2/12/07 City of FairbanksPERS Presentation

Prepared By:Michael E. Lamb, CPA, CGFM

Chief Financial OfficerFairbanks North Star Borough

P.O. Box 71267Fairbanks, AK 99707-1267

(907) 459-1370

2

The Problem

The basic problem Is: The PERS system has become under-funded. Bottom-line, there is an unpaid bill.

The question is: Whose unpaid bill, whose liability, is it anyway? Who should pay, and why?

Our purpose today: Understand the bill, then reach consensus!

BUT: Before we agree on what we should do, we need to understand what we are actually doing, now!

3

The Employee Universe

Active Retired

@ 6/30/05Active Members: 33,730

Vested Terminations: 6,105Non-vested Terminations With Balances: 12,761

Total “Active Side”: 52,596

The actuary determines the cost of future benefits (the liability) for each employee in the PERS system. (Employee here means employees and elected officials.)

73,299 Active & Retired Members

28.2%71.8%$5.7B $7.1B

$12.8B

18,262 88.2% Tier I2,303 11.1% Tier II

138 0.7% Tier III20,703 100.0% Retirees & Beneficiaries

@ 6/30/05

4

Mile High View Of PERSMile High View Of PERS

All Retired EE Actuarial Liabilities Calculated

RRA Assets

Employer Accounts

RRA Assets Get

Increased To Equal

Liabilities

EE & ER Adjusted Asset Accounts

ER Accrued Liabilities

RRA Liability

RRA Assets

EE Liabilities Allocated To ERs Pro-Rata By Years

Total Of All ER Retired Liabilities = The RRA Liability

RRA Assets Are Allocated To Employers

Based Upon ER’s Pro-Rata

Liability %Active Employee Actuarial Liabilities Calculated

Active Employee Liabilities Allocated To Employers

Unfunded Obligation – Drives PSC Rate

Employee Accounts

Benefits

$5.7B

$7.1B

$7.1B

$1.5B

$4.2B

Retired Side (Liabilities Fully Funded)Active Side

5

De

fine

d B

en

efit

Re

tire

me

nt

Pla

n B

eco

me

s E

ffe

ctiv

e

6/3

0/6

9

19

77

12

/31

/71

19

74

1/1

/61

12

/31

/72

7/1

/99

7/1

/94

19

84

6/3

0/0

5

Re

tire

me

nt

Re

serv

e A

cco

un

t E

sta

blis

he

d/U

sed

Re

tire

me

nt

Re

serv

e A

cco

un

t C

rea

ted

/Au

tho

rize

d

“Sta

tuto

rily”

Sta

te A

bso

rbs

Th

e R

etir

em

en

t R

ese

rve

Acc

ou

nt

Lo

ss/S

ho

rta

ge

Significant PERS Timeline PointsSignificant PERS Timeline Points

Ind

ivid

ua

l Em

plo

yee

Acc

ou

nts

Ge

t C

red

ited

With

In

tere

st

Le

gis

latu

re A

uth

oriz

ed

A “

Sh

are

d

Co

nso

lida

ted

No

rma

l Co

st”

Ra

te

Le

gis

latu

re A

uth

oriz

ed

Allo

catio

n O

f In

vest

me

nt

Inco

me

To

RR

A

Sta

te S

top

pe

d E

R T

ran

sfe

rs T

o R

RA

At

EE

Re

tire

me

nt

Mo

st C

urr

en

t P

ER

S S

yste

m I

nfo

rma

tion

Ava

ilab

le

EE Accounts MaintainedER Accounts Maintained (Rate Swings A Problem!)ER Accounts Paid Pension & Refund CostsContribution Rate Based on ER’s Actual Experience

EE Contribution Account Transferred At Retirement (Within 1 Year)Related ER Contributions Transferred At RetirementTransferred Assets = RRA Liabilities

EE Contribution Acct Transferred At RetirementRelated ER Contrbs Not Transferred At RetirementTransferred Assets Now Don’t Equal Liabilities At Retirement

Sys

tem

Co

nve

rsio

n,

EE

Tra

nsf

ers

No

t R

ep

ort

ed

To

Act

ua

ry

No EE Accts To RRA At Retirmnt

6

PERS Assets/Redistributions

RRA $6.3B, 73.3%

EE Accts $1.4B, 16.3%

ER Accts $0.9B, 10.5%

Pre Moving The 6/30 $800M From ER To

RRA

$8.6B @ 6/30/05 Pre ER Transfer

To RRA

EE Accts $1.4B, 16.3%

ER Accts $0.1B, 1.2%

RRA $7.1B, 82.6%

$8.6B @ 6/30/05 Post ER

Transfer To RRA

$9.4B @ 6/30/06 Post ER Transfer

To RRA

?

