Relates to the rate of regular interest used in the actuarial valuation of liabilities for the purpose of calculating contributions to certain retirement funds

The bill also would provide for the calculation of employer contributions 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 liabilities for each retirement system as of each such June thirtieth. The initial unfunded accrued liability for each retirement system, calculated as of June 30, 2010,

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. Subsequent unfunded accrued liabilities would be amortized over the number of years specified 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 parents 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 beneficiaries where such payments are statutorily guaranteed by the City under current law, and the assets of the variable supplements fund are insufficient 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 resolutions recommending enactment of the funding provisions set forth in this bill, and the board of trustees of the New York City Fire Department 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% 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-determined 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 contributions 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 liabilities 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 calculation, 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 established by statute, (2) changes in the valuation rate of interest, actuarial 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 employer contributions that reasonably follow the objective of intergenerational 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 mechanism for funding the City police and uniformed correction variable supplements funds. The police Officer's 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 fund 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 represent 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 guaranteed by the City. The Actuary has stated that the COVSF may not be obligated to pay benefits until current law requires the City to guarantee such benefits in 2019. The bill, however, in a manner similar to the approach proposed for the Police Pension Fund and its variable supplements 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 consideration of this proposal by the Legislature.

Effective date

This act shall take effect immediately and shall be deemed to have been in full force and effect on and after July 1, 2011.