North Dakota Public Employees Retirement System

Actuarial Valuation as of July 1, 2013

Brad Ramirez, FSA, MAAA, EA, FCA Tammy Dixon, FSA, MAAA, EA

November 6, 2013

DRAFT

#5276809

Copyright© 2013 by The Segal Group, Inc. All rights reserved.

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Actuarial Methods

~ Asset valuation method (actuarial value of assets) • Smoothing of investment gains or losses

• PERS uses a five-year smoothing method - Investment returns above or below the expected return are recognized over five years

• No market value corridor is applied (i.e. , actuarial value must fall within 80°/o to 120°/o of market value)

~ Cost method • Allocation of liability between past service and future service

- PERS uses the entry age normal cost method (as do most retirement systems) - Retiree Health Insurance Credit Fund uses the projected unit credit cost method

~ Amortization method • 20-year "open" period to pay off unfunded actuarial accrued liability

• Based on level percentage of payroll

• Governmental Accounting Standards Board requires 30-year maximum period to determine the Annual Required Contribution

• An open amortization period will yield contributions that reduce the unfunded actuarial accrued liability, but will not pay it off

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Economic Assumptions

~ Interest Rate • 8°/o

~ Salary Increase Rates • Based on service

• Ranges from 8.25°/o for new members to 4.86°/o for members with 5 or more years of service (5.0°/o for all years for Judges)

~ Payroll Growth • 4.5°/o (4.0°/o for Judges)

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Summary of Valuation Highlights - PERS and HPRS

);o> Market value of assets returned 13.4o/o for year ending 6/30/13 (Segal estimated calculation) • Gradual recognition of deferred gains resulted in 3.9°/o return on actuarial assets

• Unrecognized investment gains represent about 14.0o/o of market assets

);o> Net impact on funded ratio was a decrease from 65.1 °/o (as of 7/1/2012) to 62.0°/o (as of 7/1/2013)

);o> Market value of combined assets for PERS and HPRS was $2.015 billion vs. $1.785 billion last year

);o> Combined actuarial value of assets for PERS and HPRS was $1.732 billion vs. $1.675 billion last year

);o> Total actuarial value of assets is 86.0°/o of market value of assets

);o> All investment losses from 2008 and 2009 plan years are now fully recognized. Remaining years' unrecognized appreciation or depreciation will be recognized in subsequent valuations

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Summary of Valuation Highlights

Changes in Statutory Contribution Rates

Member Employer

Main System Full-Time Employees 6.00% 6.12%

Effective January 2014 7.00 7.12

Main System Part-Time Employees 12.12 N/A Effective January 2014 14.12 N/A

Judges 7.00 16.52

Effective January 2014 8.00 17.52

Highway Patrol 12.30 18.70

Effective January 2014 13.30 19.70

National Guard 4.00 6.50

Effective January 2014 4.50 7.00

Law Enforcement (without Prior Service) 5.00 N/A

Effective January 2014 5.50 N/A

Member Rate for Employees Member Rate

of Political for Employees Subdivisions of the BCI

Law Enforcement (with Prior Service) 5.00 6.00

Effective January 2014 5.50 6.00

* Segal Consulting

Summary of Valuation Highlights

)> Recommended employer contribution as a percent of payroll

Statutory/ Approved

2013-2014 2012-2013 2013-2014 Main 12.14% 12.24% 6.12%-7.12%

Judges 16.66% 16.33% 16.52%-17.52%

National Guard 9.07% 7.40% 6.50%-7.00%

Law Enforcement (with Prior Service) 11.18% 10.69% 9.31%-9.81%*

Law Enforcement (without Prior Service) 8.11% 7.33% 7.43%-7.93%

Highway Patrol 25.11% 26.83% 18.70%-19.70%

Retiree Health 0.77% 0.90% 1.14%

Job Service 0.00% 0.00% 0.00%

*Rates shown are for employees of Political Subdivisions. The rate for employees of SCI is 10.31%.

)> Funded Ratio (AVA)

July 1, 2013 July 1, 2012

PERS 62.0% 65.1%

HPRS 68.2% 70.3%

Retiree Health 57.8% 51.9%

Job Service 114.9%* 104.3%

*Reflects a change in assumed investment return from 7.5% to 8.0%. * Segal Consulting

Membership - Main System

2013 2012

Active

• Number 21 ,201 20,738

• Payroll* $865.9 mil $781.6 mil

• Average Age 47.1 years 47.1 years

• Average Service 10.4 years 10.5 years

Retirees and Beneficiaries**

• Number 8,637 8,222

• Total Monthly Benefits $8.5 mil $ 7.9 mill

• Average Monthly Benefit $985 $965 ' ............. ------------ -----

* This increase includes a change in our data processing methodology.

