Your Perpetual Care Fund: How Much is Enough? Prepared by: Hayden Burrus, FCAS, MAAA HB Actuarial Services, Inc. (561)

Purpose of Cemetery Perpetual Care Funds Regulatory purpose Public perception Endowed care fund vs. perpetual care funds HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

Cemetery Profile: New Cemetery Trust fund very low Maintenance costs low Cash flow funds maintenance costs Long-term standard of care not established Perpetual care fund management practice not firmly established HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

Cemetery Profile: Growing Cemetery Maintenance costs rising Standard of care being established Perpetual care fund management practices being established Maintenance expenses still may be paid entirely from cash flow Build-out a long time away HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

Cemetery Profile: Cemetery Near Build-Out Revenue dropping or expected to drop soon Cash flow not supporting maintenance costs Growing interest in adequacy of perpetual care funds HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

Regulations Pertaining to Cemetery Perpetual Care Funds Contributions Withdrawals Investment practices Not consistent across state boundaries No guarantee that complying with regulations will ensure adequacy There is no “Guaranty Fund” to help out underfunded perpetual care funds HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

Issue: Conforming with Regulations Permitted withdrawals Permitted investment practices Required contributions Desired standard of care HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

Issue: Expenses Continue Long After Revenue Ceases Not only do they continue, they increase! Subject to many unknowns Inflation Capital expenses “Catastrophe” expenses HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

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Issue: Variable Contributions– increasing, then stable, then decreasing Revenue - expense mismatch Both subject to uncertainty Early contributions must be adequate to cover uncertainty as well as future expenses HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

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Issue: Uncertain Capital Gain and Investment Income Uncertain over the short-term Can be more predictable over the long term HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

Reduction of Risk Over Time Each bar shows the range of compound annual returns for each asset class over the period 1926–2008. Past performance is no guarantee of future results. Results shown are based on indexes and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Index sources: Small Company Stocks—represented by the fifth capitalization quintile of stocks on the NYSE for 1926–1981 and the performance of the Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio thereafter; Large Company Stocks—Standard & Poor’s 500 ®, which is an unmanaged group of securities and considered to be representative of the stock market in general; Government Bonds—20-year U.S. Government Bond; Cash—30-day U.S. Treasury Bill. Direct investment cannot be made in an index. Used with permission. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009. [Certain portions of this work were derived from the work of Roger G. Ibbotson and Rex Sinquefield.] Small stocksLarge stocksGvernment bondsTreasury bills –60 – year Holding period 5-year20-year1-year5-year20-year1-year5-year20-year1-year5-year20-year Compound annual return: 11.7% 9.6% 5.7% 3.7% 150%

Dividend Yields

What to Do? Your perpetual care fund management plan – up to a 100 year plan Figure out where your plan is taking you Is that where you want to go? Change your plan Re-evaluate as necessary HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

Detailed Forecast of Cash Flows Gather lots of data – forecast will be inaccurate without good data Actuary – expert in forecasting uncertain cash flows Get input from many sources – management, finance, actuary, Board of Directors Forecast uncertainty around the results HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

Summary Statistics 1926– 2008 Compound annual return Arithmetic annual return Risk (standard deviation) Large cap stocks Small cap stocks* Government bonds Treasury bills Inflation 9.6% 11.7% 5.7% 3.7% 3.0% 11.7% 16.4% 6.1% 3.8% 3.1% 20.6% 33.0% 9.4% 3.1% 4.2% – * The 1933 small company stock total return was 142.9%.

Forecast Future Revenues Inflation Variability of contributions Revenues may be used to support maintenance expenses Consider how alternate revenue sources affect finances Consider how investment policy affects revenue HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

Forecast Future Contributions Inflation Contribution rates Sales volume Build-out HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

Forecast Future Expenses Inflation Annual maintenance expenses Periodic “One-Time” expenses Catastrophes Only consider ongoing expenses HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

Forecast Future Withdrawals Determine how much is available Determine how much is needed Determine what to do with excess (or shortfall) HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

How Sure Are You? Know the variability around your estimates Know how to handle if / when future results don’t come in as expected Vocabulary lesson: stochastic, deterministic, Monte Carlo simulation HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

We’ve Got to Make Some Changes Contribution rates Prices Maintenance expense budget Investment policies Continuously tweak and readjust HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

A “Fair” Contribution Rate Everyone pays the same amount Everyone pays the same percentage Expenses allocated to different interment types Setting an industry standard contribution rate (or amount) HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

Valuing a Cemetery Perpetual care fund one of the largest assets of a cemetery Perpetual care liabilities usually the largest liability of a cemetery “Perpetual Care Equity” – can be significant; usually unknown HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

Additional Resources International Cemetery and Funeral Management – (Perpetual Care Series, 2001) by Hayden Burrus, FCAS, MAAA. A Cemetery Should be Forever by John F. Llewellyn, (Tropico Press, 1999). HB Actuarial Services, Inc. (experts in perpetual care fund analyses) HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)

Conclusion Questions… Comments… Snide Remarks… Have a nice day! HB Actuarial Services, Inc. 10 NE 6 th Street, Suite 200 Delray Beach, FL (561)