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- PERS is a single-agent, multiple-employer system, i.e.,
- Assets are tracked separately,
- Liabilities are tracked separately,
- The individual employer “rate” billed and paid, is based upon an
individual member’s management decisions, individual assets, and
individual liabilities.
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- Assets (added for clarity)
- In order to calculate an employer’s past service contribution rate, we assign
retiree reserve assets to employers…
- The amount allocated to an employer does not represent contributions
made by the employer
- simply represents assets assigned.
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- Because:
- (“Rate”) x (Salaries) = Employer’s Cost
- - therefore -
(Increased “rate” = Increased cost)
- - therefore -
- (Increased cost = increased local taxes, &/or, decreased services)
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- Shared Consolidated Normal Rate (The rate calculated to fully fund
benefits expected to be earned by active members during the fiscal year
following the valuation date.)
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15
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- Compare the “assigned” assets to the “allocated” liabilities and
transfer the difference.
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- …MR. SEMMEMS asked whether an employer could have allocated assets in
the RRA when in fact they have never contributed assets to the RRA.
- He was confident that the answer is “yes” because the Board has seen an
example.
- MS. MORRISON stated the example she provided to the ARMB in September
2006 showed the tremendous asset gain of an employer at the time they
had their first retiree.
- MR. SEMMENS explained the point
is that these assets are not tied to an individual employer.
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17
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- Based on your suggestions and a discussion with our actuary,…I have
documented the following problems and recommendations regarding
transfers and adjustments to the retirement reserve.
- The actuary for lack of better information, prorates the amount to be
transferred among employers…
…The net change in reserve is allocated by employer as the
balancing item.
- There are a couple of problems…
The result can be, in essence, double transfers of employer
contributions from some employers, while others are not paying their
fair share. In some years, this
can have a very detrimental effect on employers, especially the smaller
ones.
- A timing problem also exists for employees who retire late in the
fiscal year and are included in the actuarial process, but have not had
a retirement reserve transfer made by June 30.
- …the CRS team has agreed that the proration of the employer portion
should be based on the total employee contributions made while the
member worked for that employer divided by the total employee
contributions. This also assumes
that we would be able to extract total employee contributions by
employer for each member for the entire history of that member.
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- Employers appear to share retired liabilities of all employers.
- Implications to Contribution Rates
- Retirement reserve account for each employer not based on individual
employer experience.
- Individual employer contribution rates fluctuating based on retirement
reserve account allocations.
- Employers supplementing other employers retired liabilities.
- Extent of impact unknown at this time.
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- Three primary factors contributed to the unfunded status:
- rising health care costs;
- loss of investment income; and
- change in assumptions to reflect changing conditions.
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- The primary reasons for the PERS and TRS unfunded liability
include: rising health care
costs, loss of investment income during a three-year bear market
(2000-2002), inaccurate accounting for medical liabilities for PERS by
former actuary (Mercer), changes in assumptions compared to actual
experience, and a 5% cap on PERS contribution rates (2AAC 35.900).
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- For the fiscal year, the Public Employees’ Retirement System (PERS) had
a time-weighted total return of 11.74% and the Teachers’ Retirement
System (TRS) had a time-weighted total return of 11.78%...
...Over the trailing 3-year period, a span that includes three
years of recovering equity market returns, PERS and TRS have achieved
annualized returns of 11.90% and 11.93% respectively…
….These results have largely offset the weak returns experienced
during the fiscal 2001-2003 period.
Over the longest period for which Callan has detailed data (14 ¾
years), PERS and TRS have achieved annualized total returns of 8.89% and
8.96% respectively…
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- … a # of areas merit your close scrutiny.
- Use of outdated mortality tables in determining funding levels.
- Underestimating the cost of changes in legislation in determining
funding levels.
- Underestimating the future costs of medical expenses.
- Overestimating the salaries of employees, thus overestimating the funds
flowing into the Trust Funds to pay for retiree expenses.
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- … it is significant to note that an understatement of life expectancies
was a major element leading to the current unfunded liability.
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- …the 2004 Mercer report estimates are based on a health cost trend that
assumes the combined Medical-Rx inflation rate will fall from
approximately 10% in FY07 to 5% by FY14.
- That assumption is made despite the fact that there is, to my knowledge,
no credible evidence to suggest a substantial decline in Alaska or
national health cost inflation, and the PERS/TRS medical cost inflation
rate has averaged 10% since FY78!
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- Buck’s work revealed that Mercer understated healthcare benefits by 7
percent.
- Buck’s accrued liability 2.80 percent high than Mercer’s.
- Buck’s normal cost 4.21 percent high than Mercer’s.
- Buck’s actuarial employer contribution rate 7.73 percent high than
Mercer’s.
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- In order to minimize volatility in the contribution rate, the
calculation of the average employer contribution rate has not included
actual changes in the medical premiums.
