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CHAIRPERSON DIEHR: Will the Finance and Administration Committee please come to order.
And secretary please call the roll. COMMITTEE SECRETARY SANTOS: George Diehr?
CHAIRPERSON DIEHR: Here. COMMITTEE SECRETARY SANTOS: Richard Costigan?
VICE CHAIRPERSON COSTIGAN: Here. COMMITTEE SECRETARY SANTOS: Howard Schwartz
for Julie Chapman?
ACTING COMMITTEE MEMBER SCHWARTZ: Good afternoon.
COMMITTEE SECRETARY SANTOS: Terry McGuire for
John Chiang? ACTING COMMITTEE MEMBER McGUIRE: Here.
COMMITTEE SECRETARY SANTOS: Henry Jones? COMMITTEE MEMBER JONES: Here.
COMMITTEE SECRETARY SANTOS: Grant Boyken for Bill Lockyer?
ACTING COMMITTEE MEMBER BOYKEN: Here. COMMITTEE SECRETARY SANTOS: And Bill Slaton?
COMMITTEE MEMBER SLATON: Here. COMMITTEE SECRETARY SANTOS: Thank you.
CHAIRPERSON DIEHR: Okay. We have a quorum. First item -- or second item on the agenda
is the Executive Report, and I call on Cheryl Eason.
CHIEF FINANCIAL OFFICER EASON: Good afternoon, Mr. Chair and Committee members. My Executive
report to the Finance and Administration Committee today
will be brief, in order to move directly to the agenda
items. Today's action agenda item is the second reading
of the mid-year budget revisions for fiscal year 2013-14.
Since the first reading of the mid-year budget revisions
last month, there have been no changes or updates. This
item is being recommended for approval. Also being presented today are three information
agenda items. First, we have the quarterly financial
report summary of the CalPERS Public Employees' Retirement
Fund as of September 30th, 2013, the first reading of the
review of actuarial assumptions presented by actuarial
staff, and as well, actuarial staff will be discussing the
impacts to pension risk pools as a result of pension
reform. Looking forward to the next Finance and
Administration Committee meeting in February 2014, the
Committee will be holding its annual election of the Chair
and Vice Chair. Thank you, Mr. Chair. This concludes my report.
CHAIRPERSON DIEHR: Thank you. Seeing no requests to speak. We'll move to Agenda Item
number 3, the action consent item, approval of the minutes and
the semi-annual contracting prospective report.
COMMITTEE MEMBER JONES: Move it. CHAIRPERSON DIEHR: Moved by Jones, second
by? ACTING COMMITTEE MEMBER BOYKEN: Second.
CHAIRPERSON DIEHR: Boyken. And any discussion on the motion?
Seeing none. All in favor with aye?
(Ayes.) CHAIRPERSON DIEHR: Opposed nay?
Motion passes. Item 4, Information consent items. Any requests
to pull any items? Seeing none.
Agenda Item number 5, Budgets and Financial Reporting, 2013-14 mid-year revisions.
Ms. Eason. CHIEF FINANCIAL OFFICER EASON: Thank you.
Agenda Item 5a is the second reading of the 2013-14
mid-year budget revisions. As I mentioned, since the
first reading of this item, there are no updates to this
request. It is being recommended that the 2013-14
mid-year total budget of 1,728,279,000 including 2,696 positions be approved. This represents
an increase over the 2013-14 annual budget of 15.1 million
or 0.9 percent, including 11 staff positions. I would be happy
to answer any questions.
CHAIRPERSON DIEHR: Any questions on the item? Seeing none.
Do we have -- this is an action item. Do we have
a motion. VICE CHAIRPERSON COSTIGAN: I'll move.
CHAIRPERSON DIEHR: Moved by Costigan. COMMITTEE MEMBER JONES: Second.
CHAIRPERSON DIEHR: Second by Jones. Any discussion on the motion?
Seeing none. All in favor with aye?
(Ayes.) CHAIRPERSON DIEHR: Opposed nay?
Motion passes. Agenda Item number 6, Budgets and Financial
Reporting, current budget and financial reporting update.
Ms. Eason, continue. CHIEF FINANCIAL OFFICER EASON: Thank you,
again. Agenda Item 6a, the current budget and financial
reporting updates includes the quarterly financial reports
summary. This report provides an overall analysis on
the net position of the CalPERS financial fund on the current to
previous year basis. The total increase in this first
quarter from July 1st 2013 to September 30th, 2013 was
just over 11.1 billion, or approximately 4.2 percent.
The contributions level for this quarter were at
.4 billion, while the payout to pension benefits was 4.4
billion. Therefore, a portion of the 12.1 billion
generated from investment and other income is used to
cover the overs of remaining pension benefits and other
costs. The administrative costs increased from last
year by approximately 12.9 million. Although they
remain within the approved costs for this year. The
contributing factors are related to increase in staffing,
salaries and benefits, and software maintenance. In comparison
with this quarter last year, investment management
fees are significantly lower. This increase can be
attributed to the transfer of assets from external to internal
management and performance fees, which are reported on a
cash basis and can fluctuate from period to period.
This concludes my financial report. I would be
happy to answer any questions. CHAIRPERSON DIEHR: Thank you. And I just want
to say I appreciate the improved expanded format for this
item. We have several people who wish to speak. Mr. Slaton.
COMMITTEE MEMBER SLATON: Thank you, Mr. Chair. Ms. Eason, and I think I mentioned this during
the briefing. On the summary report, the category other
investment expenses, and if you could elaborate on that a
little bit. And then I would suggest in the future that
we add a Note 4, because it's several items -- categories
that make up that item. And since it's a fairly significant number, it would be better to
have a little explanation.
CHIEF FINANCIAL OFFICER EASON: Absolutely. So
the other expense -- investment expenses are made up of
expenses such as subscriptions. So, for example, Bloomberg, which we use for investment research.
There are technology costs such, as the use of the
BlackRock system for our trading systems and custodial
fees. Those are the kinds of expenses that we're -- we
include in the other investment expenses. And we will be
noting that on the next report.
Thank you for your feedback. CHAIRPERSON DIEHR: All right. Thank you.
Mr. Boyken. ACTING COMMITTEE MEMBER BOYKEN: Thank you,
Mr. Chair. My question is on the first page under
the analysis the paragraph that talks about the
income and the expenditures. When you determine the investment return as
income, is that the gains that you valued for that
quarter? CHIEF FINANCIAL OFFICER EASON: Yes.
ACTING COMMITTEE MEMBER BOYKEN: Okay. And then
that picture that, you know, 15.6 billion coming in, to
.5 billion going out, that looks pretty good. Does that
vary, you know, during the year if you look quarter to
quarter? CHIEF FINANCIAL OFFICER EASON: It will. It
will. This is, again, a snapshot in time in terms of this
quarter, and those will vary. ACTING COMMITTEE MEMBER BOYKEN: Thanks.
CHAIRPERSON DIEHR: Okay. Mr. Jones. COMMITTEE MEMBER JONES: Thank you, Mr. Chair.
