2016 REGULAR SESSION
ACTUARIAL NOTE H B 15
Page 1 of 4
House Bill 15 HLS 16RS-182
Original
Author: Representative J. Kevin
Pearson
Date: May 2, 2016
LLA Note H B 15.01
Organizations Affected:
State Retirement Systems
OR NO IMPACT APV
This Note has been prepared by the Actuarial Services Department of the Office of
the Legislative Auditor. The attachment of this Note to H B 15 provides
compliance with the requirements of R.S. 24:52 1
Bill Header: RETIREMENT SYSTEMS. Provides for the assessment of employer contributions to fund certain administrative
expenses of state retirement systems.
Cost Summary:
The estimated actuarial and fiscal impact of the proposed legislation is summarized below. Actuarial costs pertain to changes in the
actuarial present value of future benefit payments. A cost is denoted by “Increase” or a positive number. Savings are denoted by
“Decrease” or a negative number.
Actuarial Cost to Retirement Systems $0
Total Five Year Fiscal Cost
Expenditures $0
Revenues $0
Estimated Actuarial Impact:
The chart below shows the estimated change in the actuarial present value of future benefit payments, if any, attributable to the
proposed legislation. A cost is denoted by “Increase” or a positive number. Savings are denoted by “Decrease” or a negative number.
Present value costs associated with administration or other fiscal concerns are not included in these values.
Change in the
Actuarial Cost to: Actuarial Present Value
All Louisiana Public Retirement Systems $0
Other Post Retirement Benefits $0
Total $0
Estimated Fiscal Impact:
The chart below shows the estimated fiscal impact of the proposed legislation. This represents the effect on cash flows for the
retirement systems and other government entities. Fiscal costs include estimated administrative costs and costs associated with other
fiscal concerns. A fiscal cost is denoted by “Increase” or a positive number. Actuarial or fiscal savings are denoted by “Decrease” or
a negative number.
EXPENDITURES 2016-17 2017-18 2018-19 2019-2020 2020-2021 5 Year Total
State General Fund $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Agy Self Generated 0 0 0 0 0 0
Stat Deds/Other 0 0 0 0 0 0
Federal Funds 0 0 0 0 0 0
Local Funds 0 0 0 0 0 0
Annual Total $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
REVENUES 2016-17 2017-18 2018-19 2019-2020 2020-2021 5 Year Total
State General Fund $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Agy Self Generated 0 0 0 0 0 0
Stat Deds/Other 0 0 0 0 0 0
Federal Funds 0 0 0 0 0 0
Local Funds 0 0 0 0 0 0
Annual Total $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
2016 REGULAR SESSION
ACTUARIAL NOTE H B 15
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Bill Information:
Current Law
The actuarially required employer contribution for the four state retirement systems – Louisiana State Employees’ Retirement
System (LASERS), Teachers’ Retirement System of Louisiana (TRSL), Louisiana School Employees’ Retirement System
(LSERS), and Louisiana State Police Retirement System (STPOL) – is defined in R.S. 102(B)(3) as the sum of the following:
1. The employer normal cost,
2. The annual amortization payment necessary to amortize changes in unfunded accrued liabilities (UAL) occurring in prior
years,
3. The annual amortization payment necessary to amortize the most recent year’s over- or under-payment of employer
contributions, and
4. The annual amortization payment necessary to amortize changes in UAL resulting from gains/losses, asset valuation
method changes, changes in actuarial assumptions or funding methods, and benefit changes occurring over the most
recent year.
The actuarially required employer contribution for the statewide retirement systems is defined as the sum of these same four
elements plus projected non- investment related administrative expenses (see R.S. 11:103(B)(3)).
It is our understanding that the legal staffs for LASERS and for TRSL have concluded that projected administrative expenses
cannot be directly included in the employer contribution calculation . Our understanding of their rationale is summarized below.
1. The law pertaining to employer contribution requirements for the state systems is different from the law pertaining to the
statewide systems.
2. Because the laws are written differently, the only reasonable conclusion is that the legislature in 1988 intended for the
two contribution formulas to be different.
3. Because the contribution formula for the state systems does not mandate a cost component for administrative expenses, it
is only reasonable to conclude that the legislature did not want the state systems to directly charge employers for
administrative expenses.
