Actuarial Fiscal Note

Date Requested:March 25, 2017
Time Requested:10:23 AM

3040	Comm. Sub.	HB2817
Agency:	Consolidated Public Retirement Board
CBD Number:	Version:	Bill Number:	Resolution Number:
CBD Subject:	Retirement

Retirement Systems Impacted by Legislation:

TRS

FUND(S):

TRS 2600

Sources of Revenue:

General Fund,Other Fund Counties, higher eds

Legislation creates:

Neither Program nor Fund

Actuarial Note Summary

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

    This bill would “restart” a new 30-year amortization period to pay the Unfunded Actuarial Accrued Liability (UAAL) in TRS, extending the date on which the plan will be fully amortized from June 30, 2034, to June 30, 2046. The FY2018 payment is set in the bill to $295,913,000, with payments for subsequent fiscal years to be determined annually by the actuary. The bill provides that beginning in FY2021, an additional $20 million will be transferred annually from the State Debt Reduction Fund to TRS, and that amount will not be considered by the actuary in determining the annual payment required to amortize the unfunded liability, but rather be used to accelerate the final amortization payment date. The bill provides that, until the UAAL of TRS is eliminated, the Secretary of Revenue shall deposit 1/3 of any surplus revenues accrued in any fiscal year into the TRS fund. Finally, the bill provides an increase of $808 in the annual salary of all classroom teachers beginning July 1, 2017.

    Due to the provisions of the bill that provides the salary increase, the Unfunded Actuarial Accrued Liability of the plan measured as of 7/1/2016 increases an estimated $25.652 million. The FY2018 amortization payment to TRS is reduced from $366,871,000 to $295,913,000, for a FY2018 savings of $70,958,000. The plan’s Normal Cost increases by an expected $640,000 per year beginning in FY2019 due to the provisions of the bill that provides the salary increase.

    Optimistic Perspective on State Surplus:
    Assuming the FY2018 payment is made as prescribed in the bill, and assuming that total revenue surplus amounts average $12,000,000 per year through FY2021 (with 1/3 of that amount being paid into TRS), the amortization payments for FY2019 and FY2020 would be reduced from their currently calculated amount of $366,871,000 to $302,383,000 per year, a savings of $64,488,000 per year. The FY2021 and FY2022 payments would include an additional $20 million from the State Debt Reduction Fund, with the total payment of $322,383,000 in each of those years. Annual payments in subsequent years, including the $20 million from the State Debt Reduction Fund and expected annual surplus revenues of $25,000,000 (with 1/3 of that amount being paid into TRS), would equal $326,716,000 per year. The UAAL would be fully amortized by June 30, 2041, with a total long-term cost increase of $1.374 billion.

    Pessimistic Perspective on State Surplus:
    Assuming the FY2018 payment is made as prescribed in the bill, and assuming that total revenue surplus amounts average $0 per year through FY2021, the amortization payments for FY2019 and FY2020 would be reduced from their currently calculated amount of $366,871,000 to $298,383,000 per year, a savings of $68,488,000 per year. The FY2021 and FY2022 payments would include an additional $20 million from the State Debt Reduction Fund, with the total payment of $318,383,000 in each of those years. Annual payments in subsequent years, including the $20 million from the State Debt Reduction Fund and expected surplus revenues of $12,000,000 per year (with 1/3 of that amount being paid into TRS), would equal $322,383,000 per year. The UAAL would be fully amortized by June 30, 2042, with a total long-term cost increase of $1.524 billion.

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
Impact On	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	$25,652,000.00	($70,958,000.00)	-4.55 %
Normal Cost of System	N/A	$0.00	0.00 %
Past Service Liabilities	$25,652,000.00	($70,958,000.00)	-4.55 %
Fiscal Year Past Service Amortization Period Ends	N/A	2042	N/A

Explanation of above Actuarial estimates:

    The additional pay provided to teachers results in an increase in the UAAL and Normal cost of the plan. The additional Normal Cost of $640,000 must be paid each year beginning in FY2019, in addition to the annual amortization payment on the UAAL.
    Due to the extension of the amortization period for an additional 7 to 8 years beyond the current amortization period, there is an estimated increase in total costs between $1.374 and $1.524 billion over the long term.
    Revenue surpluses each year have historically been very volatile. The cost and savings estimates presented in this Actuarial/Fiscal note assume that the revenue surplus will fall somewhere between $0 and $25,000,000 each year in the future, with this assumption based on actual historical surplus amounts and projections of future surplus amounts from the State Budget Office. The bill provides that 1/3 of any revenue surplus will be paid into TRS. Any additional payments provided by the bill (including revenue surplus and the additional $20 million annually from the State Debt Reduction Fund) are assumed to not be considered in determining the allowance for reduction of the UAAL, but instead are to be considered an additional payment to accelerate the reduction of the UAAL.
    The costs and savings presented in this Note are based on the July 1, 2016 Actuarial Valuation for Funding for TRS, including asset smoothing as adopted by the CPRB on March 8, 2017, and assume that all actuarial assumptions will be met in all future years.

Analysis of Impact on Public Pension Policy:

    It is noted that the bill establishes that the TRS UAAL will be fully amortized by June 30, 2046, but the additional payments from the State Debt Reduction Fund and from Surplus Revenues are expected to allow for the full amortization of the UAAL by June 30, 2041 or June 30, 2042, depending on the actual amount of surplus realized in future years. Because the amount of any future surplus revenues are unknown, this cost analysis assumes surplus amounts between $0 and $25,000,000 per year (with 1/3 of that deposited into TRS), based on historical surplus revenue amounts and projections of future surplus revenues from the State Budget Office.
    Note also that any direct cost to the state to pay the additional $808 per teacher salary is NOT considered in this Actuarial/Fiscal Note, and should be priced by the Department of Education. Only the impact of the $808 on pension costs is contemplated in the Actuarial/Fiscal Note.

Fiscal Note Summary

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

Fiscal Note Detail

Effect of Proposal	Fiscal Year
Effect of Proposal	2017 Increase/Decrease (use"-")	2018 Increase/Decrease (use"-")	Fiscal Year (Upon Full Implementation)
1. Estmated Total Cost	0	-70,958,000	-43,848,000
Personal Services	0	0	0
Current Expenses	0	-70,958,000	-43,848,000
Repairs and Alterations	0	0	0
Assets	0	0	0
Other	0	0	0
2. Estimated Total Revenues	0	0	0

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

Memorandum

    It is noted that the bill establishes that the TRS UAAL will be fully amortized by June 30, 2046, but the additional payments from the State Debt Reduction Fund and from Surplus Revenues are expected to allow for the full amortization of the UAAL by June 30, 2041 or June 30, 2042, depending on the actual amount of surplus realized in future years. Because the amount of any future surplus revenues are unknown, this cost analysis assumes surplus amounts between $0 and $25,000,000 per year (with 1/3 of that deposited into TRS), based on historic surplus revenue amounts and projections of future surplus revenues from the State Budget Office.
    Note also that any direct cost to the state to pay the additional $808 per teacher salary is NOT considered in this Actuarial/Fiscal Note, and should be priced by the Department of Education. Only the impact of the $808 on pension costs is contemplated in the Actuarial/Fiscal Note.

    This Actuarial/Fiscal Note is being submitted by the Consolidated Public Retirement Board. It has been reviewed by a qualified actuary, and a letter of certification is available from the CPRB upon request.

Person submitting Fiscal Note: Melody Bailey, Actuarial Analyst, WVCPRB
Email Address: melody.j.bailey@wv.gov