New Member and Associate Counsel Session

1. New Member and Associate Counsel Session Tuesday, June 26, 2012 , NAPPA Conference Basic Actuary Presented by: Michael J. Moquin

2. Annual Actuarial Valuation: Calculates contributions and benefit values on a set date Uses benefit provisions, demographic data, assets, actuarial cost method and assumptions. • 1. Plan benefit provisions provided by plan administrator • --multiplier, service , FAC, vesting, normal retirement age (NRA) • Plan data provided by plan administrator • --demographic: retirement rates, pay increases, turnover, disability, mortality • --economic: inflation, assumed rate of future pay increases, COLAs • 3. Asset data provided by plan administrator • --market value of assets at valuation data (end of plan year) • 4. Actuarial cost method actuary recommends, Legislature/Board adopts method • Actuarial assumptions actuary recommends, Board adopts • --assumed rate of investment return • --mortality, retirement rates, withdrawal and disability • A Supplemental Valuation will show the impact of plan changes as applied to the most current Annual Valuation 2 of 6

3. Annual Actuarial Valuation: Determines employer contributions for the next FY C + I = B + E C (contributions) depend on actuarial assumptions employee contributions, and actuarial cost method in the short term AND + I (investment return) in the long term and projected benefits and experience EQUAL = B (plan liabilities + benefits paid) depends on plan provisions AND + E (expenses) administration + investment 3 of 6

4. Increases in unfunded liabilities(not paying full actuarial cost up-front) • Prior service credit • Benefit increases (retro or prospective?) • Service purchases • Ad hoc COLAs • Salary spiking • Higher salary increases • Early retirement windows • Not attaining investment return assumption Decreasing investment earnings assumption from 8% to 7% (increases liabilities by more than 1/8th, or 12.5%) • Lowering Employee contributions • Employer not making actuarially required contribution (ARC) 4 of 6

5. Major Assumptions: Impact On Liabilities And Contributions Assumption Action Typical Effect Pay increases lower from decreases both 4% to 1% Retirement rate younger increases both Termination rate layoffs/ decreases both separations Amortization lower from increaseperiod 30 to 25 contributions Investment lower from increases bothreturn 8% to 7% ** more conservative assumption (e.g., 6%) for service purchases: if actuarial cost paid upfront, reduces (but does not eliminate) employer funding risk 5 of 6

6. Close DB plan to new entrants, new hires in DC: requires Actuarial Projection Short term effect (next 4 years) on overall DB+DC Employer funding Long term projection essential (next 25 years/or until last covered DB member retires) No new-hire EE contributions to DB Increase active EE contributions in closed DB plan For closed DB, GASB 25/43 requires accelerated payment UAL (increases ARC) so plan fully funded at time last present member retires (‘not run out of money’) Plan benefit changes: lower future service multiplier for all DB members; increase NRA; increase EE contributions; redefine ‘compensation’; raise FAC period; hybrid plan Plan assumption changes (raise amortization period to 30 years) 6 of 6