Actuarial Fiscal Note

Date Requested:January 25, 2019
Time Requested:02:38 PM
Agency: Consolidated Public Retirement Board
CBD Number: Version: Bill Number: Resolution Number:
2564 Introduced SB418
CBD Subject: Retirement

Retirement Systems Impacted by Legislation:

PERS 2501

FUND(S):

General Fund

Sources of Revenue:

Creates New Expense, Creates New Program, Creates New Fund: West Virginia Natual Resources Police Officer Retirement Fund

Legislation creates:

PERS



Actuarial Note Summary


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


    As of the effective date, July 1, 2019, SB 418 would create a new retirement system for the Division of Natural Resources (DNR) Police Officers, the Natural Resources Police Officer Retirement System (NRRS).
    
    The estimated actuarial accrued liability of the new retirement system as of the proposed effective date of the new system, July 1, 2019, is $19.2 million. The estimated asset transfer from PERS to the new system as of the effective date of the new system is $15.2 million creating an initial unfunded actuarial accrued liability of $4.0 million. We assume the initial unfunded liability would be amortized on a level dollar basis for 30 years leading to an annual amortization amount of $324,000. In addition to the amortization payment the employer would have to contribute the employer normal cost each year, which is estimated to be $251,000 in the first year.
    Therefore, the total employer contribution in the first year would be approximately $575,000 or 10.0% of payroll. The member contribution rate would be 8.5% of payroll.
    
    
    The new retirement system proposed in SB 418 is designed in a similar fashion to the West Virginia Deputy Sheriff Retirement System (DSRS), therefore, we calculated the liability of the proposed new retirement system using the plan provisions and actuarial assumptions from the DSRS actuarial valuation as of July 1, 2018, except for the following:
    
    • As of July 1, 2018, there are 116 active PERS members who are DNR police officers that are eligible to transfer from PERS to the proposed new retirement system, NRRS. We assume all active members of DNR that are eligible to transfer from PERS to the new system will do so. In reality, the member contribution rate in the proposed new system would be significantly higher than the current member contribution rate in the PERS plan so some members may choose to stay in the PERS plan and not transfer to the proposed new retirement system. SB 418 does not address a minimum number of participants in order to create the new retirement system, however, to be consistent with recently formed retirement systems in West Virginia and be administratively feasible, we would recommend the bill provide a provision that requires a minimum of 100 members in the new retirement system within two years from the effective date of the new retirement system.
    • The benefit provisions in the proposed retirement system are the same benefit provision in DSRS, except the new retirement system normal retirement eligibility conditions and retirement benefit multiplier are different from DSRS.
    
    • A portion of the new retirement system would be funded by revenue from the sale of Class CS/LE nonresident stamps. Our analysis does not include the revenue from these stamps and an independent analysis from the DNR would be required to determine the impact the revenue from the nonresident stamps would have on funding the new retirement system.
    • The actuarial calculations are as of the most recent valuation date, July 1, 2018; however, calculating the actuarial cost as of the effective date of the new retirement system, July 1, 2019 will change the liabilities, assets transferring to the new retirement system and the members transferring from PERS to the new system.
    



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 $4,000,000.00 $575,000.00 10.00 %
Normal Cost of System N/A $251,000.00 4.40 %
Past Service Liabilities $4,000,000.00 $324,000.00 5.60 %
Fiscal Year Past Service
Amortization Period Ends
N/A 2049 N/A


Explanation of above estimates:


    Creating a new retirement system for DNR Police Officers as of July 1, 2019 would create an initial unfunded liability of about $4 million. In the first year of implementation, the normal cost would be approximately $251,000 or 4.4% of payroll and the amortization of the unfunded liability would be about $324,000 or 5.6% of payroll. Therefore, the annual employer cost in the first year of the new retirement system would be approximately $575,000 or 10.0% of payroll.
    
    Assuming no actuarial gains of losses in the future, the normal cost would remain at 4.4% of payroll in the future. However, payroll is expected to increase over time so the annual employer contribution amount is expected to increase over time.
    

Analysis of Impact on Public Pension Policy:


    The estimated actuarial costs associated with the creation of the new retirement system for DNR police officers are based on a July 1, 2018 valuation date and assume that all relevant assumptions will be met in future years. If those assumptions are not met, the estimated actuarial costs contained in this fiscal note may change.
    
    There are a number of suggested changes to SB 418 to clarify benefit provisions and technical updates but these updates are not expected to change the actuarial costs presented in this Actuarial Note.
    



Fiscal Note Summary


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


    The employer contribution for the new retirement system would be paid by the State of West Virginia.



Fiscal Note Detail


Effect of Proposal Fiscal Year
2019
Increase/Decrease
(use"-")
2020
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 835,000 635,000
Personal Services 0 0 0
Current Expenses 0 260,000 60,000
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 575,000 575,000
2. Estimated Total Revenues 0 0 0


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


    In addition to the annual employer cost of $575,000 there is a one-time $200,000 expense to setup the administrative software for the new retirement system and an additional annual expense of $60,000 to employ two full time employees to administer the new retirement system. SB 418 should clarify whether the trust fund of the new DNR plan or an external source will pay for the one-time setup fee of $200,000. If the $200,000 setup cost is funded through the trust fund of the new plan, then the amortization of the unfunded liability would increase by approximately $16,333 per year for 30 years.



Memorandum


    As written the bill does not require a minimum number of participants to form the new retirement system. The initial participation as of the effective date of the new retirement system is voluntary, therefore, without a minimum participation requirement the new system may have only a few participants leading to an inefficient use of CPRB resources.
    
    The CPRB Board and the CPRB Board Actuary are available to discuss this Actuarial/Fiscal Note.
    



    Person submitting Fiscal Note: Kenneth M. Woodson Jr., Board Actuary, CPRB
    Email Address: kenneth.m.woodson@wv.gov