPL by 7.4 percentage points over the fiscal year. • Changes of Benefits Terms: Under the GASB's new standards, the full cost of changes in benefit terms is immediately recognized in the TPL, rather than being recognized more gradually over time. Interestingly, few of the surveyed plans changed their benefits during this fiscal year. As a result, the overall impact of benefit changes had little impact on the TPL for the surveyed plans. • Difference Between Expected and Actual Experience: This component reflects changes in the TPL due to the difference between expected actuarial experience and actual experience. As shown in Table 1, these differences for the surveyed plans amounted to $1.5 billion, increasing the TPL by 0.1 percentage points over the fiscal year. • Changes of Assumptions: This component. reflects the change in the TPL due to changes in the ac- tuarial assumptions or actuarial methods used to calculate the TPL. For the surveyed plans, these changes increased the TPL by $4.8 billion or 0.3 percentage points over the fiscal year. • Benefit Payments and Refunds: The TPL is reduced by paying the annual benefits due to retired members and refunding contributions for members who leave the plan before vesting. Overall, the surveyed plans paid $80.7 billion in benefits and refunds, lowering the TPL by 5.7 percentage points over the fiscal year. When the changes in the TPL are added together, the results show that the TPL of $1,427.7 billion as of June 30, 2013 was increased by $59.8 billion (or 4.2%) to $1,487.5 billion as of June 30, 2014. 6 As discussed on page 1, the discount rate used for accounting purposes may be different from the discount rate used to value the plan's liabilities for funding purposes. 2/25/2015 cO 2015 - Gabriel Roeder Smith & Company -3- Changes in the Fiduciary Net Position The plans' fiduciary net position reflects the fair (market) value of plan assets that are available to pay benefits. Over- all, the FNP for the sur- veyed plans increased by $127.3 billion, or 13.5% over the fiscal year. Table 2 shows that the increase con- oneni of Ganges r Bilifir ns 4 q Change >;n_, Employer (and Nonemployer) Contributions $ 33.2 3.5% Member Contributions 14.6 1.5% Net Investment Income 160.5 17.0% Benefit Payments and Refunds (80.7) -8.6% Administrative Expenses (0.7) -0.1% Other 0.4 0.0% Net Change in the Plans' FNP Over the Fiscal Year 127.3 13.5% Note: Numbers may not add due to rounding. sisted of the following changes in the components of the FNP: • Employer (and Nonemployer) Contributions: Contributions by employers (and nonemployer con- tributing entities) increased the FNP by $33.2 billion for the surveyed plans, or 3.5 percentage points over the fiscal year. • Member Contributions: In addition, member contributions amounted to $14.6 billion over the year, increasing the surveyed plans' FNP by 1.5 percentage points. • Net Investment Income: The largest increase in the FNP during this fiscal year came from invest- ment income. For the surveyed plans, investment earnings (net of investment fees) increased the FNP by $160,5 billion or 17.0 percentage points, due to strong investment returns. • Benefit Payments and Refunds: As is the case with the TPL, benefit payments and refunds also re- duce the FNP. Benefits and refunds paid by the surveyed plans amounted to $80.7 billion over the fiscal year, reducing the FNP by 8.6 percentage points. • Administrative Expenses: Plan administrative expenses also reduce the FNP, but by a relatively small amount. Administrative expenses for the surveyed plans reduced the FNP by about $700 mil- lion, or 0.1 percentage points over the fiscal year. • Other: Other changes to the FNP were relatively insignificant. When the changes in the FNP for the surveyed plans are added together, the results show that the FNP of $942.7 billion as of June 30, 2013 was increased by $127.3 billion (or 13.5%) to $1,070.0 billion as of June 30, 2014. Changes in the Net Pension Liability As a result of the changes in the TPL and FNP, the overall net pension liability for the surveyed plans de- creased by $67.5 billion, or 13.9% over the fiscal year. Since the NPL is the difference between the TPL and the FNP, it essentially contains the same components.' Components that increase the TPL also increase the NPL, since the NPL is a measure of the pension liability. Components that increase the FNP decrease the NPL, since the FNP is subtracted from the TPL to determine the NPL. Table 3 on the following page shows the changes in the NPL. Note that the dollar values for the components of the NPL are the same as in Tables 1 and 2, but the percentages are different, since they are based on percentages of the NPL (rather than the TPL or FNP) for the fiscal year. 7 However, the component for benefit payments and refunds is not included. Since it reduces both the TPL and the FNP, it is can- celed out. 2/25/2015 © 2015 Gabriel Roeder Smith & Company -4- For the surveyed plans as a whole, Table 3 shows that the service cost in- creased the NPL by 5.9 percentage points over the year. In addition, interest on the TPL increased the NPL by 21.7 percentage points. Moreover, the combined changes in benefits, differences be- tween expected and actual experience, changes in assumptions, and plan administrative expenses increased the NPL by another 1.5 percentage points. 'j'.77:` .fir r `$� ��" i i 1 1 # Coh''' 01ent d ChithgcS Intlt6l ,,.a s.... r } S' ib i ' b/o hhnge., Components of the TPL .... Service Cost $ 28.8 5.9% Interest on TPL 105.1 21.7% Changes of Benefit Tenns 0.3 0.1% Difference Between Expected and Actual Experience 1.5 0.3% Changes of Assumptions 4.8 1.0% Components of the FNP Employer (and Nonemployer) Contributions (33.2) -6.8% Member Contributions (14.6) -3.0% Net Investment Income (160,5) -33.1% Administrative Expenses 0.7 0,1%a Other (0.4) -0.1% Net Change in the Plans' NPL Over the Fiscal Year (67.5) -13.9% Note: Numbers may not add due to rounding. However, combined employer and employee contributions reduced the NPL by 9.8 percentage points and net investment income reduced it by another 33.1 percentage points, resulting in an overall decline in the NPL of 13.9 percentage points. Chart 2 illustrates the changes in the NPL over the year. As shown in the chart, the change in the NPL primarily resulted from changes in: 1) service cost; 2) interest on the TPL; 3) employer and em- ployee contributions; and 4) investment income While these results indi- cate an improvement in the financial status of public pension plans based on the accounting measures, they also demonstrate the po- tential volatility of the NPL due to changes in net investment income. Chart 2 Components of Change in the NPL for the Surveyed Pfans as a Percent of the Beginning NPL service Cost Interest on TPL Changes of Benefit 'ferns Expected vs. Aetna! Experience Changes ofAsstunplions Employer (and NCE) Contributions Member Conhibudons Net Investment Income Administrative Expenses Other 1 .40 0% .30.0%.%0 .20.0% .10,0% 0.0% 10.0% 20.0% 30.0% Comparing Funding and Accounting Measures Another topic of interest is the extent to which the funding measures and accounting measures are different. Chart 3, on the following page, compares the funding and accounting measures as of June 30, 2013.8 For the surveyed plans, it shows the accounting measure of the total pension liability was $1,427.7 billion while the actuarial accrued liability was $1,370.5 billion, resulting in the accounting measure of accrued liability being about 4.2% higher than the funding measure. During the GASB's deliberations related to the changes in the accounting standards, concerns were raised about including a portion of the municipal bond rate in the discount rate for plans where the projected FNP did not cover projected benefits. However, for the vast majority of the surveyed plans, the projected FNP 8 Although some of the plans have had funding valuations done as of June 30, 2014, not enough have been done to draw meaningful conclusions. However, all of the surveyed plans have done accounting and funding valuations as of June 30, 2013. 