Yeah, I'd also like to just congratulate you on the
continued improvement of presenting financial information
to get a better status on where we are. But I also would
like to suggest perhaps to give some consideration to
maybe an additional improvement in this kind of report,
and that is projections, because like you just stated it's
point to point, but then where are we going for the rest
of the year? That's an important question to be answered
also. So if you could think about projecting when
you bring in your various quarter report, project it for the balance of
the year. And if that can be achieved, then in the long
run, you can look at multi-year projections, so that we
could try to identify it two years in advance in these big
projects that may be necessary, and you can start
projecting, and then start to determine how you're going
to fund those going forward. So I think a beginning step would be enhancing
this report by doing the projection for the balance of the
year, and at some point in the future, looking at a
multi-year projection. Mr. Chair that's a suggestion I have.
CHAIRPERSON DIEHR: Thank you, Mr. Jones. I'm sure they will consider it carefully.
All right. Well, this is a work -- this particular one is a work in progress. And
it's pretty tricky, because as we discussed at my briefing,
the investment income is so variable, some of
the other pieces make sense as far as projection. But sort
of projecting investment income is on a quarterly basis
or something is so random that you can have a loss one quarter,
it doesn't necessarily mean a whole lot, because we expect
that to happen.
Okay. Mr. Jones, you're back again. COMMITTEE MEMBER JONES: I was primarily focusing
on the operational budgets for CHAIRPERSON DIEHR: Yeah.
COMMITTEE MEMBER JONES: Because I understand your point on that.
CHAIRPERSON DIEHR: The operational budgets, the
pension benefits, and the contributions are fairly
predictable. Okay. I have no further speakers on that item.
And that is an information item, so we'll go to Agenda
Item number 7, and call on Mr. Milligan. And the
estimated schedule I have shows 90 minutes. It would not
upset the Chair or the Committee if it was somewhat
shorter than that amount of time. (Laughter.)
(Thereupon an overhead presentation was presented as follows.)
CHIEF ACTUARY MILLIGAN: I have no intention of
speaking for 90 minutes, but I can't control what the
members ask. CHAIRPERSON DIEHR: Neither can I.
(Laughter.) CHIEF ACTUARY MILLIGAN: Good afternoon. Alan
Milligan, Chief Actuary. I have with me today David
Lamoureux, our Deputy Chief Actuary. This agenda item is to review and make recommendations
about the assumptions that we should use in future actuarial valuations and in some
of our benefit calculations.
CHIEF ACTUARY MILLIGAN: We do this review on a
regular basis every four years according to current Board
policy. This practice is consistent with best practices
in the industry. This is the year when we would normally
be doing our review of demographic assumptions. However,
as we discussed two years ago, we have advanced the
economic -- the review of economic assumptions to coincide
with the demographic review. This will allow us a greater
period of employer rate predictability. As otherwise, if
we didn't coordinate it, we would be making changes to our
actuarial assumptions every other year. And we'd like to
give our employers a greater period of stability. By chance, this year we are also doing our
review of our asset allocation, part of the ALM workshop.
We have different cycles for those two reviews,
but staff all agree that we really should be -- keep this
coordinated, so I will be working with my colleagues in
the Investment Office and the Financial Office to try to
keep these review cycles in synch in the future.
We need to review our assumptions on a regular basis, because the world keeps changing. If
we do not update our assumptions to reflect those changes, we would
not be properly funding the System. So what am I bringing
you today?
CHIEF ACTUARY MILLIGAN: This is an information item. Staff will be bringing the item back
for decision in February. But changing assumptions will
have a significant impact on our stakeholders, and
we wanted to expose these recommendations to the public
before asking you to take action on the recommendations.
In February, we will be asking for two sets of
decisions. First, what assumptions to use in future
valuations. We have a Board policy that directs us how to
amortize them. So a second question that we will be
asking you to decide on is how to amortize the cost impact
of the assumption changes. So those are the two decisions that we're
going to be asking you about, and we'll be asking
you about the assumption changes not just in economic, but
also in the demographic assumptions.
CHAIRPERSON DIEHR: Excuse me, but this is an
information item. So you are -- CHIEF ACTUARY MILLIGAN: That's in February
when we'll be asking for those decisions. Not today.
CHAIRPERSON DIEHR: Okay. CHIEF ACTUARY MILLIGAN: Okay. You just caused
me to say my point. (Laughter.)
CHIEF ACTUARY MILLIGAN: So on the economic assumptions, staff is not recommending any
changes at all. The last review of economic assumptions was
only two years ago, and there's not been enough changes for
staff -- to justify staff recommending changes to these
assumptions. However, the recommendation to continue with
the seven and a half discount rate is a bit premature,
as the Board has not yet adopted its new asset allocation.
That is anticipated to happen in the February meeting.
So at that time, a formal recommendation on the
discount rate will be appropriate.
Having said that, the Board did indicate a preference at last month's ALM workshop for
an asset allocation and margin for adverse deviation
very similar to the base case with no margin for adverse
deviation. So our recommendation, assuming that you ultimately
adopt an asset allocation with a risk return profile
very similar to that base case, which I believe is what
you were kind of looking for at last month's workshop, assuming
you adopt something like that, then our recommendation
would be to continue with a seven and a half percent
discount rate.
CHIEF ACTUARY MILLIGAN: So let's move on to the
demographic assumptions. We are recommending some changes
here. Our current assumptions are doing a good job of
predicting the levels of termination of employment. And
we are not recommending any changes with respect to that
assumption. On the other hand, our current assumptions
about rates of industrial and non-industry disability
currently predict significantly more retirements than we
are seeing in the real world. We are therefore recommending reducing the rates at which we
assume that disabilities will occur.
So if this were the only change to assumptions, this would actually result in lower liabilities
and lower costs in the future.
CHIEF ACTUARY MILLIGAN: Of course, that's not
the only change that we're recommending. Our data shows
that our current service retirement assumptions are doing
a reasonable job of predicting when members will retire in
general. However, there are two groups, the State POFF
members and CHP members that are retiring at significantly
greater rates than we are currently assuming. Staff is
recommending changes to the service retirement assumptions for all groups, but this will
have a disproportionate impact on the State POFF and CHP plans.
CHIEF ACTUARY MILLIGAN: And what I've got here
is a graph. You can see how the actual numbers of
retirements compares to the expected number retirements
for these two groups. So what the graph shows is that,
for the most part, the actual number of retirements is
very close to the expected number of retirements on our
old assumptions. They're all close to that hundred
percent, except for State POFF and State CHP. So this is why the assumption change impacts
those two groups more than the other groups. Our current
assumptions are just doing a worse job at predicting
that -- those retirements, so we're having to make bigger
changes to our assumptions. CHAIRPERSON DIEHR: I think we've had this,
you and I, discussion before. I mean, obviously
you can't continue at a 200 percent rate -- well, I
guess you could. You would just get to zero quicker that way.
But I mean was there any event recently that might have
spurred this increased retirement rate or anything about
the demographics there that --
CHIEF ACTUARY MILLIGAN: Sure. Well, what happened was this result is actually fairly
consistent with the results that we saw in the last couple of
experience studies, especially with respect to CHP. We
were concerned that the retirement rates were overstated
at that point due to -- actually, they had employer paid
member contributions that were being phased out, and so we
thought that that was spurring more members to retire. So
we were cautious in making adjustments to the rates and
did not fully reflect the data the last time we did an
experience study and changed our assumptions. But that is now gone and been gone for a while,
and we're still not seeing the retirement rates change.
So, yes, we think that it is now time to make the change.
