Actuarial Fiscal Note

Date Requested:January 15, 2018
Time Requested:11:55 AM
Agency: Consolidated Public Retirement Board
CBD Number: Version: Bill Number: Resolution Number:
1231 Introduced SB277
CBD Subject:

Retirement Systems Impacted by Legislation:

ALL

FUND(S):

TRS 2600, Revenue Shortfall Reserve (Rainy Day) Fund 7005

Sources of Revenue:

General Fund,Special Fund

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).


    As introduced, this bill provides that retirees of any of the plans administered by CPRB (PERS, TRS, SPTA, SPTB, JRS, DSRS, EMSRS, and MPFRS) be given the option at retirement of, in leiu of an annuity, a lump-sum payout of the actuarial present value of the default annuity benefit. When the lump-sum payout option is chosen, half of the benefit will be paid by the plan’s trust fund, and the other half will be paid by the State’s Rainy Day Fund. An assumption has been made that current retirees are not eligible to convert their current benefit to an immediate lump-sum payout, and so the fiscal implications of that possibility have not been assessed. If that is the intent, immediate payouts from the plans and the Rainy Day Fund could be significant.
    
    It is expected that each year the combined asset expenditures of the eight plans could decrease anywhere from $101 million to $403 million, depending on the percentage of retirees that choose the lump-sum option (if fewer than 25% of retirees choose the lump-sum option, cost savings will be lower than $101 million; the maximum estimated savings of $403 million assumes that all new retirees will choose the lump-sum option). This would result in an estimated annual reduction to the Actuarially Required Contribution of anywhere from $10 to $40 million (or 0.19% to 0.75% of total payroll for all plans combined, with the percent of payroll for each individual plan ranging anywhere from 0.01% to 1.59% of payroll). The figures presented in the table below assume that 25% of retirees will choose the lump-sum option; in the case that a higher percentage of retirees elects the lump-sum option, the savings to the plan increase.
    
    It must be mentioned that although the annuity expenditures of the plan would be expected to decrease as retiring members choose the lump-sum option, the payments to those members are actuarially equivalent to the annuity options currently provided, but the incidence of cost is shifted to the State’s Rainy Day Fund; it is only the plans that experience a cost savings, not the State as a whole.
    



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 ($100,831,000.00) ($9,982,000.00) -0.19 %
Normal Cost of System N/A $0.00 0.00 %
Past Service Liabilities ($100,831,000.00) ($9,982,000.00) -0.19 %
Fiscal Year Past Service
Amortization Period Ends
N/A varies N/A


Explanation of above Actuarial estimates:


    Because it does not change the value of the accrued benefits of any retiree, nor does it change the rate of accrual of benefits for any future retiree, the bill as proposed does not change the Normal Cost of the plan. To the extent that retiring members choose the lump-sum payout, half of the liability accrued for those members will be paid from the State’s Rainy Day Fund, thus decreasing the required asset expenditure from the plans (and over time, decreasing the Unfunded Actuarial Accrued Liability and Actuarially Required Contribution). Tables within this Actuarial/Fiscal Note assume that 25% of members will elect to receive a lump-sum payout rather than an annuity, but savings could potentially be greater if a larger percentage of the population chooses the lump-sum. Alternatively, savings to the plans might not be as great if fewer numbers of retirees choose the lump-sum option.

Analysis of Impact on Public Pension Policy:


    Three of the retirement plans that would be affected by this legislation do not currently require any contributions from the state (the Deputy Sheriff’s Retirement System, Emergency Medical Services Retirement System, and Municipal Police Officers and Firefighters Retirement System), and one plan has a significant number of contributing nonstate employers (PERS). This proposed legislation would require the state to make a portion of the lump-sum payouts to the retirees of those plans, thus assuming a portion of the liabilities of those plans for those plans without any current State contribution, and assuming additional liabilities on behalf of those employers in PERS who are not state entities.
    
    The ability for the State’s Rainy Day Fund to sustain continued payments ad infinitum to retiring members who choose the lump sum option is not considered in the Actuarial/Fiscal Note, and so the West Virginia State Budget Office should be consulted to determine the feasibility of making such payments from that Fund.
    
    An assumption has been made that current retirees are not eligible to convert their current benefit to an immediate lump-sum payout, and so the fiscal implications of that possibility have not been assessed. If that is the intent, immediate payouts from the plans and the Rainy Day Fund could be significant.
    
    To some extent, anti-selection will affect the future costs to the plan. In other words, those retiring members who expect to receive a greater benefit by choosing the lump-sum payment over a lifetime annuity (specifically, those who anticipate a shorter life expectancy) will choose the lump-sum option and slightly decrease the cost savings to the plan (and slightly increase the additional costs to the State).
    
    It should be noted that the code section in which this legislation is written already exists, and in order to not “overwrite” that code section, the provisions of this bill should be written into a new section.
    
    The bill as written specifies that “members” will be allowed to elect the lump sum option. If it is intended that surviving spouses of those members who die in active death who are entitled to an annuity also be allowed the lump-sum payment option, the bill should clearly specify.
    
    The bill does not address the administrative impacts of taxation of the portion of the lump-sum payment that would be paid from the State’s Rainy Day Fund. Consideration must be taken to determine how taxes would be paid from payments made from that Fund, and how they would be reported to the IRS and WV State Tax Department.
    