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- One of the most critical assumptions in the valuation is the expected
increase in medical costs…
- Given the recent history of medical cost increases, the Mercer method
can significantly understate liabilities if the actual increases are
greater than the assumed increases…
- …valuations are using a starting point for the projection of future
medical costs that is almost 14% lower than the current blended premium. It would take three years for the
assumed premium to catch up with the actual premium if there is no
medical inflation during that time.
This does not appear reasonable to us.
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- This actuarial forecast technique used to justify the 12% of payroll
contribution is reasonable, only if the underlying assumptions are
realistic.
- …We’re concerned about this process, which produces a projected decrease
in almost every future year. In
reviewing the prior five actuarial valuations, we saw that demographic
experience by itself would have caused contributions to increase in
every year for PERS and in every year but one for TRS.
- In costs (apart from gains or losses and assumption changes) have been increasing
every year in the past, a projection showing costs decreasing in every
year in the future is questionable.
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- It is clear that the under funding problems of the retirement systems did
not occur overnight…
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- Statement of Key Findings
- …we found a number of areas where changes are needed, and have
additional observations and recommendations for improving the actuarial
process.
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- The quality of actuarial valuation data and the participant records
underlying that data is a matter of substantial concern.
- It is of critical importance that the Administration regularly be
provided with the best possible information regarding the costs of the
retirement systems which it supports.
- It is also of critical importance that costs of potential legislative
changes to the systems be available on as accurate a basis as possible.
- This information can properly be provided only if complete and accurate
machine-readable records of employee participation in the System are
available.
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- Although the data available for this valuation with respect to political
subdivisions is more complete than that available for the previous
valuation, it is far from being totally complete.
- Where significant information was missing (birthdates, hire dates,
salaries, and sex) we made assumptions which we felt were reasonable in
relation to the remainder of the data.
- Studies of disability, turnover, and mortality experience should be made
periodically to test the adequacy of the assumptions to serve as a basis
for the revision of such assumptions.
The quality of the data provided is at least a partial reason for
the fact that such studies have not been performed recently.
- It is encouraging that the Department of Administration appears to share
my concern with regard to this problem.
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- This is to inform you of a significant change in the PERS retirement
transfer calculation (Voucher 10).
Effective July 1, 1994, the retirement transfer generated as a
result of the addition or deletion of a retirement segment will no
longer include the transfer of any employer contributions.
- …this new method should help…increase the accuracy of accounting for
employer assets.
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- A description of the benefits being valued and the actuarial methods and
assumptions used should either be included in the individual report or
referenced to the description in the System’s report.
- A reconciliation of the assets and the underlying participant data for
each employer should be maintained and disclosed.
- Documentation showing the development of the employer’s individual
contribution rate.
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- In the fall of 2000, the actuary to the PERS and TRS Boards, Mercer, was
advising the Division of Retirement and Benefits on how to allocate
assets surplus to 100% funding for TRS and 102% funding for PERS.
- Also, in those years Mercer was recommending an employer contribution
rate of 7.09% for FY’02 and 8.29% for FY’03.
- Fortunately the TRS Board kept the employer rate at 11%, because by 2003
Mercer was recommending an employer contribution rate of 35.57% for
FY’05.
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- ..the proposed changes are described below:
- Creation of a “Cash Account” within the current system. Each active member is allocated a $500
initial account balance. Upon
termination after vesting, the member is allowed to take this account
balance amount, including a credit of 8.25% interest compounded annually
(the current valuation interest rate assumption).
- Full system-paid medical benefits for Tier II and Tier III members upon
reaching 25 (30) years of service for Teachers and Police/Fire (Others).
- Full system-paid medical benefits when vested and age 60 and older.
- Full system paid medical benefits for disabilitants upon reaching normal
retirement.
- A 13th check for current retirees equal to the members’ monthly
retirement benefit. The average
TRS monthly retiree benefit is $2,388 and the average PERS monthly
retiree benefit is $1,303 at June 30, 1999.
- Automatic PRPA equal to full Anchorage CPI.
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- In our letter of August 23, 2000 we provided you with estimated costs
for a number of proposed changes to PERS and TRS. These changes were initiated by the
fact that there are funding surpluses in both Systems as of June 30,
1999. (Simply not true, the real liabilities were simply grossly
understated!)
- At the August 30, 2000 Joint Board meeting these proposals were reviewed
by the Boards and specific packages recommended by each Board. …Now that the Boards have recommended
specific packages of benefits, we can evaluate the combination of
changes to get a better estimate of the effect to System costs and
funded status.
- In addition, we have recently completed an analysis of actuarial
assumptions for both Systems. Should
the Boards adopt our recommended assumption changes, the funded ratios
of both Systems will be reduced.
- While this possibility exists, evaluating the financial effect of
surplus sharing is still applicable.
As recent history with the Systems has shown, surpluses can
accumulate in favorable market conditions in a relatively short period
of time.