Our old assumption about why there was these extra
retirements turned out to not be reflective of reality.
CHAIRPERSON DIEHR: Okay. Mr. Jelincic, you want
to speak now? BOARD MEMBER JELINCIC: Please.
Alan, I want to back up to the disability retirement. You're proposing to lower the
assumed disability retirements. Is that a cross all
groups or does that apply to any specific -- disproportionately
to any specific group?
CHIEF ACTUARY MILLIGAN: It's generally true. I'm not sure if it's true for every group,
but we are -- it is true for both industry disability, which
primarily affects just the safety groups, as well as all other
disabilities, which affect both State, safety, and
miscellaneous. We're seeing lower rates of disability in
most groups. I'm not sure if it's all. DEPUTY CHIEF ACTUARY LAMOUREUX: It's all groups.
CHIEF ACTUARY MILLIGAN: In all groups, but the
ordinary disability has such a small effect on the system
costs that it's not really changing the contribution requirements for non-safety groups. For safety
groups, the change in industrial disability is making
a change. It would be a fairly significant change. Although,
it is going to be more than offset by other changes
as we'll see.
BOARD MEMBER JELINCIC: Thank you. CHIEF ACTUARY MILLIGAN: So another area where
we are recommending changes is in the salary
scale. That is the portion of salary increases due to seniority
merit and promotion. General pay increases are covered
by the wage inflation assumption, which is one of the
economic assumptions I mentioned earlier. So this is
just the seniority merit and promotion of pay increases.
What the data shows us is that safety members are
getting pay increases later in their careers than we are
currently assuming. We think this is partially due to the
prevalence of longevity pay in the safety groups, and also due to more promotions later
in people's careers. For members other than safety members, we're seeing
mixed results in this area. We are recommending
changes to the salary scale based on what we are seeing in
the data.
CHIEF ACTUARY MILLIGAN: And this is an example of what we're seeing in the data. This particular
graph is the actual-to-expected ratios -- sorry,
the actual rates of salary increases that we see in the
data, and what we're currently assuming. The red line
with the square boxes is what we're currently assuming.
The green line with the triangles is what we're seeing
in the data. And it's particularly, that area out past
20 years, that is of concern, because that's
when members have already accrued a fairly significant
benefit. And so if we don't get the salary increases right
in that range, it has a significant impact on the funding
of the System. The data also shows us that we are understating
the increases for -- these are public agency police
members early in their career, but that has a much, much
lesser effect on the funding of the System, because at
that point, they tend to be low service, almost no
liabilities, and generally lower pay as well. So it's the
impact in those out years is what's really driving this
change. CHIEF ACTUARY MILLIGAN: So finally, the most
significant finding that we have is that we need to
strengthen our mortality assumption. Mortality rates
continue to decline, which means that life expectancy
continues to increase, which is a good thing for all of us
as individuals. However, it does mean that we should
expect to pay pensions for longer, and that means that we
would need to fund for that longer retirement. We also need to build future mortality
improvements into our actuarial basis. By doing so, we
will be properly funding the System consistent with best
practices and changing actuarial standards. Not
responding to these changes could lead to a requirement to
qualify the valuation report with implications on our
financial statements and the financial statements of
participating employers.
CHIEF ACTUARY MILLIGAN: So how much have mortality rates improved?
This graph compares the improvements we have seen
in our own population, the squiggly orange line, with the
improvement predicted by scale BB, the nice flat green
line. Scale BB is a recently released national standard
table. As you can see, the improvements we have seen have been greater than the increases
predicted by the standard table. This is for males. The data for females
does not look quite as bad or good, depending on your
perspective. Female mortality has not improved as much
as male mortality. It is above the female line for
BB, but not as much above the feline for BB.
But in both cases, we are seeing our own data greater mortality improvements than is predicted
by the national standard table. I don't want to make
too much of this, as there is a lot of data that is required
to do this kind of analysis. And in this case, I
think it makes sense to go with the national standard table,
rather than with our own data, but this graph should give
us pause and make us really think about what we're doing.
I think the right thing to do is go with the national
standard table, but this is one area where four years from
now I may be coming back to you and explaining that the
orange line was the right one. We won't know until four years
from now. So what is the impact of these improvements?
CHIEF ACTUARY MILLIGAN: Well, this slide shows how life expectancy has been changing. We
are looking for life expectancies for members who are retiring
at age 55 in this particular graph, but that doesn't
really matter. The graphs would look very similar if we were
looking at members retiring at age 65 or some other age.
The shorter blue bars are the males, and the longer red bars are females. The first three
pairs of bars are based on the results of the last
three experience studies. The four shaded sets of bars are
the results from this study extrapolated to different
years with scale BB.
As you can see, there's been a steady improvement in life expectancy. The assumption that staff
is recommending is consistent with the final
set of shaded bars. In effect, we will be calculating contribution
requirements assuming that members will live about a year
to a year and a half longer. This will probably overstate
life expectancies for the oldest retirees. It will
probably understate the life expectancy for active
members, and get it about right for the retirees and near
retirement group. Overall, the impact on our funding should
be about right, and that's why we're recommending
a 20-year static projection.
CHIEF ACTUARY MILLIGAN: So that's -- that is
what staff is recommending. We are recommending a 20-year
projection using scale BB. It is possible that this will
overstate the level of mortality improvement in the future. One possible reason for this
was discussed at the workshop on mortality improvements two months
ago, and that is smoking. There is less room for improvement
in California, because fewer of us smoke already.
We looked at this factor, and while we believe that
this is a real issue, there are other factors, including
our own data, the chart with the squiggly line, that squiggly
line that have caused us to recommend improvements equal
to the full scale BB.
If the Board believes that using a full improvement scale -- full improvements predicted
by scale BB will overstate future mortality improvement,
it could choose to use something less. If it were to
do so, we would suggest that it adopt a 15-year static
projection using scale BB.
Adopting a lower level of mortality improvement or continuing to assume that no future, a
lower level, as in lower than 15 years, not choosing 15 years,
or continuing to assume no future projection
-- no future improvements in mortality would require that
staff include a qualification in the actuarial valuation
reports with consequences on financial statements and elsewhere.
CHAIRPERSON DIEHR: Excuse me, Mr. Jelincic. BOARD MEMBER JELINCIC: Yeah. Alan, back on
the BB versus our squiggly line, do you have any
insight into why our squiggly line is above? Is there anything about
our population that is so different? CHIEF ACTUARY MILLIGAN: So there are some
differences. It may be that the healthy lifestyle in
California has an impact, and it may be that we have
already sort of gotten some improvements earlier. You
know, this is really just a front-loading of the
improvements, and that in the next little while we may be
behind the rest of the nation in terms of improvements.
Smoking might be part of that as well. The other issue though that is of more concern
is that some of the studies do show that people
with higher levels of education and better access to health
care are having bigger mortality improvements than
others. And that pretty much describes our population.
And there's really no reason to expect that that factor
will decrease in the future.
So that's a concern, because if that's the answer, then we should probably be a assuming
even more mortality improvement in the future than what
we're -- what staff is recommending.
BOARD MEMBER JELINCIC: Thank you.
CHIEF ACTUARY MILLIGAN: So up until now, we've been talking about what assumptions to adopt.