Fiscal Note Summary


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


    As introduced, this bill provides that retirees of any of the plans administered by CPRB (PERS, TRS, SPTA, SPTB, JRS, DSRS, EMSRS, and MPFRS) be given the option at retirement of, in leiu of an annuity, a lump-sum payout of the actuarial present value of the default annuity benefit. When the lump-sum payout option is chosen, half of the benefit will be paid by the plan’s trust fund, and the other half will be paid by the State’s Rainy Day Fund. An assumption has been made that current retirees are not eligible to convert their current benefit to an immediate lump-sum payout, and so the fiscal implications of that possibility have not been assessed. If that is the intent, immediate payouts from the plans and the Rainy Day Fund could be significant.
    
    While the Unfunded Actuarial Accrued Liability (and ultimately the Actuarially Required Contribution) to the individual plans will decrease over time as retiring members choose the lump-sum option, those liabilities will instead be assumed by the Rainy Day Fund under the provisions of the bill (in essence, the total liability established in the plans does not change, but a portion of that liability will no longer borne by the plans and is instead borne by the State’s Rainy Day Fund). Some of those liabilities are currently borne by nonstate employers. For example, many of the employers participating in PERS are political subdivisions, and the state currently is not responsible for any of the liabilities of the DSRS, EMSRS, and MPFRS plans. Because the bill provides that half of the cost of the lump-sum payments will be required from the State’s Rainy Day Fund, including payments to retirees in plans that do not currently require any State contributions, and for all retirees of PERS who were previously employed by a nonstate entity, the State will actually assume a slightly increased liability (estimated to be between $15.5 million and $61.9 million annually) due to the provisions of the bill. Figures shown in the table below assume that 25% of all future retirees will choose the lump-sum option, but if a higher percentage of retirees chooses the lump-sum then additional liabilities borne by the State will be greater. Likewise, if fewer than 25% of retirees choose the lump-sum option, additional liabilities to the State will be lower.
    



Fiscal Note Detail


Effect of Proposal Fiscal Year
2018
Increase/Decrease
(use"-")
2019
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 15,679,000 15,468,000
Personal Services 0 0 0
Current Expenses 0 15,468,000 15,468,000
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 211,000 0
2. Estimated Total Revenues 0 0 0


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


    While the Actuarial Accrued Liability (and ultimately the Actuarially Required Contribution) to the individual plans will decrease over time as retiring members choose the lump-sum option, those liabilities will instead be assumed by the Rainy Day Fund under the provisions of the bill (in essence, the total liability established in the plans does not change, but a portion of that liability will no longer borne by the plans and is instead borne by the State’s Rainy Day Fund). Some of those liabilities are currently borne by nonstate employers. For example, many of the employers participating in PERS are political subdivisions, and the state currently is not responsible for any of the liabilities of the DSRS, EMSRS, and MPFRS plans. Because the bill provides that half of the cost of the lump-sum payments will be required from the State’s Rainy Day Fund, including payments to retirees in plans that do not currently require any State contributions, and for all retirees of PERS who were previously employed by a nonstate entity, the State will actually assume a slightly increased liability (estimated to be between $15.5 million and $61.9 million annually) due to the provisions of the bill. Figures shown in the table below assume that 25% of all future retirees will choose the lump-sum option, but if a higher percentage of retirees chooses the lump-sum then additional liabilities borne by the State will be greater. Likewise, if fewer than 25% of retirees choose the lump-sum option, additional liabilities to the State will be lower.



Memorandum


    Three of the retirement plans that would be affected by this legislation do not currently require any contributions from the state (the Deputy Sheriff’s Retirement System, Emergency Medical Services Retirement System, and Municipal Police Officers and Firefighters Retirement System), and one plan has a significant number of contributing nonstate employers (PERS). This proposed legislation would require the state to make a portion of the lump-sum payouts to the retirees of those plans, thus assuming a portion of the liabilities of those plans for those plans without any current State contribution, and assuming additional liabilities on behalf of those employers in PERS who are not state entities.
    
    The ability for the State’s Rainy Day Fund to sustain continued payments ad infinitum to retiring members who choose the lump sum option is not considered in the Actuarial/Fiscal Note, and so the West Virginia State Budget Office should be consulted to determine the feasibility of making such payments from that Fund.
    
    An assumption has been made that current retirees are not eligible to convert their current benefit to an immediate lump-sum payout, and so the fiscal implications of that possibility have not been assessed. If that is the intent, immediate payouts from the plans and the Rainy Day Fund could be significant.
    
    To some extent, anti-selection will effect the future costs to the plan. In other words, those retiring members who expect to receive a greater benefit by choosing the lump-sum payment over a lifetime annuity (specifically, those who anticipate a shorter life expectancy) will choose the lump-sum option and slightly decrease the cost savings to the plan (and slightly increase the additional costs to the State).
    
    It should be noted that the code section in which this legislation is written already exists, and in order to not “overwrite” that code section, the provisions of this bill should be written into a new section.
    
    The bill as written specifies that “members” will be allowed to elect the lump sum option. If it is intended that surviving spouses of those members who die in active death who are entitled to an annuity also be allowed the lump-sum payment option, the bill should clearly specify.
    
    The bill does not address the administrative impacts of taxation of the portion of the lump-sum payment that would be paid from the State’s Rainy Day Fund. Consideration must be taken to determine how taxes would be paid from payments made from that Fund, and how they would be reported to the IRS and WV State Tax Department.
    
    This Actuarial/Fiscal Note is being submitted by the Consolidated Public Retirement Board. It has been reviewed by a qualified actuary. Both the Board and the actuary are available upon request for questions.



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