Relates to the rate of regular interest used in the actuarial valuation of liabilities for the purpose of calculating contributions to retirement systems; the making of contributions to such retirement systems; and the crediting of special interest and additional interest to members of such retirement systems.
NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A2296
SPONSOR: Abbate TITLE OF BILL: An act to amend the administrative code of city of New
York, in relation to the rate of regular interest used in the actuarial
valuation of liabilities for the purpose of calculating contributions to
the New York city employees' retirement system, the New York city teach-
ers' retirement system, the police pension fund, subchapter two, the
fire department pension fund, subchapter two and the board of education
retirement system of such city by public employers and other obligors
required to make employer contributions to such retirement systems, the
establishment of the entry age actuarial cost method of determining
employer contributions to such retirement systems, the making of
contributions to such retirement systems by such public employers and
such other obligors, and the crediting of special interest and addi-
tional interest to members of such retirement systems, and the allowance
of interest on the funds of such retirement systems; and to amend the
education law, in relation to employer contributions to the board of
education retirement system of such city
SUMMARY OF PROVISIONS: This bill would establish at 7% per annum the
statutory rate of interest used by the New York City Employees' Retire-
ment System, Teachers' Retirement System, Board of Education Retirement
System, Police Pension Fund and Fire Department Pension Fund (City
retirement systems) in valuing retirement system liabilities for the
purpose of calculating employer contributions to those systems. The
proposed 7% valuation rate, which would be applicable to employer
contributions due for fiscal years 2011-12 through 2015-16, would
replace the current 8% valuation rate which is scheduled to expire on
June 30, 2012. Only tier 1 and tier 2 members may participate in the
increased-take-home-pay (ITHP) program. Under the bill, tier 1 and tier
2 members of the City retirement systems would continue to have their
member contribution and ITHP accounts credited with interest at the
current rate of 8% per annum through fiscal year 2015-16.
The bill also would provide for the calculation of employer contrib-
utions to the City retirement systems in accordance with the entry age
actuarial cost method, beginning with the calculation of contributions
payable to the systems in fiscal year 2011-12. The proposed method would
replace the frozen initial liability method currently used to calculate
employer contributions.
Under the proposed funding method, the benefits to which individual
members are expected to become entitled would be funded, in general, on
a level basis over their expected working lifetimes through annual
employer contributions known as employer entry age normal contributions,
which would be calculated using relatively constant entry age employer
contribution rates applicable to individual members. The Actuary for the
City retirement systems, in addition to calculating the employer entry
age normal contributions each year as of the second June thirtieth
preceding the fiscal year in which employer contributions are payable,
also would calculate and specifically identify unfunded accrued liabil-
ities for each retirement system as of each such June thirtieth. The
initial unfunded accrued liability for each retirement system, calcu-
lated as of June 30, 2010, would be amortized over a period of 22 fiscal
years following its establishment, with the first of 21 annual install-
ments becoming payable in fiscal year 2011-12. Subsequent unfunded
accrued liabilities would be amortized over the number of years speci-
fied by statute, depending upon the nature of each such unfunded accrued
liability.
Most employers participating in the City retirement systems are covered
by current statutory provisions which specify the timing of their
contribution payments to the retirement system within the fiscal year.
For example, the City is required to pay its contributions for the
fiscal year in 12 equal monthly installments. The bill would require
any participating employer which is not covered by a time of payment
provision to make its employer contribution payments, beginning with
payments due in fiscal year 2012-13, either (1) in total by January
first of the fiscal year, or (2) in 12 monthly installments, with each
monthly installment to be paid by the last day of each month. The bill
also would require participating employers to pay interest on overdue
employer contribution payments beginning with fiscal year 2012-13.
As will be discussed more fully below, the bill would provide a method
of funding variable supplements benefits payable by the City's police
and uniformed correction variable supplements funds to eligible benefi-
ciaries where such payments are statutorily guaranteed by the City under
current law, and the assets of the variable supplements fund are insuf-
ficient to make such payments to all eligible beneficiaries in any
calendar year.
REASONS FOR SUPPORT: The boards of trustees of the New York City
Employees' Retirement System, Teachers' Retirement System, Board of
Education Retirement System and Police Pension Fund have adopted resol-
utions recommending enactment of the funding provisions set forth in
this bill, and the board of trustees of the New York City Fire Depart-
ment Pension Fund is expected to adopt a similar resolution. In general,
the Actuary for the retirement systems has recommended such funding
provisions based upon his evaluation of the experience of the retirement
systems and their financial situation, and experience studies of the
systems prepared by firms of actuarial consultants in 2006 and 2011.
Specifically, the Actuary recommends a valuation interest rate of 7-1;
through June 30, 2016 as reasonable and justified based upon (1) the
recent actual investment performances of the retirement systems; (2) a
study of the long-term performance of the United States capital markets;
(3) likely expectations for future investment performance of the assets;
and (4) the relationships among economic assumptions used for actuarial
valuation purposes.
The Actuary intends the recommended 7% valuation rate for each of the
systems to be net of investment expenses paid by the retirement systems
from their investment earnings. Under current law, the valuation rate is
not net of investment expenses because participating employers are
required to repay such investment expenses during the second fiscal year
after the fiscal year in which retirement system assets were drawn upon.