2/25/2015 © 2015 - Gabriel Roeder Smith & Company -5- was sufficient to pay projected benefits, and so the discount rate for funding purposes was the same as the discount rate for accounting purposes.' Consequently, the difference between the AAL and the TPL was less than expected. Chart 3 also shows that, for the surveyed plans, the val- ue of assets for accounting purposes (FNP) was larger than the actuarial value of assets for funding purposes (AVA). The overall FNP for the surveyed plans was $942.7 billion while the A:VA was $912.3 billion, making the FNP about 3.3% higher than the AVA. Since investment experi- ence was generally above expectations as of June 30, 2013, this was expected, given the smoothing of as- sets for funding purposes. Note that the FNP in Chart 3 does not include the sub stantial investment income earned between June 30, 2013 and June 30, 2014. $1,6i Chart 3 Funding and Accounting Measures for the Surveyed as of June 30, 2013 .07t,ndin r4;;;Ws „-.. :Mcamting Measured As a result of the differences between: i) the TPL and AAL and ii) the FNP and AVA, the accounting meas- ure of the net pension liability (NPL) was somewhat higher than the funding measure of the unfunded actuar- ialaccrued liability (UAAL). For the surveyed plans overall, the NPL amounted to $485.0 billion, while the UAAL amounted to $458.2 billion, making the NPL 5.8% larger than the UAAL as of June 30, 2013. Conclusions The GASB's new accounting measures for state and local government pensions include the total pension liability, the fiduciary net position, and the net pension liability, which are different from the funding measures. To understand the new measures, it is important to understand their components and how the components interact. The major components of changes to the TPL include: 1) service cost; 2) interest on the TPL; and 3) benefit payments and refunds. However, changes in benefit terms, plan assumptions, and plan experience can also have significant impacts. The major components of changes to the FNP include: 1) employer and member contributions; 2) net investment earnings; and 3) benefit payments and refunds. Overall, for the 44 surveyed plans over the fiscal year, the TPL increased $59.8 billion (4.2%) from $1,427.7 billion to $1,487.5 billion. However, the FNP increased $127.3 billion (13.5%) from $942.7 billion to $1,070.0 billion. This resulted in a $67.5 billion (13.9%) decline in the NPL from $485.0 billion to $417.5 billion. In addition, while the differences between the accounting and funding measures were less than anticipated, there will likely be substantial future volatility in the accounting measures due to the measure of plan assets (i.e., the FNP) being based on the fair (market) value. 9 This is likely due to plans establishing or updating funding policies to include closing their amortization periods, but further re- search is needed to confirm. 2/25/2015 © 2015 - Gabriel Roeder Smith & Company -6- Gabriel Roeder Smith c` : Company Research Report Pension Obligation Bonds: Risks and Rewards By Lance J. Weiss and Amy Williams* Introduction States and local governments continue to be interested in Pension Obligation Bonds ("POBs") due primarily to low interest rates, rising underfunded pension liabilities and shrinking revenues. POBs are financial in- vestments and, as such, involve both investment risks as well as investment rewards. Bob Eichem, Chief Financial Officer of the City of Boulder, Colorado, summarized the nature of POBs by stating "POBs are not for the faint of heart, you have to understand them."' A POB issued by a financially strong government following careful analysis of all the risks may be a part of a prudent long-term pension funding strategy. On the other hand, a POB issued by a financially weak gov- ernment may lead to significant problems for the government and the pension fund. Further context and bal- ance is essential to truly understanding the nature of both the risks and potential rewards of POBs. The pur- pose of this Research Report is to provide more clarity on both the potential risks and rewards inherent in issuing pension obligation bonds. Background POBs are a fotni of pension financing using debt instruments issued by a governmental entity. The POB proceeds will typically be used to fund all or a portion of the unfunded actuarial accrued liability of a pen- sion plan (or a retiree health care program). Today, most are issued in the form of taxable general obligation ("GO") bonds that are subject to constitutional debt limitations and are backed by the full faith and credit, as well as the taxing power, of the issuing state or local government. Simply stated, the idea is for a state or local government to issue such bonds and contribute the proceeds into the pension fund. Essentially, the issuer of the POB is borrowing money to invest in the financial markets. The hope, of course, is that the pension fund will earn a higher rate of return onthe invested POB proceeds than the interest rate that the sponsoring government pays on the bonds. If that happens, the transaction will reduce the overall cost of the pension plan to the plan. sponsor (i.e., reduce the annual pension contribution requirement to the fund by more than the cost of borrowing) and, at the same time, improve the funded ratio, liquidity position and benefit security of the pension plan. * Lance J. Weiss is a senior actuarial consultant with GRS and has over 35 years of experience in employee benefits and retirement support planning, with special emphasis on the design, funding, security, administration and communi- cation of retirement and post -retirement medical programs for private -sector and public -sector employers. Amy Williams is an actuarial consultant with GRS and has 15 years of actuarial experience. Her work involves con- sulting on pension and retiree health care valuations, funding projections, experience studies, actuarial audits and plan design. Additional information about the authors is provided on page 8. The authors of this article are actuaries, not investment consultants. This article shall not be construed as providing tax advice, legal advice, or investment advice. Readers are cautioned to examine the original source materials and to consult with subject matter experts before making decisions related to the subject matter of this article. The article expresses the views of the authors and does not necessarily express the views of Gabriel, Roeder, Smith & Company. 7/10/2014 © 2014 — Gabriel Roeder Smith & Company -1- However, it is very important to recognize that in order to achieve a net positive financial impact for the plan sponsor, the investment returns on the POB proceeds need to exceed the interest rate paid on the bonds over the life of the debt. It is also important to remember that the issuance of a POB itself does not reduce the total debt obligations of the sponsor. It does, however, convert the unfunded pension liability that is currently a "soft" debt of the plan sponsor and which can potentially be deferred into the future in difficult economic times, into a "hard" debt that must be paid to the bond holders even during the most trying economic times. POBs in Perspective According to a 2010 report on POBs by Alicia Munnell of the Center for Retirement Research at Boston College, the first POB was issued in 1985 by the City of Oakland, California." Prior to 1986, POBs could be issued on a tax-exempt basis which provided governments with the ability to invest the proceeds through the pension fund in higher yielding taxable securities, thus ensuring a positive net return from the transaction. However, the tax exemption for POBs was eliminated by the Tax Reform Act of 1986, and the interest in POBs waned for a while. Interest in POBs picked -up again in the 1990s, as taxable interest rates decreased and pension plans were able to generate higher returns by increasing their equity allocation. Between 1984 and 2012, governments issued approximately $100 billion of POBs,' The majority of POB debt, however, has been issued by about 11 states, with California, Illinois, Oregon and New Jersey being the major players.' Even though the $1.00 billion total of POB issues sounds large, the amount issued in any one year has never been more than one percent of total pension assets across the country." However, for several states, POBs make up a significant portion of pension assets. For example, POBs represent approximately 19% of pen- sion assets for Illinois, 15% for Oregon, 13% for Connecticut and 10% for New Jersey." As the result of two financial crises in the last decade, public pension plans suffered a significant drop in av- erage funded status and a corresponding increase in pension contribution requirements. The average funded ratios of state and local pension plans fell from a high of 103% in 2000 to 73% in 2012. In addition, the av- erage GASB "ARC" (i.e., the Governmental Accounting Standards Board's Annual Required Contribution) for such plans increased from 6.4% o of payroll in 2001 to 15.5% of payroll. in 2012." Nevertheless, pension costs as a percentage of state and local own -source revenues remain a modest percent of state andlocal budgets. Absent a new crisis and taking into account the impact of recent pension reform changes adopted by state and local pension plans, pension costs as a percentage of state and local own -source revenues are projected to change as follows: "" Period of Time Pension Costs as Percentage of State and Local Own - Source Revenues Pre -financial crisis in 2007 4.1% Post -crisis in 2011 6.5% In 2028 as pension reform changes are partially recognized 5.3% In 2046 as pension reform changes are fully recognized 3.3% Even though pension costs, on average, represent a modest cost for state and local governments, a number of states and municipalities face net pension liabilities in excess of annual revenues, thus fostering continued interest in POBs. According to a 2013 report by Moody's Investors Service, nine states have adjusted net pension liabilities that are greater than annual