Actuarial Fiscal Note

Date Requested:February 21, 2017
Time Requested:10:23 AM
Agency: Municipal Pensions Oversight Board
CBD Number: Version: Bill Number: Resolution Number:
2037 Introduced HB2549
CBD Subject: Municipalities, Retirement

Retirement Systems Impacted by Legislation:

Municipal Pension Funds (civilian)

FUND(S):

Municipal funds

Sources of Revenue:

General 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).


    The bill as proposed affects municipalities which have their own municipal pension systems for civilian employees as allowed in WV Code ยง8-22-2. As proposed, it does not affect municipal policemen's or firemen's pension and relief funds which are defined in sections 16-28 of article 22, chapter 8 of the WV Code.
    
    



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 $0.00 $0.00 0.00 %
Normal Cost of System N/A $0.00 0.00 %
Past Service Liabilities $0.00 $0.00 0.00 %
Fiscal Year Past Service
Amortization Period Ends
N/A N/A


Explanation of above estimates:


    Estimates above are blank due to the fact each municipal pension plan is funded at different levels and any deferral of required contributions would have to be targeted to a specific plan before numbers could be assigned to each category. In all cases, any costs would be the responsibility of municipality, not the state of WV.

Analysis of Impact on Public Pension Policy:


    The proposed legislation would materially affect when a municipality paid funds into a municipal pension system and thereby causing the unfunded liability to grow by deferring payments one year and causing the pension plan to lose interest on those funds that would have been deposited to pension assets one fiscal year earlier. The lost interest would be amortized over the lifetime of the existing amortization table for unfunded liabilities.



Fiscal Note Summary


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


    Costs to state government would not be impacted. However, costs to municipal governments would be impacted, and some significantly over a long period of time.



Fiscal Note Detail


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


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


    No state funds are used in the management of municipal pension plans.



Memorandum


    If the intent of the proposed legislation is to affect municipalities with municipal policemen's and municipal firemen's pension funds, the Municipal Pensions Oversight Board and its contracted actuary have several concerns. Fifty-one of the fifty-three plans have different accrued actuarial unfunded liabilities. Each receives a separate actuarial valuation annually. Those plans that are reasonably well funded would be able to more easily absorb the increased unfunded liabilities this legislation will cause. Those plans that are poorly funded could possibly have a much harder time absorbing the increases in unfunded liabilities over the course of their amortization period to become fully funded. In addition, the size of the pension plan would also affect how well a municipality would be able to absorb the additional annual costs.
    
    This proposed legislation would cause the actuarial accrued unfunded Liabilities to increase over the amortization period for pension plans.
    
    Should a municipality be allowed to push the required contribution into a future fiscal year, the portion of the interest the actuary assumed would be earned in the then current fiscal year would have to be amortized over the remaining years available before the plan is required to be fully funded by statute. The concept also raises the question of what would happen if the pension fund showed actuarial losses every year for a number of consecutive years. Pushing the payments out one fiscal year for each of these years which showed an actuarial loss would likely compound the pension's unfunded liabilities immeasurably.
    
    The assumption of the proposed legislation appears to assume all of the actuarial assumptions are met every year, when in fact, in most years, plans have actuarial gains and losses that are not controlled by the managers of the plan, but rather by market forces in the larger economy. As written, anytime there was an actuarial loss due to any reason, that loss could be pushed to the following fiscal year. At the same time any actuarial gain would be immediately realized. This would create a biased contribution policy which defers municipal contributions while immediately realizing actuarial gains. Actuarial standards require both gains and losses to be recognized and included in the current year's contributions. To do otherwise is not compatible with current actuarial standards.
    
    There are several funding methods allowed for municipal policemen's and municipal firemen's pension plans in WV. Those plans using the Alternative Funding Methodology have costs that rise at a minimum of 7% greater than last year's contribution. Would this language allow a municipality to defer this 7% increase too? If additional contributions are needed to maintain solvency within the 15 year period in a plan, would that additional contribution be subject to the deferral of payments till the following year too? Those plans using the conservation funding method are in effectively using a pay-as-you-go system. Significant increases by the employer could be the impact in such a system.
    
    Finally, if municipalities defer their required contributions, would the municipality be at risk of losing the state aid annually allocated each September 1st and which must be claimed 18 months later by the municipality?
    
    The Municipal Pensions Oversight Board (MPOB) had its actuary, Gabriel Roeder Smith & Co. review the proposed legislation and they have provided a letter to the MPOB regarding the legislation. That letter is available to be discussed in detail by contacting the MPOB. Some of the material in this Fiscal Note was summarized from the material provided in the letter. The letter also includes sample examples of how a municipal pension plans cost would be increased should the legislation pass. Questions raised in the note are a result of the the actuary's response to the MPOB.



    Person submitting Fiscal Note: Blair Taylor, Executive Direcor MPOB
    Email Address: blair.m.taylor@wv.gov