2016 REGULAR SESSION
ACTUARIAL NOTE H B 16
Page 1 of 4
House Bill 16 HLS 16RS-190
Original
Author: Representative J. Kevin
Pearson
Date: May 2, 2016
LLA Note HB 16 .01
Organizations Affected:
Louisiana School Employees’
Retirement System
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 HB 16 provides
compliance with the requirements of R.S. 24:52 1
Bill Header: RETIREMENT/SCHOOL EMPS: Provides for the funding of administrative expenses of the La. School Employees'
Retirement System.
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 16
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Bill Information:
Current Law
The actuarially required employer contribution for the Louisiana School Employees’ Retirement System (LSERS) 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)).
LSERS and its advisors concluded that projected administrative expenses cannot be directly included in the employer contribution
calculation. Their rationale is summarized below.
1. The law pertaining to employer contribution requirements for LSERS 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 LSERS does not mandate a cost component for administrative expenses, it is only
reasonable to conclude that the legislature did not want LSERS to directly charge employers for administrative expenses.
SB 26, introduced during the 2014 regular session, contained provisions for all four state retirement systems that would have
achieved the same result for LSERS as HB 16. Our actuarial note for SB 26 of the 2014 session contained a $50 million per year
estimated fiscal cost. LSERS’ share of this cost was estimated to be $4.53 million. 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 in the fall of 2015 with the actuaries of the state retirement systems, 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. LSERS assumes that it will earn 7 .25% on the actuarial value of assets.
2. The system assumes that 2 5 basis points of the investment return will be used to offset administrative expenses.
3. The LSERS actuary calculates normal costs and liability values using a discount rate of 7.00% (7.25% - 0.25%).
4. Using this methodology, administrative expenses are recognized as they occur.
The actuary for the LSERS agrees that it would be more transparent to have a direct charge for administrative expenses rather
than to continue to use the indirect method currently in use, particularly if the cost is the same.
Proposed Law
Under HB 16, indirect recognition of the cost of administrative expenses will be eliminated for LSERS and direct recognition will
be implemented. The employer contribution components applicable to LSERS will then be identical to the components
applicable to the statewide systems. HB 16 will become effective with the June 30, 2016 valuation.
Implications of the Proposed Changes
If HB 16 is enacted, administrative expenses associated with LSERS would be accounted for directly as one of the components of
the employer contribution calculation . Under current law, administrative expenses are accounted for indirectly.
Cost Analysis:
Analysis of Actuarial Costs
Retirement Systems
HB 16 contains no benefit provisions. Therefore, there are no benefit provisions having an actuarial cost..
2016 REGULAR SESSION
ACTUARIAL NOTE H B 16
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Current Law
There are no actuarial costs associated with HB 16 .
Other Post-Employment Benefits
There are no actuarial costs associated with HB 16 for post-employment benefits other than pensions.
Analysis of Fiscal Costs
There are no fiscal costs associated with HB 16 .
HB 16 is identical to portion of SB 26 of the 2014 session applicable to LSERS. The actuarial note for SB 26 estimated the fiscal
cost for LSERS to be about $4.53 million per year. The fiscal cost for HB 16 of the 2016 session is estimated to be $0. Although
SB 26 and HB 16 contain provisions that would achieve identical results for LSERS, the cost estimate has changed primarily
because our understanding of how administrative expenses are accounted for in the annual valuation has changed. An explanation
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 $4.53 million annual fiscal cost for LSERS was developed in accordance with the following:
1. LSERS’ share of the $50 million estimate was about $4.53 million.
2. LSERS assumes the return on the actuarial value of assets will be 7 .25%. Or in other words, LASERS assumes that if it
earns 7.25% 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, LSERS indirectly charges
employers by assuming actuarial earnings on investment will be 2 5 basis points less, or 7 .00%.
4. The net rate, 7.00% (7.25% - 0.25%), is then used to discount all other future payments to obtain appropriate normal
costs and actuarial present values.
5. 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 prepared in
this manner do not comply with actuarial standards of practice.
6. SB 26 would have put the valuations of LSERS into compliance with actuarial standards. However, such a correction
would have increased annual fiscal costs by $4.53 million.
Estimated Fiscal Cost for HB 16 of the 2016 Session
Estimated fiscal costs for HB 16 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 LSERS was developed in accordance with the following:
1. If HB 16 is enacted, it would be actuarially incorrect to directly charge employers $4.53 million for administrative
expenses and also to indirectly charge employers a 25 basis point reduction in the assumed rate of return. This would
result in a double charge for administrative expenses.
2. Directly charging employers $4.53 million as required under HB 16 therefore requires that the 2 5 basis point indirect
charge be eliminated.
3. The discount rate would then be determined to be 7.25%.
4. Using a discount rate of 7.25% with a $4.53 million direct charge for administrative expenses will produce valuation
results that are generally equivalent to the use of a 7. 00% discount rate with an indirect charge of 25 basis points.
5. Therefore there no fiscal costs associated with HB 16 .
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 16 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 16 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 LSERS 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 2016 REGULAR SESSION
ACTUARIAL NOTE H B 16
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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. LSERS 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, LSERS 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
LSERS contends that this is a benefit right that cannot be taken away.
HB 16 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 16 .
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 16 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