Copyright © 2017 GRS – All rights reserved.

Texas Municipal Retirement System

Actuarial Valuation Report

as of December 31, 2017

May 24-25, 2018

Brad Stewart

Mark Randall

Joe Newton

Today’s Agenda

• Summary of System-wide Results & Experience – Benefit changes

– Asset Performance

• Liabilities with Projections

• Funded Status with Projections – Amortization policy example

• Contribution Requirements with Projections

• Sustainability Checklist

• Summary

2

Summary of System-wide Results

$ amounts in millions Dec 31, 2015

Valuation Dec 31, 2016

Valuation Dec 31, 2017

Valuation

Actuarial Accrued Liability (AAL) $28,379 $29,963 $31,812

Actuarial Value of Assets 24,348 25,844 27,814

Unfunded Actuarial Accrued Liability (UAAL)

$4,031 $4,119 $3,998

Funded Ratio 85.8% 86.3% 87.4%

Average Funding Period (Years) 20.6 19.7 18.8

Full Contribution Rates:

Straight Average 9.02% 9.07% 8.89%

Payroll Weighted Average 13.24% 13.27% 13.09%

Normal Cost % 8.41% 8.41% 8.43%

Prior Service % 4.83% 4.86% 4.66%

3

Aggregate BAF Valuation ($ in millions) Reconciliation of Unfunded Actuarial Accrued Liability (“UAAL”)

Change in UAAL

Impact on Funded Ratio

Impact on Full Rate

UAAL @ BOY $4,119 86.3% 13.27%

Interest (6.75%) 280

Amortization Payments (305) 0.7% -0.06%

Asset Performance (93) 0.3% -0.12%

Benefit Changes 32 -0.1% 0.06%

Assumption/Method Changes - - -

Contributions different than Actuarially Determined (22) 0.1% -0.01%

Liability (Gains)/Losses (13) 0.1% -0.05%

UAAL @ EOY $3,998 87.4% 13.09%

4

Non-Investment Experience

• Actual CPI of 2.11% was less than the 2.50% assumption, so liability for repeating COLAs was less than expected – System-wide, created a Liability Gain of about $20 million – 2016 CPI of 2.07% resulted in a system-wide gain of about $20 million – 2015 CPI of 0.73% resulted in a system-wide gain of about $110 million

• Valuation uses 3-year smoothing on salaries – The 2016-2017 salary experience in aggregate was higher than

expected (6.4% vs 5.0%), but this line item will vary based on who received what increase and if the City had USC

– System-wide, created a liability loss of about $70 million

• For active employees: – Average age is unchanged from last year at 43.2 years – Average service is 10.6 years and is unchanged from last year

5

Summary of Benefit Changes

• Total Changes

– 54 cities made changes that impacted the total retirement rate since the last valuation

Increases in Benefits 49 (45,45)

Decreases in Benefits 5 (2,3)

• Number of cities changing matching ratio, deposit rate, and/or eligibilities 30 (27,28)

6

Numbers in parentheses are the values for 2016 and 2015, respectively

Summary of Benefit Changes (cont)

• USC Changes ’17 ‘16 ‘15

– Ad Hoc USC 11 12 13

– New Repeating USC 1 2 0

– Rescind/Decrease Repeating USC 4 1 2

• COLA Changes

– Ad Hoc COLA 13 15 11

– Adopted/Increased Repeating COLA 2 1 1

– Rescind/Decrease Repeating COLA 3 1 2

7

Yields based on Market Value of Assets

8

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Market -1.3% 10.0% 9.0% 2.3% 9.9% 9.7% 5.7% 0.1% 6.7% 13.8%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

6.75% assumption*

~ 6.5% average compound return (on market value) over last 10 years

Market and Actuarial Values of Assets

9

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Market $14.7 $14.6 $16.3 $18.0 $18.6 $20.5 $22.5 $23.7 $23.7 $25.2 $28.6

Actuarial $14.2 $15.1 $16.3 $17.0 $18.3 $19.8 $21.3 $22.9 $24.3 $25.8 $27.8

$0

$5

$10

$15

$20

$25

$30

$ i

n B

illi

on

s

• AVA is currently 97.2% of MVA, was 102.4% last year

AVA was Book Value prior to 2009

Actuarial Value of Assets (Smoothed) vs.

