Actuarial Fiscal Note

Date Requested:January 30, 2018
Time Requested:10:23 AM
Agency: Consolidated Public Retirement Board
CBD Number: Version: Bill Number: Resolution Number:
2412 Introduced HB2817
CBD Subject: Retirement

Retirement Systems Impacted by Legislation:

TRS 2600

FUND(S):

General Fund

Sources of Revenue:

county school boards, higher eds Increases Existing Expenses, Decreases Existing Expenses

Legislation creates:

TRS



Actuarial Note Summary


Impact this measure will have on the liabilities and contributions associated with the retirement system(s).


    This bill as written would “restart” a new 30-year amortization period beginning July 1, 2016 to pay the Unfunded Actuarial Accrued Liability (UAAL) in TRS, extending the date on which the plan must be fully amortized from June 30, 2034, to June 30, 2046. The FY2018 payment is set in the bill to $330,768,000, with payments for subsequent fiscal years to be determined annually by the actuary. In addition, the bill provides that beginning in FY2021, an additional $20 million will be transferred annually from the State Debt Reduction Fund to TRS, and that amount will not be considered by the actuary in determining the annual payment required to amortize the unfunded liability, but rather be used to accelerate the final amortization payment date. It must be noted that the specific provisions of the bill are “outdated” in the sense that the effective date provided and the established FY2018 payment have been reproduced from similar legislation proposed in 2017, and so for purposes of pricing this bill have been updated to their more appropriate equivalents based on a July 1, 2017 effective date.
    
    As a result of the provisions of the bill (with appropriate updates), payments required to fund the Unfunded Actuarial Accrued Liability result in a total long-term additional cost of $1.540 billion. The FY2019 and FY2020 amortization payments to TRS would be reduced from $360,707,000 to $281,922,000, for a FY2019 and FY2020 savings of $78,785,000; it is assumed that the language of the bill would be amended to either strike the language that prescribes a payment for FY2019 in statute, or prescribe $281,922,000 as the appropriate FY2019 payment. In years FY2021 and later, the expected amortization payment (including transfers from the State Debt Reduction Fund) would be $301,922,000 for the remainder of the amortization period, which is expected to end on June 30, 2043. The completion of the amortization of the unfunded liability is projected to occur years before the proposed new statutory deadline as a result of the impact of the additional annual payments of $20 million.
    



Fiscal Detail of Actuarial Impact

Impact on current benefit costs, prior service benefit costs and ongoing contribution requirements following full implementation.


Impact On Following Full Implementation
Increase in Unfunded Actuarial Accrued Liability Initial Impact on Annual Contribution Requirement of System(s) Contribution Increase as a Percentage of Annual Payroll
Total Annual Costs $0.00 ($78,785,000.00) -5.21 %
Normal Cost of System N/A $0.00 0.00 %
Past Service Liabilities $0.00 ($78,785,000.00) -5.21 %
Fiscal Year Past Service
Amortization Period Ends
N/A 2043 N/A


Explanation of above estimates:


    The provisions of the bill do not affect any benefits payable to any current or future TRS members, and so do not affect the plan’s annual Normal Cost of approximately $72.5 million (payment of which is required in addition to any payment toward the reduction of the UAAL). The $3.534 billion UAAL as of 7/1/2017 remains unaffected, but the incidence of payments required to fund that liability is changed. The FY2019 and FY2020 amortization payments to TRS would each be reduced from $360,707,000 to $281,922,000, for an annual savings each year of $78,785,000. In subsequent years, the expected amortization payment (including transfers from the State Debt Reduction Fund) would be $301,922,000 for the remainder of the amortization period, which is expected to end on June 30, 2043. Due to the extension of the amortization of the UAAL for an additional 9 years beyond the current amortization period, there is a total increased cost of $1.54 billion over the long term. These short-term savings and long-term costs are based on the July 1, 2017 Actuarial Valuation for Funding for TRS, including asset smoothing as adopted by the CPRB on March 8, 2017, and assume that all actuarial assumptions will be met in all future years.

Analysis of Impact on Public Pension Policy:


    As introduced, the bill provides an effective date of July 1, 2016, which would necessarily need to be updated to July 1, 2017. The bill also sets the FY2018 amortization payment at $330,768,000, which is assumed to have been established as the appropriate payment at some date prior to the CPRB’s adoption of the asset smoothing method in TRS, and prior to the July 1, 2017 Actuarial Valuation for funding for TRS. At this date, more than halfway through the 2018 fiscal year, the amortization payment for FY2018 is no longer variable. However, with the adoption of asset smoothing on March 8, 2017, and the completion of the July 1, 2017 Actuarial Valuation as approved by the CPRB on January 24, 2018, along with the bill provisions establishing the new 30-year amortization period and the $20 million transfers from the State Debt Reduction Fund, the appropriate amortization payment for FY2019 could be established as $281,922,000 (which is also the anticipated required contribution for FY2020). However, it would not be necessary to prescribe that payment amount within the legislation, since the updated actuarial valuation as of July 1, 2017 using the provisions within the bill would specify the same payment amount. For years beginning in FY2021, the anticipated annual contribution (including the $20 million transfers from the State Debt Reduction Fund as provided for in the bill) would be $301,922,000. These amortization payments result in total additional amortization payments of $1.54 billion compared to the payments anticipated under the current amortization policy. Compared to current amortization payment requirements, the FY2019 and FY2020 payment savings would be $78,785,000 per year. Anticipated payments in subsequent years would increase by the $20 million that must be transferred annually from the State Debt Reduction Fund.