The bill would eliminate that specific repayment requirement.
The proposed entry age actuarial cost method of determining employer
contributions to the retirement systems has certain advantages over the
current frozen initial liability method. Under the current method, the
Actuary calculates separately for each retirement system an employer
normal contribution each year as of the second June thirtieth preceding
the fiscal year in which the normal contribution is payable. That normal
contribution calculation provides for the total actuarial present value
of future employer contributions to be funded over the remaining working
lifetimes of members. Additional unfunded liabilities that may arise
each year are not specifically identified and amortized over a pre-det-
ermined number of years, but rather are generally included as part of
the calculation of the normal contribution. This causes the normal
contribution rate, and hence the normal contribution, to fluctuate each
year, depending on the investment return on retirement system assets,
the addition of newly enacted benefits and certain other factors.
Under the Proposed entry age actuarial cost method, employer contrib-
utions would tend to fluctuate less than under the current method. This
is because the entry age normal contributions for each fiscal year would
be calculated under the proposed method using relatively constant
employer rates of contribution applicable to individual members which
are necessary to fund their expected benefits on a level basis over
their expected working lifetimes. Additional unfunded accrued liabil-
ities would be specifically identified and amortized over appropriate
periods as provided by statute.
The bill would cancel any remaining installments of unfunded accrued
liability calculated under current law, and would provide for the calcu-
lation, as of June 30, 2010, of an initial unfunded accrued liability
under the proposed method that would be amortized over a period of 22
fiscal years following its establishment, with the first of 21 annual
installments becoming payable in fiscal year 2011-12. The 21 annual
installments would be developed using the increasing dollar payment
method so that each installment after the first would be increased by 3
over the immediately preceding installment. The Actuary believes it is
appropriate to use a slightly longer amortization period for the initial
unfunded accrued liability calculated under the proposed method, in
light of the significant actuarial losses incurred by the retirement
systems over the last 10 years, including those attributable to poor
investment performance.
Unfunded accrued liabilities established in subsequent years would be
amortized in equal installments over periods which vary according to the
basis of such liabilities. Unfunded accrued liabilities attributable to
the following causes would be amortized over the following periods: (1)
benefit changes would be amortized over the remaining working lifetimes
of affected members, unless the amortization period is otherwise estab-
lished by statute, (2) changes in the valuation rate of interest, actu-
arial tables and actuarial methods would be amortized over 20 fiscal
years and (3) actuarial gains and losses would be amortized over 15
fiscal years.
Overall, the proposed entry age actuarial cost method and the proposed
amortization of the initial unfunded accrued liabilities develop employ-
er contributions that reasonably follow the objective of intergenera-
tional equity whereby the retirement benefits of plan participants are
financed over the time period during which those participants provide
services to the citizens and taxpayers they serve. Moreover, the Actuary
has stated that the proposed entry age actuarial cost method is used by
more public employee retirement systems in the United States than any
other funding method.
Finally, as noted above, the bill would remedy a problem in the mech-
anism for funding the City police and uniformed correction variable
supplements funds. The Police Officers' Variable Supplements Fund
(POVSF) and the Police Superior Officers' Variable Supplements Fund
(PSOVSF) provide annual non-pension payments to eligible beneficiaries
of those funds which are statutorily guaranteed by the City. As the
result of poor investment returns on equity investments of the main
Police Pension Fund over the past decade, there have been no transfers
of assets from the main fund to the variable supplements funds in
accordance with the existing statutory mechanism for a number of years.
The Actuary has estimated that the POVSF currently has sufficient assets
to pay benefits for a few more years. The PSOVSF, however, may no longer
have sufficient assets to cover the annual payments to eligible retirees
due in December 2012. Absent sufficient funds, the benefits due from the
PSOVSF that are not covered by existing PSOVSF assets would require
funding directly from the City of New York.
This bill would provide for the transfer of assets from the main Police
Pension Fund to the POVSF and the PSOVSF in any year in which the assets
of such variable supplements funds are insufficient to pay variable
supplements benefits. This approach is consistent with the financing
mechanics currently employed by the Actuary whereby portions of the
employer contributions to the main Police Pension Fund each year repre-
sent amounts that are expected, at some point, to be transferred to the
related variable supplements funds.
The Correction Officers' Variable Supplements Fund (COVSF) has not made
variable supplements payments to eligible beneficiaries in recent years
because its assets are insufficient, and such payments are not yet guar-
anteed by the City. The Actuary has stated that the COVSF may not be
obligated to pay benefits until current law requires the City to guaran-
tee such benefits in 2019. The bill, however, in a manner similar to the
approach proposed for the Police Pension Fund and its variable supple-
ments funds, would provide for the transfer of assets from NYCERS to the
COVSF in any year in which the City guarantees the payment of variable
supplements benefits, and the assets of the COVSF are insufficient to
pay such benefits.
This bill would implement a sound, well-conceived plan for funding the
retirement systems through fiscal year 2015-16.
Accordingly, the Mayor urges the earliest possible favorable consider-
ation of this proposal by the Legislature.