However, these assumptions will impact the funding requirements and
hence will impact our stakeholders. And I believe we have
at least one member in the audience who will be talking to
you later about the impact on their organization. Staff is recommending that the assumptions
be adopted in a manner consistent with how we
handled the smoothing policy changes. That is we are recommending
that the new assumptions be built into projected employer
contributions in the first year, and then into the actual
contributions in the following valuation. This will give
employers sort of more notice and more ability for them to
start making changes to their finances. Also, this should be done in a, so that the
contribution increases happen at the same time to
everyone, State, schools and public agencies. So this
would mean that we would use them to set the required
contributions for the 2016-17 fiscal year and in future
fiscal years. So our recommendation would be to -- that
would be the first year that it would actually be
hitting employer rates.
CHAIRPERSON DIEHR: Mr. Jelincic again. BOARD MEMBER JELINCIC: Yeah, Alan looked over.
Right now we stagger when these various assumption come
in, so they hit, I guess, state and school later than public agencies. You're proposing
to bring them all on at
the same time. Why the change and what's the rationale
behind it? CHIEF ACTUARY MILLIGAN: I like consistency
whenever I can get it, and this would be consistent with
how we handled the smoothing changes. It's also -- you
know, I don't really see why the State would need less
time to plan than local agencies or school -- or why
school districts wouldn't require the additional time to
plan. So I like the idea of consistency, and that's the
primary driver for recommending that it be implemented
that way. BOARD MEMBER JELINCIC: Okay. So it's
consistency rather than any real economic driver.
CHIEF ACTUARY MILLIGAN: Correct. BOARD MEMBER JELINCIC: Okay. Thank you.
CHIEF ACTUARY MILLIGAN: So our current policy is
to amortize changes and liabilities due to assumption
changes over 20 years with a five-year ramp up of
contributions and a five-year ramp down. So the impact of
the -- on various plans at CalPERS is shown in Attachment
of the agenda item. And that's on our recommendation --
recommended assumption changes as well as current Board
policy. CHIEF ACTUARY MILLIGAN: What we've done here
is graph for you how it would work for a sample
public agency miscellaneous plan. The bottom line is the
anticipated pattern of contributions under our current
assumptions. The top line is what we would expect under
the Board's amortization policy, if it were to adopt our
recommended assumptions. The green line in between the
yellow and the blue line is what would happen under the Board's
amortization policy, if you adopted our recommended assumptions, but with a 15-year project -- static
projection of mortality instead of a 20 year static
projection. I think that -- the impact of that is shown
in Attachment 4, if I remember the number correctly.
CHAIRPERSON DIEHR: I think it's important to
point out that this -- the different -- I mean, anybody
would say well let's just take the orange or yellow line
here, why not. But that means that the -- what you assume
is correct and the evidence points to the BB line. And if
you're wrong and you really should have done it -- we
really should have done it for 20 years, then we -- then
at some point out in the future we're going to go through
another jump up. So it's -- CHIEF ACTUARY MILLIGAN: Yeah. If we're right
about what the assumptions should be, and we don't change
our funding, then we will be underfunding the System by
the difference between the two lines, and eventually it
will catch up with a vengeance. CHAIRPERSON DIEHR: Right, and the yellow to
green or yellow to blue catch-up would be pretty
substantial. CHIEF ACTUARY MILLIGAN: And the risk with
going with the 15-year static projection is that
the 20 years is what we should be doing, and then we will
be underfunding albeit by a lot less. The green is a lot -- you
know, the difference between the green and the blue
is a lot less than the difference between the blue and the
yellow. CHAIRPERSON DIEHR: Of course, we may -- we
might catch that. I mean, whenever, five years from
now or something, you might catch it and it wouldn't
be too bad versus waiting until 31, 32, as we're -- so
anyway, I just --
CHIEF ACTUARY MILLIGAN: Yeah, yeah. Selecting a
different assumption is different from selecting a
different amortization, in that selecting a different
assumption, one that you don't really believe in, is sort
of deliberately underfunding the System. Selecting a
different amortization is recognizing the realities of the
impact on our stakeholders and trying to do something that is appropriate.
So certainly, I would recommend that the Board, when it makes its decision in February, ask
yourself what do you believe is the right set of assumptions?
That's what you should -- we should use. When we
go onto, well okay, now how are we going to build this into
employer rates? That's the second decision, the financing
decision, which I'm about to get to right now.
CHAIRPERSON DIEHR: Mr. Jelincic. BOARD MEMBER JELINCIC: Alan, back on this
chart, impact of recommendations, alternative assumptions.
I understand why we see the rate increase, you
know, earlier on at -- or five, six years out. I don't understand
why they eventually come back together.
CHIEF ACTUARY MILLIGAN: They -- the reason why
they come back together is that you have fully paid off
the difference in the unfunded liability. In fact, they
don't quite come back together, because you're actually
making different assumptions. So the normal cost is
different. So out there in fiscal year 45-46, all you're
paying is the normal cost, and that's how much -- the
difference in the normal cost is much different -- much
less than the overall impact on contributions until you've
fully paid off the unfunded liability, the increase in liability associated with the
assumption change. BOARD MEMBER JELINCIC: So the gap between
the lines is really funding the unfunded liability.
CHIEF ACTUARY MILLIGAN: Correct, and specifically the unfunded liability associated
with the assumption change. You'll notice that after
20 years, all of these lines come back together -- pretty
much come back together, even before it falls down to the
normal cost. This is because this particular plan has an
existing unfunded liability that is being amortized
and some of it is being amortized as a gain or a loss, so
over a 30-year period. But the change due to the assumption
change is amortized over 20 years in accordance with
current Board policy.
BOARD MEMBER JELINCIC: Okay. Thank you.
CHIEF ACTUARY MILLIGAN: So if the Board feels that the contribution increases are too much
for stakeholders to bear, you could elect to change
how we amortize the changes. We have shown two possible
alternative amortizations in the agenda item, but both
have a downside. A longer smoothing period means that we
will have a higher peak contribution rate. That would be
the 20-year amortization with seven year smoothing that we
showed in the agenda item. A longer amortization period as opposed to a
smoothing period means that it will take significantly longer to payoff -- pay for the increase in
the liabilities. So those both have -- those are
the downsides of electing either more smoothing
or longer amortizations.
CHIEF ACTUARY MILLIGAN: So this shows -- this is
the same plan as before, a public agency miscellaneous plan. And it shows three possible variations.
These are all with the 20-year static projection. The
pale blue line, which you can really only see in those
peak years, is the seven-year smoothing 20-year amortization.
The medium blue line, which is the lowest at the
peak, but continues higher for longer, is the 30-year
amortization with five-year smoothing, and the dark blue
line is the Board amortization methodology, current Board
policy.
CHIEF ACTUARY MILLIGAN: And this is the same set
of information. It looks very similar, but it's for the
-year mortality projection instead of the 20-year
mortality projection. So as you can see in both of these
graphs, those three lines are actually fairly close
together. The amortization has -- doesn't really have
that much of an ability to relieve the impact on employers. They do alleviate it, but to
a fairly small degree.
