OFFICE OF FISCAL ANALYSIS

Legislative Office Building, Room 5200

Hartford, CT 06106 (860) 240-0200

http://www.cga.ct.gov/ofa

SR-7

RESOLUTION PROPOSING APPROVAL OF AN AGREEMENT BETWEEN THE STATE OF CONNECTICUT AND THE STATE EMPLOYEES BARGAINING AGENT COALITION.

OFA Fiscal Note

State Impact:

Agency Affected

Fund-Effect

FY 18 $

FY 19 $

State Comptroller - Fringe Benefits (SERS Account)

GF - Savings

154 million

84 million

State Comptroller - Fringe Benefits (SERS Account)

TF - Savings

18 million

10 million

Various

Various - Savings

5 million

3 million

Note: GF=General Fund; TF=Transportation Fund, SERS = State Employees' Retirement System

Municipal Impact: None

Explanation

The provisions of the agreement lower the projected actuarial determined employer contribution (ADEC) by $220 million in FY 18 (an estimated $154 million in General Fund (GF) and $18 million in Transportation Fund (TF)) and $120 million in FY 19 (an estimated $84 million in GF and $10 million in TF), while increasing the unfunded actuarial accrued liability (UAAL) by $6.77 billion (a 45% increase). As summarized in Table 1.1 on the following page, if the provisions of the agreement are not implemented the FY 18 ADEC will be $1.87 billion (compared to $1.65 billion) and $1.94 billion in FY 19 (compared to $1.82 billion). Further discussion about the impact to the ADEC and the UAAL from the agreement is provided in the following pages.

Table 1.1 ADEC Under Current Schedule Compared to ADEC Under Agreement1

($ billions – All Funds)

 

ADEC - Current Schedule

ADEC - Under Agreement

Difference

FY 18

1.87

1.65

(0.22)

FY 19

1.94

1.82

(0.12)

The total combined GF and TF portion of the ADEC with the agreement is $1.30 billion in FY 18 and $1.43 billion in FY 19, which reflect approximately 79% of the total ADEC of $1.65 billion and $1.82 billion respectively for the State Employees' Retirement System (SERS).

Impact to the Actuarial Determined Employer Contribution (ADEC)

Table 1.2 on the following page provides a breakout of the impact on the FY 18 and FY 19 ADEC from provisions contained in the agreement and those factors which are not contained in the agreement.

I. FY 18 ADEC

The provisions of the agreement partially offset the $300 million increase between the FY 17 ADEC and the FY 18 ADEC the state will have to pay without the agreement by $220 million; therefore resulting in an increase of $80 million between FY 17 and FY 18.

The recommendation to decrease the discount rate to 6.9% and change the amortization method to entry age normal contained in the agreement increase the ADEC by $220 million ($190 million and $30 million respectively). At the same time, changing the amortization period (e.g. splitting the UAAL into pre-1984 and post-1984, extending the UAAL for the post-1984 portion, and implementing a 25 year layer amortization methodology) reduce the ADEC by $440 million.

Non-agreement demographic changes and actual plan experience account for a $300 million increase between the FY 17 and FY 18 ADEC.

II. FY 19 ADEC

The increase between the FY 18 and FY 19 ADEC is $170 million with the agreement. The change to a level dollar amortization methodology contained in the agreement is being phased in over five years and accounts for $100 million of the increase between the FY 18 and the FY 19 ADEC. FY 19 is the first year this change is reflected in the state's contribution.

Non-agreement demographic changes and expected plan experience account for a $70 million increase between the FY 18 and FY 19 ADEC.

Table 1.2 Impact of the Agreement on the SERS Actuarial Determined Employer Contribution for FY 18 and FY 19

 

Actuarial Determined Employer Contribution (ADEC)
($ in billions - All Funds)

FY 17 ADEC (6/30/14 Valuation)

1.57

Provisions of Agreement Impacting the FY 18 ADEC

Change to Entry Age Normal

0.03

Change in Amortization Period

(0.44)

Change in Economic Assumptions (6.9% Discount Rate)2

0.19

Total Agreement Changes

(0.22)

Non- Agreement Changes Impacting the FY 18 ADEC

Actual Experience of the Plan

0.15

Demographic Assumption Changes

0.15

Total Non-Agreement Changes

0.30

FY 18 ADEC (6/30/16 Valuation)