revenues." Ratios range from a low of 6.8% of revenue for Wisconsin to a challenging 241% for Illinois, with the median being 45%," The problem is even more acute, 7/10/2014 2014 — Gabriel Roeder Smith & Company -2- however, for the larger municipalities. Thirty of the top 50 largest municipalities have unfunded pension liabilities greater than annual revenues. Ratios range from a low of 10% for Washington D.C. to a high of 680% for Chicago with the average being 100%.' Considering these circumstances, some states and local governments continue to look to POBs as one of sev- eral tools to help manage rising pension liabilities and related costs. The Role of POBs in Pension Cost Management As a financial investment, the issuance of POBs should be considered as a component part of a government's broader strategy to manage its pension costs. As previously pointed out, however, the issuance of a POB itself does not reduce the total pension debt obligations of the plan sponsor. It does, however, convert the unfunded pension liability that is currently a "soft" debt of the plan sponsor into a "hard" debt that must be paid even during the most trying times. In this regard, the Government Finance Officers Association recommends that state and local governments use caution when issuing pension obligation bonds and undertake a careful financial analysis. The GFOA also states: "... the issuance of pensionobligation bonds should not become a substitute for prudent funding of pension plans."'"' The State of Illinois Governor's Advisory Commission on Pension Benefits stated in their November 1, 2005 recommendation: "Consider the issuance of Pension Obligation Bonds ... as a financing instrument to reduce the State's pension costs, as long as (1) there are favorable market conditions and (2) the issuance of such POBs is a component part of a broader plan to reduce the Pension Systems' unfunded liabilities." Gary Findlay, Executive Director of the Missouri State Employees Retirement System, has stated that if POBs are issued "it should be done with full disclosure of the potential downside, so policy makers are con- versant with the risks involved."""` Timing Considerations Given the inherent fluctuations in the investment markets, it is to be expected that there will be times during the life of the POB when the interest rate paid on the bonds exceeds the investment return of the pension fund and other times when the investment return of the pension fund exceeds the interest rate paid on the bonds. While in the long run, most people expect a diversified portfolio to produce returns in excess of cur- rent bond interest rates, it is important for the POB issuer to have financial strength sufficient to weather the ups and downs of the investment market over the life of the bond issue. As previously stated, however, a POB issue should only be viewedas a success or failure after all the bonds are retired, not over the short-term. Given the inherent fluctuations in the investment market, it can be mis- leading to conclude that POBs are a bad investment because of market conditions at any one interim valua- tion date prior to retirement of the bonds. A good example of this timing difference is illustrated by examining Connecticut's $2.28 billion POB issu- ance in April of 2008. When this bondwas issued, the Dow Jones average was approximately 13,000 and by the following March it stood at just over 6,600. However, only looking at the Connecticut POB transaction immediately after the market crisis points out the flaw in trying to measure the success or failure of POBs at one point in time before the bonds mature. According to Denise Nappier, Connecticut State Treasurer, based on a stochastic projection of the Connecti- cut POB results, there is an 88% probability of exceeding the 5.88% borrowing cost by the time the bonds mature in 2032." Nappier also pointed out an additional important benefit of the POB, which was a much 7/10/2014 © 2014 -- Gabriel Roeder Smith & Company -3- needed liquidity cushion thus avoiding the need for the pension plan to sell assets during the credit crisis and market downturn. Finally, another less obvious but no less important benefit of the Connecticut POB trans- action was a unique bond covenant that requires the State to fully fund the annual required contributions for as long as the POBs remain outstanding. The 2010 report on POBs by the Center for Retirement Research at Boston College indicates just how im- portant timing is in assessing whether a POB issue saves the plan sponsor money or not.' The report shows that if the POBs' assessment date was at the end of 2007 (the peak of the stock market), the internal rate of return on the POBs by year issued is positive for 11 of the 16 years from 1992 to 2007. However, if the POBs' assessment date was at the middle of 2009 (post financial crisis), the internal rate of return on the POBs by year issued is positive for only 6 of the 18 years from 1992 to 2009. Further, the 2010 report con- cludes that " ...POBs could well leave plan sponsors worse off than where they were before they issued the POBs" even though they admit "...the story is not yet over, since about 80% of the bonds issued since 1992 are still outstanding." In fact, in a just -released update to their 2010 report, the Center finds that the internal rate of return on POBs was positive for 18 of the 22 years from 1992 to 2013.X" Actuarial Projection Results One way to analyze the potential success or failure of a POB issue is to model the long-term expected per- formance of the POB and associated pension plan. In this regard, Gabriel, Roeder, Smith & Company (GRS) performed a stochastic projection study showing a cost comparison for a hypothetical underfunded plan with and without a POB issue. The modeled plan covered 30,000 active members and 20,000 retirees and included a benefit multiplier of 2.2% of final average pay per year of service and a normal retirement age of 60. At the time of the hypothet- ical bond issue, this plan was 45% funded and had an annual contribution requirement of $500 million per year. Finally, the plan's funding policy was to pay normal cost plus a 30-year closed period level percent of pay amortization payment of the unfunded liability. The assumptions used in the projection study included the following: • A 7.00% investment return assumption and discount rate under the scenarios with and without pen- sion obligation bond proceeds; • The comparison of cost on a present value basis based on a discount rate of 7.00%; • A 3.00% payroll growth assumption; • An assumed open group, with the number of active members remaining constant; • An interest rate on debt service of 5.00%, with a 2.00% spread between the expected investment re- turn and interest on debt service; • One 30-year pension obligation bond with a level dollar debt service schedule at 5.00%; and • No benefit increases adopted during the life of the POB and the plan sponsor contributes the full ARC (normal cost plus amortization of the unfunded actuarial accrued liability) during the life of the POB and makes all required debt service payments. This example is not intended to suggest or recommend an appropriate amount of POBs for a pension plan to issue or the characteristics of a plan that should issue a POB. This example is for illustrative purposes only. GRS perf'orined simulations on two POB issues: 1) a $6 Billion POB issue; and 2) a $2 Billion POB issue, with the results based on 1,000 trials of possible future investment returns. Returns were assumed to follow a lognormal distribution and included an expected return assumption of 7.00% and a standard deviation as- sumption of 10.00%. The bonds were assumed to be issued by the employer in 2012 and paid into the plan in 2013. 