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4 6pres Vrs

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Presentation I developed for the Director of Finance to present to the Board of County Supervisors regarding the sudden increase in local government contributions to employees retirement plans.

Presentation I developed for the Director of Finance to present to the Board of County Supervisors regarding the sudden increase in local government contributions to employees retirement plans.

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  • Good afternoon Chairman, members of the Board. There have been various discussions and questions surrounding PWC’s VRS contributions. We have been diligently looking into this issue also, and I believe our presentation will facilitate your understanding of these issues and begin to answer your questions.
  • We are going to talk about: Where we were How did we get there? Where we are How did we get here? Staff met with VRS regarding Bolton’s Report that was dispatched to you with the staff report on 3/26 And we will share with you their comments
  • A Board of Trustees oversees VRS with a Fiduciary responsibility they are not elected officials PWC has participated in VRS since 1962 Participation is irrevocable (sec. 51.1-139).
  • PWC has 4,894 participants as of 6/30/03 consisting of employees with PWC former employees separated from PWC that are still earning benefits in VRS Former employees that are not earning benefits in VRS and are vested, and those that are not Retirees from PWC receiving benefits Retirees from other employers that were with PWC at one time, now receiving benefits
  • The rates employers pay are expressed as a % of “covered” payroll. A % of compensation to active employees is the source of funding the retirement plan. PWC funds this contribution through the general fund. Most of your questions are regarding the Employer’s Contribution Rate this is a percent determined every 2 years by VRS based on actuarial information for PWC Employee’s Share of 5% of salary, that PWC as an employer pays for its employees. (The County Attorney has concluded that this contribution is also irrevocable.) Health Insurance Credit of 0.12%, and changes insignificantly.
  • I said what we would show you today would begin to address your questions, most questions are about the contribution rate that is greater than in prior years. This is a history of our contribution rate including both the 5% PWC picks up for employees and the employer contribution rate. What does this chart tell you? Well, it tells you where we have been with the employer contribution rate since FY95. You can see our contribution rate climbing at a slow rate and then dropping from 10% to just above 8% effective July 1, 2001. You can see that recently, PWC prior to this budgeting cycle, dropped down to just above 6%. By the way, that’s 6% of “covered” payroll. In other words, the employer share was 1%. The employee share stayed at 5%. How did PWC drop to 6% when formerly up between 8-10%? To understand these changes, I need to briefly talk to you about some terms used in pension funding.
  • Actuarial Present Value. This is the amount that would have to be invested so that the invested amount + investment earnings would provide funding for Total Projected Benefits. If you have a retirement plan, you don’t pay for just current retirees, but you MUST provide adequate funding over time for future retirees – your current employees you said you would provide a defined benefit for. The actuary determines this amount based on life expectancies, employment longevity, and other specialized information. PWC’s normal cost currently approximately 12% of “covered” payroll, annually. So, if we aren’t paying 12%, what is happening?
  • We already defined what actuarial present value is. Actuaries also value the assets and liabilities of the plan. In valuing the assets & liabilities, they use assumptions. The assumptions used by VRS for PWC are: 3% cost-of-living adjustments (last changed in 2000 from 3.5%) Pay raises from 4% to 6½%, this being COLA + Merit (last changed in 1997) 8% market rate of return (last changed in 1989) The first 2 assumptions are close to actual results for PWC. The actuary utilizes a time horizon that smooths out changes varying from assumptions and allows the employer to contribute to the plan over a period of time. The longer your horizon, the greater the window of time to realize results close to the assumptions. The shorter the horizon, the shorter the time to realize results. Market return is the most significant assumption regarding valuing the assets for the plan.
  • Actuarial value of assets is how the actuary values the assets of the plan, given a set of assumptions and the particular types of assets in the plan. Generally, any gains/losses in market value are only partially reflected in the actuarial value of assets, approximately 20% annually. Therefore, recouping market losses or reaping market gains are spread in the actuarial value of assets over 5 years. This is what the market value of assets were according to VRS actuarial report for PWC on 6/30/00, and the actuarial value of assets. The $43 million is not realized all at once in the plan but over a period of years.
  • The next term, Actuarial Accrued liability. This is the sum of all costs based on service prior to the current year, or valuation date + any interest accrued on those costs. So, take the difference between the actuarial value of assets and the actuarial accrued liability and you’ve either overfunded or underfunded your plan. And those results also have some specific terms: unfunded actuarial accrued liability, positive or negative. But generally, you can always expect a difference between the projected benefits and actuarial value of assets, and the market returns and employer contribution over time makes up for that difference.
