~I Report No: Meeting Date:

Alameda-Contra Costa Transit District

STAFF REPORT

TO: AC Transit Board of Directors FROM: David J. Armijo, General Manager SUBJECT: Report on the Actuarial Valuation

BRIEFING ITEM

RECOMMENDED ACTION!SI:

12-189a September 5, 2012

Consider Receiving a Presentation on the Actuarial Valuation for 2012, Prepared by Buck Consultants.

EXECUTIVE SUMMARY:

The District's actuary, Buck Consultants has reviewed the Actuarial Valuation prepare by EFI Actuaries, Inc. on behalf of the AC Transit Employees' Retirement Plan. Buck Consultants will present their views, including alternative recommendations for the District to consider. (please see Attachment 1 Alternative Views of the 2012 Valuation and Suggestions for the Future).

BUDGETARY/FISCAL IMPACT:

There is no budgetary or fiscal impact associated with this presentation.

BACKGROUND/RATIONALE:

This presentation provides the District with an alternative view of the 2012 Actuarial Analysis.

ADVANTAGES/DISADVANTAGES:

This report does not recommend a course of action with notable advantages or disadvantages.

ALTERNATIVE ACTIONS:

This report does not recommend an action.

PRIOR RELEVANT BOARD ACTIONS/POLICIES:

There are no prior relevant board actions or policies for this report.

ATTACHMENTS

1. Alternative Views of the 2012 Valuation and Suggestions for the Future September 5, 2012

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Report No. 12-189a

Page 2 of 2

Approved by: David J. Armijo, General Manager

Reviewed by: Lewis G. Clinton, Jr., Chief Financial Officer

Prepared by: Buck Consultants

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Agenda

• Major Valuation Results- 2012 and Before

• Why Are Contribution Rates Moving Up and

Funded Ratios Moving Down?

• Specific Issues and Recommendations

• Members on Leave of Absence

• Changes in Amortization Schedule

• Investment Losses

• CAAP, Moody's, and GASB Changes

• An Approach that Breaks with Actuarial Tradition

• Your Questions

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Major 2012 Valuation Results

• Contribution amount increases from $39.0 to $39.9 million

• Contribution rate increases from 30.79°/o to 31.62°/o of payroll

• Payroll declined from $126.5 to $124.4 million

• Funded ratio changes - From 61.90°/o to 62.87% based on actuarial assets

- From 62.05°/o to 59.33% based on market assets

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History of Contribution Rates and Funded Ratios

• Since the 2000 valuation, the District's contribution rate has increased from 9.9% to 31.6°/o

• Since the 2000 valuation, the Plan's Funded Ratio has declined from 1 04.35°/o to 62.87°/o

• The Plan had a surplus of $11.8 million in the 2000 valuation, but a deficit of $267.8 million in the 2012 valuation

• Since 1/1/2000, Plan liabilities have grown by 8.5o/o, but actuarial assets have grown by 4.0o/o

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Why Are Contribution Rates Moving Up and Funded Ratios Moving Down?

• Rehiring of members on leave of absence

• Changing length of amortization period

• Recognizing investment losses

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Specific Issues and Recommendations

• Rehiring of members on leave of absence - Members with vested balances should be valued as deferred

vested members

- While on leave of absence members disappear from data

- When they return, system experiences a loss

- Loss added .81°/o to 2012 contribution rate

• Recommend study of data process to ensure members remain on data as members entitled to future benefit when they go on leave of absence - Effect will be to steady contribution rates somewhat

- Will not increase or decrease long-range costs

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Specific Issues and Recommendations

• Changing length of amortization period

- Decreasing from 16 years in 2011 to 12 years in 2015 and beyond

- Shortening the period increases 2012 contribution rates by .63°/o

• Recommend a study of amortization practices - Level percentage of pay amortization will create losses when

payroll increases are less than assumed rate (3%)

- Payroll has not increased meaningfully in last 10 years

- Half of 2008 investment loss is amortized over separate 30-year period using level percent of pay method

• Should review amortization practice in view of CAAP "model practices" and change in GASB standards

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Specific Issues and Recommendations

• Recognizing investment losses

- Market assets returned -0.41 °/o during 2011

- Added .48% to 2012 contribution rate

• Big loss in 2008 ($157,526,000) receives special treatment - Half is subject to normal smoothing process and will exert

upward pressure on contribution rate for one more year

- Half is not smoothed and is subject to separate 30-year amortization, using level percent of pay method

• This approach calls for contribution amounts that are less than interest on the unfunded liability

• Recommend a major overhaul of funding policies and methods

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CAAP, Moody's, and GASB Changes

• California Actuarial Advisory Panel has issued a draft of its proposed "model practices" regarding

- Actuarial cost method

- Amortization methods

- Smoothing methods

• Moody's has announced that it will adjust reported pension information in performing its ratings

- Investment return= rate on corporate bond index (5.5o/o)

- Actuarial assets = market assets

- Common amortization period

- Allocate plan liabilities to employers in cost-sharing plans

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CAAP, Moody's, and GASB Changes

• GASB has issued new standards 67 and 68 to replace current standards 25 and 27

• New standards will:

- Require entry age normal cost method

- Require actuarial assets to be market assets

- Require discount rate to be a blend of long-term rate and municipal bond rate, based on when plan will experience a "depletion"

- Show deficit as liability on plan sponsor's balance sheet

- Divorce accounting and funding for public plans

• Plans with long or rolling amortization periods may have depletion dates that require use of blended discount rate

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CAAP, Moody's, and GASB Changes

• Currently guidance on funding public plans comes from - GASB Standards 25 and 27

- Actuarial Standards of Practice (ASOPs)

• Because new GASB Standards will separate accounting from funding, ASOPs will become the only guidance

• CMP has leaped into the breach, offering its "model practices" based on traditional actuarial methods

• It is possible to adopt new funding procedures that comport with ASOPs and CMP guidance, but depart radically from traditional actuarial methods in an effort to achieve: - More stable contribution rates

- Earlier recognition of effects of new tiers of benefits

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An Approach that Breaks with Actuarial Tradition

Suggest the following 4-step approach:

1.Perform valuation in compliance with "model practices" of CAAP

2.Perform 75-year open-group projection of valuation

3.Determine contribution amounts each year

4.Find the level contribution rate that will produce contributions that have the same present value as those determined in 3

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Projection of Costs from 2011 Valuation Report

35%

30% ~~

' 25%

20%

15%

10%

5%

0% 2010

..........

Total Cost as a Percentage of Pay

~~~ ...............

.....~

\.. ..... ~

~

2015 2020 2025 2030 2035 2040 2045 2050

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Projection of Costs with New Tier Added

Total Cost as a Percentage of Pay 35% .---------------------------------------------------------~

300/0 ,. 25%

200/0

15%

100/0

5%

0% 2010 2015 2020 2025 2030 2035 2040 2045 2050

-. Projection of Dist r ict costs with new tier added before 2015

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Projection of Costs with New Tier and New Method

Total Cost as a Percentage of Pay 35% .---------------------------------------------------~-------------------.

5%

0%

2010 2015 2020 2025 2030

- Pro jection of Dist rict costs with new tier add ed before 2015

2035 2040

- - Projection of District costs with new tier add ed before 2015 under 75-year open group met hodology

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2045 2050

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Your Questions?

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