Public Plan Solvency & Funding

GFOA MeetingOctober 6, 2011

Gary S. Curran, FCA, MAAA, ASA, EA

CONSULTING ACTUARY

 

 G. S. Curran & Company, LTD.10555 N. Glenstone PlaceBaton Rouge, LA 70810 (225) 769-4825

Typically Solvency Measured By

Assets ÷ Liabilities

But…

Which Assets and Which Liabilities?

Various Asset Measurements Available

CostMarketActuarial

Cost Value of Assets

Generally, not currently used

Used under prior accounting rules

Market Value of Assets

Fair Value of Investments

Special Cases: Hedge Funds Private Equity Real Estate Timber

Actuarial Value of Assets

Market Value

Smoothed Value Objective Methodologies Periods Corridors

Assets: GASB 25 / 27

Currently Actuarial Value of Assets

Proposed Market Value

Various Liability Measurements Available

Funding Method Liability Based on whatever actuarial funding

method is used

Rules Based Liability Based on a prescribed method. Measured

at the funding interest rate or a stipulated interest rate.

Liabilities: GASB 25 / 27

Currently Funding Liability

Proposed Stipulated Method Liability

Liability Interest Rate

GASB 25 / 27

Currently Funding Interest Rate

Proposed Blended rate based on current fixed

income rate and funding interest rate

Funding BasicsPresent Value of Future Benefits

Funding Methods

Unit Credit

Projected Unit Credit

Entry Age Normal

Frozen Entry / Attained Age Normal

Aggregate

Normal CostUnit Credit

Present value of benefits earned during the year

Projected Unit Credit Present value of benefits (with projection for

salary increase) earned during the year

Entry Age Normal Designed as level percent of pay over

working career

Unfunded Accrued Liability(Unit Credit / Projected Unit Credit /

Entry Age Normal)

UAL = Accumulated Normal Costs

+ Accumulated Losses (Gains)

+ Accumulated Changes in Assumptions

+ Accumulated Benefit Increases

– Assets

Normal Costs

Frozen Attained / Entry Age Normal Allocated Share of Present Value of

Future Normal Costs Derived from the UAL

Aggregate Funding Allocated Share of Present Value of

Future Normal Cost Derived from a Zero UAL

Unfunded Accrued Liability

Frozen Attained / Entry Age Normal Set by reference to Unit Credit / Entry Age

Normal Method

Aggregate

Set = 0

Gains & LossesSources:

Assets & Liabilities

Allocated to: Unfunded Accrued Liability for Unit

Credit, Projected Unit Credit & Entry Age Normal

Normal Cost for Frozen Attained / Entry Age Normal & Aggregate Method

Funding Sources

Employee ContributionsDirect Employer ContributionsAd Valorem TaxesRevenue Sharing FundsInsurance Premium Taxes

Funding Volatility

Different systems have different contribution volatility based on different plan provisions and different demography of the group

Funding Leverage

Leverage of employee contributions will depend on what percentage of the cost of the plan is paid for by direct employer contributions

Back to Solvency…

Funded Ratio Single measurement can be misleading Trend is more important than single

measurement Change in accounting rules will change

ratios Even with standardized measure,

comparatives between plans are not valid since assumptions will differ