7/10/2014 © 2014 — Gabriel Roeder Smith & Company -4- The results of the stochastic simulation show the following savings in employer contributions (including debt service) over 30 years with the POB as compared to without the POB. The results also show the increase in funded ratio after 30 years with the POB as compared to without the POB: Average Annualized Return 95th Percentile 10.2% 75th Percentile 8.2% Median 7.0% 25th Percentile 5.7% 5th Percentile 3.9% $6 Billion POB Savings in PV of Employer Contributions plus Debt Service (in Millions) Over 30 Years with a POB 1,955 1,020 394 (242) (954) Increase in Funded Ratio After 30 Years with a POB 103.2% 24.1% 2.6% 1.1% 0.4% $2 Billion POB Savings in PV of Employer Contributions plus Debt Service (in Millions) Over 30 Years with a POB 841 435 192 (45) (286) $6 Billion POB increased initial funded ratio to 90%. $2 Billion POB increased initial funded ratio to 60%. Increase in Funded Ratio After 30 Years with a POB 23.6% 4.0% 0.6% 0.3% 0.2% The simulation results indicate that, for this sample plan and under the given assumptions and funding policy (i.e., normal cost plus 30-year closed period amortization of the unfunded liability as a level percentage of pay), there is approximately a 70% probability that issuing a POB produces a savings in employer contribu- tions (including debt service) over the life of the bond issue. The downside is that there is a 30% probability that issuing a POB produces an increase in employer contributions (including debt service) over the life of the bond issue. Of course, these probabilities depend on the specific situation that was modeled. Under dif- ferent circumstances, different probabilities would result and, in some situations, the probability of produc- ing a savings could be less than 50%. In addition to the projected cost savings (70% probability) to the plan sponsor, the issuance of a POB also improves the funded ratio, liquidity position and benefit security of the pension plan. The additional assets from a POB may also provide a liquidity cushion to help the plan avoid selling assets, thus resulting in the plan achieving a higher return than if the POB had not been issued. As shown in the chart above, our simulation indicated an increase in the funded ratio after 30 years at all percentiles under both the $6 Billion and the $2 Billion POB scenarios. The large increase in the funded ra- tio at the 75th and 95th percentiles for scenarios with a POB compared to without a POB is a result of a sig- nificant initial increase in the assets and funded ratio from the POB proceeds, and sustained favorable in- vestment performance, These scenarios illustrate that, strictly from the pension plan's perspective, there is little or no downside risk on the funded ratio of issuing a POB (assuming that the funding policy would al- ways be followed). ]despite the higher funded ratios under the scenario in which a POB was issued, the plan sponsor would be required to continue making the debt service payments. Whereas under the scenario in which no POB was issued, contributions would not be required in the small percentage of instances where the amortization of a surplus balance was more than the normal cost contribution. The graph and chart on the next page show the net present value of the cumulative contribution savings of issuing a $6 Billion POB in 2012 (i.e., the assumed year of the POB issue). By 2042, the debt service is ful- ly paid off and the full impact of the POB can be analyzed. As shown in the graph, there is approximately a 70% likelihood that issuing the POB will result in lower employer contributions (including debt service) on a present value basis than if a POB had not been issued. 7/10/2014 © 2014 — Gabriel Roeder Smith & Company -5- $2,000 $1,500 $1,000 - $0 Net Present Value as of 2012 of Contribution Savings (Including Debt Service) from $6B POB Scenario Compared to No POB Scenario rfrr`' r \ ;kS NWN\\XXW, For Year Coded December 31 -$1,000 ---, 2012 2015 2018 2021 2024 2027 2030 2034 2038 2042 95thPercentile $ 0 $ (324) $ (181) $ 93 $ 386 $ 666 $ 919 $ 1,227 $ 1,620 $ 1,955 75th Percentile 0 (336) (266) (95) 112 297 464 674 842 1,020 Median 0 (343) (320) (235) (129) (3) 111 245 326 394 25th Percentile 0 (349) (371) (370) (343) (315) (287) (252) (242) (242) 5th Percentile 0 (358) (439) (556) (655) (722) (801) (856) (889) (954) Percentile ®75th-95th ❑ 50th-75th ® 25th-50th 1a5th-25th Because we have not assumed that any pension assets could be used to pay debt service (even in the case of a funded status in excess of 100%), the additional contributions under the POB scenarios result in funded rati- os that are also much higher in certain future simulated outcomes. However, because of the required debt service payments, the likelihood of achieving savings on a net present value basis before the end of the 30- year period is much lower than 70% (e.g., less than 25% after 9 years and less than 50% after 15 years), and illustrates the importance of only evaluating the success of a POB over the long-term and not the short-term. Finally, because of the higher amount of assets under the POB scenarios, there is likely to be more contribu- tion rate volatility (Le., there is a higher likelihood that the change in the contribution rate will be higher when there is favorable or unfavorable investment performance). However, the stability of the debt service payment helps mitigate the volatility of the total contribution rate (when also taking into account the debt service payment). Refinancing Analogy The issuance of a POB has often been characterized as being similar to refinancing a debt that bears a high interest rate (i.e., the interest rate used to amortize the pension plan's unfunded accrued liability) with one that bears a lower interest rate (the underlying borrowing rate of the POB). However, the long-term, actual investment performance of the POB proceeds is what determines the final savings or cost of issuing the POB and not the interest rate used to amortize the pension plan's unfunded accrued liability. Note that, although issuing a POB will usually produce a near -term reduction in contributions to the retirement plan, it is not possible to know in advance whether the POB will produce any long-term savings. However, it is possible (as shown above by our analysis) to conduct a stochastic projection of the pension plan in order to model the probability of the longer term success or failure of the POB issue. Rating Agencies View of POBs According to Moody's Investors Service, the issuance of pension obligation bonds may be neutral or nega- tive for an issuer's credit rating depending onthe use of the proceeds, the relative size of the bond issue and associated debt service, the level of future budget savings assumed and the assumptions on which such sav- ings are based. 7/10/2014 © 2014 — Gabriel Roeder Smith & Company -6- However, Moody's points out that pension obligation bonds are often a red flag associated with greater rigid- ity of longterm obligations, failure to find sustainable solutions to pension funding and a pattern of pushing costs off into the future. For this reason, Moody's indicates that most pension bonds have at best a neutral impact on the assessment of an issuer's credit quality. Moody's cautions that if proceeds of POBs directly substitute for the issuer's pension contribution require- ments, they would view the transaction as deficit financing and such transactions could have a material im- pact on credit quality. Moody's does offer that if the issuance of POBs is made as part of a broader effort aimed at restoring the balance between a plan's assets and liabilities and restoring affordability, the initiative would be considered as a credit positive effort. Other Risk Considerations POBs are financial investments, and like any other, they involve various forms of risk, including, but not limited to: 1) investment risk; 2) timing risk; 3) flexibility risk; and 4) political risk. The following issues should therefore be considered before issuing Pension Obligation Bonds: 1. Is the POB period sufficiently long to earn the needed return? To achieve any real savings from issuing a POB, the proceeds need to earn an investment return that exceeds the total cost of borrowing during the entire period the POB is outstanding. Further, what level of risk can the plan sponsor tolerate over this period to earn the desired return? 2. How will the pension fund invest the proceeds of the POB? Will the proceeds be invested all at once or via dollar -cost averaging? Will they be entirely invested in equity -type securities or will a portion be in- vested in debt instruments that are not that dissimilar to the POB itself? How will the influx of funds impact investment policy and asset allocation strategy? 3. How will the rating agencies view the transaction? 4. How will the transaction affect the debt capacity of the issuer? 5. Will a higher funded ratio lead to pressure for benefit enhancements? 6. Is the long-term expected financial reward of issuing the bonds (i.e., reducing the overall cost of the pen- sion plan to the plan sponsor) worth the loss of potential funding flexibility? Issuing POBs converts the unfunded pension liability that is currently a "soft debt of the issuer, and which can potentially be de- ferred into the future in difficult economic times, into a "hard" debt that must be paid to the bond holders even during the most trying economic times. Another risk consideration is how market performance, particularly in the short-term, could affect the funded ratio of the plan. For example, even after issuing the POB, short-term market declines producing low or negative investment returns can cause the unfunded actuarial accrued liability (UAAL) to rise to the pre- POB level or higher. Therefore, a plan sponsor hoping to reduce or eliminate its UAAL amortization pay- ment by using a POB may still find it owes a pension contribution (including the UAAL amortization pay- ment) at the same time the POB debt payments are due. As a result, plan sponsors considering issuing POBs need to be aware of the impact of short-term market declines. In summary, plan sponsors considering the issuance of POBs need to go into such transactions fully prepared with all available information and knowledge about the various potential risks. Conclusions POBs are not a silver bullet and will not, on their own, solve the