HomeMy WebLinkAbout07. CCCERA Board actions related to economic assumptions7.
June 6, 2016
Central Contra Costa Sanitary District
TO: ADMINISTRATION COMMITTEE
VIA: ANN SASAKI, DEPUTY GENERAL MANAGER W
FROM: TEJI O'MALLEY, HUMAN RESOURCES MANAGES
SUBJECT: CONTRA COSTA COUNTY EMPLOYEES' RETIREMENT ASSOCATION
(CCCERA) RECENT BOARD ACTIONS RELATED TO ECONOMIC
ASSUMPTIONS
Every three years, the CCCERA Board of Trustees conducts two sets of studies which
review both the economic and demographic assumptions that are utilized by CCCERA
to calculate pension costs. During their meeting on Wednesday, April 27, 2016, the
Board was presented with the recommended economic assumptions by their actuary,
and this memo summarizes the actions of the Board based upon the presentation.
Specifically, the Board rejected one of its actuary's recommended assumptions and
approved a motion that modified the assumptions to be more conservative than
recommended. The inflation rate decreased from 3.25% to 2.75%, the wage inflation
rate decreased from 4.00% to 3.25%, and the assumed earnings/discount rate was
dropped from 7.25% to 7.00%.
On May 24, 2016, the District received a letter from CCCERA (attached) stating that the
actuaries have updated the projected employer contribution rates based upon the
changes to the economic assumptions that were adopted by the Board on April 27,
2016. In summary, starting in Fiscal Year 2017-18, the projected employer contribution
rates for the District for the next five years will change as follows:
Fiscal Year
2016-2017
2017-2018
2018-2019
2019-2020
2020-2021
Rate Change
- 1.80%
-0.44%
- 0.27%
0.41%
0.80%
Please note that the changes to the economic assumptions were not the only factors
considered when determining the projected contribution rates. In addition to the
changes in the economic assumptions, the other components include investment gains
Central Contra Costa Sanitary District
CCCERA Recent Board Actions Related to Economic Assumptions
Page 2 of 2
CONTRA COSTA COUNTY EMPLOYEES' RETIREMENT ASSOCATION (CCCERA)
RECENT BOARD ACTIONS RELATED TO ECONOMIC ASSUMPTIONS.
or losses, actual experience related to the economic and demographic assumptions,
and contribution variances which occur from delaying the implementation of new rates
until 18 months after the actuarial valuation date (December 31st of each year).
Additionally, the actuary informed the Board that they will most likely be making a
significant adjustment to the mortality table as outlined in the study related to the
demographic assumptions which will be presented sometime in June. It is anticipated
that the Board will consider adopting any changes to the demographic assumptions at
one of their meetings in June. Any changes to the demographic assumptions will impact
the contribution rates and the District's Unfunded Actuarial Accrued Liability (UAAL).
Once the Board adopts the demographic assumptions and issues the valuation, staff
will apprise the Board accordingly.
Staff will be at the meeting to answer any questions or provide additional clarification.
Attachment
4 -Segal Consulting
100 Montgomery Street Suite 500 San Francisco, CA 94104-4308
T 415.263.8200 www.segalco.com
May 19, 2016
Ms. Gail Strohl
Chief Executive Officer
Contra Costa County Employees' Retirement Association
1355 Willow Way, Suite 221
Concord, CA 94520
John W. Monroe, ASA, MAAA
Vice President & Actuary
jmonroeCsegaico corn
Re: Contra Costa County Employees' Retirement Association
Five -Year Projection of Employer Contribution Rate Changes
Based on Estimated 2.6% Gross Market Value Investment Return for 2015 and
Economic Assumptions Adopted by the Board for the December 31, 2015 Valuation
Dear Gail:
As requested, we have updated our five-year projection of estimated employer contribution rate
changes for CCCERA. This projection is derived from the December 31, 2014 actuarial
valuation results. It incorporates an updated estimated gross market value investment return of
2.6% for the 2015 calendar year (2.4% was previously used) as well as the economic
assumptions adopted by the Board for the December 31, 2015 valuation. These economic
assumption changes include:
• Investment Return Assumption decreases from 7.25% to 7.00% per annum
• Price Inflation Assumption decreases from 3.25% to 2.75% per annum
• Wage Inflation Assumption decreases from 4.00% to 3.25% per annum
Key assumptions and methods are detailed below. It is important to understand that these results
are entirely dependent on those assumptions. Actual results as determined in future actuarial
valuations will differ from these results. In particular, actual investment returns and actual salary
levels different than assumed can have a significant impact on future contribution rates.