  • These are results in the actuary report VRS issued to PWC as of June 30, 2000. Therefore there was not an unfunded liability: there was a negative unfunded liability of $52,542,951. Based on actuarial calculations, this resulted in a lower contribution rate for PWC for the next 2 years, as VRS sets the rate for a 2-year period.
  • This is what happened when the contribution rate was set beginning July 2002. First, the actuarial valuation was performed as of June 30, 2001. At that point, the market performed better than the long-term assumption.
  • Simultaneously, VRS implemented the banding methodology discussed in the staff report distributed to you. The methodology of determining employer contribution rates based on Unfunded Actuarial Liability was changed and it provided for an even shorter amortization period of the Unfunded Actuarial Accrued Liability, so the negative unfunded liability was used up over a shorter period resulting in an even lower contribution rate. This had the effect of reducing the employer contribution rate so significantly it fell below normal cost. If the amortization period was not shortened to 9 years due to banding, the resulting contribution would be approximately 9%. W/out bands the amortization period would have been 25 years. What happened the following year? Well, market performance dropped significantly – the market performed lower than the assumption of 8%, and the value of assets supporting the plan dropped.
  • Back to market value and actuarial value, this is the difference between Market value and actuarial value as of 6/30/03. The plan has deferred losses of $67,600,000 as of 6/30/03, and at that time PWC had an unfunded actuarial liability of $9,967,281. This is why PWC’s contribution rate increased: PWC must make up over time the unfunded liability through employer contributions and assets performing greater than the assumptions. Without significant market gains before the next valuation, we expect our contribution rate to increase again in the future. (flip)
  • Our required contribution rate today is making up for market losses, but not all $67,600 million. The assets need to increase to get closer to market value through employer contributions as a % of payroll and market performance of the assets in the plan. Bolton partners calculated this rough estimate based on the actuarial reports they did have from VRS and came up with a rate increase to approximately 14% in the next two years, an increase in the FY07 and FY08 of $2.6 million and $2.7 million respectively.
  • For comparison purposes, if a longer amortization period was used starting July 2002 and continuing to the future, say amortization of 30 years, we would still have to make up for losses in the market as they were significant, but the changes in the rate would be less volatile.
  • PWC Staff Met with VRS on 3/26/04
  • The same VRS actuarial methods are used for every participating political subdivision and the Commonwealth Participants’ contribution rates are not set based on Commonwealth budgets but rather they are based on the actuarial assumptions and the employer-specific asset and liability data
  • Localities participating in VRS must pay the contribution determined as a result of actuarial studies There are statutory penalties for failure to make the required contributions
  • VRS assures us the Commonwealth’s budget does not change actuarial methods and assumptions. They don’t need to. The Commonwealth contributed the employees’ 5% and ½ the employer share in FY02. In FY03, The commonwealth contributed the employees’ share of 5%, but has not contributed the employer’s share. I am told the Commonwealth can do this w/out being in default on the plan. However, GASB does require the Commonwealth to recognize this and it is shown here as from their CAFR for FY03.
  • Banding was implemented prior to significant market swings up and down as a way to limit fluctuation in employer contribution rates That is not the result given the subsequent market performance Market performance was not forecasted by VRS or its actuary
  • Chairman, members of the Board, Thank you for your attention through this complex matter. I hope we have made some things a bit clearer for you. Staff has been researching this and discussing alternatives given where we are today. We cannot go back and change what has already happened. Here are our recommendations. VRS Actuary interpret and explain key issues as they arise VRS Actuary explain the impact on the future of this current valuation in budgeting terms Actuary to provide a 5-year forecast for PWC utilizing assumptions and estimates We would like to send VRS a letter requesting these actions.
  • Contract with an actuary to review actuarial reports from VRS and use actuarial methods to provide 5-year projections Staff to recommend funding strategies within the County’s 5-year budget plan to stabilize the County’s contribution rate Smooth out fluctuations in the rate and the impacts on the 5-year plan Make prepayments to VRS to cushion our contribution rate Incorporate in Principles of Sound Financial Management policies regarding funding of VRS
  • Transcript

    • 1. Virginia Retirement System Contributions Christopher E. Martino, Finance Director Mr. Bryan Avant, ASA, EA Bolton Partners, Inc.
