Managing the Transition from Unit Credit to Projected Unit Credit

1
Managing the Transition from Unit Credit to
Projected Unit Credit

• Implementation Tips and Considerations

2
Timing Issues

• 12/31/07 valuation impacts a citys 9/30/08
  financial statement disclosures 1/1/09 required
  rate
• In normal years any plan changes would have to be
  made by the valuation date to be considered as
  part of the valuation
• Due to the enormity of the impacts, TMRS is
  allowing for all of 2008 to make plan changes and
  then will redo the 2007 valuation accordingly.

3
Timing Issues

• If a city wishes to impact both their 2009 rate
  and their 2008 CAFR disclosures, they will need
  to adopt any plan changes by their fiscal year
  end (typically September).
• While plan changes made in 2008 will impact the
  2009 rate, additional voluntary contributions
  made in 2008 will not be considered until the
  2008 valuation (2010 rate).

4
Phase In Options

• Phase in for up to eight years
• Pros
• Low initial rate for 2009
• Gradual increases are easier to absorb
• Provides time to consider other options
• Cons
• Eight years of annual increases creates eight
  years of budget issues
• Creates large NPO on the financial statements
• Results in a a higher ultimate rate (7 to 10
  above non phase in rate)
• Could leave MAF balances too low (i.e. funded
  status too low to allow gradual increase in
  rates)

5
Phase In Options

• Request up to forty year amortization period
• Pros
• Can lower your rate by as much as 200 basis
  points over 25 year amortization
• Creates a stable rate in the first year that will
  not need to go up over time
• Was actually created by GASB for the first ten
  years of GASB 25 27
• Cons
• Creates a NPO in financial statements for the
  first ten years
• Could also leave MAF balances too low
• Forty years is a long time exceeding a typical
  workers career

6
Phase In Options

• Additional one time or periodic payments
• Existing balances
• Sweeping TMRS budget accounts
• Pension Obligation Bonds
• Pros
• Higher earnings of a diversified portfolio make
  voluntary contributions more attractive
• Will buy down the rate in two years
• Can provide needed cushion for MAF
• Can be used to buy down the NPO for 40 year
  amortization or 8 year phase in
• Voluntary additional contributions are flexible
  and can be stopped at any time
• Cons
• Required debt service on POBs could exceed return
  on portfolio

7
Phase In Options

• Going ad hoc and phasing in the rate before
  passing the annually repeating again (I do not
  recommend!)
• Pros
• Provides immediate rate relief and ultimate
  flexibility
• Cons
• Dangerous strategy as council may not turn
  benefits back on or allow voluntary payments to
  be what they need to be
• Funded status will decline and rates will
  increase
• TMRS or the entitys own external auditors may
  step in and consider the ad hoc passed several
  years in a row as no different than annually
  repeating
• GAAP issues related to accumulating large net
  pension assets but then having your funded status
  drop when annually repeating turned back on. The
  instant creation of huge actuarial liabilities
  could create perception that you were
  understating your plan liabilities.

8
Changing Benefits

• Plan Modifications-Currently Available
• Matching percentage
• Most cities do not consider this a desirable
  option
• Dropping or reducing USC and AI
• Current levels of 50, 75 or 100 for USC and 70,
  50 or 30 for AI reduce flexibility
• Method for calculating reduced AI can hurt long
  time retirees
• USC at 75 is probably not a benefit for vast
  majority of long tenured employees
• Dropping Buyback
• Limited number of beneficiaries with a
  disproportionate cost to the employer
• Various combinations of previously listed
  strategies.

9
Changing Benefits

• Dropping Transfers
• Benefits those that have worked at other TMRS
  cities
• No one really knows how much transfers cost an
  individual city because not reported separately
  but the potential is there for transfers to be
  quite expensive dependant on circumstances
• Non-TMRS plan for new employees
• Results in an immediately higher rate for the
  current plan
• Assumption changes from covered payroll growth to
  a decline
• Amortization period cannot exceed career of
  existing employees
• Can create perception of second class employees
  
• Non-TMRS plan for COLAs

10
Possible Plan Changes

• Plan Changes requiring legislative change
• Two tiered TMRS plan with one rate (includes any
  grandfathering options)
• Indexing USC and AI in 5 increments
• Change AI to be calculated prospectively rather
  than retroactively

11
Reporting Issues

• Not all reporting issues have been communicated
  yet
• Reporting of CSARF assets/liabilities
• RSI related disclosures regarding the change
• Impact of statutory maximums
• Annual tracking reporting and amortization of
  NPO/NPAs
• Impact of GASB 50
• At what point do repeating ad hoc USC AI become
  no different than annually repeating USC AI
• If in doubt, err on the side of additional
  disclosure
• Be doubly careful with OS related disclosures
  during this transition time especially if your
  city has a lower funding percentage

12
Finding Expert Help

• TMRS Staff Actuary-Leslee Hardy [phone]
  lhardy_at_tmrs.com
• NCTCOG Shared Services Actuary (see
  www.nctcog.org/aa for link)
• Other actuaries -make sure they have governmental
  pension expertise, are familiar with TMRS
  structure and it would be preferable for them to
  have done previous TMRS studies