In addition, we are currently reviewing the demographic actuarial assumptions for future
discussion and adoption by the Board. The results in this letter have not reflected the
impact due to any possible changes in demographic actuarial assumptions.
Benefits, Compensation and HR Consulting. Member of The Segal Group. Offices throughout the United States and Canada
Ms. Gail Stroh!
May 19, 2016
Page 2
RESULTS
The estimated contribution rate changes shown below apply to the recommended average
employer contribution rate. For purposes of this projection, we estimated and reflected in the
starting year results (December 31, 2015 valuation date) the cost impact due to changes in
economic assumptions based on the December 31, 2014 valuation results. In addition, the rate
changes that are reflected include the asset gains and losses that are funded as a level percentage
of the Association's total active payroll base.
The changes in contribution rate during the five-year projection are due to: (1) recognition of
recent investment gains and losses that are deferred under the actuarial asset smoothing
methodology; (2) gains due to investment income earned on the excess of the Market Value of
Assets (MVA) over the Actuarial Value of Assets (AVA) (and losses when the opposite occurs);
(3) contribution gains which occur from delaying the implementation of new rates until 18
months after the actuarial valuation date; and (4) gains due to change in economic actuarial
assumptions.
The following table provides the year-to-year rate changes resulting from each of the above
components and the cumulative rate change over the five-year projection period. To obtain the
estimated average employer contribution rate at each successive valuation date, these cumulative
rate changes should be added to the rates developed from the December 31, 2014 valuation.
These rate changes become effective 18 months following the actuarial valuation date shown in
the table.
The rate changes shown below represent the average rate for the aggregate plan.
Rate Change Valuation Date (12/31)
Component 2015 2016 2017 2018 2019
(1) Deferred (Gains)/Losses -0.73% -0.21% -0.24% 0.39% 0.79%
(2) (Gain)/Loss of
Investment Income on
-0.26% 0.07% 0.08% 0.10% 0.07%
Difference Between
MVA and AVA
(3) 18 -Month Rate Delay -0.52% -0.34% -0.14% -0.04% 0.02%
(4) Changes in Economic -1.18% 0.00% 0.00% 0.00% 0.00%
Assumptions
Incremental Rate Change -2.69% -0.48% -0.30% 0.45% 0.88%
Cumulative Rate Change -2.69% -3.17% -3.47% -3.02% -2.14%
The difference between these cumulative rate changes and those shown in our March 2, 2016
letter (i.e., previous five-year projection) are as follows:
5430280v1/05337.002
Ms. Gail Strohl
May 19, 2016
Page 3
Cumulative Rate Change
From March 2, 2016 Letter
Reflecting Changes in Economic
Assumptions and an Updated
Estimated 2.6% Gross Market
Value Investment Return for 2015
Valuation Date (12/31)
2015 2016 2017 2018 2019
-1.44% -1.77% -1.97% -1.51% -0.65%
-2.69% -3.17% -3.47% -3.02% -2.14%
Difference -1.25% -1.40% -1.50% -1.51% -1.49%
The average employer contribution rate as of the December 31, 2014 Actuarial Valuation is
40.06%, and based on the cumulative rate changes above is projected to progress as
shown below.
Average Employer
Contribution Rate
Valuation Date (12/31)
2015 2016 2017 2018 2019
37.37% 36.89% 36.59% 37.04% 37.92%
The rate change for an individual cost group or employer will vary depending primarily on the
size of that group's assets and liabilities relative to its payroll. The ratio of the group's assets to
payroll is sometimes referred to as the asset volatility index (AVI). A higher AVI results in more
volatile contributions and can result from the following factors:
> More generous benefits
> More retirees
> Older workforce
> Higher funded ratio
> Issuance of Pension Obligation Bonds (POBs)
5430280v1/05337.002
Ms. Gail Strohl
May 19, 2016
Page 4
The attached exhibit shows the AVI for CCCERA's cost groups along with the "relative AVI"
which is the AVI for that specific cost group divided by the average AVI for the aggregate plan.
