AFSCME District Council 36

LACERA: The Actuary Cometh

Article By: Fred Massey

California’s Pension laws require public pensions to conduct valuation and experience studies at least every three years. LACERA has done a pension review every year and a full experience study every third year. Every year, Milliman, LACERA’s Actuary, comes to the Board of Investment and discusses the actuarial assumptions that guide the Board’s policy and actions. Last year Milliman came early beginning in October, returning in November and returning again in December. Every three years, the Board does a robust review to assess the reasonableness of the assumptions. The actuaries call this review an experience study. 2016 was the third year and the robust review was in order.

Actuaries work in finance and insurance. They evaluate and measure risk and uncertainty using mathematical and statistical methods. If you bought an insurance policy for your grandchild, the cost of the policy would be based on actuarial assumptions. If the child is one year old, the child has an excellent chance of living to maturity and into old age. What are the chances that the child will die before age 21? Answering the question is an actuary’s task. They use statistics, and morbidity and mortality data to answer these questions. With a pension plan they use Social Security data.

The central issue that the actuaries help the Board address is the expected rate of return on their investments. The rate of return affects the contribution rate for the County of Los Angeles and its employees. When the assumed rate of return is too high, the investment pool cannot fund the promised pension. On the other hand, if the contribution rate is too high, it competes with providing money for direct services, and employees have less money for living. Aside from the rate of return, actuaries need to estimate how long retirees will live. People are living longer because of better health care, improved diets, exercise regimes, and better self care. While people are living longer, the cost of providing a pension grows and becomes a challenge.

During the October meeting, the focus was initially on both economic and demographic issues. It became clear early in the meeting that Board Members were very concerned about the economic issues, particularly the expected rate of return. They wanted to spend the entire meeting on the rate of return, wage, and productivity growth and inflation. So, Milliman was invited back for a second round and the balance of the first meeting was focused on demographic issues.

Actuaries have methods and procedures. The remainder of the meeting focused on their method for evaluating demographic data. Actuaries have historically used a statistical method. The Society of Actuaries has recently developed a generational method. The latter method compares individuals in an age group with others in that age group. Thus, they compare 45 year olds with other 45 year olds and 65 year olds with other 65 year olds. The method assumes that people will live longer and they build that into their numbers and expected cost into it. The generational method is more expensive for pension boards but a more stable predictor of cost. The new method was not well received by the Board.

In November, Milliman’s Actuaries returned with their more senior actuary to discuss expected rates of return. He assured the Board that they have financial analysts who help evaluate economic data. Milliman’s staff believes that the expected rate of return is 6.2%. This number is an historical figure and includes inflation, wage and productivity growth. LACERA’s expected rate of return is 7.5% and has been for three years. Milliman recommended that the Board adopt an expected rate of return of 7% or 7.25%. The rate reduction, bringing the rate down to 7.25%, will cost the county about $294 million per year. The new rate will bring LACERA more in line with other pension boards around the state. Gregg Rademacher, LACERA’s CEO, announced that he had consulted with Segal, the auditing actuary. Segal agreed with Milliman.

In December, Milliman returned for a third time. SEIU came to the meeting with a letter from a consulting actuary. Ms. Sachi A. Hamai, Los Angeles County’s CEO, gave a short speech. She also provided a letter to the Board quoting another actuarial firm. The Coalition of County Unions sent a letter to the Board of Supervisors supporting the agreement worked out by all the parties. The parties agreed that the rate would be reduced to 7.25% from 7.5%, and the cost increase will be spread over three years.

The expected rate of return for public pension systems is an issue that has been publicly discussed and debated for some time. In the years since the Great Recession, the discussion has been especially heated. So, why is the Board taking it up now? The last time BOI took up the issue they were doing the experience study in 2014. It was also a contentious issue for the County and its budget. Pension funding was competing with public services for public dollars. Now, three years later, the American economy is doing better. Unemployment is down. Real estate sales and values in Los Angeles County have improved dramatically, and local government revenues have improved over the past three years. The state budget and tax revenues are much improved and more stable. The politics surrounding the state budget are more settled and less contentious than a few years ago. The Board of Supervisors has been able to find the initial $100 million down payment without much difficulty. They did not need to take money from direct services to address pension costs.

The fact that the parties, the Board of Investment, the Board of Supervisors and the Unions, needed to consult 4 actuarial firms suggests that the battle for public dollars remains contentious.

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