challenge of pension funding and rising pension costs. In fact, if either the plan sponsor or the plan are having financial difficulties, it may be advis- able to explore solutions that do not involve additional borrowing. Further, POBs are not a substitute for regular pension fund contributions made in accordance with a well thought out funding policy. However, 7/10/2014 © 2014 — Gabriel Roeder Smith & Company -7- POBs do represent one of several management tools that state and local governments may wish to consider to address pension funding. A POB issued by a financially strong government following careful analysis of all the risks may be a part of a prudent long-term pension funding strategy. A POB issued by a financially weak government as a last ditch effort to save the pension fund from ruin may lead to significant problems for the government and the pension fund. Are there risks involved with issuing POBs? Of course there are and this Research Report describes many of them. But there are also benefits, primarily the potential for the transaction to produce net cost savings for the issuer. In addition, there are also less obvious benefits such as: • The potential for POB proceeds to provide a liquidity cushion thus avoiding the needfor a pension fund to liquidate long-term assets. • The positive message perceived by both active and retired plan members of an immediate increase in benefit security resulting from the inclusion of the POB proceeds into the pension fund. The bottom line is that state and local governments need to analyze both the risks and rewards of POBs and determine if the upside potential is worth the downside risk. It is also important to keep in mind that an open discussion and full disclosure of allthe issues raised will go a long way to getting all of the interested parties on the same page with respect to making a final determination on whether to issue POBs or not. About the Authors Lance J. Weiss is a senior actuarial consultant with Gabriel, Roeder, Smith & Company. Lance has over 35 years of experience in employee benefits and retirement support planning, with special emphasis on the de- sign, funding, security, administration and communication of qualified and nonqualified retirement and post- retirement medical programs for private -sector and public -sector employers. He is an Enrolled Actuary, a Member of the American Academy of Actuaries and a Fellow of the Conference of Consulting Actuaries. Lance is also a Past President of the Conference of Consulting Actuaries and a former member of the Board of Directors of the American Academy of Actuaries. He has a Bachelor of Science Degree in Mathemat- ics/Actuarial Science from the University of Illinois at Urbana -Champaign. He frequently serves as a speak- er and author on public pension topics and recently coauthored an article for the Government Finance Re- view entitled "Addressing Media Misconceptions about Public Sector Pensions and Bankruptcy." Amy Williams is an actuarial consultant with Gabriel, Roeder, Smith & Company and has 15 years of actu- arial experience. Amy's work involves consulting on pension and retiree health care valuations, funding projections, experience studies, actuarial audits and plan design. She manages, directs and monitors the work of actuarial analysts and senior analysts. Amy is an Associate of the Society of Actuaries, a Member of the American Academy of Actuaries and a Fellow of the Conference of Consulting Actuaries. She has a Bachelor of Science Degree in Mathematics/Actuarial Science from the University of Illinois at Urbana - Champaign. 7/10/2014 © 2014 -- Gabriel Roeder Smith & Company -8- Appendix: Additional Stochastic Projection Results The following graphs provide ad- ditional details from the stochastic projection results under the "No POB" scenario and the two "POB Issued" scenarios. Graphs Ia through Ic illustrate the projected funded ratios of the plan. Initially, the contribution amounts and rates under POB scenarios Ib and Ic do not include the POB proceeds but do include the annual contribution amounts and annual debt service payments. The assets and funded ratio first reflect the POB proceeds in 2013. As a result of the POB proceeds, the funded ratio increases by 41 percentage points under the $6 Billion POB scenario (Graph Ib) and 14 percentage points under the $2 Billion POB scenario (Graph Ic). By the end of the 30-year closed amortization period, the median funded ratio is about 100% under all scenarios. However, the fund- ed ratio at the 75th and 95th per- centiles is significantly higher un- der the "POB Issued" scenarios as compared to the "No POB" sce- nario. The large increase in the funded ratios at the 75th and 95th percentiles in Graphs Ib and Ic is the result of the significant initial increase in the assets and funded ratio from the POB proceeds, and sustained favorable investment performance. These scenarios illustrate that, strictly from the pension plan's perspective, there is little or no downside risk on the funded ratio of issuing a POB (assuming that the funding policy would always be followed). Graph Ia 200% Funded Ratio Scenario with No POB Issued 160% 140% -- 120% ... 100% - - 80% - 60% -. 40% 20% 0% For Year Ended December31 2012 2015 2018 2021 2024 2027 2030 2034 2038 2042 Percentile 0751h-95th ❑500o-75th 0125t9-50,1r e51h-251h 95th Percentile 46.4% 61.0% 73.3% 83.5% 92,1% 103.1% 109.8% 121.7% 141.9% 159.3'% 75th Percentile 44.1% 53.5% 60.3% 65,9% 71.8% 773% 82.8% 91.1% 99.7% 108,9% Median 42.7% 48.7% 53.2% 56.8% 60.5% 639% 68.7% 76.6% 86.8% 100.8% 251h Percentile 41.4% 44.4% 46.2% 48,5% 50.1% 53.1% 57.5% 65,5% 77.3% 97.2%. 5th Percentile 39'.6% 38.4% 38.5% 39.2% 40.3% 42.4% 46.0% 53.3% 66.8% 93.2% 200% 180% - 160% - 140% - 120% - 100% - 80% - 60% 40% 20% 0% Graph lb Funded Ratio Scenario with $6B POB Issued For Year Ended December 31 2012 2015 2018 2021 2024 2027 2030 2034 2038 2042 Percentile 1a 750r--95111 ❑5001-75th 02501-50th 185w-25th 95th Percentile 46.4% 101.7% 119.3% 132.9% 143.6% 160.1% 175.6% 197.3% 230.4% 262.5% 75111Percen10e 44.1% 93,1% 100.2% 104,7% 108.7% 110.9% 113.1% 118.7% 127,0% 133.0% Median 42.7% 87.2% 89.0% 89.3% 90,1% 89.2% 90.9% 93.1% 97.7% 103,4% 256 Percentile 41.4% 81.8% 78.1% 759% 73.4% 72.9% 74.4% 77.7% 84.2% 98.3% 5th Percentile 39.6% 74.8% 65.5% 60.8% 57.0% 55.7% 56.4% 60.9% 70.4% 93.6% Graph le 200% 18 OYo . I Funded Ratio cenario with $2B POB Issued 160%- 60% - 40% 20% For Year Ended December 3l 0% 2012 2015 2018 2021 2024 2027 2030 2034 2038 2042 95th Percentile 46.4% 73,9% 88.2% 99.1% 107.5% 119.5% 126.7% 140.7% I57,6% 182.9% 75th Percentile 44.1% 66.6% 73.4% 78.6% 83.7% 88.2% 92.5% 99.1% 103.5% 112.8% Median 42.7% 61,2% 64.8% 67.5% 70.2% 72.4% 76.0% 819% 89.8% 101.4% 25th Percentile 41.4% 56.7% 56.8% 57.6% 57.8% 59.7% 62.8% 69.3% 79.6% 97.5% 5th Percentile 39.6% 50.3% 47.3% 46.5% 45.7% 47.2% 49.6% 55,8% 67,7% 93.3% Percentile o751h-95th ❑50t0-75th 0251h-50111 51h-25th 7/10/2014 © 2014 -Gabriel Roeder Smith & Company -9- Graphs Ila through IIe illustrate the total contribution rates (including POB debt service) as a percentage of pay under each scenario. The total contribution rate is lower under both of the "POB Issued" scenarios between the 25th and 75th percentiles for most years when compared with the No POB scenar- io. Contribution rates are slightly higher in the earlier years under the POB scenarios due to the level dol- lar debt service payments. At the 5th percentile (i.e., the line above the red shaded area indicating the most unfavorable investment performance), the contribution rate is higher under the POB scenarios than underthe No POB scenario as a result of having to pay the debt service payments in addition to the required contributions to the pen- sion fund. At the 95th percentile (i.e., the line below the blue shaded area indicat- ing the most favorable investment performance), the contribution rate is higher under the POB scenarios (Graphs Ilb and IIc) in the later years. This is partly the result of favorable investment performance which causes the required contribu- tions to the pension fund to be zero, but there are still remaining obliga- tions to make the debt service pay- ments under the POB scenarios. Because the illustrations are based on a plan with a closed -period amortization policy, the variability of the contribution rate increases as the amortization period decreases. Therefore, in 2042, there is signifi- cant variability because the contri- bution rate is basedon amortizing the unfunded liability over the one year remaining in the closed amorti- zation period. 95th Percentile 75th Percentile Median 251h Percentile 5th Percentile 100% 90%-- 80% - 70% - - 60% • - 50% - 10% 30%- 20% -. 10% - 0% 2012 Graph Ha Contribution Rate Scenario with No POB Issued For Year Ended December31 38.9% 39.3% 39.6% 39.9% 40.2% 100% 90"/0._ 00% 70% 60% 50°/a 40% 30% - 20% - l0%-• 95th Percentile 75th Percentile Median 25th Percentile 5th Percentile 95th Percentile 75th Percentile Median 25th Percentile 5th Percentile 2015 2018 2021 2024 2027 36.4% 39.1% 40.9Y'o 42.4% 44.8% 31.3% 37.6% 41.3% 44.6% 48,6% 26.8% 36.5% 41.8% 46.6%o 52.1% Percentile Id750r-95th ❑50th-751h 0251h-500, ®5m-231h 2030 203! 