A bill identical to HB 15 was introduced during the 2014 regular session of the legislature. Our actuarial note for SB 26 of the
2014 session contained a $50 million per year estimated fiscal cost. In preparing this estimate, it was our understanding that
annual administrative costs were being accounted for as an unending series of annual actuarial losses. After a meeting we had
with the actuaries of the state retirement systems in the fall of 2015, our understanding changed. It is now our understanding that
administrative expenses are accounted for indirectly by the difference between what each system assumes it will earn on
investments and the rate used to discount liabilities. For example:
1. LASERS assumes that it will earn 8.15% on the actuarial value of assets.
2. The system assumes that 15 basis points of the investment return will be used to offset administrative expenses and 25
basis points of the investment return will be used to offset the cost of the COLA program.
3. The LASERS actuary calculates normal costs and liability values using a discount rate of 7.75% (8.15% - 0.15% -
0.25%).
4. Using this methodology, administrative expenses are recognized as they occur.
It is our understanding that the actuaries for the state systems agree that it will be more transparent to have a direct charge for
administrative expenses (as provided under HB 15) rather than to continue to use the indirect methods currently in use,
particularly if the cost is the same.
Proposed Law
Under HB 15, indirect recognition of the cost of administrative expenses will be eliminated and direct recognition will be
implemented. The employer contribution components applicable to the state systems will then be identical to the components
applicable to the statewide systems.
Implications of the Proposed Changes
If HB 15 is enacted, administrative expenses associated with the state retirement systems would be accounted for directly as one
of the components of the employer contribution calculation . Under current law, administrative expenses are accounted for
indirectly.
2016 REGULAR SESSION
ACTUARIAL NOTE H B 15
Page 3 of 4
Cost Analysis:
Analysis of Actuarial Costs
Retirement Systems
HB 15 contains no benefit provisions. Therefore, there are no benefit provisions having an actuarial cost..
Current Law
There are no actuarial costs associated with HB 15 .
Other Post-Employment Benefits
There are no actuarial costs associated with HB 15 for post-employment benefits other than pensions.
Analysis of Fiscal Costs
There are no fiscal costs associated with HB 15 .
HB 15 is identical to SB 26 of the 2014 session. The actuarial note for SB 26 estimated the fiscal cost to be about $50 million per
year. The fiscal cost for HB 15 of the 2016 session is estimated to be $0. Although SB 26 and HB 15 are identical, the cost
estimate has changed primarily our understanding of how administrative expenses are accounted for in the annual valuation has
changed. An explanation, using LASERS as an example is given below.
Estimated Fiscal Cost for SB 26 of the 2014 Session
Estimated fiscal costs for SB 26 were based on our understanding that administrative expenses were being treated as actuarial
losses. The $19 million annual fiscal cost for LASERS was developed in accordance with the following:
1. LASERS’ share of the $50 million estimate was about $19 million.
2. LASERS assumes the return on the actuarial value of assets will be 8.15%. Or in other words, LASERS assumes that if
it earns 8.15% on the actuarial value of assets, the system will not incur any gains or losses and the cost of administrative
expense and the COLA program will be completely covered.
3. Because they are not able to directly charge employers with expenses under current law, LASERS indirectly charges
employers by assuming actuarial earnings on investment will be 15 basis points less, or 8.00%.
4. Note: LASERS also indirectly charges employers for the COLA program by assuming actual earnings on investments
will be reduced by another 25 basis points .
5. The net rate, 7.75% (8.15% - 0.15% - 0.25%), is then used to discount all other future payments to obtain appropriate
normal costs and actuarial present values.
6. It was our understanding in 2014 that administrative expenses were being accounted for by recognizing them as an
unending stream of actuarial losses. Except for the fact that this method was proscribed by law, valuations prepar ed in
this manner do not comply with actuarial standards of practice.
7. SB 26 would have put the valuations of the state systems into compliance with actuarial standards. However, such a
correction would have increased annual fiscal costs by $19 million.
