By Tom Moutes, RLACEI Legislative Director
Every year at about this time it is like Christmastime for retirement nerds – also known as when the annual actuarial valuation is published!
Following are four interesting things I found in this year’s valuation (for fiscal year ending June 30, 2021):
The Market Value of LACERS Assets ($22.8 billion) Is Significantly Higher than the Actuarial Value ($20 billion).
This is good news! LACERS had a great investment return last fiscal year, which meant that the value that LACERS could have sold its holdings for on June 30 (market value) was much higher than the actuarial value of assets that is calculated into the City’s contribution rate for next fiscal year (more on that below).
Because it’s not good for anyone to have the City’s annual pension contribution whipsaw up and down every fiscal year, each year’s investment return is phased in over a seven-year period (so, only one-seventh of last year’s great return will be recognized each year). The phased-in years of investment returns create the actuarial value of assets. By phasing in the returns, the good investment return years don’t artificially push down the City’s contribution for the following year and, conversely, poor investment years don’t unnecessarily inflate the City’s contribution.
When the market value of LACERS assets is significantly above the actuarial value – which hasn’t happened for many years, until now – that means there are several years of investment gains to be phased-in in future years. This helps the City’s contribution rate while improving the funding of LACERS at the same time.
LACERS-Funded Ratios Have Improved.
Based on the market value of LACERS assets, the funded ratio for retirement benefits improved from 66.3 percent (2020) to 81.3 percent (2021), and the funded ratio for retiree health benefits moved from 81.8 percent to 107.4 percent. It is always good news when funded ratios improve because that means our pension plan is in a more solid fiscal position.
While it’s best not to get too excited about the improvements to the funded ratio that largely are attributable to one year’s investment return, we’ll take the good news where we can find it these days!
The City’s Contribution Rate for Fiscal Year 2022-23 Will Be Going Up!
You might think that, with the good news in the paragraphs above, the City’s contribution rate would be heading downward, but that’s not the case – at least for now. This is because each year, there are many ingredients in what I call the “actuarial stew.” To determine the City’s contribution rate, you have to make sure all of the ingredients of the “stew” are taken into consideration.
For fiscal year 2022-23, the City’s contribution rate will increase by 1.06 percent from 32.25 percent to 33.31 percent of payroll. The biggest reason for the increase (or ingredient in the “stew”) in the City’s contribution rate is the impact of having a smaller-than-expected payroll in 2022-23 due to the Separation Incentive Program the City recently offered. It takes a higher percentage of the smaller payroll to come up with the dollar amount of contribution that the City owes LACERS. (For example, if you owe someone $10 and you have $100, you will pay them only 10 percent of what you have, but if you have $70 then you need to pay them close to 14 percent of what you have to come up with the same $10.)
Increase in the Number of Retirees.
The Separation Incentive Program along with the pandemic and other factors caused a large increase in the number of retirements last fiscal year. In fact, the total number of Retired members went up by almost 10 percent last fiscal year! In fiscal year 2020-21, LACERS retired more members than any year since the Early Retirement Incentive Program that was offered during the Great Recession and the second most ever in a fiscal year. As of June 30, 2021, LACERS had 17,054 Retirees.
While I realize not everyone will geek-out over the release of the annual actuarial valuation, it’s important to understand the positive and negative implications for LACERS and the City based on the numbers and trends contained in these reports.