2030 2042 22.0% 14.6% 6.5% 34.6% 33.3% 31.4% 42.2% 43.0 % 44,2% 49.1% 51.4% 53.6% 55.5% 59.4% 63.6% Graph lib Contribution Rate Scenario with $6B POB Issued (Includes Debt Service Payments) For Year Ended December 0% 2012 2015 2018 2021 2021 2027 2030 2034 2038 2042 0.0% 27.3 % 44.2% 57.2% 716% 0.0% 0.0% 17.8% 0.0% 44,2% 44,4% 63.6% 99.2% 84.4% 155.9% 38.9% 36.6% 26009 17.3% 16,0% 14.8% 13.6% 12.1% 10.7% 9.4% 39.3% 39.6% 34.8% 29.6% 25.2% 209% 16.7% 12.1% 10.7% 9.400 39,6% 41.7% 39.7% 38.7% 37.9% 37.1% 36.4% 34.3% 31.2% 11.5% 39.9% 43.3% 44.7% 46,3% 48.4% 49.7% 51.4% 53.8% 58.6% 87.4% 40.2% 45.9% 50.8% 55.4% 58.9% 63.4% 67.1% 74,4% 86.6% 156.9% Graph IIc Contribution Rate Scenario with $2B POB Issued (Includes Debt Service Paytents) 0% 2012' 2015 2018 2021 7024 2027 2030 2034 2038 2042 Percentile Percentile 07519-951h ❑500r.75th o251h-501h 1951h-25th 38.9% 36.4% 29.6% 22.9% 16.0%7.6% 4.5% 4.0% 3,5% 3.1% 39.3% 39.3% 36.7% 34.2% 31,6%. 29.3% 26.8% 21.7% 11.2% 3,1% 39.6% 41.1% 40.7% 40.9% 40.6% 409% 41.7% 40,8% 40,100 38,4% 39.9% 42.7% 44.7% 46.3% 48.9% 50,8% 53.0% 56.4% 62.1% 95.9% 40.2% 45.1% 49.3% 53.2% 36.4% 60.7% 64.7% 72.2% 84,9% 156.2% 7/10/2014 0 2014 - Gabriel .Roeder Smith & Company -10- Graph IIIa shows the annual savings in total dollar contributions (including debt service) as a result of issuing the $6 Billion POB. Because, for pur- poses of the example, the debt service payments were calculated as a level dollar amount and the pension plan contributions were calculated as a level percent of pay (with increasing dollar amounts), contributions under the "POB Issued" scenario are higher in the early years. However, in the later years, there is about a 75% likelihood that the annu- al contribution under the "POB .Is- sued" scenario is lower than under the "No POB" scenario. In Graph Ilia, the results shown at the 5th percentile flatten out in the later years as a result of a continued required debt service payment under the "POB Issued" sce- nario and no required contribution to the pension plan (since under these scenarios the plan is 100% funded). Graph LIIb shows the net present vale 95W Parrentda $ ue in 2012 of the cumulative contri- 7501 Percentile bution savings. By 2042, the debt Medina 25W PIImanWa idr PercenWu service is fully paid off and the full S1,500 - 51,000 - Graph Ilia Annual Contribution Savings Scenario with $6B POB Compared with No POB $500 - SO Percentile 5175th-9591 ❑501h-751h 1725t11-50111 B5th-25th Per Year Ended December 31 -5500 2 12 2015 2018 2021 2024 2027 2030 2034 2038 2042 95111 Percentile $ 0 $ 6 $ 116 $ 214 $ 277 $ 334 $ 399 $ 523 $ 760 $ 2 040 75111 Percentile 0 (5) 61 127 177 217 252 320 354 353 Median 0 (13) 25 58 88 111 133 164 154 4 25111 Percentile 0 (19) (10) (0) 7 8 6 (11) (88) (359) SW Percentile 0 (28) (56) (82) (93) (119) (198) (359) (359) (359) S2 000 S1,500 - S1,000 - S500 Graph IIIb Net Present Value as of 2012 of Contribution Savings (Including Debt Service) from $6B POB Scenario Compared to No POB Scenario \‘‘.\\\X\‘‘ For Year Ended Decebe•31 $1,000 2012 2015 2018 2021 0 $ (324) $ (181) § 93 $ 0 (336) (266) (95) 0 (343) (320) (235) 0 (349) (371) (370) 0 (358) (439) (556) 2024 2027 2030 2034 2038 2042 386 112 (129) (343) (655) 666 $ 919 $ 297 464 (3) 111 (315) (287) (722) (801) Percentile 5175W-950 ❑501h-751h 5125W-50dt 951h-25111 1.227 $ 1,620 $ 1 955 674 842 1 020 245 326 394 (252) (242) 2421 (856) (889) 9541 impact of the POB can be analyzed. There is approximately a 66% likelihood that issuing the $6 Billion POB will result in lower contributions on a present value basis than if a POB had not been issued. Because we have not assumed that any pension assets could be used to pay debt service payments (even in the case of a funded status in excess of 100%), the additional contributions under the POB scenario results in funded ratios that are also much higher in certain future simulated outcomes. If pension assets could be used to make debt service payments or excess assets could be "refunded" from the pension plan, we project that the POB scenarios would result in lower contributions in 80% of the simulation trials. 7/10/2014 © 2014 — Gabriel Roeder Smith & Company -11- Graph IVa shows the annual savings in total dollar contributions (includ- ing debt service) as a result of issu- ing the $2 Billion POB. The scale of the graph is the same as in Graph IIia in order to provide a sense of the rel- ative size of the annual contribution. savings compared with the $6 Billion POB scenario. Graph IVb shows the net present value in 2012 of the cumulative con- tribution savings. By 2042, the debt service is fully paid off and the full impact of the POB can be analyzed. There is approximately a 70% likeli- hood that issuing the $2 billion POB will result in lower contributions on a present value basis than if a POB had not been issued. 52,000 51,500 51,000 8500 50 Graph IVa Annual. Contribution Savings Scenario with $2B POB Compared with No POB For Year Ended December3l •$500 2012 2015 2018 2021 2024 2027 2030 2034 2038 2012 951h Percentile $ 0 $ 2 $ 38 $ 85 $ 124 $. 162 $ 185 $ 223 $ 264 $ 480 7.51h Percentile 0 (2) 20 45 69 9) 106 131 143 113 Median 0 (4) 8 20 32 46 53 66 64 9 250i Pereeolile 0 (6) (3) 1 4 8 9 9 (13) (118) 9lh Percentile 0 (9) (18) (26) (28) (35) (49) (118) (118) (118) Graph IVb Net Present Value as of 2012 of Contribution Savings (Including Debt Service) from $2B POB Scenario Compared to No POB Scenario 81,000 2012 2015 2018 2021 2024 2027 2030 2034 2038 2042 Percentile 18751h-951h ❑ 50th 751h m 5th-25th c45th-25th Percentile 95th Peroontile $ 0 $ (106). $ (59) $ 47 $ 178 $ 321 $ 442 $ 593 $ 712 $ 841 75th Percentile 0 (110) (87) (30) 48 140 210 291 376 435 Median 0 (112). (1051 (77) (39) 12 61 119 166 192 25111 Percentile 0 (114) (122) (121) (112) (100) (81) (62) (39) (45) %Percentie 0 (117) (114) (181) (210) (234) (255) (261) (279) (286) © 75th-95th ❑50th-75th 025th-50th l5th-25th 7/10/2014 © 2014.— Gabriel Roeder Smith & Company -12- Notes Eric Schulzke, "Pension Obligation Bonds: Risky Gimmick or Smart Investment?" Governing, January 2013. Alicia H. Munnell et al., "Pension Obligation Bonds: Financial Crisis Exposes Risks," State and Local Issue in Brief 9, Center for Retirement Research at Boston College, January 2010. 'i' "Pension Obligation Bonds: "Do you feel lucky?" Jean-Pierre Aubry, Assistant Director of State and Local Re- search at the Center for Retirement Research at Boston College. Presentation at 2013 Annual Meeting of the Con- ference of Consulting Actuaries. Source cited in presentation: Data set compiled from Bloomberg Online Service (1992-2009), supplemented with Thomson Reuters SDC Municipal Bond Dataset (1984-2012). Ibid. • "Pension Obligation Bonds: "Do you feel lucky?" Jean-Pierre Aubry, Assistant Director of State and Local Re- search at the Center for Retirement Research at Boston College. Presentation at 2013 Annual Meeting of the Con- ference of Consulting Actuaries. Source cited in presentation: Data set compiled from Bloomberg Online Service (1992-2009), supplemented with Thomson Reuters SDC Municipal Bond Dataset (1984-2012); The Census of Governments State and Local Government Finances (1986-2011). vii viii xi Ibid. Alicia H. Munnell et al., "The Funding of State and Local Pensions: 2012-2016," State and Local Issue in Brief 32, Center for Retirement Research at Boston College, July 2013. Alicia H. Munnell et al., "State and Local Pension Costs: Pre -Crisis, Post -Crisis, and Post -Reform," State and Lo- cal Issue in Brief 30, Center for Retirement Research at Boston College, February 2013. Moody's Investors Service, Adjusted Pension Liability Medians for US States, June 27, 2013. The report used Moody's measure of the "adjusted net pension liability" which is substantially different from the measures used to fund public pension plans and typically results in a higher unfunded liability. Ibid. Pension Obligation Bonds: "Do you feel lucky?" R. Ray Kljajic, Managing Director of Citigroup. Presentation at the 2013 Annual Meeting of the Conference of Consulting Actuaries. Source cited in presentation: Moody's, Sep- tember 19, 2013. • Government Finance Officers Association, "Evaluating the Use of Pension Obligation Bonds," GFOA Advisory, 2005. • "Questions to Consider Before Issuing Pension Obligation Bonds," GRS Insight, Gabriel, Roeder, Smith & Com- pany, February 2004. xvi Eric Schulzke, "Pension Obligation Bonds: Risky Gimmick or Smart Investment?" Governing, January 2013. Alicia H. Munnell et al., "Pension Obligation Bonds: Financial Crisis Exposes Risks," State and Local Issue in Brief 9, Center for Retirement Research at Boston College, January 2010. Alicia H. Munnell et al., "An Update on Pension Obligation Bonds," State and Local Issue in Brief 40, Center for Retirement Research at Boston College, July 2014. 