1. Tacoma Employes’ Retirement System December 4, 2008 Board Meeting Implications of Recent Market Events Mark Olleman Milliman Inc.

2. Outline Funding Principles and the Board’s Funding & Benefits Policy
8/8/2019
Outline
Funding Principles and the Board’s Funding & Benefits Policy
Impact of Recent Market Events
Response: Gradual Contribution Increases without Benefit Increases
Why do we have a Defined Benefit Plan?

3. Funding Principles
investments $
Assets
PENSION
FUND
benefits
expenses
employer contributions
employee contributions
Ultimately: Contributions + Investment Earnings = Benefit Payments + Expenses

4. The Four Necessary Elements of an Actuarial Valuation

5. Normal Cost Rate
Normal Cost Rate = Level % of pay that will fund a member’s benefit if paid over his or her entire career. (Based on 7.75% returns, and all other assumptions)
Normal Cost Rate = 16.94% of Pay
Contribution Rate = 14.00% of Pay

6. Actuarial Accrued Liability
Actuarial Accrued Liability = all past Normal Costs added together
This is the target level of assets IF:
Contribution Rate = Normal Cost Rate
All future experience = Actuarial Assumptions
No provision for adverse experience

7. Unfunded Actuarial Accrued Liability
- Actuarial Assets
(Actuarial Assets
Include 4 yr smoothing)
Financing requires
Contributions > Normal Cost Rate

8. Funding Reserve / Funding Ratio
Opposite of Unfunded Actuarial Accrued Liability
Funding Reserve = Actuarial Assets minus Actuarial Accrued Liability
1/1/2007 Valuation = $1,021.3M – $895.8M = $125.5M
Estimated 1/1/2008 = $1,123.3M – $939.8M = $183.5M
Funding Ratio
Actuarial Assets / Actuarial Accrued Liability
1/1/2007 Funding Ratio = 114.0%
Estimated 1/1/2008 Funding Ratio = 119.5%

9. What Happens if there is no Funding Reserve?
The Funding Reserve has been financing the difference between the 14.00% of pay Contribution Rate and the 16.94% of pay Normal Cost Rate.
If there is no Funding Reserve, there is no justification to contribute less than the 16.94% of pay Normal Cost Rate.
In addition, contributions larger than the 16.94% of pay Normal Cost Rate are required to pay off any Unfunded Actuarial Accrued Liability.

10. Funding & Benefits Policy
Objective:
Provide guidance on adjusting contributions and benefits

11. Funding & Benefits Policy
Why is this important?
Ensure decisions are made based on sound, consistent and thoroughly examined criteria.
Road Map / Strategic Policy
Responsibility to members and taxpayers

12. What is the Board’s Funding & Benefits Policy?
When the Funding Ratio is:
Above 120% - The potential for benefit improvements will be reviewed provided funding status is expected to remain stable after improvements
Between 95% and 120% - “No action zone” if:
The Contribution Rate is greater than or equal to the Normal Cost Rate, OR
The Funding Reserve is expected to last at least 20 years If neither of the above are true, then consider a contribution increase.
Between 80% and 95% - Consider a contribution increase
Under 80% - Review and re-evaluate Funding & Benefits Policy

13. What is the Board’s Funding & Benefits Policy?
Additional Guidelines:
Long term goal: Contribution Rate greater than or equal to Normal Cost Rate
Contribution increases may be in small increments

14. What Happened in the Market?
September 17, 2008
Federal Reserve bails out AIG for $85 billion
September 2007
Liquidity in inter-bank market slows. Bank of England bails out Northern Rock. US housing prices decline. Banks have mortgage related losses.
March 14, 2008
JP Morgan Chase and Federal Reserve make emergency loan to Bear Stearns
July 2008
IndyMac (mortgage lender) is seized by the FDIC
September 15, 2008
Merrill Lynch sold to Bank of America
April 2008
CEO’s of banks state that the crisis is nearing its end
August 2007
BNP Paribas freezes withdrawal in 3 investment funds
Early 2008
Markets seem to calm
September 18, 2008
HBOS (Britain’s largest mortgage lender) sold to TSB
Late April 2008
Stimulus checks are distributed but do not contribute to economic growth
September 15, 2008
Lehman Brothers declares bankruptcy
March 2008
2 hedge funds, Peleton and Carlyle Capital are shut down
September 7, 2008
Federal Housing Finance Agency places Fannie Mae and Freddie Mac in conservatorship
March 16, 2008
Bear Stearns (5th largest US investment bank) acquired by JP Morgan Chase
August 2007
2 Bear Stearns subprime hedge funds lose almost all value
October 2007
Merrill Lynch is 1st to report losses of over $8 billion

15. What Happened in the Market?
Major Stock Indexes 2008 YTD through Dec. 1
Dow Jones Industrial: -38.6%
Standard & Poor’s 500: -44.4%
MSCI EAFE*: -50.5% (*Europe, Asia, Far East in U.S. Dollars)
Tacoma Retirement System 2008 YTD
Through October 31, 2008: %
Through December 31, 2008: ???