Estimated Fiscal Cost for HB 15 of the 2016 Session
Estimated fiscal costs for HB 15 are based our new understanding that administrative expenses are being recognized as an indirect
annual charge to employers. The $0 annual fiscal cost estimate for LASERS was developed in accordance with the following:
1. If HB 15 is enacted, it would be actuarially incorrect to directly charge employers $19 million for administrative
expenses and also to indirectly charge employers a 15 basis point reduction in the assumed rate of return. This would
result in a double charge for administrative expenses.
2. Directly charging employers $19 million as required under HB 15 therefore requires that the 15 basis point indirect
charge be eliminated.
3. The discount rate would then be calculated as 8.15% minus 25 basis points for the COLA program, or 7.90%.
4. Using a discount rate of 7.90% with a $19 million direct charge for administrative expenses will produce valuation
results that are generally equivalent to the use of a 7.75% assumed rate of return on assets with an indirect charge of 15
basis points.
5. Therefore there no fiscal costs associated with HB 15 . 2016 REGULAR SESSION
ACTUARIAL NOTE H B 15
Page 4 of 4
Allowing administrative expenses to be funded by a continuous series of actuarial losses is contrary to actuarial standards of
practice. Allowing administrative expenses to be indirectly funded complies with actuarial standards, but is not the method most
preferred by actuarial professionals. The most acceptable method under actuarial standards of practice is to directly charge for
administrative expenses on an annual basis. HB 15 complies with the most acceptable practice.
Some of the systems have indicated that the boards of trustees would not increase the discount rate if HB 15 is enacted and the
indirect charge is eliminated. For example, a board of directors may choose not to increase the discount rate in order to align their
system with future expected earnings. The effect of a board choosing not to increase the discount rate would put upward pressure
on employer contribution requirements. Such a decision by the board, however, is outside the scope of this actuarial note as is the
cost associated with such a decision.
It is our understanding that LASERS and TRSL currently calculate investment gains or losses without regard to administrative
expenses. In other words, an investment gain or loss includes returns that are going to be used for administrative expenses. As a
result, gains are larger than what they would be should gains be reduced for administrative expense and losses would be smaller
than what they would be otherwise. LASERS and TRSL support this practice by relying on a legal theory of contemporaneous
construction. When retirement laws were originally enacted in the late 1980s and early 1990s, no direct guidance was provided
on how to account for administrative expenses. With the lack of such guidance, LASERS and TRSL took a position on
administrative expenses and investment gains and losses that has been used ever since. The contemporaneous construction theory
asserts that given no guidance originally, the adoption of an administrative process in the absence of guidance, and with the
passage of time, the procedures originally established actually become law and therefore cannot be changed without legislation.
The end result of the application of the contemporaneous construction theory is that more funds become available for transfer to
the Experience Account and for future disbursement to retirees in the form of COLA benefits. Again, it is our understanding that
LASERS and TRSL contend that this is a benefit right that cannot be taken away.
HB 15 does not address, change, or override the contemporaneous construction theory. Therefore, this actuarial note has been
prepared under the assumption that the contemporaneous construction theory is outside the scope of HB 15 .
Actuarial Data, Methods and Assumptions
This actuarial note was prepared using actuarial data, methods, and assumptions as disclosed in the most recent actuarial valuation report approved by PRSAC. These assumptions and methods are in compliance with actuarial standards of practice. This data,
methods, and assumptions are being used to provide consistency with the actuary for the retirement system who may also be
providing testimony to the Senate and House retirement committees.
Actuarial Caveat
There is nothing in HB 15 that will compromise the signing actuary’s ability to present an unbiased statement of actuarial opinion.
Actuarial Credentials:
Paul T. Richmond is the Manager of Actuarial Services for the Louisiana Legislative Auditor. He is an Enrolled Actuary, a
member of the American Academy of Actuaries, a member of the Society of Actuaries and has met the Qualification Standards of
the American Academy of Actuaries necessary to render the actuarial opinion contained herein.
Dual Referral:
Senate House
13.5.1: Annual Fiscal Cost ≥ $100,000 6.8(F)(1): Annual Fiscal Cost ≥ $100,000
13.5.2: Annual Tax or Fee Change ≥ $500,000 6.8(F)(2): Annual Revenue Reduction ≥ $100,000
6.8(G): Annual Tax or Fee Change ≥ $500,000