Actuarial Accrued Liability (AAL)

10

$14.2 $15.1 $16.3 $17.0 $18.3

$19.8 $21.3

$22.9 $24.3

$25.8 $27.8

$19.3 $20.4 $21.5 $20.5 $21.5

$22.7

$25.3 $26.6

$28.4 $30.0 $31.8

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Assets Liability

Liabilities for previous years reflect the previous structure before 2010, PUC cost method before 2013,

and 7.00% discount rate before 2015

Relative Size of UAAL to AAL

11

$5.1 $5.2 $5.2 $3.5 $3.2 $2.9

$4.0 $3.7 $4.1 $4.1 $4.0

$19.3 $20.4 $21.5 $20.5 $21.5

$22.7

$25.3 $26.6

$28.4 $30.0 $31.8

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

UAAL Liability

Relative Size of UAAL to Payroll

12

120% 114% 108%

73% 66%

58%

78% 70% 71% 70% 65%

0%

50%

100%

150%

200%

250%

300%

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

UAAL Payroll UAAL/Payroll

Funded Ratio Percentages

13

73.7%

74.4% 75.8%

82.9% 85.1%

87.2% 84.1% 85.8% 85.8% 86.3% 87.4%

60.0%

70.0%

80.0%

90.0%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Funded Ratio Percentages: Compared to Peers

14

73.7% 74.4% 75.8%

82.9%

85.1% 87.2%

84.1% 85.8% 85.8% 86.3%

87.4% 86.3%

85.2%

80.0%

77.1% 76.0%

73.5% 71.8%

73.7% 73.7% 72.1%

60.0%

70.0%

80.0%

90.0%

2007 2008 2009 2010* 2011 2012 2013* 2014 2015* 2016 2017

Funded Ratio Average Funded Ratio for NASRA Fund Survey

• Restructure in 2010, Change to EAN in 2013, 6.75% Discount Rate in 2015

• 2017 Fund Survey Not Yet Available

Funded Ratio Percentages: Normalized to Current Assumptions and Benefits

15

73.7% 74.4% 75.8%

82.9%

85.1%

87.2%

84.1% 85.8% 85.8%

86.3% 87.4%

76.2% 75.9% 76.4%

76.5% 78.4%

80.3%

82.9% 84.7%

85.6% 86.2% 87.4%

60.0%

70.0%

80.0%

90.0%

2007 2008 2009 2010* 2011 2012 2013* 2014 2015* 2016 2017

Funded Ratio Funded Ratio based on Current Benefits and Assumptions/Methods

* Restructure in 2010, Change to EAN in 2013, 6.75% Discount Rate in 2015

Projected Funded Ratio (Longer Term)

16

60.0%

70.0%

80.0%

90.0%

100.0%

2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045

2017 Valuation 2016 Valuation

Assumes all assumptions are met in future years, including earning 6.75% on the current smoothed value of assets

Projected Funded Ratio: System-wide

17

•Assumes ADEC met each year

•Assumes continuation of current amortization policy & payroll grows at 3.00% per year

•Investment returns are only variable in the stochastic process

Median Expectation 25th-75th percentile of expectation

0%

20%

40%

60%

80%

100%

120%

140%

160%

2017 2022 2027 2032 2037

25% probability of being less than 80% funded in 2027 (4.2% per year)

Funding policy will hold funded ratio in this region in lower performance scenarios (~5% per year)

Median expectation of 94.6% funded ratio in 2027

25% probability of being 100% funded in 2023 (9.4% per year)

Returns and probabilities based on results of 2015 experience and asset allocation studies

Distribution of Funded Ratio Percentages

18

95th percentile

75th percentile

50th percentile

25th percentile

5th percentile

The percentile represents the proportion of employers below the point. For example, the 75th percentile is 99%, meaning that 75% of cities have a funded ratio less than 99%. Conversely, 25% of the cities have a funded ratio of 99% or greater.