Using these ratios we have estimated the rate change due to these generally investment related
net gains (except the rate change due to the change in economic assumptions) for each individual
cost group by multiplying the rate changes shown above for the aggregate plan by the relative
AVI for each cost group. These estimated rate changes for each cost group are shown in the
attached exhibit.
Note that because we have estimated the allocation of the rate changes (excluding the economic
assumption changes) across the cost groups, the actual rate changes by group may differ from
those shown in the exhibit, even if the plan -wide average rate changes are close to those shown
above.
KEY ASSUMPTIONS AND METHODS
The projection is based upon the following assumptions and methods:
> December 31, 2014 non -economic assumptions remain unchanged.
> December 31, 2014 retirement benefit formulas remain unchanged.
> December 31, 2014 1937 Act statutes remain unchanged.
> UAAL amortization method remains unchanged (i.e., 18 -year layers, level percent
of pay).
> 7.25% investment return assumption for the December 31, 2014 valuation and 7.00%
starting with the December 31, 2015 valuation.
> 3.25% inflation assumption for the December 31, 2014 valuation and 2.75% starting with
the December 31, 2015 valuation.
> 4.00% active payroll growth for the December 31, 2014 valuation and 3.25% starting
with the December 31, 2015 valuation.
> The gross market value investment return of 2.6% during 2015 was reduced by an
estimated 0.65% to account for investment and administrative expenses.
> We have assumed that returns of 7.00% are earned on a market value basis for each of the
next four years after 2015.
> Deferred investment gains and losses are recognized per the asset smoothing schedule
prepared by the Association as of December 31, 2014. In addition, the estimated
investment loss for 2015 is also recognized over a five-year period. They are funded as a
level percentage of the Association's total active payroll base.
5430280v1/05337.002
Ms. Gail Strohl
May 19, 2016
Page 5
> Deferred investment gains are all applied directly to reduce the UAAL. Note that this
assumption may not be entirely consistent with the details of the Board's Interest
Crediting and Excess Earnings Policy.
> The AVI used for these projections is based on the December 31, 2014 Actuarial
Valuation and is assumed to stay constant during the projection period.
> All other actuarial assumptions (i.e., demographic assumptions) used in the December 31,
2014 actuarial valuation are realized.
> No changes are made to actuarial methodologies, such as adjusting for the contribution
rate delay in advance.
> The projections do not reflect any changes in the employer contribution rates that could
result due to future changes in the demographics of CCCERA's active members or
decreases in the employer contribution rates that might result from new hires going into
the PEPRA tiers.
Finally, we emphasize that projections, by their nature, are not a guarantee of future results. The
modeling projections are intended to serve as illustrations of future financial outcomes that are
based on the information available to us at the time the modeling is undertaken and completed,
and the agreed-upon assumptions and methodologies described herein. Emerging results may
differ significantly if the actual experience proves to be different from these assumptions or if
alternative methodologies are used. Actual experience may differ due to such variables as
demographic experience, the economy, stock market performance and the regulatory
environment.
Unless otherwise noted, all of the above calculations are based on the December 31, 2014
actuarial valuation results including the participant data and actuarial assumptions on which that
valuation was based. That valuation and these projections were completed under the supervision
of John Monroe, ASA, MAAA, Enrolled Actuary.
The undersigned is a member of the American Academy of Actuaries and meets the
Qualification Standards of the American Academy of Actuaries to render the actuarial opinion
herein.
Please let us know if you have any questions.