RRA $?B, ?%?

$8.2B @ 6/30/04 Post ER Transfer

To RRA

$7.4B @ 6/30/03 Post ER Transfer

To RRA

RRA $5.8B, 71.0%

EE Accts $1.4B, 16.6%

ER Accts $1.0B, 12.4%

RRA $4.0B, 54.6%

EE Accts $1.3B, 17.6%

ER Accts $2.1B, 27.8%

$1.3

$2.1

$4.0

$1.0

$1.4

$5.8

$1.4

$0.9

$6.3 $7.1

$1.4$0.1

7

Cousin Bud Example:Cousin Bud Example:Assignment of Assignment of

Retirement LiabilityRetirement Liability

11

/1/7

4

6/3

0/0

4

11

/1/9

0

11

/1/8

0

11

/1/0

0

6 years on

School Board, $1k/yr

10 year UA

employee $70k/yr

10 year City

employee $30k/yr

4 year State

employee $110k/yr

$2

0k

/yr

co

mp

.

$4

0k

/yr

co

mp

.

$5

0k

/yr

co

mp

.

$9

0k

/yr

co

mp

.

$1

00

k/y

r c

om

p.

$1

20

k/y

r c

om

p.

$1

k/y

r c

om

p.

$1

k/y

r c

om

p.

(a) (b) (c) d (e =c x d) (f) (g = c x e) (h = e + g) (i=b/30) (i x $900k)-(g)

ER # YrsAve

Comp/Yr

Consol ER

RateER Contrb

By EREE

Rate EE Contr

ER + EE Total Plan Contr $'s

ER Total

Liab %

ER Liab. After EE $ With $900k

Benefit156 6 1,000$ 11.1% 666$ 6.75% 405$ 1,071$ 20% $179,595172 10 30,000$ 11.1% 33,300$ 6.75% 20,250$ 53,550$ 33% $279,750113 10 70,000$ 11.1% 77,700$ 6.75% 47,250$ 124,950$ 33% $252,750101 4 110,000$ 11.1% 48,840$ 6.75% 29,700$ 78,540$ 13% $90,300

30 160,506$ 97,605$ 258,111$ 802,395$

8

Actual RRA assets “allocated” from other employers to employer 232

Employer 232’s RRA liability determination =‘s 232’s required assets

9

City of Kenai ExampleCalculation of Retiree Reserve Balances by employer

1. Actuary calculates liability for every member in the system.2. Determines retired liability at end of year 7,130,177,977 A

3. Calculate the transfer needed from active bucketBeginning Retiree Reserve assets 6,261,218,368 Net change in the reserve in total (expense+ income) (67,162,412)

Assets in the reserve at YE prior to transfer 6,194,055,956

Difference is what needs to be transferred from Active Bucket 936,122,021

4. Allocate assets in Retiree ReserveThis is done by calculating the weighted average of each employer of the total liabilityEx: Kenai has YE liability of 29,202,591 Bweighted average % of total YE liability (A) 0.40956328% B/AShare of Assets 25,368,579 Amount to be transferred - diff in assets and liability 3,834,012 this has no relationship to the actual cash Also equals weighted avg times amount to be transferred 3,834,012 flow of Kenai retirees

City of Kenai FY 05 FY 04So Kenai's active account is reduced by $3.8 million resulting in assets available 1,356,347 3,898,539 Active Account liability 18,276,644 15,463,800 Unfunded Liability 16,920,297 11,565,261 Amortized over 25 years produces originally published rate 36.67% 29.81%Retiree Reserve Liability 29,202,591 28,152,100 Note the jump in rate is impacted by the decline in assets in the active account. Was it fair for Kenai to have to transfer $3.8 million? Who knows?The retiree liability only increased by less than $1 million.Is Kenai paying for liabilities incurred by other entities? Who knows?

10

The State Had, And Has, The Primary Role In The Current Circumstance

The State needs to accept a larger portion of the unfunded obligation.

("The State" refers to the Legislature, the PERS Administrator, the PERS Board, the ASPIB and the ARMB collectively.)

