DATE: March 28, 2023
TO: Board of Supervisors
SUBMITTED BY: Donald C. Kendig, CPA, Retirement Administrator
SUBJECT: June 30, 2022 Annual Actuarial Report and FY 2023-24 Retirement Contribution Rates
RECOMMENDED ACTION(S):
TITLE
1. Receive and file the Fresno County Employees’ Retirement Association Actuarial Valuation and Review report (the Actuarial Valuation and Review report) as of June 30, 2022 by The Segal Group, Inc. (Segal), relating to the Fresno County Employees’ Retirement Association (FCERA) and;
2. Approve and adopt the Board of Retirement’s recommended rate of interest, and employer and FCERA member contribution rates, for FY 2023-24 as provided for in the FCERA member contribution rates in Section 4, Exhibit 3 entitled “Member Contribution Rates”, the employer contribution rates in Section 2, Subsection F entitled “Recommended Contribution” and the Administrative Expense Load percentage of Payroll rates in Section 4, Exhibit 1 of the Actuarial Valuation and Review report as of June 30, 2022, in accordance with Government Code sections 31453 and 31454.
REPORT
Generally, under Government Code section 31453, upon the basis of the investigation, valuation, and recommendation of FCERA’s actuary, the Board of Retirement, at least 45 days prior to the beginning of a fiscal year, (here, FY 2023-24) recommends to your Board the changes in the rates of interest, in the rates of contributions of FCERA members, and in County and district appropriations (i.e., employer contributions) as are necessary. Accordingly, Government Code section 31454 generally requires your Board, no later than 90 days following the commencement of the fiscal year, (here, FY 2023-24) to adjust the rates of interest, the rates of contributions of FCERA members, and County and district appropriations (i.e., employer contributions) in accordance with the recommendations of the Board of Retirement.
The Fresno County Employees’ Retirement Association’s (FCERA) delivery, on behalf of the Board of Retirement, of the accompanying Actuarial Valuation and Review report by FCERA’s actuary, Segal, to your Board along with this item enables your Board to timely adopt and implement these necessary employer and FCERA member contribution rates for fiscal year 2023-24 that would satisfy your Board’s statutory requirement for that fiscal year.
The recommended employer contribution rates and FCERA member contribution rates, as well as Valuation Highlights and Summary of Key Valuation Results, and the bar graphs of the projection of the unfunded actuarial accrued lability balances and payments, and the recommended rate of interest set forth in the Actuarial Valuation and Review report, are attached to this item.
ALTERNATIVE ACTION(S):
Your Board may defer implementation of the recommended rates up to 90 days after the end of current FY 2022-23; however, that would delay the timing of the assumed funding of FCERA, as recommended by Segal, and result in an adjustment by way of a subsequent Actuarial Valuation and Review report, and related likely increased employer and FCERA member contribution rates, as such deferred contributions would be provided as a percentage of annual assumed payroll in a shorter time period than presently assumed by Segal over the entire fiscal year (i.e., the recommended rates are assumed to be effective and implemented starting July 1, 2023). The Board of Supervisors also has the option of timely pre-funding contributions based on the new rates, which would lower future rates on a relative basis.
FISCAL IMPACT:
The following are based on a review of the Actuarial Valuation and Review report, and, as applicable, are rounded to the nearest thousand, shown as changes from FY 2022-23 to FY 2023-24, or, where stated as a percentage of payroll, are based on a projected covered payroll of approximately $491.5 million as of FYE June 30, 2022:
Pgs. 11 or 32 - The average member contribution rate will decrease 0.04%, from 9.55% to 9.51% of payroll, primarily attributed to a refinement to the application of the Entry Age Actuarial Cost Method, partially offset by the changes in the demographic assumptions adopted by the Board of Retirement.
Pgs. 11 or 31 - The average employer contribution rate will decrease across all retirement tiers. The overall composite employer rate will decrease 4.86%, from 51.35% to 46.49% of payroll. This decrease is primarily due to the June 30, 2007 UAAL amortization layers becoming fully amortized, the overall investment return (after “smoothing”) greater than the 6.5% return assumption, changes in demographic assumptions adopted by the Board of Retirement, partially offset by the greater than expected COLA increases for retiree’s and beneficiaries.
Pgs. 11 or 34 - The decrease in the total employer contribution rate in FY 2023-24 is estimated at $23.9 million, from an estimated $252.4 million to $228.5 million assuming no change in plan sponsors’ projected payroll.