7/10/2014 © 2014 — Gabriel Roeder Smith & Company -13- Visit the GRS website at: www.gabrieiroeder.com GRS Measuring Pension Risk By Paul Zorn' May 2015 In December 2014, the Actuarial Standards Board (ASB) released an Ex- posure Draft (ED) of a proposed Actuarial Standard of Practice (ASOP) titled, Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions. The ED was devel- oped by the ASB's Pension Committee to provide guidance to actuaries regarding the risks inherent in measuring pension obligations and actuari- ally determined contributions. The ED applies to both private -sector and public -sector pension plans. As discussed in the ED, measuring pension obligations and calculating actuarially determined contributions requires the use of assumptions re- garding future economic and demographic experience. However, these measures are generally presented as a single value at a single point in time, even though there is a range of future possibilities. Moreover, users may not understand the potential volatility of the measures. To remedy this, the ED would require that, when a pension funding valuation is performed, the actuary should include an assessment of the significant risks associated with the measures. Under the ED, "risk" is defined as "the potential of future deviation of actual results from expecta- tions derived from actuarial assumptions."' (See the endnotes on page 6.) Moreover, the ED lists a variety of risks that may affect the plan's financial condition, including: • Investment Risk — that investment returns may be different than expected; • Asset/Liability Mismatch Risk — that changes in assets may not be matched by changes in liabilities; • Interest Rate Risk — that interest rates may be different than ex- pected; • Longevity Risk — that mortality experience may be different than expected; and • Other Risks — that other risks may have a material effect on the plan's condition as determined by the actuary.2 In addition, the ED would require actuaries to use professional judgment in selecting the appropriate methods for assessing risk, including: Paul Zorn is director of governmental research for GRS. He thanks David Kausch, Mita Drazilov, Brian Murphy, Mark Randall, and Mary Ann Vitale for their helpful comments. © 2015 Gabriel Roeder Smith & Company 2 GRS Insight 5/2015 • Stress Tests — measuring the impact of adverse changes in one or relatively few factors affect- ing the plan's financial condition; • Scenario Tests measuring the impact of one or several simultaneous or sequentially occur- ring possible events on a plan's financial condi- tion; • Sensitivity Tests — measuring the impact of the change in an actuarial assumption on an actu- arial measurement; and • Stochastic Modeling — estimating the distri- butions of possible outcomes by allowing for random variations in one or more inputs over time.' According to the ED, the assessment of risks can be either qualitative, quantitative, or both. However, for large pension plans, the ED would require a quantitative risk assessment, which should "illustrate, over at least a 10-year period beyond the measurement date, poten- tial deviations in significant actuarial measurements that are the results of the funding valuation and that are dependent upon the risks that are being assessed."4 In addition, the risk assessment should be performed at least once every 5 years. If significant changes have occurred since the last assessment, the actuary should perform a new assessment. The ED would also require the actuary to calculate and disclose "plan maturity measures" that the actuary be- lieves are significant to understanding the risks associ- ated with the plan. Suggested plan maturity measures presented in the ED include: • Ratio of market value of assets to payroll; • Ratio of retired life liability to active life liabil- ity; • Ratio of net cash flow to market value of assets; and • Ratio of benefit payments to contributions. To provide a better understanding of these measures, the author calculated them using the 145 large public - sector retirement plans in the Public Plans Database as of the 2013 fiscal year.' In addition, regression analysis was usedto illustrate the relationship between these measures and the plans' funded. status. However, not all plans had complete data, so the number of plans used in each analysis varies. Chart 1 shows the distribution of funded ratios for the 145 public -sector plans as of 2013 that are included in the database. Thirty-one percent of the plans had funded ratios of 80% or more. Forty-six percent had funded ratios between 60% and 80%, and the remainder had funded ratios below 60%. The median funded ratio was 72%. Ratio of Market Value of Assets to Payroll As noted above, one of the risk measures suggested in the ED is the ratio of the market value of assets to payroll (abbreviated here as the "MVA/ PAY ratio"). According to the ED, this measure helps describe the potential for volatility in contribution rates. Mathematically, the impact of changes in investment returns on pension con- tributions is directly proportional to the MVA/PAY ratio. For example, if the market value of assets :is 5 times the plan sponsor's payroll, a 5% decline in assets would equal 25% of payroll. Similarly, if the market value of assets is 10 times payroll, a 5% decline in assets would equal 50% of payroll. While the impact of a decline in assets can be mitigated by asset smoothing and amortization policy, the relationship between assets and payroll is a useful indicator of the potential volatility of contributions. 20% 5% -- 0% L Chart 1: Distribution of Funded Ratios for Large Public -Sector Retirement Plans in 2013 14% 3% 23% 23% 20% s% <40% 40-499% 50-59.9% 60-69.9% 70-79.9% 80-89.9% 90-99.9% FUltded Ratio 3% 100 A+ Source: Authoesnnalysis using the Public Plans Database for large public -sector retirement plans as of2013. Distribution is based on 145 plans. Numbers do not add to 100%% due to rounding. 2015 Gabriel Roeder Smith & Company GRS Insight 5/2015 3 Chart 2 shows the relationship between the MVA/PAY ratio and the funded ratio for 145 large public -sector retirement plans in 2013. For the surveyed plans, the MVA/PAY ratio ranged from about 1.5 to 12.0, with a median of 4.1. A linear regression of the relationship between the MVA/PAY ratio and the funded ratio shows an upward sloping line. This is consistent with what we would expect: that plans with more assets (relative to payroll) are better funded. However, while the regression results are statisti- cally significant at the 95% confidence level, the R2 value for the regression (0.0587) is low. This suggests a relatively weak correlation between the MVA/PAY ratio and the funded ratio. Neverthe- less, the MVA/PAY ratio can be a useful indicator of the volatility related to pen- sion contributions, as discussedlater in Appendix A. (Note: The R2 value measures the correlation between variables, and ranges from 0 (no correlation) to 1 (exact correlation). Statistically significant results at the 95% confidence level are unlikely to be due to chance.) 120% :.............. • 20% 4, 0.0 Chart 2: Relationship between. Funded Ratio and Ratio of Market Value of Assets to Payroll 4: 2,0 4.0 6.0 8.0 10,0 Ratio of Marker Value of Assets to Payroll. y = 0.0219x+ 0.6194 R'=0.0587 - ... 12.0 14.0 Source: Author's analysis using the Public Plans Database for large public -sector retirement plans as of 2013. The analysis is based on 145 plans and the results are statistically significant at the 95% level. The ratio of the market value of assets to payroll is used as the independent variable. Ratio of Retired Life Liability to Active Life Liability The second risk measure suggested in the ED is the ratio of the retired life liability to the active life liability (abbreviated here as the "RLL/ALL ratio"). According to the ED, this may indicate a risk of mismatch between plan assets and plan liabilities. In other words, the as- sets may be invested "long" while liabilities have a short duration. This ratio may also be useful for indicating the extent to which the liabilities for retirees outweigh those for active members, thus increasing financial pres- sure on plan sponsors. Chart 3 shows the relationship between the RLL/ALL ratio and the funded ratio for 113 of the public plans. For the surveyed plans, the RLL/ALL ratio ranged from 0.1 to 3.0 with a median of 1.0. A linear regression of the relationship between the RLL/ALL ratio and the funded ratio shows a downward sloping line. This suggests that, as the RLL/ALL ratio increases, the funded ratio tends to de- crease. The R2 value for the regression (0.2139) is higher than for the MVA/PAY ratio regression. This indicates a stron- ger correlation between the RLL/ALL ratio and the funded ratio. The results are statistically significant at the 95% confidence level. 