60.7% 63.3% 66.2% 66% 68.2% 68.4% 69.5% 70.5%

310 267

190

245

185 179 167 138

0

100

200

300

400

500

600

700

800

900

1000

0%

20%

40%

60%

80%

100%

120%

140%

2010 2011 2012 2013 2014 2015 2016 2017

Number of Units with less than 80% Funded Ratio

5th percentile Funded Ratio: 10% improvement over last 10 years

25% of units are fully funded!

Amortization Layer Exhibit (Sample City)

19

Source Original Balance

Remaining Balance

as of December 31,

2017

Payment

FY2018

Payment

FY2019

Payment

FY2020 Years Remaining

2013 Valuation (Fresh Start) 25,099,074$ 24,887,934$ 1,831,551$ 1,886,498$ 1,943,092$ 19

2014 Experience (1,320,133) (1,307,100) (96,192) (99,078) (102,050) 19

2015 Experience 475,691 485,214 27,834 28,669 29,529 28

2015 Actuarial Changes (138,287) (136,985) (10,081) (10,383) (10,695) 19

2016 Experience 1,484,334 1,490,344 93,877 96,693 99,594 24

2017 Experience (355,659) (355,659) (26,174) (26,959)$ (27,768)$ 19

Unfunded Actuarial Accrued Liability 25,063,748$ 1,820,815$ 1,875,440$ 1,931,703$

Projected Payroll 27,941,147$ 28,779,381$ 29,642,763$

Amortization Payment as a Percent of Payroll 6.52% 6.52% 6.52%

Total System vs Individual City

20

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

2017 2020 2023 2026 2029 2032 2035 2038 2041 2044

Projected Contribution Rate

System City

Projected from current smoothed assets

An individual City will likely have a substantial cliff when the original PUC base is fully amortized The System is made up of multiple units, with varying remaining amortization periods, thus the aggregate contribution rate should be more of a gradual decline

Distribution of Single Equivalent

Amortization Periods

21

Remaining average period in years 0 would be overfunded

0

50

100

150

200

250

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Nu

mb

er o

f C

itie

s

Distribution of Single Equivalent

Amortization Periods

22

Remaining average period in years 0 would be overfunded

0

50

100

150

200

250

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Nu

mb

er o

f C

itie

s

2017 2016

Distribution of Single Equivalent

Amortization Periods: Weighted by UAAL

23

$ in millions Remaining average period in years 0 would be overfunded

$-

$100

$200

$300

$400

$500

$600

$700

$800

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Am

ou

nt

of

Cu

rren

t U

AA

L

Historical Dollar Weighted Contribution

Rates for TMRS

24

11.9% 12.2% 12.5% 13.5%

14.2% 14.5%

12.9% 12.9% 13.0% 12.8% 12.6% 13.0% 13.2% 13.1%

25.0 25.0 25.0

29.2 28.5 27.8 26.8 25.6 24.3 23.0 20.9 20.6 19.7 18.8

0

10

20

30

40

50

60

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Contribution Rate Single Equiv Period (Years)

Contributions represent aggregate phase in minimums

Distribution of Full Retirement Rate

25

95th percentile

75th percentile

50th percentile

25th percentile

5th percentile

The percentile represents the proportion of employers below the point. For example, the 75th percentile is 13.30%, meaning that 75% of cities have a rate less than 13.30%.

0%

5%

10%

15%

20%

25%

2010 2011 2012 2013 2014 2015 2016 2017

Distribution of Changes: By City

Total Changes in Full Retirement Rate

26

Rounded to nearest 0.25% change in rate

0%

5%

10%

15%

20%

25%

30%

35%

40%

178 Cities had decrease of 0.50% or more 41 Cities had increase of 0.50% or more

Distribution of Changes: Payroll Weighted

Total Changes in Full Retirement Rate

27

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Rounded to nearest 0.25% change in rate