Pg. 81 - The administrative expense load will remain the same as last fiscal year at 1.30% of payroll.
Pg. 24 - FCERA’s investment portfolio lost 9.93% in Market Value during the fiscal year 2021-22. The return was 16.43% lower than the assumed rate of return of 6.5% on the Market Value of Assets. Investment gains and losses are smoothed over a rolling five-year period.
Pg. 21 - The total unrecognized net investment loss as of June 30, 2022 is about $510.7 million as compared to an unrecognized net investment gain of $572.5 million in the previous valuation. This deferred investment loss of about $510.7 million will be recognized in the determination of the Actuarial Value of Assets for funding purposes in the next few years as shown in Section 2, Subsection B of the Actuarial Valuation and Review report. Deferred losses as of June 30, 2022 recognized in each of the next five years (i.e. “smoothing”) is expected as follows:
(a) Amount recognized on June 30, 2023 $(110,502,976)
(b) Amount recognized on June 30, 2024 (56,800,020)
(c) Amount recognized on June 30, 2025 (58,063,876)
(d) Amount recognized on June 30, 2026 (184,977,440)
(e) Amount recognized on June 30, 2027 (100,392,412)
Total $(510,736,724)
The net deferred loss of $510.7 million represents about 9.1% of the Market Value of Assets. Unless offset by future investment gains or other favorable experience, the recognition of the $510.7 million market loss is expected to have a negative impact on FCERA’s future funded ratio and contribution rate requirements.
The unrecognized investment losses for FY 2021-22, alone (which is part of the net deferred investment loss of about $510.7 million), were approximately $49.7 million for the six-months ended December 31, 2021 and approximately $903.5 million for the six-month period ended June 30, 2022 (see pg. 21).
Segal’s Actuarial Valuation and Review report sets the rates recommended for FY 2023-24, by member types (general and safety) and retirement tier as provided in the member contribution rates in Section 4, Exhibit 3, entitled “Member Contribution Rates” (pages 109-125) the employer contribution rates in Section 2, Subsection F entitled “Recommended Contribution” (pages 30-37) and the Administrative Expense load as a percentage of payroll in Section 4, Exhibit 1 (page 81).
DISCUSSION:
In accordance with Government Code Section 31453 and 31454, the Board of Retirement for FCERA reviews and approves the retirement contribution rates as set forth in the Fresno County Employees’ Retirement Association Actuarial Valuation and Review report (the Actuarial Valuation and Review report), and then, at least 45 days prior to the beginning of the next fiscal year, (here, FY 2023-24), recommends those rates to the Fresno County Board of Supervisors for its adoption and implementation. The Board of Supervisors then implements those adopted rates no later than 90 days after the beginning of the succeeding fiscal year (here, Fy 2023-24). However, as stated above, the recommended rates in the Actuarial Valuation and Review report are assumed to be effective and implemented starting July 1, 2023. In summary, the Board of Retirement reviews, approves, and recommends the retirement rates for the adoption and implementation by the Board of Supervisors.
Pursuant to the Actuarial Valuation and Review report, the Board of Retirement adopted the employer and member contribution rates for all retirement tiers as presented by Segal in the Actuarial Valuation and Review report at the Board of Retirement’s regular meeting held on December 14, 2022.
The Actuarial Valuation and Review report reflects changes in the demographic assumptions. These changes are documented in Segal’s Analysis of Demographic Actuarial Experience and are outlined in Section 4, Exhibit 1 of the Actuarial Valuation and Review report. These assumption changes resulted in a decrease in the Actuarial Accrued Liability of $35.9 million (or a 0.5% decrease see page 29), a decrease in the average employer contribution rate of 0.53% of payroll (see page 31), and an increase in the average member contribution rate of 0.04% of payroll (see page 28).
In addition to the fiscal impact information, above, key findings of the Actuarial Valuation and Review report are as follows (dollar amounts are stated in approximate thousands).
Pgs. 1, 24 or 81 - The Board of Retirement’s recommended rates of interest (i.e., FCERA’s assumed net investment rate of return) is 6.50% for FY 2021-22.
Pgs. 13 or 16 - FCERA’s membership totals 20,489 and is comprised of: 8,175 retired members and beneficiaries receiving benefits; 4,848 terminated members entitled to, but not yet receiving benefits (also known as inactive vested and nonvested members (“Inactive Members”)), and 7,466 active members.
