Actuarial Fiscal Notes: A Tool For Avoiding Pension Problems

Office of the State Actuary“Supporting financial security for generations.”

Aaron Gutierrez, MPA, JD

Senior Policy Analyst

Presentation to:

NCSL RELACS Conference 2017

Actuarial Fiscal Notes: A Tool For Avoiding Pension Problems

September 25, 2017

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No, I’m Not An Actuary

Very common question at conferences I’ve attended

“What is an actuary doing at a conference for lawyers?”

I’m speaking to you today in my role as

Non-partisan legislative staff

Staff coordinator for a legislative committee

Researcher/policy analyst

Bill drafter

During legislative session, my role in bill analysis centers on helping

produce actuarial fiscal notes

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Actuarial Fiscal Notes Are A Third Stage In Bill Analysis

First two stages are likely similar in all states

Bills that are introduced receive

Bill analysis prepared by non-partisan legislative staff

Fiscal notes showing the administrative costs for the near biennia

Actuarial fiscal notes provide long-term pension-specific analysis

Required by statute for all pension bills

Tool that helps avoid pension problems in the future

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Today’s Presentation

Background

Contractual rights

Pension funding 101

How most states engage pension actuaries

How Washington State engages pension actuaries

Actuarial Fiscal Notes

Purpose

Process

Examples

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In Washington, Pension Benefits Are Considered Contractual Rights

Once enacted, a benefit or benefit improvement is difficult or

impossible to repeal

Costs can take decades to materialize

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Background: Pension Funding 101

Begin State

Employment Death

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Retirement

Date

Begin State

Employment Death

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Retirement

Date

Money Goes In

(Contributions)

Money Comes Out

(Benefits)

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Retirement

Date

Benefits

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Most States/Municipalities Engage An Actuary Once A Year

Typically hire a private sector actuarial firm once every year or so to

perform a valuation of pension system

A valuation provides full disclosure of the financial status of a

pension plan

Shows changes to assets, liabilities, and “funded status”

Most critical part of the valuation: shows changes to contribution rates

I.e., the left side of the diagram

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An Actuarial Valuation Is Only A Snapshot

Not in real time

Lags behind due to data collection

Does not show how particular bill could impact the system until after

that bill is already law

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Office of the State Actuary Is An In-House Actuarial Firm Within The Legislature

Non-partisan legislative agency

State employees; not a private firm on contract

Year-round content experts

Small office - 17 employees

Actuaries, analysts, and admin

We prepare not only annual valuations, but also actuarial fiscal

notes, and consult with legislators on pension proposals

Many more duties listed in appendix; keeping it simple for this

presentation

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AFNs Show The Actuarial Cost To The System If The Bill Is Enacted

Not administrative costs – those are in normal fiscal note

AFN shows projected impacts over the next 25 years

Bill Impacts

Contribution Rates

Liabilities (Long-Term Cost

of Benefits)

Budgets

Assets in the Trust Fund

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Constructing An Actuarial Fiscal Note

Analyze

Perform basic bill analysis

Consider

Special data needed?

Will this impact retirement behavior?

Calculate

Revise mathematical models

Run the calculations

Write

What do the numbers really mean?

Would it benefit from sensitivity analysis?

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Sensitivity Analysis – What If The Assumptions Are Wrong?

Future projections are best estimates

Can never be 100% accurate

What happens if actual experience varies from our assumptions?

For example

What if we earn 1% less on investments than expected?

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Risk Analysis: Another Layer of Analysis

Risk model utilizing stochastic modeling

Essentially creates 2,000 actuarial valuations, and looks at the range

of outcomes using random assumptions

Resource intensive; not used on all AFNs

Link to the Risk Assessment in the appendix

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Actuarial Fiscal Notes* Are Divided Into Five Sections

*Samples provided in your handouts.

Section 1

• One-page overview/summary

• Provides a high-level overview in lay terms

• Provides deeper analysis designed for a more advance audienceSection

2

• Certification provided by a credentialed actuary

• Technical appendix

• At a level designed for other actuaries to reproduce the work

Section

3

Section

4

• Glossary of Terms

• Included with every AFNSection 5

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Recap: Actuarial Fiscal Notes

Are a tool that

Informs legislative deliberations and negotiations

Helps manage long-term costs

Has helped WA avoid pension problems

Show the long-term impact of pension legislation before it is enacted

New benefits may be difficult or impossible to repeal

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Questions?

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Appendix: Handout 1 - House Bill 1560

Subject

Changing the default retirement plan for new employees

Bill Title

Addressing Membership in State Retirement Plans Prior to Attaining the

Normal Retirement Age in Another Plan

Notes

Shows sensitivity analysis

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Appendix: Handout 2 - Senate Bill 5556

Subject

New COLA

Bill Title

Providing an Enhanced Retirement Benefit for Public Employees’ and

Teachers’ Retirement System Plans 1

Notes

Uses Risk Measures

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Appendix: Helpful Links

Actuarial Resources

About actuaries

BeAnActuary.com

Office of the State Actuary

2016 Actuarial Valuation Report

2016 Risk Assessment Study

Interactive Web Reports

2017 Report on Financial Condition/Economic Experience Study

Select Committee on Pension Policy

http://leg.wa.gov/osa/education/Pages/AboutActuaries.aspx

http://www.beanactuary.com/

http://leg.wa.gov/osa/Pages/default.aspx

http://leg.wa.gov/osa/presentations/Documents/Valuations/16AVR/2016ActuarialValuationReport_FINAL.pdf

http://leg.wa.gov/osa/presentations/Documents/RiskAssessment/2016RAAS.pdf

http://leg.wa.gov/osa/pensionfunding/Pages/InteractiveReports.aspx

http://leg.wa.gov/osa/presentations/Documents/2017-RFC-EES.pdf

http://leg.wa.gov/SCPP/Pages/default.aspx

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Appendix: Other OSA Duties

In addition to serving the Legislature, OSA provides services to many

other agencies, such as

Guaranteed Education Tuition Committee (529 plan)

Washington State Investment Board

Governor’s Office

State Treasurer

For more information

About us

What we do and who we serve

http://leg.wa.gov/osa/aboutus/Pages/WhoWeAre.aspx

http://leg.wa.gov/osa/aboutus/Pages/WhatWeDo.aspx

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Appendix: Washington State

Part-time legislature

Cycle

105 days (odd years)

60 days (even years)

Nine active pension plans, plus a few legacy systems

Roughly $105 billion in liabilities*

Meaning today’s cost of all future benefits to be paid

Roughly $75 billion in current assets* set aside to pay those benefits

Funded status averaged across all plans is 84%*

*Liabilities measured using present value of fully projected benefits; assets measured using market

value of assets. See the 2016 Actuarial Valuation for more information, including assumptions and

methods.

Actuarial Fiscal Notes: A Tool For Avoiding Pension Problems

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