A | COMPARISON WITH PRIOR VALUATION
The last full valuation was performed by PERAC as of January 1, 2022. The investment return assumption of 7.0% was maintained in this valuation. We maintained the base mortality assumption determined from our local system retiree mortality analysis completed in 2019 but updated the mortality improvement scale (see Part B). Other assumptions are based on our Local Experience Study Analysis issued in 2002 with a subsequent adjustment to the salary increase assumption. Below we have shown a comparison of the results between the two valuations.
| 1/1/24 | 1/1/22 | Increase/ (Decrease) | % Increase/ (Decrease) | |
|---|---|---|---|---|
| Total Normal Cost | $6,692,512 | $5,723,572 | $968,940 | 16.9% |
| Expected Employee Contributions | 3,614,456 | 3,001,720 | $612,736 | 20.4% |
| Net Normal Cost | $3,078,056 | $2,721,852 | $356,204 | 13.1% |
| Total Actuarial Liability | $265,352,598 | $246,793,195 | $18,559,403 | 7.5% |
| Assets | 199,712,214 | 176,141,162 | $23,571,052 | 13.4% |
| Unfunded Actuarial Liability | $65,640,384 | $70,652,033 | ($5,011,649) | (7.1%) |
| Funded Ratio | 75.3% | 71.4% | 3.9% | |
| Number of Active Employees | 674 | 596 | 78 | 13.1% |
| Total Salary | $39,357,496 | $33,254,883 | $6,102,613 | 18.4% |
| Average Salary | $58,394 | $55,797 | $2,597 | 4.7% |
| Average Age | 46.9 | 47.9 | (1.0) | (2.1%) |
| Average Service | 9.7 | 11.1 | (1.4) | (12.6%) |
| Number of Retirees/Survivors | 485 | 476 | 9 | 1.9% |
| Total Benefits* | $16,139,499 | $14,785,474 | $1,354,025 | 9.2% |
| Average Benefits* | $33,277 | $31,062 | $2,215 | 7.1% |
| Average Age | 74.1 | 73.8 | 0.3 | 0.4% |
*excluding State reimbursed COLA
B | FUNDED STATUS AND PLAN EXPERIENCE SINCE PRIOR VALUATION
Funded Status
The unfunded actuarial liability (UAL) and funded ratio are measures of the plan’s funded status. These measures reflect the plan’s position as of January 1, 2024. We believe these measures, by themselves, are not appropriate for assessing the sufficiency of plan assets to cover the estimated cost of settling the plan’s benefit obligations or assessing the need for or the amount of future contributions. However, we believe these measures, in conjunction with the plan’s funding schedule shown on page 9, are appropriate for assessing the amount of future contributions.
The UAL in this valuation reflects the actuarial value of assets, a method that recognizes investment gains and losses over five years. As of January 1, 2024, the actuarial value of assets is 102.7% of the market value. On a market value basis, the UAL is $70.9 million and the funded ratio is 73.3%.
Plan Experience
Plan Liabilities
The System experienced a loss on the actuarial liability of approximately $1.6 million since the last valuation (the actuarial liability was greater than expected). This loss is primarily due to salary increases for continuing active members increasing more than assumed as well as payment of the 5% COLA in FY23. This loss is determined before reflecting the assumption change discussed on the next few pages.
Plan Assets
The System previously adopted an asset smoothing methodology to determine the actuarial value of assets (AVA). As of January 1, 2024, the AVA is $199.7 million compared with the market value of assets (MVA) of $194.4 million. The AVA is 102.7% of the MVA. The rates of return on a market value basis in 2022 and 2023 were -10.9% and 11.5% respectively. The returns on an AVA basis were approximately 5.1% and 7.9% respectively. The recognition of a portion of prior deferred investment gains and losses contributed to an asset loss of approximately $2.0 million over the 2-year period on an AVA basis.
Total
There was a total net loss of approximately $3.6 million since the last valuation ($1.6 million loss on actuarial liability plus $2.0 million loss on the AVA).
Actuarial Assumptions
Investment Return
Early this year, NEPC, the Pension Reserves Investment Trust’s (PRIT) investment consultant, provided figures for 30-year expected return projections using a building block approach, the target allocation and expected long-term returns by asset class. The expected annual return is 7.7% in this study (7.2% if we assume expenses of 50 basis points and the expected return reflects a gross return). This figure is the same as the figure from the 2023 study. Note that the 7.7% average expected return does not mean that the expected return each year will be 7.7%. In fact, over the shorter term (10 years) the average expected return is 6.6% (40 basis points less than last year). Greater expected returns in later years determine NEPC’s long-term projection. The NEPC projected returns are the first measure we use to determine a reasonable range for the long-term investment return assumption.
A comparison of recent expected return projections as well as historical PRIT returns is shown on the next page.
| Expected Annual Return | |||||||
|---|---|---|---|---|---|---|---|
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | |
| 10-year expected return * | 6.6% | 6.8% | 6.2% | 5.8% | 5.7% | 7.0% | 6.6% |
| 30-year expected return | 7.7% | 7.9% | 7.3% | 6.8% | 6.9% | 7.7% | 7.7% |
* In years prior to 2020, NEPC’s short-term horizon was 5-7 years
| Actual Returns as of December 31, 2023 | |
|---|---|
| 2023 | 11.4% |
| 5 years (2019-2023) | 9.5% |
| 10 years (2014-2023) | 8.0% |
| 20 years (2004-2023) | 7.8% |
| 39 years (1985-2023) | 9.4% |
Besides the NEPC analysis, we review the capital market assumptions (CMAs) of other investment consultants for comparison. We estimate the short-term and long-term expected returns using these capital market assumptions and PRIT’s asset allocation. The expected returns using these CMAs are generally consistent with that of NEPC.
