Actuarial Fiscal Note

Date Requested:January 15, 2020
Time Requested:11:40 AM
Agency: Consolidated Public Retirement Board
CBD Number: Version: Bill Number: Resolution Number:
2028 Introduced HB4363
CBD Subject: Retirement

Retirement Systems Impacted by Legislation:

PERS 2501

FUND(S):

Special Fund

Sources of Revenue:

Creates New Expense, Creates New Program, Creates New Fund: West Virginia Natural 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, January 1, 2021, HB 4363 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, January 1, 2021, is $20.0 million. The estimated asset transfer from PERS to the new system as of the effective date of the new system is $16.5 million creating an initial unfunded actuarial accrued liability of $3.5 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 $285,000. In addition to the amortization payment the employer normal cost is estimated to be $195,000 in the first year. Therefore, the total minimum actuarially required employer contribution in the first year would be approximately $480,000 or 7.8% of payroll. The member contribution rate would be 9.5% of payroll.
    
    At the start of the new retirement system and the foreseeable future, the recommended annual employer contribution rate will be set at 12% of payroll. The reason for setting the employer rate at 12% of payroll is the plan would mature over time with benefit payments expected to increase. Therefore, to ensure adequate funding of the proposed system as the plan matures, we set the employer rate at 12% of payroll or approximately $740,000 for FY 2021.
    
    The new retirement system proposed in HB 4363 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, 2019, except for the following:
    • As of July 1, 2019, there are 117 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. If the number of members in the new system are fewer than 100 on July 1, 2022, then the new retirement system would cease to exist, and the new plan would be merged into PERS.
    • 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.
    • The actuarial calculations are as of the most recent valuation date, July 1, 2019; however, calculating the actuarial cost as of the effective date of the new retirement system, January 1, 2021 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 $3,500,000.00 $480,000.00 7.80 %
Normal Cost of System N/A $195,000.00 3.20 %
Past Service Liabilities $3,500,000.00 $285,000.00 4.60 %
Fiscal Year Past Service
Amortization Period Ends
N/A 2051 N/A


Explanation of above Actuarial estimates:


    Creating a new retirement system for DNR Police Officers as of January 1, 2021 would create an initial unfunded liability of about $3.5 million. In the first year of implementation, the employer normal cost would be approximately $195,000 or 3.2% of payroll and the amortization of the unfunded liability would be about $285,000 or 4.6% of payroll. Therefore, the total minimum actuarially required annual employer contribution in the first year of the new retirement system would be approximately $480,000 or 7.8% of payroll.
    At the start of the new retirement system and the foreseeable future, the recommended annual employer contribution rate will be set at 12% of payroll. The reason for setting the employer rate at 12% of payroll is the plan would mature over time with benefit payments expected to increase. Therefore, to ensure adequate funding of the proposed system as the plan matures, we set the employer rate at 12% of payroll or approximately $740,000 for FY 2021.
    
    Note, 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, 2019 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.



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.
    
    As of the effective date, January 1, 2021, HB 4363 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, January 1, 2021, is $20.0 million. The estimated asset transfer from PERS to the new system as of the effective date of the new system is $16.5 million creating an initial unfunded actuarial accrued liability of $3.5 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 $285,000. In addition to the amortization payment the employer normal cost is estimated to be $195,000 in the first year. Therefore, the total minimum actuarially required employer contribution in the first year would be approximately $480,000 or 7.8% of payroll. The member contribution rate would be 9.5% of payroll.
    
    At the start of the new retirement system and the foreseeable future, the recommended annual employer contribution rate will be set at 12% of payroll. The reason for setting the employer rate at 12% of payroll is the plan would mature over time with benefit payments expected to increase. Therefore, to ensure adequate funding of the proposed system as the plan matures, we set the employer rate at 12% of payroll or approximately $740,000 for FY 2021.
    
    The new retirement system proposed in HB 4363 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, 2019, except for the following:
    • As of July 1, 2019, there are 117 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. If the number of members in the new system are fewer than 100 on July 1, 2022, then the new retirement system would cease to exist, and the new plan would be merged into PERS.
    • 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.
    The actuarial calculations are as of the most recent valuation date, July 1, 2019; however, calculating the actuarial cost as of the effective date of the new retirement system, January 1, 2021 will change the liabilities, assets transferring to the new retirement system and the members transferring from PERS to the new system.
    



Fiscal Note Detail


Effect of Proposal Fiscal Year
2020
Increase/Decrease
(use"-")
2021
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 1,000,000 800,000
Personal Services 0 0 0
Current Expenses 0 260,000 60,000
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 740,000 740,000
2. Estimated Total Revenues 0 0 0


Explanation of above Fiscal Note estimates (include possible long-range effect):


    In addition to the annual employer cost of 12% of payroll, or $740,000 for FY 2021, 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. HB 4363 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.
    
    Note, payroll is expected to increase over time, so the annual employer contribution amount is expected to increase over time.
    



Memorandum


    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