1. Public Plan Solvency & Funding GFOA Meeting October 6, 2011 Gary S. Curran, FCA, MAAA, ASA, EA CONSULTING ACTUARY G. S. Curran & Company, LTD. 10555 N. Glenstone Place Baton Rouge, LA 70810 (225) 769-4825

2. Typically Solvency Measured By Assets ÷ Liabilities

3. But… Which Assets and Which Liabilities?

4. Various Asset Measurements Available  Cost  Market  Actuarial

5. Cost Value of Assets  Generally, not currently used  Used under prior accounting rules

6. Market Value of Assets  Fair Value of Investments  Special Cases:  Hedge Funds  Private Equity  Real Estate  Timber

7. Actuarial Value of Assets  Market Value  Smoothed Value  Objective  Methodologies  Periods  Corridors

8. Assets: GASB 25 / 27  Currently  Actuarial Value of Assets  Proposed  Market Value

9. 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.

10. Liabilities: GASB 25 / 27  Currently  Funding Liability  Proposed  Stipulated Method Liability

11. Liability Interest Rate GASB 25 / 27  Currently  Funding Interest Rate  Proposed  Blended rate based on current fixed income rate and funding interest rate

12. Funding Basics Present Value of Future Benefits

13. Funding Methods  Unit Credit  Projected Unit Credit  Entry Age Normal  Frozen Entry / Attained Age Normal  Aggregate

14. Normal Cost  Unit 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

15. 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

16. 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

17. Unfunded Accrued Liability  Frozen Attained / Entry Age Normal  Set by reference to Unit Credit / Entry Age Normal Method  Aggregate  Set = 0

18. Gains & Losses  Sources:  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

19. Funding Sources  Employee Contributions  Direct Employer Contributions  Ad Valorem Taxes  Revenue Sharing Funds  Insurance Premium Taxes

20. Funding Volatility  Different systems have different contribution volatility based on different plan provisions and different demography of the group

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

22. 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