In addition, we also review the Horizon Actuarial Services Survey of Capital Market Assumptions. The latest survey compares the assumptions of 42 different investment consultants including NEPC. The Horizon study used in our analysis was published in August 2023. Since it reflects 2023 capital market assumptions, there is a one-year lag between the current results of the Horizon survey and the current NEPC study. The Horizon long-term (20 years) expected return based on its hypothetical portfolio is 7.2% (6.3% in the prior study) and is consistent with the 80-basis point increase we saw with NEPC a year ago. We also estimated the short-term and long-term results using the Horizon average expected returns by asset class and PRIT’s asset allocation. This result is consistent with NEPC. The results of the Horizon survey appear to show a bottoming of the long-term expected returns two years ago.
The National Association of State Retirement Administrators (NASRA) periodically publishes a survey of investment return assumptions used by over 100 large public plans. The most recent survey available at the time of our analysis was published in July 2023. In this survey, the average investment return assumption was 6.91%, a slight decrease from the 6.93% figure published in March 2023. Although the NASRA survey does not consider different asset allocations between the plans, it demonstrates the continuing reduction, and again, perhaps a bottoming of this assumption.
The system used an investment return assumption of 7.0% in the prior valuation. We recommended maintaining that assumption in 2024, and the board adopted a schedule using that assumption. Because of the small decrease in the NEPC short-term expectation and the unchanged NEPC long-term expectations from last year, the 7.0% assumption that we used in our January 1, 2022 actuarial valuation continues to be below the long-term expectation and is slightly above the short-term expectation.
Mortality
We completed a local system retiree mortality analysis in 2019. As part of our analysis, we compared our experience to the public retirement plan mortality tables released in 2019 (the Pub-2010 Mortality Tables- which did not include Massachusetts public plan experience). We found that our experience was not consistent with these tables. Based on our findings, we adopted the RP-2014 Blue Collar table projected generationally with Scale MP-2018 and updated to Scale MP-2020 in our 2022 valuations. We continue to use this base table for our 2024 local system actuarial valuations. However, we updated the mortality improvement scale to the more current MP-2021.
This modest change increased the normal cost by approximately $7,000 and increased the actuarial accrued liability by approximately $570,000.
Chapter 176 Provisions
Chapter 176 of the Acts of 2011, An Act Providing for Pension Reform and Benefit Modernization, made many changes to the Chapter 32 pension law. There are several changes that will have the most impact on decreasing plan liabilities over the longer term. These include an increase in the normal retirement age by two years (for example, from age 65 to age 67 for Group 1 members), an increase in the age (early retirement) reduction factor for ages below the maximum age (from a 4.0% to a 6.0% annual reduction), and an increase in the period for determining a member’s average annual compensation (from 3 years to 5 years). These changes are effective only for members hired after April 1, 2012.
As of January 1, 2024, there were 485 members hired after April 1, 2012. The normal cost is approximately $411,000 lower and the actuarial liability is approximately $3.29 million lower for these members under the new provisions compared to the figures under the prior provisions.
COLA Base
This valuation reflects a COLA base of $13,000. The 2022 valuation reflected this same base.
Current Payable Adjustment
In the data originally provided by the Board, the current payable field was overstated due to the payment of the 5% COLA for FY23 first being made in 2023. The software vendor provided an update. However, this update did not appear to entirely correct the issue. Therefore, in this valuation, we determined the current payable by taking the current payable information from the prior valuation and rolling it forward with the COLAs provided by the Board during the last two years.
Expenses
We have generally included administrative expenses paid by the plan in the development of normal cost in our actuarial valuations. However, that is not the case with investment-related expenses. Historically, most local systems have used an investment return assumption that is net of investment related expenses. For a number of years, we have been reflecting a portion of investment related expenses in the normal cost. We used an expense assumption of $650,000 in this valuation, which reflects approximately $425,000 of investment related expenses. Over time, we expect the total administrative and investment expenses to be included in the normal cost. Alternatively, a lower investment return assumption can achieve a similar result.
Net 3(8)(c) Reimbursements
A common assumption is that §3(8)(c) payments paid from a system are approximately equal to §3(8)(c) payments paid to a system. However, we found for most local systems, this is not true. For your system, there is net §3(8)(c) cash outflow during the year. In order to better reflect the actual cost to the System, we have once again included expected net §3(8)(c) payments in the funding schedule.
Funding Schedule
The funding schedule presented in this report was recently adopted by the Board. The FY25 payment was maintained from the prior schedule. The total appropriation increases 4.5% each year through FY31 with a final amortization payment in FY32.
GASB 67/68
The auditors requested we use the results of this valuation to prepare the Governmental Accounting Standards Board (GASB) disclosures for the fiscal year ending June 30, 2024 and the plan year ending December 31, 2023. The statements are commonly referred to as GASB 67 and GASB 68. GASB 67 relates to financial reporting for state and local government pension plans (plan financials). GASB 68 relates to financial reporting by state and local governments for pension plans (employer financials). We have used a measurement date of December 31 in each year we have provided these disclosures. We have not provided any GASB 67/68 exhibits in this report. These disclosure exhibits were provided under separate cover.
COVID-19 Pandemic
The assumptions in this report do not reflect any potential impacts of the COVID-19 pandemic on the System. In the short-term, the pandemic likely had a material effect on the mortality experience, and to a lesser extent, the retirement and withdrawal experience in ways not anticipated by the assumptions on which the projections are based.