FCERA June 2008 Interest Crediting 4049213 FCERA Board Interest Crediting and Excess Earnings Policy...

FCERA June 2008 Interest Crediting

4049213

FCERA BoardInterest Crediting and Excess Earnings Policy Discussion

Wednesday, June 18, 2008

Paul Angelo, FSA

Andy Yeung, ASA

The Segal Company

San Francisco


Outline

Reserves, Interest Crediting and Excess Earnings Mechanics FCERA Interest Crediting Policy Prior FCERA Excess Earnings Distributions Open Questions

Level of Contingency Reserve Tracking and possibly restoring prior interest crediting shortfalls

(Contra Account) Priority of Undistributed Earnings distributions


Typical 1937 Act Reserve StructureMarket Value of Assets

Market Stabilization Reserve

Actuarial Value of AssetsLitigation Contingency ReserveBoard Benefit DesignationsUndistributed (Excess) Earnings (Non-Valuation Reserves)Additional Contingency ReserveMinimum Contingency Reserve

Valuation AssetsEmployer Advance ReserveMember Contribution ReserveRetiree Reserve (Valuation Reserves)


Basic Interest Crediting Process

Determine “Available Earnings” for the period All current period earnings Min. (1%) + Add’l (>1%) Contingency Reserve (CR) Some or all of Undistributed (Excess) Earnings Reserve (UER)

Determine earnings needed for interest credits If Available Earnings is enough, do the credits

Then restore Contingency Reserve Balance to UER Excess Earnings Policy determines use of UER


Mechanics: Undistributed Earnings Reserve

Two-Step process for spending Excess Earnings: First, “siphon” Excess Earnings into a

“non-valuation reserve” Excluded from Valuation Assets Prevents decrease in UAAL contribution rate

Later, “spend” Excess Earnings No sudden impact on contribution rate A form of forced budgeting!


Investment Income

Valuation Assets

Benefits

Expenses

County Contributions

Member Contributions

Undistributed Excess EarningsAd-Hoc

Benefits

Drawing Not to Scale!

Contingency Reserve

Plumbing for Excess Earnings


FCERA Interest Crediting Policy

Last reviewed: October 2005 Available Earnings: Return on Actuarial Value

plus CR and UER

Credit Member Reserve at rate of retiree COLA limited to 3%, one-half credited on 6/30 and 12/31

Credit total Valuation reserves (including Member Reserve) at valuation rate

Credit Non-Valuation Reserves at valuation rate Supplemental COLA and Retiree Health Insurance


FCERA Interest Crediting Policy

If Available Earnings is insufficient: CR may become negative, but CR + UER + Non-Valuation Reserves > 1% of Market Value of Assets Interpretation of statutory 1% CR requirement Negative CR used to track interest credit shortfalls, but only up to Non

Valuation Reserves less 1% MVA

If Available Earnings is sufficient: Restore CR to 3% level Any remaining available earnings go to UER


Prior FCERA Excess Earnings Distributions

Combination of Settlement Agreement and Board discretion Settlement Agreement

Section 6 – enhanced retirement benefits for active members retiring on or after January 1, 2001

Section 8 – enhanced retirement benefits for retired members retired before January 1, 2001

Section 9 – All retirees, $3 per month per year of service, future increase tied to UER.

Last valuation when Undistributed Earnings available: June 30, 2002



June 30, 2002 Application of Undistributed Earnings: Priority #1 - Current year employer and member contribution relief (NC and current

UAAL cost) for: Section 8Section 6Section 9

Priority #2 - Reduce unfunded liabilities (“amortized” employer contribution relief) for:Section 8Section 9Section 6



June 30, 2002 Application of Undistributed Earnings: Priority #3 - Create new retiree health benefits under

Section 9 of Settlement Agreement Priority #4 - Other uses at Board’s discretion

Supplemental COLA and Retiree Health Insurance


Employer Contribution Relief

Priority #1 - Allow “dollar-for-dollar” contribution credit for settlement benefits Full or partial contribution offset

Priority #2 - Increase in Valuation Assets for settlement benefits Reduces Unfunded Actuarial Accrued Liability Reduces cost on an amortized basis


Member Contribution Relief

Priority #1 - Allow “dollar-for-dollar” contribution credit Full or partial member COLA contribution offset


Allocated in June 30, 2002 Valuation

Undistributed Earnings allocated in June 30, 2002 valuation Priority 1 – Current year contributions:

Section 8: $1.3 millionSection 6: $19.7 millionSection 9: $1.2 million

Priority 2 – Reduce unfunded liabilities:Section 8: $19.9 millionSection 9: $11.6 millionSection 6: $17.2 million


Open Questions

Level of Contingency Reserve Tracking and possibly restoring prior interest

crediting shortfalls (Contra Account) If so, what level of priority?

Priority of Undistributed Earnings distributions Settlement vs. other uses Priorities among Settlement uses


Level of Contingency Reserve

Provide further cushion against future earnings shortfalls A form of “smoothing ”short term earnings fluctuations

Current FCERA policy is 3% of Market Value 1% statutory plus 2% additional Additional is consistent with equity investing Various practices among 1937 Act Systems

Earnings are not “excess” until CR is restored


Tracking/restoring prior interest crediting shortfalls

Use “Contra Account” instead of “negative” Contingency Reserve to track interest credit shortfalls

Policy issue: Do we restore past shortfalls with later excess earnings before any other priorities?

If “yes”, then track shortfall in Contra Account In future years, restore prior shortfalls by reducing Contra Account

Effect: Measures “excess” earnings on a cumulative basis Are earnings “excess” if prior shortfalls not restored? Legal requirement or preferred practice? Most 1937 Act systems either do not track or do not require priority restoration.


Contra Account Concept

Difference comes when good year follows bad Consider this policy thought experiment

forget about Contingency Reserve for now Scenario X: earn zero, then 16% Scenario Y: earn 8%, then 8% Scenario Z: earn 16%, then zero

Should UER be any different in these scenarios?


Undistributed Earnings Distribution Priorities

Not in any presumed order: Restoring prior interest shortfalls (Contra Account)

Unless required before earnings are “excess” Allocation to settlement benefit

Priority among settlement items Allocation to UAAL for regular benefit Supplemental COLA, Retiree Health Insurance Others


Q U E S T I O N S

FCERA June 2008 Interest Crediting 4049213 FCERA Board Interest Crediting and Excess Earnings Policy...

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