16. What does this mean to the Retirement System?
Milliman estimates a -15% return in 2008 would reduce the System’s market value of assets below its Actuarial Accrued Liability.
In this case, the estimated 119.5% January 1, 2008 Funded Ratio would be projected to decrease below 100% when all asset losses were realized.

17. What does this mean to the Retirement System?
If assets are less than liabilities there is no funding reserve to justify contributing less than the 16.94% of pay Normal Cost Rate.
This indicates the current 14.00% of pay contribution rate needs to increase.
The longer until contribution increases are made, the larger they will need to be.

18. What does the Board’s Funding and Benefits Policy Say?
When the Funding Ratio is between 95% and 120% - “No action zone” if:
The Contribution Rate is greater than or equal to the Normal Cost Rate, OR
The Funding Reserve is expected to last at least 20 years If neither of the above are true, then consider a contribution increase.
Long term goal: Contribution Rate greater than or equal to Normal Cost Rate
Contribution increases may be in small increments

19. How Bad is This?
The stock market is changing rapidly and there is no way to know where it will go.
Milliman will perform its next actuarial valuation based on January 1, 2009 data and is expected to complete the study in May.
This will be a precise measurement of a moving target.

20. How Bad is This?
Asset returns after January 1, 2009 are expected to make things either better or worse. We don’t know which.
Over time, contributions might need to increase by 10% of pay or more. 46% of this is paid by employees and 54% is paid by the City.

21. How Can we Respond?
The situation is changing so rapidly. Can we do something today that still makes sense tomorrow?
Yes: gradual contribution increases can show a measured discipline.
Funding and Benefits Policy: “Increases in the contribution rate may be made in small increments.”

22. How Can we Respond?
We recommend repeated annual 2% of pay contribution increases which allow some time for members and the City to adjust and time for experience to develop.
If assets outperform the 7.75% assumption fewer increases will be needed.
If assets under perform the 7.75% assumption more increases will be needed.

23. Gradual Contribution Increases
2.00% of pay annual shared increases mean:
0.92% of pay annual increases for employees,
1.08% of pay annual increases for the City.
This is shared 46% for employees and 54% for the City just like the current 6.44% (employee) % (City) = 14.00% (total) contribution rate.
Everyone shares the cost.

24. Should We Increase Benefits?
Currently benefits increase anytime employee contributions increase. Why?
Minimum monthly benefit = 2 times employee contributions
Vested withdrawal benefit = 150% employee contributions
Optional Death Benefit = 2 times employee contributions paid over 10 years

25. Should We Increase Benefits?
Increasing benefits when there are funding problems makes no sense.
It makes required contribution increases larger for both employees and employers.
We recommend benefits be kept at their current level
limit the employee contributions included in the 2 times and 150% benefits to the current 6.44% of pay.

26. Why do we have a Defined Benefit Plan?
Defined benefit plans are the most cost effective way of providing adequate retirements for public employees
Nebraska and the West Virginia Teachers returned to defined benefit pension plans to provide their employees adequate retirement benefits at a better cost
Higher investment returns
Longevity pooling
That’s why 90% of public employees are in a defined benefit plan.

27. Why do we have a Defined Benefit Plan?
Defined benefit plans are the most cost effective way of providing adequate retirements for public employees
A recent study by the National Institute on Retirement Security “A Better Bang for the Buck” found defined benefit plans provided the same retirement income as defined contribution plans including 401(k)s for 46% less cost. Available at

28. Why do we have a Defined Benefit Plan?
Defined benefit plans provide guaranteed lifelong income
Participants in defined contribution plans including 401(k)s have to worry about outliving their assets.
Defined benefit plans pool longevity experience.
Participants in defined contribution plans including 401(k)s may have to make major changes in their retirement plans after the current Bear market.

29. Why do we have a Defined Benefit Plan?
Defined benefit plans are more attractive to government employees
In states where new hires are given a choice between defined benefit plans and defined contribution plans, only 3% to 26% have chosen defined contribution
More likely to attract and retain employees

30. Why do we have a Defined Benefit Plan?
Adequacy
A Tacoma employee with 30 years of service gets 60% of pre-retirement income with a 2.125% COLA. (before reductions for beneficiary protection)
Social Security is targeted to provide roughly another 33% of pre-retirement income at 65 to 67 with a Full CPI COLA.

31. Tacoma Contribution Rate History
Time Period
Total Contribution Rate
1979 – 1996
19.33%
1997 – 2000
16.70%
2001 to Present
14.00%

32. Remember
investments $
Assets
PENSION
FUND
benefits
expenses
employer contributions
employee contributions
From time to time adjustments need to be made to keep a retirement plan in balance.
Contributions + Investment Income = Benefits + Expenses

33. Summary
It is extremely likely the January 1, 2009 actuarial valuation will show required contribution increases.
Contribution increases are consistent with the Funding and Benefits Policy.
The longer until contribution increases are made, the larger they will need to be.

34. Summary
Contribution increases of 2% of pay per year shared by employer and employee can achieve the needed goal gradually, with less shock, and some level of predictability while incorporating future experience.
Benefits should not increase.