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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% SEGAL CONSULTING