Impact of Strong Performance on Projected

Contribution Rates

28

Example City

Projected from current market assets

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

From 2016 From 2017

Impact from Illustrated Adverse Experience

in 2018

29

Example City

A 3.6% return in 2018 would offset current deferred excess and hold rates mostly steady throughout the period A 0.8% return in 2018 would more than push the trajectory back towards last year’s projections

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

From 2016 From 2017 2017, 3.6% in 18 2017, 0.8% in 18

Impact from Longer Term Adverse Experience

30

Example City

18.08%16.67%

21.38%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

From 2017 2017, 6% per year therafter 2017, 5% per year therafter

Phase-In

• As of the prior valuation, 113 TMRS cities were eligible to pay a phase-in rate due to changes in 2013 and 2015

• The remaining base is phased in by 0.50% per year and further decreased by experience gains, if any. – 17 cities have a phase-in rate this year

Lower than last year’s expected 36 due to experience gains

– Expected Runoff: 9 cities with a phase-in in 2018 valuation (0% of overall payroll)

4 cities with a phase-in in 2019 valuation (0% of overall payroll)

2 cities with a phase-in in 2020 valuation (0% of overall payroll)

• We continue to recommend cities contribute their full rate

31

Sustainability Checklist

• The following is a list of metrics that can be used to assess the sustainability of a pension plan.

• This can be used to gain a larger picture of sources of risk on a pension plan

• Please note the aggregate results are much more meaningful than the impact of any one item.

• Also, it is unnecessary to achieve a 5 star result on each item to be considered sustainable. In fact, that type of result may suggest too much conservatism

32

Sustainability Checklist Answer Stars

Do you have a legally required contribution amount based on accepted actuarial practices? Yes *****

Does the contribution amount automatically adjust if certain minimums are not met? Yes *****

Has the sponsor demonstrated a 10-year history of meeting the required contribution? Yes **** (>90%, Phase In)

Is your funded ratio higher than it was 10 years ago? Yes *****

Based on current practices and assumptions, is your UAAL expected to be lower 10 years from now? Yes *****

What is the amortization period for the current UAAL based on the required contribution? 18.8 ***** (<20, positive amortization)

What is the amortization period for new losses? 25 ***** (<25)

What is the sum of your amortization period and asset smoothing period? 35 *** (<35)

What is the amortization period for benefit enhancements? 25/15 **1/2 (20 years or less for retirees (ad hoc)/25 years or less for active (repeating))

What is the likelihood of meeting or exceeding the assumed return assumption over the next 20 years based on actuarial analysis?

45-50% ** (Between Arithmetic and Geometric Mean)

Does the Board regularly review actuarial assumptions? Yes ***** (at least every 4 years)

What is the assumed rate of payroll growth for amortization purposes? 3.00% ***** (Equal to the wage inflation assumption with a stable active population and supported by historical 10-year average of past payroll growth, and adjustments if population declining)

What is the annual percent change in active population last 10 years? ~1.00% ***** (>0.5%)

Are any of the liabilities contingent on future experience? Yes/No *** (COLA is CPI based, benefits can be discretionally adjusted prospectively)

What is your current active to retiree ratio? 1.8 ***** (1.7 or higher)

What is your longer term active to retiree ratio? 1.1-1.4 **

What is your short – intermediate term negative cash flow as a % of assets? <1.0% ***** (<3.0%)

What is your longer term negative cash flow as a % of assets? ~3.0% ***** (<3.0%) 33

Sustainability Checklist

• TMRS grades out very well on the checklist – Required actuarial contributions – Closed amortization periods in the 18-25 year range – Reasonable payroll growth assumptions – Manageable short and long term cash flow needs – Benefit that automatically adjusts to changing mortality patterns

• Items to pay attention to

– Capital market expectations continue to contract, continues to become more difficult to generate safe/passive earnings

– Longer term liability (or asset) to payroll ratios will increase contribution rate volatility

– Amortization periods for benefit enhancements are slightly longer than optimal

34

In Summary

• Overall System-wide “health” continues to improve

– Overall funded levels continue to improve

– Contributions rates have remained relatively stable

• With no changes in assumptions, the expectation is for an increasing funded ratio over the next few valuations and continued stability in the contribution rates, System-wide

35