1.65

Provisions of Agreement Impacting the FY 19 ADEC

Phase in Level Dollar Amortization Methodology

0.10

Total Agreement Changes

0.10

Non- Agreement Changes Impacting the FY 19 ADEC

Expected Experience of the Plan

0.07

Total Non-Agreement Changes

0.07

FY 19 ADEC (6/30/16 Valuation)

1.82

Impact to the Unfunded Actuarial Accrued Liability (UAAL)

Provisions of the agreement account for $4.57 billion (or 68%) of the total $6.77 billion increase in the SERS UAAL. Specifically, the recommendation to decrease the discount rate from 8% to 6.9% makes up approximately 55% (or $3.70 billion) of the increase in the UAAL. Secondly, changing the amortization method from projected unit credit to entry age normal accounts for 13% (or $870 million) of the increase in the UAAL.

Non-agreement related changes, including demographic changes3 and actual plan experience, account for $2.20 billion (or 32%) of the increase in the UAAL.

Table 1.3 below provides a breakout of the impact on the UAAL from provisions contained in the agreement and those factors which are not contained in the agreement but have resulted in an increased in the UAAL since the June 30, 2014 valuation

 

Unfunded Actuarial Accrued Liability
($ in billions)

2014 Valuation

14.92

Provisions of Agreement

Change to Entry Age Normal

0.87

Change in Amortization Period

0

Change in Economic Assumptions (6.9% Discount Rate)4

3.70

Total Agreement Changes

4.57

Non-Agreement Changes

Actual Experience of the Plan Between 2014 and 2016

0.85

Demographic Assumption Changes

1.35

Total Non-Agreement Changes

2.20

2016 Valuation

21.69

Total Change from 2014

6.77

Table 1.3 Impact of Agreement and Non-Agreement Provisions on the SERS UAAL

Supplemental Summary Information:

Table 1.4 below provides a comparison of the June 30, 2014 and the June 30, 2016 valuation. The June 30, 2016 valuation incorporates the provisions of the agreement.

Table 1.4 Comparison of June 30, 2014 and June 30, 2016 SERS Actuarial Valuation

 

June 30, 2014

June 30, 2016

% Change

Amount Change

Accrued Liability

25,505,636,777

33,616,716,085

31.80%

8,111,079,308

Actuarial Value of Assets

10,584,795,257

11,922,965,860

12.64%

1,338,170,603

Unfunded Liability

14,920,841,520

21,693,750,225

45.39%

6,772,908,705

Funded Ratio

41.50%

35.50%

-14.46%

-

Actuarial Determined Employer Contribution (ADEC)

Normal Cost

278,812,817

365,570,268

31.12%

86,757,451

Accrued Liability

1,235,654,507

1,282,836,995

3.82%

47,182,488

Total ADEC1

1,514,467,324

1,648,407,263

8.84%

133,939,939

Active Members

49,976

50,019

0.09%

43

Retired Members

45,803

48,191

5.21%

2,388

Years Left in Amortization Period2

17

25.1

-

-

1ADEC for the first year of the valuation (FY 16 and FY 18, respectively).

2For June 30, 2016 this reflects the average amortization period remaining.



The Out Years

The ongoing fiscal impact will continue into the future. Future SERS ADEC's will be certified every two years in the actuarial valuation for the system. Contributions to SERS under the agreement for the period FY 18 to FY 47 are estimated to be $66.3 billion. After 2047 the cost to the state will include the normal cost and any amortization payment for the actuarial accrued liability which exist under the layered amortization methodology.

Contributions to SERS without the agreement for the same period are estimated to be $47.3 billion, approximately $18.9 billion less than under the agreement. After 2032, the cost to the state will reflect the annual normal cost of the plan.

Figure 1.1 on the following page reflects the projected ADEC if the agreement is not implemented for the period FY 17 to FY 47 and the impact to the projected ADEC if the agreement is implemented.5

Figure 1.1 Projected ADEC

1 The ADEC under the “current schedule” reflects the FY 18 and FY 19 ADEC including the impact of actual plan experience for the period 2014 to 2016 and the demographic changes implemented based on the June 30, 2015 experience study.

2 Changing the discount rate is a recommendation in the agreement and was adopted by the Retirement Commission, on December 15, 2016.

3 Demographic changes were adopted by the Retirement Commission based on the SERS experience study for the four year period ending June 30, 2015 and are not included as provisions of the agreement.

4 Idid. 2

5 The current method is a projection based on the June 30, 2014 SERS valuation and the June 30, 2015 experience study and reflects the estimated impact of demographic and experience changes for the plan between 2014 and 2016.