General Manager Comments, March 2005

I have attached a number of articles related to the Governors efforts to reduce California public employees retirement benefits. Two articles may be of particular interest:

1) The DB to DC actuarial analysis performed by Milliman for the Los Angeles County Employees Retirement Association (LACERA); and

2) The analysis by Mellon Consultants describing the general actuarial consequences of closing a DB plan and converting to a DC plan.

Several conclusions seem to be generally agreed upon by the actuarial community:

1) Current DB programs finance long-term liabilities by spreading risks among a large number of participants. Closing the DB system to new members would require the actuary to change the actuarial method for funding the Unfunded Accrued Actuarial Liability (UAAL) to reflect a declining DB population over the amortization period (both of these models use a 30-year amortization period similar to ACERA). The result is a very substantial increase in the amortization payment for 2007-2008. It increases by 66 percent in the Mellon model and in LACERAs case by some 3.66 percent of covered payroll;

2) Employer contributions to just the closed DB plan alone will be higher than they would have been for the first 12 years in the Mellon model and 11 years in LACERAs analysis;

3) Under GASB 25 standards, any additional costs (such as from changes in the amortization method) must be recognized in the first DB system valuation prepared after such change, even if it is prior to the effective date of the DC plan. This could mean as early as 2006, if plan changes are enacted in 2005;

4) A number of issues have not been addressed in the current proposals, such as the nature of any voluntary transfer to the DC plan (does it involve contributions or the present value of accrued benefits), and the existence of reciprocity benefits. These items have the potential to further increase employer costs;

5) In addition to these increased DB plan costs, the employer may also face the expense of providing separately insured replacement death and disability benefits; and

6) Finally, the employer will presumably make a contribution to a replacement DC plan. The Jarvis initiative caps that contribution at 6 percent of pay for general employees and 9 percent for sworn police officers and full-time firefighters (if the employees are making matching contributions).

While each of the studies is based on a variety of assumptions, those assumptions are very typical of a 37 Act plan like ACERA, and the impact on ACERA is likely to be very similar under the same conditions. The financial impact on the employer will be a substantial increase in total retirement costs for the first 10+ years after enactment of the ACA 5 / Jarvis initiative proposals.