Fiscal Note Summary


Effect this measure will have on costs and revenues of state government.


    This bill as written would “restart” a new 30-year amortization period beginning July 1, 2016 to pay the Unfunded Actuarial Accrued Liability (UAAL) in TRS, extending the date on which the plan must be fully amortized from June 30, 2034, to June 30, 2046. The FY2018 payment is set in the bill to $330,768,000, with payments for subsequent fiscal years to be determined annually by the actuary. In addition, the bill provides that beginning in FY2021, an additional $20 million will be transferred annually from the State Debt Reduction Fund to TRS, and that amount will not be considered by the actuary in determining the annual payment required to amortize the unfunded liability, but rather be used to accelerate the final amortization payment date. It must be noted that the specific provisions of the bill are “outdated” in the sense that the effective date provided and the established FY2018 payment have been reproduced from similar legislation proposed in 2017, and so for purposes of pricing this bill have been updated to their more appropriate equivalents based on a July 1, 2017 effective date.
    
    As a result of the provisions of the bill (with appropriate updates), payments required to fund the Unfunded Actuarial Accrued Liability result in a total long-term additional cost of $1.540 billion. The FY2019 and FY2020 amortization payments to TRS would be reduced from $360,707,000 to $281,922,000, for a FY2019 and FY2020 savings of $78,785,000; it is assumed that the language of the bill would be amended to either strike the language that prescribes a payment for FY2019 in statute, or prescribe $281,922,000 as the appropriate FY2019 payment. In years FY2021 and later, the expected amortization payment (including transfers from the State Debt Reduction Fund) would be $301,922,000 for the remainder of the amortization period, which is expected to end on June 30, 2043. The completion of the amortization of the unfunded liability is projected to occur years before the proposed new statutory deadline as a result of the impact of the additional annual payments of $20 million.



Fiscal Note Detail


Effect of Proposal Fiscal Year
2018
Increase/Decrease
(use"-")
2019
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 -78,785,000 -58,779,000
Personal Services 0 0 0
Current Expenses 0 -78,785,000 -58,779,000
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 0 0
2. Estimated Total Revenues 0 0 0


Explanation of above estimates (including long-range effect):


    The provisions of the bill do not affect any benefits payable to any current or future TRS members, and so do not affect the plan’s annual Normal Cost of approximately $72.5 million (payment of which is required in addition to any payment toward the reduction of the UAAL). The $3.534 billion UAAL as of 7/1/2017 remains unaffected, but the incidence of payments required to fund that liability is changed. The FY2019 and FY2020 amortization payments to TRS would each be reduced from $360,707,000 to $281,922,000, for an annual savings each year of $78,785,000. In subsequent years, the expected amortization payment (including transfers from the State Debt Reduction Fund) would be $301,922,000 for the remainder of the amortization period, which is expected to end on June 30, 2043. Due to the extension of the amortization of the UAAL for an additional 9 years beyond the current amortization period, there is a total increased cost of $1.54 billion over the long term. These short-term savings and long-term costs are based on the July 1, 2017 Actuarial Valuation for Funding for TRS, including asset smoothing as adopted by the CPRB on March 8, 2017, and assume that all actuarial assumptions will be met in all future years.



Memorandum


    As introduced, the bill provides an effective date of July 1, 2016, which would necessarily need to be updated to July 1, 2017. The bill also sets the FY2018 amortization payment at $330,768,000, which is assumed to have been established as the appropriate payment at some date prior to the CPRB’s adoption of the asset smoothing method in TRS, and prior to the July 1, 2017 Actuarial Valuation for funding for TRS. At this date, more than halfway through the 2018 fiscal year, the amortization payment for FY2018 cannot be changed. However, with the adoption of asset smoothing on March 8, 2017, and the completion of the July 1, 2017 Actuarial Valuation as approved by the CPRB on January 24, 2018, along with the bill provisions establishing the new 30-year amortization period and the $20 million transfers from the State Debt Reduction Fund, the appropriate amortization payment for FY2019 could be established as $281,922,000 (which is also the anticipated required contribution for FY2020). However, it would not be necessary to prescribe that payment amount within the legislation, since the updated actuarial valuation as of July 1, 2017 using the provisions within the bill would specify the same payment amount. For years beginning in FY2021, the anticipated annual contribution (including the $20 million transfers from the State Debt Reduction Fund as provided for in the bill) would be $301,922,000. These amortization payments result in total additional amortization payments of $1.54 billion compared to the payments anticipated under the current amortization policy. Compared to current amortization payment requirements, the FY2019 and FY2020 payment savings would be $78,785,000 per year. Anticipated payments in subsequent years would increase by the $20 million that must be transferred annually from the State Debt Reduction Fund.
    
    This Actuarial/Fiscal Note is being submitted by the Consolidated Public Retirement Board. It has been reviewed by a qualified actuary, and a letter of certification is available from the CPRB upon request.
    



    Person submitting Fiscal Note: Melody Bailey, Actuarial Analyst, WV CPRB
    Email Address: melody.j.bailey@wv.gov