Sincerely,
John Monroe
AW/bbf
Enclosure
5430280v1/05337.002
Exhibit
Contra Costa County Employees' Retirement Association
Estimated Employer Rate Change by Cost Group (CG) Based on December 31, 2014 Valuation with Estimated 2.6% Gross Market Value Return for 2015
And Economic Assumption Changes Adopted for December 31, 2015 Valuation
Markel Value of Assets (MVA)`
Projected Payroll for 2015
Asset Volatility Index (AVI)= MVA/Payroll
Relative Volatility Index (AVI) = CG AVI / Total Plan AVI
Estimated Incremental Rate Change as of 12/31t2015
Estimated Incremental Rate Change as of 12/31/2016
Estimated Incremental Rate Change as of 12/31/2017
Estimated Incremental Rate Change as of 12/31/2018
Estimated Incremental Rate Change as of 12/31/2019
Cumulative Rate Change as of 12/31/2015
Cumulative Rate Change as of 12/31/2016
Cumulative Rale Change as of 12/31/2017
Cumulative Rate Change as 0012/31/2018
Cumulative Rate Change as of 12/31/2019
Market Value of Assets (MVA).
Projected Payroll for 2015
Asset Volatility Index (AVI) = MVA/Payroll
Relative Volatility Index (AVI)= CG AVI / Total Plan AVI
Estimated Incremental Rate Change as of 12/31/2015
Estimated Incremental Rate Change as 0012/31/2016
Estimated Incremental Rate Change as of 12/31/2017
Estimated Incremental Rate Change as of 12/31/2018
Esdmated Incremental Rale Change as of 12/31/2019
Cumulative Rate Change as of 12/31/2015
Cumulative Rate Change as of 12/31/2016
Cumulative Rate Change as of 12/31/2017
Cumulative Rate Change as of 12/312018
Cumulative Rate Change as of 12/31/2019
• Excludes Post Retirement Death Benefit reserve.
CG#t & CG#2
Combined CG#3 CG#4 CG#5 CG#6
Enhanced Enhanced Enhanced Enhanced Non -Enhanced
General CCC Sanitary District Housing Authority CCCFPD District
53868,021,019 5252,455,464 545,545,717 $43,562,772 55,713,632
$523,821,353 528,098,047 $5,121,371 $3,559,597 5829,729
7.38 8.98 8.89 12.24 6.89
0.75 0.91 0.90 1.24 0.70
-2.41% -1.80% -2.22% -2.71% -2.33%
-0.36% 444% -0A3% -0.591/4 -0.33%
-0.22% -0.27% -0.27% -0.37% -0.21%
0.34% 0A1% 0.41% 0.56% 0.319E
0.66% 0.80% 0.79% 1.09% 0.61%
-2.41% -1.80% -2.22% -2.71% -2.33
-2.77% -2.24% -2.65% -3.30% -2.66%
-2.99% -2.51% -2.92% -3.67% -2.87%
-2.65%. -2.10% -2.51% -3.11% -2.56%
-1.992, -1.30% -1.72% -2.02% -1.95
CG87 & CG419
Combined CG#8
Enhanced Enhanced
County FCCFPO/East CCCFP
$1,425,947,997 1794,008,4 6.4
$79,906,640
17.85
1.81
$30,596,130
25.95
2.63
CG#10 CG#11 CC#12
Enhanced Enhanced Non -Enhanced
Moraga-Orinda FD San Ramon Valley FD Rodeo -Hercules FPO
$143,579,601 $289,553,978 $25,457,256
57,015,592 $16,668,561 02,214,817
20.47 17.37 11.49
2.07 1.76 1.16
-3.79% -4.77% -4.25% -3.72% -2.05%.
-0.87% -1.26% -0.99% -0.84% -0.56%
-0.54% -0.79% -0.62% -0.53% -5.35%
0.81% 1.18% 0.93% 0.79% 0.52%
1.59% 2.31% 1.824. 1.55% 1.02%
-3.79% -4.77% -4.25% -3.72% -2.05%
-4.66% -6.03% -5.24% -4.567,, -2.61%
-5.20%. -6.82% -5.86% -5.09% -2.96%
-4.39% -5.64% -4.93% -4.30% -2.44%
-2.80% -3.33% -3.11% -2.75% -1.42%
These rates du not include any employer subvention of member contributions or any member subvention of employer contributions.
5430280v1/05337 002
Total
Plan
$6,093,045,899
5697,831,837
9.80
1.00
-2.69%
-0.48%
-0.30%
0.45%
0.88%
-2.69%
-3.17%
-3.47%
-3.02%
-2.14%
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