CHIEF ACTUARY MILLIGAN: So in the previous two
graphs, we showed the impact on the contribution --
contributions of alternative amortization schedules. In
this graph, we're showing some of the downside of the
longer amortization periods. The graph shows how the
unfunded liability due to the assumption change will be
paid off. You'll notice that in the early years it
continues to increase. The current Board policy, which is
the blue line with the squares, has the lowest peak and
starts falling the soonest. Thirty year amortization with
five-year smoothing, the green line, has the highest peak
and it takes a lot longer to bring -- begin bringing down
the unfunded liability. In fact, it takes 20 years for
the unfunded liability to fall below the initial amount.
For a million dollars of unfunded liability, current Board policy results in $1.2 million
of interest being paid. So you more than double the total
cost by spreading it out over time, the way we -- under
our current policies. Extending the amortization
period to 30 years means that $2.2 million in interest
will need to be paid.
There has been some discussion about what would -- about combining a 30-year amortization
with seven year smoothing. While this could be done,
the peak of the unfunded liability would be even higher, and
additional interest would be about the same as the 30-year
amortization with five-year smoothing.
CHAIRPERSON DIEHR: Excuse me, that's the brown unlabeled line?
CHIEF ACTUARY MILLIGAN: That's the purple and
the label should have appeared. CHAIRPERSON DIEHR: Yeah. Okay. It isn't on
what was printed, I guess. Yeah, okay. CHIEF ACTUARY MILLIGAN: Yeah, it's probably
not on the printed copy.
CHAIRPERSON DIEHR: Okay. CHIEF ACTUARY MILLIGAN: I'm hoping you can
see it on the monitor.
CHAIRPERSON DIEHR: Yep. CHIEF ACTUARY MILLIGAN: Changing the assumptions
will also mean that we will be recognizing an additional
actuarial liability.
CHIEF ACTUARY MILLIGAN: We think that the increase in liability, if we had done it as
of June 30th, would be about 22, 23 billion dollars distributed
nine billion for the State, four billion for schools, and
billion for public agencies. Recognizing these assumptions would also mean
that we would recognize a decrease in our funded status of
about four percent.
CHIEF ACTUARY MILLIGAN: In addition to the impacts on the liability and employer contributions,
we also wanted to make you aware that these changes
will result in increases in normal costs. Under
the PEPRA, Public Employee Pension Reform Act that was
passed last year, new public agency members and new school
members, I believe, will have to pay half of the normal
cost. And so we wanted to make sure that you, the Board,
were aware of the impact of these assumption changes on
the normal costs. And that is shown in the agenda item
in Attachment number 3.
Normal cost does have to increase by one percent cumulative increase in order to trigger an
increase in the member contribution rate. Most of the miscellaneous
groups are expecting to see an increase in normal costs of
less than one percent of payroll. So this probably will
not trigger an increase in the member contribution rate
for the miscellaneous plans. Most of the safety groups are expecting to
see an increase in the normal costs of between one and two
percent of payroll. And so it would likely see an
increase in the member contribution rate, again public
agencies and schools, not the State, unless the State and
its collective bargaining partners negotiate something.
CHIEF ACTUARY MILLIGAN: In addition to all of
these other changes, the new assumptions will also impact
member calculations. In particular, there's two
calculations that tend to be impacted by our assumptions.
And those are service purchase costs. While we no longer
have airtime, we do still have a number service purchases
that are permissible under the "present value" method, the
most important of these is military service purchases. So
these -- by changing these assumptions in a way that makes
the System overall more expensive, we will actually be
increasing the cost to purchase service. In addition it will impact how much of a benefit
you receive when you elect an optional form of benefit at
retirement. But in this case, it will actually work to
the benefit of members. They will see a small reduction
in the future for these optional forms, in general.
CHIEF ACTUARY MILLIGAN: So we will be bringing this agenda item back for a final decision
in February, which will be occurring. We'll coordinate that with a
decision on the asset allocation. We will -- we are
currently having an external review of our work being
prepared by an external consulting firm. We expect to
have those results in time for the February Board meeting,
and we do anticipate having the external -- the external
actuary present to answer any questions that you might
have. Obviously, if there are changes that the external
actuary recommends, we will consider those, and may build
those into the final results that we present to you in
February. Not anticipating any changes, but on something
as significant as what we are facing, we thought
it was appropriate to just go ahead and get the external
review done.
The first year this will impact employer contribution rates, assuming that the Board
adopts our recommendation with respect to the timing,
would be the -17 fiscal year with the impact fully being
built into employer rates by the 2021 fiscal year.
CHIEF ACTUARY MILLIGAN: And with that, I will stop talking. I think I kept it less than
90 minutes, George.
CHAIRPERSON DIEHR: Okay. We have -- very good. We have one request from the audience to speak.
Mr. Is it Leyne Milstein from City of Sacramento. Ms.
Leyne? MS. MILSTEIN: Leyne.
CHAIRPERSON DIEHR: Leyne. MS. MILSTEIN: Good afternoon, members of the
Committee. Leyne Milstein with the City of Sacramento.
I'm currently the Finance Director for the City.
And let me start by saying there is no disagreement that we understand that changes
are necessary. Mortality is improving. That will
change the assumptions. That will change costs.
But what I am here to advocate for is that we
need to be reasonable in how we get there. Given what we
and other local government agencies and the State have
gone through over the past seven or eight years, we have
had eight years of deficit. We have had six years of
cutting. We have cut over 1,200 positions from our
general fund. And so when you start to look at the impacts
on cities, I think it's important to acknowledge
those cost impacts. And Mr. Milligan provided several
charts that alluded to the percentage impact. And what
I want to share with you is really that dollar impact.
And so hopefully you all have a chart that looks
like this that was handed out to you, I hope, because I'm going to be referencing those
numbers. So you can see for us that the impact on a large city -- and
I know some of those numbers that were just presented on
the impact and the interest costs were fairly small, in the
couple of million dollars.
But for us, if we look at that first line where
it says 20-5 proposal, that is what's being proposed right
now based on current smoothing and amortization assumptions. That will cost the City of Sacramento
$237 million. And I know it says 30-year costs.
That is so that we can compare the 20- to the 30-year.
That is the -year cost of that.
And you can see if we go to the 30-year and five-year smoothing, there's a difference
of $61 million. So that's not something that we're going to
say we're going to advocate to pay just so we can have
a longer roll-in period, but we need to look at how
to -- and minimize isn't the right word, but to understand
the impact that we're having when we make these
changes and the actual costs to your member agencies.
So I'd like to go to that fifth year column, and
that 12 million 205 number under the proposal. What that
equates to for us is about a reduction of 102 FTE. And
I've broken it down for you by our three organizations, our police officer -- our safety, police and
fire, as well as our miscellaneous, because those are the proportional
FTE that equate to that $12 million cost, where we get
that cost from. So it's important, I think, that we are here
and we're sharing and we're available to answer
any questions that you might have when it comes to the actual
dollar impact of these proposed changes. And just
let me say what we used when we prepared this analysis
was one percent in salary growth, because we're not
really giving out raises. That's the generic growth that
we see, as well as the average of rates that were provided
in the presentation Attachments 2, 4, and 5. And
I'm available if you have any questions.
CHAIRPERSON DIEHR: Okay. Thank you for your comments.
Mr. Jelincic. BOARD MEMBER JELINCIC: On -- actually, I had
a question for Alan, but while you're here,
what kind of projection have you made on your increase
in revenue over the next five years?