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- WHEREAS, on behalf of the Systems, the State of Alaska Department of Law
has investigated the performance of Mercer during the period of its
retention, and the results of such investigations yield strong
indicators of professional negligence and significant damage to the
Systems;
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- In October, the Division reported to the Alaska Retirement Management
Board that it believes its accounting practices for the retirement
reserve account do not comply with statutory requirements.
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- …MS. MORRISON…There has been no documentation to explain why the RRA was
created. She thought it was
created to bring about ease administratively because it is easier to pay
benefits out of one pool than from 160 employers.
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- Employers appear to share retired liabilities of all employers.
- Implications to Contribution Rates
- Retirement reserve account for each employer not based on individual
employer experience.
- Individual employer contribution rates fluctuating based on retirement
reserve account allocations.
- Employers supplementing other employers retired liabilities.
- Extent of impact unknown at this time.
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- Benefit payments, plan expenses, and investment earnings should all be
accounted for by employer in the retirement reserve; however, they are
not.
- Instead, annual retired life liabilities for each employer are
calculated by the actuary and the ratio of employer liability to total
liability is calculated for each employer. The balance of assets in the fund at fiscal
year end is reported to the actuary (including expenses and earnings).
- The actuary reallocates assets by employer based upon the employer’s
ratio of liabilities in the retirement reserve. The difference between liabilities and
assets is then transferred from the employer’s active asset account to
the retirement reserve to achieve 100% funding.
- This process clearly affects employer rates in the active asset account.
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- …factors favoring a change to such a process (i.e., a cost sharing
system) include the difficulty in ascertaining asset balances and rates
assignable to each employer and the attendant disruption and cost of
definitively resolving the issues through a dispute processes;
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- Why are we here today?
- Contribution rates for PERS DB plan not supported by employer level
accounting records.
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- 2. The Board supports consideration of a settled upon allocation of
liabilities between the State of Alaska and other participating
employers and recognizes that the proper entity to allocate additional
liabilities is the Alaska Legislature; and
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- Shared Consolidated Normal Rate
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- The State, with their Actuary; ultimately, annually, and autonomously set
all PERS “rates”. Member employers only “role” has been to pay the “rates”
as submitted.
- Had normal rates been set at appropriate levels in prior years, there
would be an insignificant unfunded obligation, and therefore, a minimal
past service cost rate component.
- Contributions by the State into the PERS system towards any accrued
unfunded obligation is not State assistance to member entities. Rather,
any amounts paid by member entities above the normal cost rate is
in-fact financial assistance to the State by member entities.
- Member entities believe some past normal rates should have been higher
than set, and therefore, should proportionally share in paying down the
unfunded balance.
- Member entities want to work with the State in a Shared Solution that
brings Alaskans together and that does not pit urban communities against
rural communities; nor PERS communities against non-PERS communities;
nor municipalities, school districts, or the university system against
the State or each other. The PERS history is what it is; accordingly, a
PERS Shared Solution result needs to be one that brings Alaskans
together, not one that creates and fosters divisiveness between or
amongst any groups!
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- The long held belief that PERS is a single agent multiple employer
system has been determined not to be true.
- Individual employer member liabilities are impacted by other member
employer actions and employer assets are annually blended.
- The annual reallocating of assets goes back potentially as far as 1971.
- Accordingly, individual unfunded obligations cannot be assigned to
individual employers!
- Therefore, no individual employer’s past service cost rate can be
substantiated…
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- Main points a Shared Solution needs to consider:
- Individual member employer liabilities have been affected by other
employers’ actions.
- Since the creation of the retirement reserve account, in 1971, each
member’s assets have been blended and reallocated yearly to other member
employers.
- As a result of 1 and 2 above, the State does not know what any member’s
actual individual asset or liability balance is. Therefore, the State
does not know what the unfunded liability is either, which, drives the
PSC rate.
- The normal rate paid since 1977, by State action, has been a “shared
consolidated” rate.
- PERS is a consolidated system due to its formulas and the blending of
assets and liabilities.
- Historical re-creation of records going back to 1971 is not possible.
- Accordingly, advantaged, and/or disadvantaged employers is not
determinable.
- Fiduciary duty and legal issues will rise without an equitable and
timely resolution, a key component being a fair allocation of the
unfunded obligation to the State.
- Components of a final Shared Solution:
- Amend State statutes to reflect an actual consolidated PERS Plan.
- Set one uniform consolidated normal cost rate that all member employers
pay.
- 85% of the past service cost rate is paid by the State.
- 15% of the past service cost rate is paid by all PERS member employers
as a separate uniform consolidated past service cost rate.
- Set in statute the State’s FY 2007/08 position on the TRS liability.
- The Actuary should forward to the ARM Board a refinance-based flat 25
year amortization rate.
- Actuarially-calculated individual member employer “rates” are no longer
used for anything.
- Seek and use methods to reduce the future carrying costs of the unfunded
obligations.
- With a sense of urgency Governor Palin’s SB 125, with some “rates”
related tweaking, should be adopted as Alaska’s “Shared Solution.”
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Notes