**Does not include 13 suspended retirees as of 201 2 and 21 as of 201 3.

Change

+2.2°/o

+10.8%>

+0.0 years

-0.1 years

+5.0°/o

+7.6°/o

+2.1 °/o

* Segal Consulting

Membership - PERS

2013 2012 Change

Active

• Number 21 ,588 21 ,091 +2.4o/o

• Payroll* $888.5 mil $800.9 mil +10.9%

• Average Age 47.0 years 47.0 years +0.0 years

• Average Service 10.4 years 10.3 years +0.1 years

Retirees and Beneficiaries

• Number 8,730 8,303 +5.1 o/o

• Total Monthly Benefits $8.7 mil $8.1 mil +7.4°/o

• Average Monthly Benefit $999 $979 +2.1 o/o

* This increase includes a change in our data processing methodology.

* Segal Consulting

Active and Retired Membership - Main System

25,000

20,000 18,299 ; 2

1~686 2~372 2~359

2~738 2L 201

f • a • ~

17,887 17,745

• 17,522

~ ... ...

.... ....

15,000

10,000

I

5,000 ~ 1i1 '6 ... ~ ~~ 'sfit ·9 9 fl

5,063 5,278 5,540 5,824 6.627

6,990 7,480 7,853

' 3

0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

..... Active Members -tiiiilaRetired Members*

*Retired Members excludes beneficiaries.

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Active Payroll - Main System

$1,000

$900

$800

$700

$600 Ill r.: 0

$500 :E I $511.9 ~ $494.5

$400

$300

$200

$100

$0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

..... Covered Payroll for Upcoming Year

* Segal Consulting

Average Age and Service of Active Members­Main System

60

50 '46.4 46.6 46:8 --41-;0 4-].;{) 47.0 q /-.J. "I ~ 47.1 4J

40

30

20

10 - -- -

l 10.4 10.5 10.7 10.6 10.5 10.4 10.5 10.6 10.5 10.4

0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

..... Average Age ~Average Service

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Average Salary and Average Benefit- Main System

$45,000

$40,000

$35,000 $31,169

$30,000

$25,000

$20,000

$15,000

$10,000

I l $8.964 $5,000 -

$0

·.····.· III Inch ....

~ ifj ~ Iii :uSJ ff 'Gf .. . _ ·- $11976 $12,263 B * +.· $9,228 $9,552

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

..... Average Annua l Salary ~Average Annual Benefit

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Assets - PERS and HPRS

~ The market value of assets increased from $1.785 billion (as of June 30, 2012) to $2.015 billion (as of June 30, 2013) • Segal determined the investment return was 13.41 °/o, net of investment expenses

~ The actuarial value of assets - which smooths investment gains and losses over five years- increased from $1.675 billion (as of June 30, 2012) to $1.732 billion (as of June 30, 2013) • Investment return of 3.93°/o, net of investment expenses

• Actuarial value is 86.0°/o of market value

• There is a total of $283 million of deferred investment gains that will be recognized in future years

~ The average annual return on market assets over the past 10 years is 6.8°/o

~ The average annual return on actuarial assets over the past 10 years is 4. 7o/o

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Market Value of Assets {$ in billions)­PERS and HPRS - Historical Returns

Year Ending Market Actuarial June 30 Value Value

2004 16.65o/o 3.16o/o

2005 14.17 4.36

2006 12.04 7.79

2007 19.63 15.84

2008 (5.21) 8.51

2009 (24.05) 1.72

2010 13.25 1.48

2011 21.09 3.31

2012 (0.20) (0.15)

2013 13.41 3.93

* Segal Consulting

Market Value of Assets ($ in billions)­PERS and HPRS

Fiscal Year Ending June 30, 2013

Beginning of Year $1.785

Contributions:

• Employer 0.050

• Member 0.048

• Service Purchases 0.008

• Total 0.106

Benefits, Expenses and Refunds (0.115)

Investment Income (net) 0.239

End of Year $2.015

Rate of Return +13.41 °/o

-ft Segal Consulting

Actuarial Value of Assets {$ in billions) -PERS and HPRS

1. Market Value of Assets as of June 30, 2012

2. Contributions, Interest, Dividends, Benefits and Expenses

3. Preliminary Market Value as of June 30, 2013

4. Actual Market Value as of June 30, 2013

5. Excess/(Shortfall ) Return for Year Ended June 30, 2013

Excess/(Shortfall) Returns:

$1.785

0.029 $1 .814

2.015

$0.201

Year Initial Amount Deferral o/o I Unrecognized Amount I .... ,--

2013 $0.201 80°/o $0.160

2012 (0.040) 60°/o (0.024)

2011 0.289 40°/o 0.116

2010 0.153 20°/o 0.031

2009 (0.464) Oo/o 0.000

6. Total $0.283

7. Actuarial Value of Assets as of June 30, 2013: (4) - (6) $1.732

8. Actuarial Value of Assets as a 0/o of Market Value of Assets 86.0°/o ----------------------------------

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Market Value of Assets ($ in billions)- Main System

Fiscal Year Ending June 30, 2013

Beginning of Year

Contributions

Benefits, Refunds and Expenses

Investment Income (net)

End of Year

Rate of Return

$1 .683

0.100

(0.1 09)

0.225

$1.899

+13.40o/o

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Market and Actuarial Values of Assets - Main System