MS. MILSTEIN: You know, thank you for asking that question. We have a five-year forecast
that we prepare. And I know someone was asking for
some outyear forecasts for you all. And we actually did
a six-year forecast this year, because we have a half
cent sales tax that was just authorized by the voters that expires in
. So we know we have a $27 million, we call it,
fiscal cliff coming in 1920, as well. We are projecting -- unfortunately, we know
property taxes for the 14-15 fiscal year are going to be
set at 0.045, so we're not even getting our two percent
growth on property taxes. We're projecting some
optimistic sales tax growth. We're projecting slightly
smaller growth in our UUT, property tax, sales tax, and
UUT make up our three largest general fund revenues.
Slightly less, because we're not seeing the same
amount of hook-ups and we're seeing the effects of
conservation. People aren't paying as large bills, so we
don't get as large utility user tax. So we do have growth
in there. It averages out to be about three percent
growth on our general fund, but we have expenses that are
just keeping pace with that. We've built in the PERS rate changes that
we already know are coming that we received this
last fall, as well as we have general -- as I mentioned
about a one percent salary increase. That's sort of the
normal growth when we've got folks moving through our steps
on the salary slide. We're not projecting any increases,
at this point, for health contributions. We're sort
of strapped on the expenditure side, because we're really
not seeing that growth yet on the revenue side. It's been slow for
us to come to the Sacramento Valley that kind of growth
that we would like to be seeing that could keep pace with
these kinds of increases. CHAIRPERSON DIEHR: Mr. Costigan. I'm sorry,
were you -- BOARD MEMBER JELINCIC: Well, if he's got a
question for her. CHAIRPERSON DIEHR: Okay. Yeah, he does.
VICE CHAIRPERSON COSTIGAN: Go ahead. BOARD MEMBER JELINCIC: No, my question was
for Alan, so I can wait.
VICE CHAIRPERSON COSTIGAN: Well, first I want to
thank you for being here. With all the cities and
counties that we have, to only have the City of Sacramento
on such an important issue, so I appreciate you being
here. I guess the question I have is, while I
appreciate the data, and the cost, it's then -- you know,
everyone comes up here and no, no, no. What's a solution
then? MS. MILSTEIN: I don't think we're saying no,
no, no. I think we're saying let's look at something
that is not perhaps as drastic. I know the change
to the BB is a new change. I know the change to the 20-year
is going from 0 to 100 in, what, three months. And so maybe
consideration of alternatives that you all already
starting to ask about. VICE CHAIRPERSON COSTIGAN: But you're on the
front end of it every day, so what would be an alternative
that you would -- I mean, the fact that you're here again,
appreciate you being here, because often we don't -- and
that's one of my complaints to CSAC and League is we don't
see enough of you all up here to talk. Then what is an
alternative that you would offer? MS. MILSTEIN: I would look at either the
proposal with the seven-year and the 20 BB or as -- or the
the five and the 15. I'm just not convinced -- and I
am not an actuary. I'm going to state that right up front
and have that on the record -- that 20 is the right
number. And I think that we saw from the conversation here there isn't such a significant difference
between 15 and 20, that if we look at the experience,
because this is a new set of assumptions that there couldn't
be a change in between, but it creates a reasonable factor
for those of us who are experiencing the costs to begin
to take those costs on, then perhaps an adjustment
can be made when we have an opportunity to look at how
that's really rolling in on the improvements.
VICE CHAIRPERSON COSTIGAN: Thank you. CHAIRPERSON DIEHR: Let me -- Mr. Schwartz.
ACTING COMMITTEE MEMBER SCHWARTZ: Thank you George, and thank you very much for coming.
We appreciate your input. I just have a couple of questions
on your FTE reduction predictions here. Are those all
filled positions that would be reduced or could that
-- some of that be absorbed by eliminating vacant positions?
MS. MILSTEIN: So right now we're in the process of ramping up, because we had that half cent
sales tax that was just approved by our voters. So my
-- there are always vacancies. You can't but help that.
And we survived these last years of reductions mostly
with eliminating vacant positions. So I would believe
well into the fifth year that we're talking about
filled positions, and more than likely actual layoffs.
ACTING COMMITTEE MEMBER SCHWARTZ: And do you have an analysis of in the first year or second
year how -- what percentage of that 102 would have
to be eliminated?
MS. MILSTEIN: So, for example, if you look at
the first year cost, the 3.3 million is about 25 percent
of the fifth year cost, so you could take about 25 percent
of that number. ACTING COMMITTEE MEMBER SCHWARTZ: In the first
year?
MS. MILSTEIN: Yeah. ACTING COMMITTEE MEMBER SCHWARTZ: All right.
Thanks much. CHAIRPERSON DIEHR: Is there another speaker
on this? I had the impression that somebody else
wanted -- was planning to speak on this?
Yes, please. Did you -- maybe you should turn in
a -- go ahead, J.J. Just a minute, let me light you up here. There
you go. BOARD MEMBER JELINCIC: Before you leave, I
appreciate the dollar numbers, but you talked about the
salary -- or your projection is for three percent annual
increase in the general -- MS. MILSTEIN: For revenue growth, correct.
BOARD MEMBER JELINCIC: Yeah, for revenue growth. And what is general fund -- I mean, what is
the size of your general fund, so I could figure out what
three percent of it is.
MS. MILSTEIN: Sure. Our general fund is about $370 million. So it's substantial. However,
there are a substantial number of things that are chipping
away at that on an annual basis. When we do our forecasts,
we look at everything that we know is growing
and why it's growing. So our expenditures continue to just
keep pace with that revenue growth. And until such time as we see
some indication that we're going to have a turn around
that's greater than we're seeing right now, we're not
willing to go out on the limb for revenues that don't yet
exist. BOARD MEMBER JELINCIC: Okay. And I appreciate
that. It's just that you point out the importance of
looking at the dollar amount, and then gave us percent on
the other one. So I appreciate that. Thank you.
CHAIRPERSON DIEHR: Thank you very much. MS. MILSTEIN: Thank you.
CHAIRPERSON DIEHR: Will the speaker please --
you can stay -- give us your name and your affiliation and
go ahead, and you'll have three minutes. MR. SHERWOOD: Okay. Thank you, Dr. Diehr.
My name is Phillip Sherwood. I'm the executive
director of the California State Retirees who advocate
for nearly ,000 retired California State employees.
I'm here speaking on behalf of President Tim Behrens who could not be here today. Ordinarily
when increases in employer and employee pension
contributions are discussed, we would be the first to question
the need for such increases. But the currently reality
shows it is prudent to adjust contributions in light of
the updated actuarial assumptions. Members are living
longer. Hence, the long-term stability of the fund outweighs knee-jerk
objections in our estimation. We know it's very unpopular to suggest increases
in contributions. CalPERS staff should be applauded for
stepping forward on this issue. They have recognized the
need for intervention to assure retirement security.
Finally, I would like to share with you a comment
from Jon Hamm of the California Association of Highway
Patrolmen. In the most recent edition of the Public
Retirement Journal - I imagine you also read this - he
sagely points out, and this is a quote, "It is
disingenuous that opponents of traditional pensions argue
that CalPERS is not being honest with the numbers by
assuming too high of a rate of return. Yet, when CalPERS
proposes doing the right thing with their actuarial work,
our opponents are going to use it as evidence that
pensions are unsustainable". Mr. Hamm aptly states this conundrum.