140% Chart 3: Relationship between Funded Ratio and Ratio of Retired Life Liability to Active Life Liability 0.0 0.5 1.0 1.5 y=-0.1513x+ 0.8745 R = 0.2139 2,0 2.5 3.0 Ratio of Retired Life Liability to Active Life Liability Source: Author's analysis using the Public Plans Database for large public:-seetorretirementt plans no of 2013. The analysis is based on 113 plans and One results are statistically significant at. the 95% level, The ratio of the retired life liability to active life liability is used as One independent variable, Ratio of Net Cash Flow to Market Value of Assets The third risk measure suggested in the ED is the ratio of net cash flow to the © 2015 Gabriel Roeder Smith & Company 4 GRS Insight 5/2015 market value of assets (abbreviated here as the "NCF/MVA ratio"). According to the ED, this measure may be helpful in understanding the potential for amplify- ing investment risk. Net cash flow is defined as plan con- tributions minus benefit payments and administrative expenses. The lower the NCF/MVA ratio, the more the plan must rely on investment returns to pay promised benefits. Low net cash flows are not necessarily indicators of finan- cial difficulty. To some extent, they are a planned outcome of prefunding pension benefits, since investment returns are expected to pay a portion of the benefits. However, very low cash flows may in- duce plan sponsors to adopt more con- servative asset allocations, and invest larger portions of the portfolio in liquid assets in order increases, the funded ratio tends to increase as well. to pay current benefits.6 Chart 4 shows the relationship While the R2 value (0.1412) indicates a somewhat weak between the NCF/MVA ratio and the funded ratio for correlation, the results are statistically significant at the 92 of the plans. 95% confidence level. From an actuarial perspective, negative cash flows reflecting the real investment return, For the surveyed plans, the NCF/MVA ratio ranged adjusted for inflation, (e.g., -3% to -4%) are expected' from -16.2% to 1.5%, with a median value of -2.6%. A for well -funded plans in the long -run. This permits all linear regression of the relationship between the NCF/ of the investment returns above the inflationrate to be MVA ratio and the funded ratio resulted in an upward used to pay benefits. sloping line. This suggests that, as the NCF/MVA ratio 2 Chart 4: Relationship between Funded Ratio and Net Cash Flow as a Percent of the Market value of Assets 120% y = 2.2681x+ 0.7721 R = 0,1412 80% 60% 40% 20% ♦ 44Lp4 *.y. ..... •IS -18,0% 16.0% -14.0% -12.0% -10.0% -8,0% -6.0% -4.0% -2.0% 0.0% Net Cash Plow as a Percent of the Market Value of Assets 2.0% 4.0% Source: Author's analysis using the Public Plans Database for large public -sector retirement plans as of 2013. The analysis isbased on 92 plans and the results are statistically significant et the 95% level. Net cash flow as a percent of the market value of assets is used as the independentvariable. 80% • 40% Chart 5: Relationship between Funded Ratio and Ratio of Total Benefits to Total Contributions • gig .,4- �� [yr.. -0.0334x+ 0.7661 RS=0.0205 • 0.50 1.00 1.50 2.00 2.50 3.00 3.50 Sabo of Total Benefits to'fotal Contributions Source: Author's analysis using the Public Plans Database for large public -sector retirement plans as of2013, The analysis is based on 123 plans and the results are not statistically significantat the 95% level. Theistic, of total benefits to total contributions is used as the independent variable. Ratio of Benefit Payments to Contri- butions The last risk measure specifically suggested in the ED is the ratio of benefit payments to contributions (abbreviated here as the "B/C ratio"). According to the ED, in situations where contribution rates are fixed, this measure may help to informdeci- sion-makers of their dependence on stable investment returns in order to continue providing benefits. Chart 5 shows that, for 123 plans, the B/C ratio ranged from about 0,4 to 4.2, with a median of 1.5. A linear regres- sion of the relationship between the B/ C ratio and the funded ratio showed a downward sloping line. This suggests that as the B/C ratio increases, the © 2015 Gabriel Roeder Smith & Company GRS Insight 5/2015 5 funded ratio tends to decrease. However, the R2 value (0.0205) was very low, indicating little correlation between the B/C ratio and the funded ratio. Moreover, the analysis was not statistically significant at the 95% level. Conclusions Understanding pension risk is a difficult, but necessary, aspect of understanding pension plans. From a wide range of possible future outcomes, actuarial valuations determine single -point measures of the pension obligation and actuarially determined contribution. However, in accepting these measures, it is also important to understand the range of possibilities and the associated risks. The ASB's ED proposes a new ASOP for assessing and disclos- ing the risks associated with pension plans, including: 1) the risks to be assessed; 2) related assumptions; and 3) the methods for assessing risk. While the various measures of risk may not apply to all pension plans, and new measures may be determined in the future, the ED helps prepare the groundwork for these efforts. Comments to the ASB regarding the ED are due by May 29, 2015. The Actuarial Standards Board's ED is under the "Drafts" link at: www.actuarialstandardsboard.org Appendix A: The Impact of Asset Changes on Pension Contributions As discussed on pages 2 and 3, the impact of a change in assets on pension contributions is directly proportional to the ratio of assets to payroll. For example, if assets are 5 times the plan sponsor's payroll, a 5% decline in assets would equal 25% of payroll. As another example, consider a situation where the ratio of plan assets to payroll is 5, the expected investment return is 8% and the actual return is 0%. In this situation, the asset loss would be 40% of payroll (i.e., [0% - 8%] x 5 =-40%). It would result in a loss, since the plan was expected to earn an 8% return. .Alternatively, if the annualreturn is 16%, the asset gain would be 40% of payroll (i.e., [16% - 8%] x 5 40%), all else held equal. The standard deviation of an investment portfolio is a measure of the portfolio's risk, In 2014,.an investment portfolio composed of 70% stocks and 30% bonds could reasonably be assumed to earn an expected return (i.e., arithmetic mean) of 7.75% and a standard deviation of 14%. For a lognormal distribution with an arithmetic mean of 7.75% and a standard deviation of 14%, the following probabilities would apply for a 1-year period: • A 25% probability the return will be 16.60% or greater; • A 47% probability the return will be 7.75% or greater; • A 50% probability the return will be 6.90% or greater; • A 69% probability the return will be 0.00% or greater; and • An 80% probability the return will be -4.00% or greater. The impact of changes in investment return can be managed with an actuarial funding policy that involves asset smoothing and amortization of actuarial gains and losses. The following table shows how the ratio of assets to payroll affects pension contributions and how asset smoothing and amortization mitigates the impact. Scenarios 2 3 (a) Actual Annual Return 16.60% 7.75% 0.00% (b) Expected Annual Return 7.75% 7.75% 7.75% (e) Actual Minus Expected Return 8.85% 0.00% -7.75% (d) Ratio Assets/ Payroll 5 5 (e) Asset Gain/(Loss). asa%of Payroll 44.25% 0.00% -38.75% (f) (g) (h) Smooth- 20-Year Contribution Rate ing Period Amortization Change as a % of (Years) Factor Payroll 5 13.51 -0.66% 5 13.51 0.00% 5 13.51 0.57% (I) Annual Probability Actual Return will be Greater 25% 47% 69% 80% Calculations: (e) = ,l (a) — (b)1 x (d); (h = -L(e) / (f) j f (g). Amortization factor is based on 7.75% interest and 3.5% wage inflation. Table 1 shows the potential contribution rate changes for four scenarios based on assets that are 5 times payroll. In Scenario 1, the actual annual return is 16.60%, while the expected return is 7.75%, resulting in an annual asset gain of 8.85% (i.e., 16.60% - 7.75%), Given that plan assets are 5 times payroll, the gain expressed as a percent 4 -4.00% 7.75%-11.75% 5-58.75% 5 13.51 0,87% CO 2015 Gabriel Roeder Smith & Company 6 GRS Insight 5/2015 of payroll is 44.25% (i.e., 8.85% x 5). However, the plan's funding policy is to smooth asset gains and losses over a 5-year period. In addition, the funding policy amortizes changes in the unfunded accrued liability over a 20-year period based on 7.75% interest and 3.5% wage inflation, resulting in an amortization factor of 13.51. Consequently, the invesment gain, when smoothed and amortized, lowers the plan sponsor's annual contribution by -0.66% of payroll (i.e., [44.25% / 5] / 13-.51) over the following 20 years. Note that there is a 25% probability that the actual annual return will be greater than 16.60%. Similar logic applies to the other scenarios shown in Table 1. Endnotes ED, Paragraph 2.2. z ED, Paragraph 3.2. However, the proposed ASOP would not require the actuary to evaluate the ability of the plan sponsor or another contributing entity to make contributions to the plan when due. Moreover, the actu- ary is not expected to provide investment advice. 3 ED, Paragraphs 2.3 to 2.6. 4 ED, Paragraph 3.7. s The Public Plans Database is maintained by the Center for Retirement Research at Boston College and the Center for State and Local Govern- ment Excellence. 'Public Fund Survey, Summary of Findings for FY 2013, January 2015. © 2015 Gabriel Roeder Smith & Company