    • 2. Agenda for 4/6/04
      • Brief Background Information on VRS and PWC participation
      • Employer Contribution Rate
        • Prior Contribution Rates
        • Pension Plan Terminology
        • Current Contribution Rate
        • Future Contribution Rates
      • Summary of Meeting with VRS on 3/26/04
      • Recommendations
    • 3. PWC has participated in VRS since 1962
      • A Board of Trustees oversees VRS
        • Fiduciary responsibility
        • Not elected officials
      • Employer participation is irrevocable (sec. 51.1-139)
      • There are 405 participating political subdivisions
    • 4. PWC has participated in VRS since 1962
      • PWC has 4,894 participants as of 6/30/03 consisting of
        • employees with PWC
        • former employees separated from PWC that are still earning benefits in VRS
        • Former employees that are not earning benefits in VRS and are vested, and those that are not
        • Retirees from PWC receiving benefits
        • Retirees from other employers that were with PWC at one time, now receiving benefits
    • 5. PWC contributions consists of:
      • Employer’s Contribution Rate
        • this is a percent determined at least every 2 years by VRS based on actuarial information for PWC
      • Employee’s Share of 5% of salary, that PWC as an employer pays for its employees
      • Health Insurance Credit of 0.12%, and changes insignificantly
    • 6. PWC Contribution Rate History
    • 7. Terms
      • ACTUARIAL PRESENT VALUE is the amount that would have to be invested so that the invested amount + investment earnings would provide funding for Total Projected Benefits or benefits based on current service.
        • PWC’s normal cost is currently approximately 12% of “covered” payroll, which covers benefits based on current service.
    • 8. Actuarial Assumptions
      • Assumptions are used to value Actuarial Present Value and the liabilities of the plan
      • The assumptions used by VRS for PWC:
        • 3% cost-of-living adjustments for retirees
        • Pay raises from 4% to 6.1% (COLA+Merit)
        • 8% market rate of return
    • 9. Terms
      • Actuarial Value of Assets vs. Market Value of Assets
      • PWC As of June 30, 2000 Valuation:
    • 10. Terms
      • The sum of all costs based on service prior to the current year, or valuation date + any interest accrued on those costs =
      • ACTUARIAL ACCRUED LIABILITY
      • − Actuarial Value of Assets
      • = UNFUNDED ACTUARIAL ACCRUED LIABILITY or UAAL
    • 11. Plan Value on June 30, 2000
    • 12. PWC Contribution Rate History
    • 13. If Market Performance was amortized over a longer term
    • 14. Asset Value on June 30, 2003
      • PWC’s Unfunded Accrued Actuarial Liability is currently $9,967,281 requiring funding during amortization period through
        • Contributions
        • Market outperforming assumptions
    • 15. PWC contribution rate today
    • 16. PWC contribution rate in the future
    • 17. PWC contribution rate in the future
    • 18. PWC Staff Met with VRS On 3/26/04
    • 19. VRS Actuarial Methods
      • The same VRS actuarial methods are used for every participating political subdivision and the Commonwealth
      • Participants’ contribution rates are not set based on Commonwealth budgets but rather they are based on the actuarial assumptions and the employer-specific asset and liability data
    • 20. Employer Contributions
      • Localities participating in VRS must pay the contribution determined as a result of actuarial studies
      • There are statutory penalties for failure to make the required contributions
      • Participation is irrevocable and the employers’ share for the employee is irrevocable
    • 21. Employer Contributions
      • The Commonwealth has not contributed the employer’s share
    • 22. VRS Actuarial Methods
      • Banding was implemented prior to significant market swings up and down as a way to limit fluctuation in employer contribution rates
      • That is not the result given the subsequent market performance
        • Market performance was not forecasted by VRS or its actuary
    • 23. Recommendations: More Meaningful Summaries and Projections from VRS
      • VRS Actuary interpret and explain key issues as they arise
      • VRS Actuary explain the impact on the future of this current valuation in budgeting terms
      • Actuary to provide a 5-year forecast for PWC utilizing assumptions and estimates
    • 24. Recommendations for Staff
      • Contract with an actuary to review actuarial reports from VRS and use actuarial methods to provide 5-year projections
      • Staff to recommend funding strategies within the County’s 5-year budget plan to stabilize the County’s contribution rate
        • Smooth out fluctuations in the rate and the impacts on the 5-year plan
        • Make prepayments to VRS to cushion our contribution rate
      • Incorporate in Principles of Sound Financial Management policies regarding funding of VRS