Contribution increases are unpalatable, but pension fund
instability is unthinkable. CHAIRPERSON DIEHR: Thank you very much.
Mr. Jelincic. BOARD MEMBER JELINCIC: Yeah. Alan, you had
said that the purchase -- the service purchases
would become more expensive. And I understand that. But the other
part of it, you said the options became cheaper. And I
did not understand that. CHIEF ACTUARY MILLIGAN: So most of the optional
forms that you can take involve providing some sort of
benefit after your death to your beneficiaries or your
spouse. In effect, it's a form of insurance. And as life
expectancies go up, the cost of insurance goes down. And
so the amount that we have to reduce the member's pension
by in order to pay -- to equalize the cost is less,
because the cost of insurance is less. BOARD MEMBER JELINCIC: Okay. So because I'm
going to live longer, the -- CHIEF ACTUARY MILLIGAN: The cost of providing
something after your death is more highly discounted.
BOARD MEMBER JELINCIC: Although, my survivor will probably live longer too, so it's -- you're
starting later, but you're going to pay it later.
CHIEF ACTUARY MILLIGAN: Right. What you're saying is absolutely true. The change in the
mortality affects both the numerator and the denominator,
so it is actually a fairly small effect. The change
on the service purchases is a much more significant impact.
BOARD MEMBER JELINCIC: Especially if you're playing both parts. CHAIRPERSON DIEHR: Mr.
Lind. BOARD MEMBER JELINCIC: Thank you.
BOARD MEMBER LIND: Thank you. Alan, once we make this decision, amongst all the different
options -year, 20-year, what have you, and start that
ball rolling, how much flexibility do we have to
change that? Let's say something happens. All right. There's
tax money from heaven, or there's an outbreak
of the Bubonic Plague or something that changes the dynamic
significantly. (Laughter.)
BOARD MEMBER LIND: Sorry to be that negative. Maybe I should have thought of something on
the other side.
(Laughter.) BOARD MEMBER LIND: Anyway. A cure of diabetes.
There you go. It got better. Could we change course
easily or how does that all work? CHIEF ACTUARY MILLIGAN: So we have -- we are
scheduled, under current Board policy, to do a review
every four years. So even if nothing really special
happens, we would come back and revisit this after four
years. So it's not a -- you know, you do have an
opportunity to revisit it. If something very significant happened in
between the four-year reviews, we would -- if it was significant
enough, we would certainly want to come back and take a
look at the assumptions and decide whether or not we
needed to make an interim change. My guess is that's unlikely. Most of the
significant changes actually come through as experience,
and we don't need to bother changing the assumptions. If
the Bubonic Plague kills a fairly significant portion of
the population, but the rest -- the ones that survive are
just as -- you know are going to survive for a while.
We'll get a very good experience gain, but we don't
necessarily change future assumptions. BOARD MEMBER LIND: Okay.
CHAIRPERSON DIEHR: All right. I think we are ready to move to the next agenda item, 8 -- excuse
me, 7b impact on pension risk pools as a result of
pension reform.
CHIEF ACTUARY MILLIGAN: Thank you. This agenda item is about some, we think, unintended consequences
arising out of sort of the combination of the
implementation of the Public Employees' Pension Reform
Act, PEPRA, and the way we have chosen to fund our risk
pools, our small public agency plans. This only affects benefits from a public
agency -- for -- this only affects the funding of the small public agency plans. It does
not affect State plans. It does not affect the schools pool,
nor does it affect the larger stand-alone public agency
plans. The issue is caused by having all new employees
go into the new benefit formulas. Because we pool by
benefit formula currently, this means that all of the old
pools are effectively closed. So it's no longer reasonable to expect that the payroll of the
closed pools will continue to increase the way they would,
if they were open and had a stable ongoing population.
The implication of this, under our current Board
policies, is that we might have -- is that we would have
to change from amortizing the unfunded liability as a
level percentage of a growing payroll to just a flat level
dollar amount. What this means is that the payment on the
unfunded liability, if we don't make any changes for all
of the pool plans, will increase, except for the very
small number that have a surplus. So this would, in effect, front-load some
of the contributions that would otherwise be made,
but this doesn't make sense to us. And employers -- the
employers are not closed. It's just the plan -- the
benefit formula that they had before. So the fact that the
employers themselves are not closed does give us a suggestion
as to how to resolve this issue. What we believe
we will be recommending to you in the spring is that we should close -- we should
combine all of the existing pools into two pools,
so bring all of the miscellaneous -- pooled miscellaneous
plans into a single miscellaneous pool, bring all of the
pooled safety plans into a single safety pool.
In order to do this, we will have to allocate out
the unfunded liability that currently exists in the
existing pools to the individual employers, so that we can
then combine the pools, because they have different levels
of unfunded liability. What's actually fairly interesting about this
particular issue is that employers have been asking for
just that. This came out at the employer forum last -- in
October. I was somewhat surprised, because I thought that
this was something that they would be opposed to, and
here, they were asking for it. So it shows you you've got
to keep paying attention, because things keep changing.
If we do combine all of the miscellaneous and
safety plans into two pools, the pools will now be opened.
Ongoing members will be flowing into them, because the new
PEPRA formulas would be in the same pools as the non-PEPRA
formulas. So this is -- that is what we think we will be
coming back to you as a recommendation in the spring.
We do feel that -- we feel that we need to address this this year, because both accounting
and actuarial standards. Under both accounting
and actuarial standards, you should not amortize an unfunded
liability as a level percentage of a growing payroll
if the payroll is not expected to grow. And so we do have
a technical problem. We think that we will have a technical
solution. If we do make the changes that we are
recommending, there would be no overall increase in
employer contributions. Essentially, we will be
collecting what we think we really should be collecting.
There will be some shuffling of the cost contributions between employers. So some employers will
actually end up paying less than they would have if we had
-- than they -- than we would have, if we had not had PEPRA.
Some other employers will be paying -- you know,
some will pay less, some will pay more. Overall, the net
impact is kind of zero. We think that the majority of employers, about
half the employers will see a rate change of less than one
percent, either positive or negative. So between a drop
of one percent and an increase of one percent, somewhere
in that range. That's half the plans. About 75 percent
of the plans will have -- see a difference of between
minus two percent and plus two percent on their rate.
So we're talking about not insignificant changes, but also changes that are reasonable -- that
we think is reasonable and overall not an increase in
contributions. This will require changes to Board policies.
So when we bring this back, we will be bringing
back changes to Board policies, because the structure of
poolings is really established in Board policy.
Finally, I would like to point out that these changes do not mean that pooling will be less
effective at spreading the impact of unexpected demographic
changes for small employers. We put pooling in place in
order to protect employers from the impacts of an isolated
demographic event causing a significant change to their
funding. I had a situation years ago where a disability
in a couple of retirements caused an employer's
rate to jump by 17 percent of pay in a single year. I hope
to never have to talk to an employer about that level
of change in a single year in the future.
Pooling is what has kept us from seeing those sorts of things, and this will preserve the
benefit of pooling, while making it operate really more
efficiently and more equitably.
With that, I think I will stop talking and take
any questions you may have. CHAIRPERSON DIEHR: Ms. Mathur. COMMITTEE MEMBER
MATHUR: Thank you, Mr. Chair. I want to make sure I understand how this
is going to work, because it's fairly complex, or maybe
I'm the only one who's not entirely following it.