$2,000 I $1,838

,. $1,800

$1,600 I -. ... IlL - - .. ..._

$1,633

$1,400 -- - - - - $1,580

$1,200 Ill c: I $1,172 0 :: $1,000 ~ ~

$800

$600

$400

$200

$0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

..... Market Value of Assets ~Actuaria l Value of Assets

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Asset Returns - PERS and HPRS

25%

20%

15%

10%

5%

0%

-5%

-10%

-15%

-20%

-25%

-30% l 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

... Market Value of Assets -tiiiit-Actuarial Value of Assets ---Assumed Rate of Return

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Contributions vs Benefits and Refunds - PERS

$120

$100

$80

$60

$40

$20

so 2004 2005 2006 2007 2008 2009 2010

-.-contributions* ~Benefits & Refunds**

* Includes member and employer contributions, and service purchases

** Includes administrative expenses

$111.4

2011 2012 2013

* Segal Consulting

External Cash Flow as a % of Market Value -PERS

0.0%

-0.2%

-0.4%

-0.4%

-0.6%

-0.8%

-1.0%

-1.2%

-1.4%

-1.6% -1.5%

-1.8% L 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

..... External CF %

* Segal Consulting

Valuation Results ($ in millions)- Main System

July 1, 2013 July 1, 2012

Actuarial Accrued Liability:

• Active Members $1 ,552 $1,396

• Inactive Members 155 171

• Retirees and Beneficiaries 944 875

Total $2,651 $2,442

Actuarial Assets 11633 11580

Unfunded Accrued Liability $1 ,018 $862

Funded Ratio 61.6°/o 64.7°/o

* S egal Cons ulting

Actuarially Recommended Contribution -Main System

July 1, 2013 I July 1, 2012

Normal Cost Rate 10.31 %> 1 0.04°/o

Member Rate 6.50°/o 5.50o/o

Employer Normal Cost Rate 3.81 °/o 4.54°/o

Amortization of UAAL 8.33°/o 7.70o/o

Actuarially Recommended Contribution 12.14°/o 12.24°/o

Employer Rate 6.12-7.12°/o 5.12-6.12°/o

Contribution Sufficiency/(Deficiency) (4.52o/o) (5.62°/o)

If the actuarially recommended contribution is calculated using the market value of assets, the ultimate contribution sufficiency/( deficiency) is (2.37o/o ).

* Segal Consulting

Valuation Results ($ in millions)- PERS

July 1, 2013 July 1, 2012

Actuarial Accrued Liability:

• Active Members $1 ,591 $1,430

• Inactive Members 969 173

• Retirees and Beneficiaries 157 898

Total $2,717 $2,501

Actuarial Assets 11683 11627

Unfunded Accrued Liability $1,034 $874

Funded Ratio 62.0o/o 65.1 o/o

* Segal Consulting

Actuarial Value of Assets and Actuarial Accrued Liability- Main System

Ill c 0

$3,000

$2,500

$2,000

:: $1,500 ~

11).

$1,000

$500

$0 2004

$1,450

--,-- ·r--

2005 2006

$2,651

$2,157

UAAL $1,018 61.J" tctr.o5'1-- -

I

$1,633)

'r T ---,

2007 2008 2009 2010 2011 2012 2013

..... Actuarial Accrued Liability Actua rial Value of Assets

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Funded Ratios - Main System

140%

120%

100%

80%

60%

40%

20%

0%

2004 2005

117%

2006 2007 2008

...... AVA Ratio

2009

MVA Ratio

62%

2010 2011 2012 2013

* Segal Consulting

GASB 25 Annual Required Contribution (ARC) -Main System

14%

12%

12.14%

10%

8%

6% 6.30%

6.03% 6.08% 6.26%

4%

2%

0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

...-GASB 25 Annual Required Contribution (ARC)

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Projected Funded Ratios {AVA Basis)- Main System

110.00%

100.00%

90.00%

80.00%

70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00"'

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- 24%Return - 16%Return - s %Return - o%Return - ·8%Return - -l 6%Return 24% Return

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3 3 N N N

* Segal Consulting

Target Funded Ratios - Main System

Rate of Return Required for All Years Beginning on and after 2014/2015 To Achieve Target in 2033

Target Assumed 2013/2014 Return Funded

Ratio 24.0°/o 16.0°/o 8.0°/o 0.0°/o -8.0% -16.0°/o -24.0o/o

70°/o 6.8% 7.3% 7.7% 8.3% 8.8% 9.5% 10.2%

BOo/o 7.5% 7.9% 8.4% 9.0% 9.5% 10.2% 10.9%

90°/o 8.1% 8.6% 9.1% 9.6% 10.2% 10.8% 11.5%

100°/o 8.7% 9.1% 9.6% 10.1% 10.7% 11.4% 12.1%

* Segal Consulting

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Questions?

* Segal Consulting

5990 Greenwood Plaza Blvd, Ste 118 Greenwood Village, CO 80111 T 303.714.9952

Brad Ramirez, FSA, MAAA, EA, FCA bramirez@segalco.com

* Segal Consulting

330 North Brand Blvd, Ste 1100 Glendale, CA 91203 T 818.956.6767

Tammy Dixon, FSA, MAAA, EA tdixon@segalco.com

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