Pg. 16 - For each active member, there are 1.74 inactive members (i.e., inactive vested and nonvested members, and retired members and beneficiaries).
Pg. 68 - The Contra Tracking Account increased $52.6 million, from $1,420.9 million at June 30, 2021, to $1,473.5 million at June 30, 2022.
Pg. 12 - On a Valuation Value of Assets basis (smoothed), the Unfunded Actuarial Accrued Liability (UAAL) decreased $154.6 million, from $939.3 million to $784.7 million. On a Market Value of Assets basis, the UAAL increased $928.8 million from $366.7 million to $1,295.5 million.
Pg. 12 - The funded ratio, on a Valuation Value of Asset basis, increased from 85.88% to 88.66%, while on a Market Value of Asset basis, the funded ratio decreased from 94.49% to 81.28%.
Pg. 81 - The Administrative Expense load remained the same at 1.30% of payroll. The allocation of the expense between Employer Basic Normal Cost, Employer Basic UAAL, and the Member Basic rates are adjusted annually, and are shown below with historical rates.
Expense Load Category 6/30/22 6/30/21 6/30/20
Employer Basic Normal Cost Rate 0.22% 0.20% 0.17%
Employer UAAL Rate 0.86% 0.90% 0.86%
Member Basic Rate 0.22% 0.20% 0.17%
Total 1.30% 1.30% 1.20%
The decrease in the employer contribution rate is primarily due to the June 30, 2007 UAAL amortization layers becoming fully amortized, the overall investment return (after “smoothing”) greater than the 6.50% return assumption, changes in demographic assumptions adopted by the Board of Retirement, partially offset by the greater than expected COLA increases for retirees and beneficiaries. A complete reconciliation of FCERA’s average employer rate is provided in Section 2, Subsection F.
Continued in this year’s Actuarial Valuation and Review report is a Risk Assessment beginning on page 42 in Section 2, Subsection J, required by Actuarial Standards of Practice No. 51 (“ASOP 51”). The Risk Assessment is a concise discussion of some of the primary risks that may affect the plan’s future financial condition. As a mature pension plan, determined by the ratio of members in pay status to active participants, the cash needed to fulfill benefit obligations will increase over time. Therefore, the plan’s asset allocation needs to evolve to meet emerging pension liabilities.
A further discussion of plan maturity measures and how they relate to changes in assets and liabilities is included in Section 2, Subsection I, Volatility Ratios on page 41. The Asset Volatility Ratio (AVR) equals the Market Value of Assets divided by total payroll and is currently about 11.4, which means that a 1% asset gain or loss (relative to the assumed investment return of 6.5%) translates to about 11.4% of one year’s payroll. Since these gains and losses are amortized over 15 years, there would be an approximate 1.0% of payroll decrease/(increase) in the required contribution for each 1% asset gain/(loss). The Liability Volatility Ratio (LVR) equals the Actuarial Accrued Liability divided by payroll, and provides an indication of the longer-term potential for contribution volatility for any given level of investment volatility. The current total plan LVR is about 14.1, but is 13.3 for General compared to 18.0 for Safety. Please refer to page 41 of the Actuarial Valuation and Review report for a chart of the AVR and LVR from fiscal years ended 2013 through 2022.
REFERENCE MATERIAL:
BAI #12, March 22, 2022 - Actuarial Valuation and Review Report
BAI #24, February 9, 2021 - Actuarial Valuation and Review Report
ATTACHMENTS INCLUDED AND/OR ON FILE:
Excerpts of June 30, 2022 Actuarial Valuation and Review report:
Section 1, Actuarial Valuation Summary, Valuation Highlights (pages 7-10), and Summary of
Key Valuation Results (for June 30, 2022 and June 30, 2021) (pages 11-13)
Section 3, Exhibit I - Projection of UAAL Balances and Payments (pages 75-76)
Section 2, Subsection F - entitled “Recommended Contribution” - Recommended Employer Contribution Rate (pages 33-34)
Section 4, Exhibit 3 - entitled “Member Contribution Rates” -Recommended Member Contribution Rates (pages 109-125)
On file with Clerk - June 30, 2022 Actuarial Valuation and Review Report
CAO ANALYST:
Paige Benavides