So in allocating the unfunded liability, that's from the current pools that they're in, correct?
CHIEF ACTUARY MILLIGAN: (Nods head.) COMMITTEE MEMBER MATHUR: And then once they're
in the new big pool, it will be pooled -- a pooled
liability or there will still be side funds reflecting --
CHIEF ACTUARY MILLIGAN: Yeah. So what would happen is right now we would take all of each
of the pools, allocate the existing unfunded liability
out into their side funds. That way we could then -- when
we allocate the assets out, we'll end up -- every
employer will have an appropriate share of the assets
of the pool. They will take those assets into the new pool.
When we combined them in the new pool, we were
not planning on setting up a new pooled unfunded liability. Pools work better when the pool's
unfunded liability is very small. So we're going to
leave the unfunded liability in the side fund. That's
the aspect that employers are actually asking for. They
want the ability to take control and pay down their
unfunded liability. Certainly, cities and counties
are under a lot of financial strain, but some special districts
would really like the ability to take control of their
unfunded liability, pay it down, and not -- you know,
and be shown -- you know, and be very responsible
about the funding of their plan. And this will permit
it. COMMITTEE MEMBER MATHUR: So then there will
be no unfunded liability in the new pool starting
out, but at some point there might be or it might fluctuate.
And that will be in a pooled context as opposed to
individual employers.
CHIEF ACTUARY MILLIGAN: One change that we are
thinking about making is actually doing the allocation of
the unfunded liability due to any gains and losses,
assumption changes, whatever on an annual basis, so that
the pool actually never does develop an unfunded liability.
This will mean that employer side funds are somewhat variable, but it will mean that they
continue to have the ability to pay the side fund off,
not just now but basically on into the future.
COMMITTEE MEMBER MATHUR: Okay. But that -- just to be clear, that unfunded liability --
CHIEF ACTUARY MILLIGAN: It's a tweak. COMMITTEE MEMBER MATHUR: -- will be at the
pooled level, not at an individual employer's --
individual employers won't have individual unfunded
liability based on their own demographics. It will be
based on pooled experience. CHIEF ACTUARY MILLIGAN: Yes. The pooled -- if
an individual employer actually has some experienced losses due to industrial disability, but overall
the pool has a gain on industrial disability, then
every employer would get a share of that gain, including
the one that had more increases in their unfunded -- you know,
more industrial disabilities than expected, because
the pool has a gain.
So, yes, they get a share of the pool's experience not their own experience. And that
is the essential element of pooling that we want
to preserve. COMMITTEE MEMBER MATHUR: Okay. Thank you.
CHIEF ACTUARY MILLIGAN: Because otherwise, we
will have volatile rates again. COMMITTEE MEMBER MATHUR: Yeah. That makes
a lot of sense. Thank you.
CHAIRPERSON DIEHR: Thank you. Mr. Jones.
COMMITTEE MEMBER JONES: Yeah. Thank you. Thank you, Mr. Chair. Yeah, Alan, on the -- how
does that work with the schools? You're just talking about
cities and counties, and leaving schools as a whole separate pool?
CHIEF ACTUARY MILLIGAN: Right. This is not touching the schools pool at all. This is
only the public agency pools. So it has no impact on schools,
unless they have contracted separately for their police,
school police. If they have contracted separately
for the school police, they are a public agency and in a
public agency pool. And this would affect them, but it would
affect them the same way as every other. But for
the big schools pool, no impact whatsoever.
COMMITTEE MEMBER JONES: Okay. Thanks. CHAIRPERSON DIEHR: Mr. Jelincic.
BOARD MEMBER JELINCIC: Alan, have you looked at -- recognizing that the legislature said
this formula is closed, and in some ways it's really a
closed pool, and allocating that to the employers, costing
that separately and then charging the employers just the normal
cost on new people coming in? I think the end results
would be the same. But have you -- and looking at the
puzzle, I have not made myself clear. Let me try again.
If we said this was a closed pool, then we would
fund the unfunded liability over the expected working life
of the people currently in the pool, correct? CHIEF ACTUARY MILLIGAN: We would change them
from a -- to the extent that -- when an agency currently becomes inactive with no active
members, we move them from the active pool into an inactive pool, and
we start charging them a contribution as a dollar amount.
But that actually involves this -- they have to take
-- they get a share of the pool's assets, which is reduced
by the fact that the pool unfunded liability. So this
type of thing does happen currently when an employer ceases
to have active members.
This is a little bit different, in that they still have active members. They're just in
a different formula, and that actually is causing us this
issue. BOARD MEMBER JELINCIC: Well, but they would
have active members in the current formula, because
they've got active members when the legislature said,
"Hey, nobody else gets -- nobody else gets into this formula".
Have you looked at treating those bodies and those obligations as a separate unit? And
since it's not going to be an expanding pool yet, I think
it becomes a dollar amount rather than a percent of payroll.
And so treat those people separately, and also look
at the new people that are coming in. And since the new
people coming in have no unfunded liability, it would
be essentially normal cost. So you really are
calculating two different rates for the employer when
you cover the people in the old formula, people in the new
formula. CHIEF ACTUARY MILLIGAN: Yeah. We did actually
look at that. That's alternative one in the agenda item.
The downside of that is that it does cause a significant
increase in employer required contributions for basically
for all employers. And we felt that that was unnecessary
and kind of a technical aberration to the funding that we
didn't feel it was appropriate to put on employers. However, that is, if we don't do anything,
then that's pretty much what would happen.
BOARD MEMBER JELINCIC: Okay. Thank you. CHAIRPERSON DIEHR: All right. Seeing no further
requests to speak. We have one person on public comment.
Mr. Neal Johnson. So this item then is concluded and we're moving
to public comment. Thank you very much. We'll hear more
from you in the future I assume. (Laughter.)
(Laughter.) CHAIRPERSON DIEHR: Well, at least some things
are certain, right. (Laughter.)
MR. JOHNSON: Good afternoon. Neal Johnson, SEIU local 1000. This goes back to actually
your earlier agenda item on your list of prospective contracts
RFPs, et cetera. Now, there's some like Bloomberg and
FTSE, et cetera, you know, clearly makes sense. You're
buying a specific product, but unique to that service.
But then there's -- and we've talked about this
in several previous Committee and Board meetings. You
know, when I look at, for example, line item five, which
is investment consulting services spring-fed pool number
, in the list -- or description of services, I see things
like monitoring reporting. The investment consulting
services consultant RFP manager and program monitoring.
Without knowing specifically, you know, it's a
little bit hard, but we see that through a number of
these. And it appears we're paying somebody to manage or
to follow-up on the manager we're hiring to do the actual
work, and also paying them to report to us. Sort of a
classic thing that should really be brought inside.
Your consultant from PCA, about 24 hours ago, made the observation that when you have -- if
you have been paying -- paying people for this and
you now stop paying, you're probably not going to get as
good of service. But overall, at some point, if you
bring that inside, you're going to develop that expertise
and actually save money. Then the other is we
have a series of them that are exempt from competitive bid. Do we really
need to award contracts on a non-bid basis? I really
question that.
Anyway, thank you very much. CHAIRPERSON DIEHR: Thank you, Mr. Johnson.
And that concludes this meeting.