11

Take Away & Solution Frame WorkMain points a Shared Solution needs to consider: 1. Individual member employer liabilities have been affected by other employer’s actions.2. Since the creation of the retirement reserve account, in 1971, a member’s assets have been blended and

reallocated yearly to other member employers.3. As a result of 1 and 2 above, the State cannot say what any member’s actual individual asset or liability

balance is, and therefore, can’t say what their unfunded liability is either, which drives the PSC rate.4. The normal rate paid since 1977, by State action, has been a “shared consolidated” rate.5. PERS is a consolidated system due to its formulas and the blending of assets and liabilities.6. Historical recreation of records going back to 1971 isn’t possible.7. Advantaged, and/or, disadvantaged employers isn’t determinable.8. Fiduciary duty and legal issues will rise without an equitable and timely resolution, a key component

being a fair allocation of the unfunded obligation to the State.

Some components of a final Shared Solution:1. Amending State statutes to reflect an actual consolidated PERS Plan.2. Having one uniform consolidated normal cost rate that all member employers pay.3. Having 85% of the unfunded obligation go on the State’s books and be accounted for and paid by the

State as a separate stand alone obligation.4. The other 15% of the unfunded obligation belongs to all PERS member employers.5. To pay the 15% unfunded obligation, there should be a separate uniform consolidated past service cost

rate that all member employers pay, that is a separate rate from the normal cost rate.6. The TRS obligation should likewise be broken into an 85%/15% split with 85% being accounted for as a

separate obligation on the State’s books. As with PERS, there should be two separate rates, a uniform normal cost rate and a uniform past service cost rate that amortizes the 15% unfunded obligation.

7. Methods to reduce the future carrying costs of the unfunded obligations should be sought and used.

12

WHY 85/15?

A. We can’t recreate historical records, or outcomes.

B. Accordingly: A clean legal solution wherein the State would send a properly and legally allocated bill to each participant isn’t achievable, nor probably even desirable given how our system works.

C. Therefore, if the debt cannot be legally allocated and billed, we need to devise a method of allocating the unfunded obligation in a manner that meets the standards of logic and rational thought, and, which somehow captures the practical realities of what participant employers reasonably could have expected. 

13

WHY 85/15?FNSB Example:

1. For 22 years (FY ’83 to FY ’05) FNSB had a 4.17% total average employer PERS rate.

2. An 85/15 rate for FY ’08 would be: 14.48 + 3.79 = 18.27%. This is a 438% increase of the 4.17%!

3. The FY ’08 ARMB approved rate for FNSB is 29.98%. This is a 719% increase of the 4.17%!

4. With a FY ’08 system wide average rate of 39.76%, FNSB would face a 953% increase!

5. With a FY ’09 projected PERS rate of 46.64%, FNSB would face a 1,118% increase!

Thus:

Even an 85/15 Shared Solution probably falls outside of what a participant employer (the FNSB here), could reasonably have expected as an adjustment to a two decade old average rate for system assumption and method changes.

More than a 438% increase clearly exceeds what a participant using logic and rational thought could have expected, and clearly does not meet any standard of predictability, stability, or affordability.

Therefore, as in this real example, an 85/15 allocation of the unfunded obligation presents a more than reasonable and fair settlement of the unfunded obligation wherein all employers are paying more, (i.e., a Shared Solution) but where they aren’t driven into a position of fiscal incapacity. Please understand, that right now, all employers are paying more than they reasonably expected.

14

WHY 85/15?

If/Then:One could argue that if a fiduciary cannot send an accurate bill (when as

a fiduciary they had a duty to properly account for activities such that an accurate bill could be sent) and they didn’t and can’t, then no bill can be sent.

Accordingly:With 100% authority comes an equivalent level of responsibility. The

responsibility and duty the State had as a fiduciary for the System creates the reasonable conclusion that an 85/15 split is accommodative to the circumstances.

15

Price Of Uncertainty And Failure To Reach Agreement

16

Respectfully, I Ask The City To Formally Support:

A Shared Solution:

1. Amending State statutes to reflect an actual consolidated PERS Plan.

2. Having one uniform consolidated normal cost rate that all member employers pay.

3. Having 85% of the unfunded obligation go on the State’s books and be accounted for and paid by the State as a separate stand alone obligation.

4. The other 15% of the unfunded obligation belongs to all PERS member employers.

5. To pay the 15% unfunded obligation, there should be a separate uniform consolidated past service cost rate that all member employers pay, that is a separate rate from the normal cost rate.

6. The TRS obligation should likewise be broken into an 85%/15% split with 85% being accounted for as a separate obligation on the State’s books. As with PERS, there should be two separate rates, a uniform normal cost rate and a uniform past service cost rate that amortizes the 15% unfunded obligation.

7. Methods to reduce the future carrying costs of the unfunded obligations should be sought and used.