Description:
This video contains a screen view of the COLA Reserve Fund PowerPoint presentation along with a view of the presenters, John Boorack and Patrick Charles. PERAC Executive Director, Bill Keefe, opens the session, and PERAC Communications Director Natacha Dunker, closes the session. There are also questions from the in-person audience.
Transcript:
00:00:02:19 - 00:00:26:07
Bill Keefe
Hey, everybody. Hello to everyone here at PERAC and out there on Zoom. Thank you for joining us today. We have a crowd of over 300 altogether between in person here and online. Given that legal panel at MACRS a run for its money for the most attended course. We'll be recording this session and it will be available on our website afterwards.
00:00:26:07 - 00:00:49:00
Bill Keefe
And all board members that are live here, just please make sure you sign in all the people on zoom. You'll be getting your three credits. Thank you to Natacha Dunker for all her work organizing. And thank you to John Boorack and Patrick Charles for presentations today and throughout this process, along with Nate Gaetz and Anna Wang here at PERAC.
00:00:49:02 - 00:01:10:12
Bill Keefe
You don't have to adjust your screens. That is the planet Jupiter on my forehead. It's a little pre skin cancer thing. I've had to put some cream on. Nothing to worry about. Just some bad timing. I have one picture with the Stanley Cup, with a couple of my colleagues here at PERAC. And of course when it was taken, I was going through the same thing and had the same giant red circle and slightly different spot.
00:01:10:14 - 00:01:39:08
Bill Keefe
A couple of quick things - I want to highlight the PERAC dictionary that went out. We sent it out electronically. It's posted on the website. It was a team effort led by Ken Hill, with the primary assist to Patrick and Karen McMahon. Hopefully it'll be a resource to veterans and to newer folks alike. We envision it being updated periodically and, sending any cards and letters on any suggestions you may have with that, but I thought it came out great.
00:01:39:12 - 00:02:09:04
Bill Keefe
There's links to statutes and memos in there, over 150 terms defined. So hopefully it'll be something that people can use. The dictionary was presented at the Northampton Administrators Training and it will be at the November 4th training in Woburn at the Crown Plaza and March 11th in Norwood also. Yesterday we put out an education memo. Just want to highlight there's a Recent Cases of Interest scheduled for Tuesday, November 10th.
00:02:09:06 - 00:02:37:11
Bill Keefe
For folks that were at Emerging Issues, you heard this, but I'll repeat it for folks that weren't - we’re celebrating our 30th anniversary this year. The first commission meeting was held November 7th, 1996 at Emerging Issues. I rattled off some different numbers from over the years, but this is the one that maybe stuck out the most. The total assets of public retirement at the end of 1996 were $26.2 billion, and today it's $145 billion.
00:02:37:12 - 00:03:22:09
Bill Keefe
So clearly, we've come a long way together. And there's much for which to be proud. Looking forward to macros to some of first to third. Will conduct another session on the caller form for anyone who could make today, or for further discussion and questions for anybody who is attending today. As you know, the Coachella reform legislation came out of legislatively created special COLA Commission to examine the state and teachers systems out of that, out of the work of that commission, which included the chairs of the Public Service Committee, Rep Dan Ryan and Senator Mike Brady, PRIM executive director Mike Trotsky, Mass Taxpayers Foundation President Doug Howgate, administration and finance assistant budget director Amelia
00:03:22:09 - 00:03:50:21
Bill Keefe
Marceau, State Retirement Board executive director Kathy Kougias, former teachers’ executive director Erica Glaster, Mass Retirees president Frank Valeri, and myself. Out of that Commission came legislation. Mass Retirees was the catalyst behind the creation of the Commission and championed the legislative process from the get go. This doesn't happen without them. So thank you to Mass Retirees and to everyone we sought out as we developed the memo around this legislation.
00:03:50:23 - 00:04:12:19
Bill Keefe
It was a group effort, and it was purposely a group effort. We sought out board directors, board members, board attorneys, all of the private actuaries, Mass Municipal Association, the pension software companies. We wanted to gain as many perspectives as we could and as much feedback as we could as this will have a wide impact. And by doing so, we hope to build by consensus.
00:04:12:21 - 00:04:32:21
Bill Keefe
So with that, I'm going to turn it over to actuary John Boorack and First Assistant Deputy Director Patrick Charles, and look forward to questions and discussion at the end.
00:04:32:23 - 00:04:54:19
Patrick Charles
Good afternoon everyone. I'm Patrick Charles and I'm just going to go over the COLA process and sort of the genesis of all of the provisions and what they mean. You will then hear from the actuary who will talk about funding it, how you do all of your calculations on on this issue. You do not want me trying to teach you anything having to do with the math.
00:04:54:19 - 00:05:17:17
Patrick Charles
So we'll just stick to the words on the screen and the words from the text of the legislation, frankly. So as Bill mentioned, this came out of the special COLA Commission, and it was done through the budget, through the annual budget, which is chapter 137 of the acts of 2026. And it's the fiscal year 27 budget. And this provided two different things.
00:05:17:19 - 00:05:41:23
Patrick Charles
COLA reserve fund and an enhanced COLA process. And there are two distinct groups here. You have the state and teacher systems who are mandated to do this, and they are mandated in how they do all of the enhanced COLAs and also COLA based increases. And that's because the legislature controls the COLA for state and teachers. So that is a mandatory process.
00:05:42:03 - 00:06:05:16
Patrick Charles
But the locals, it's a local option whether or not to do the enhanced COLA and to do the COLA reserve fund. And so a lot of what I'm going to talk about today is for the locals, because the state and teachers, they don't have leeway. They're mandated to do certain things. So they're going to have to come up with and we're going to have to go over with them some accounting issues and transferring of assets when there's an excess benefit.
00:06:05:16 - 00:06:15:14
Patrick Charles
But that's all something that's just done. Whereas the locals have more option as to what to do and what.
00:06:15:16 - 00:06:40:18
Patrick Charles
Memo 23 of 2026 is the memo that Bill just mentioned. It talks about the entire process. There's also at the back of that memo, a couple of, I'll call them roadmaps for how and the timeline for how some of these things would be adopted when certain calculations would be made, when transfers would occur. So you can use that as sort of a reference point.
00:06:40:20 - 00:07:09:12
Patrick Charles
So like I mentioned, the state and teachers, the legislation establishes a reserve fund into which the excess investment gains of the system will be placed. And that is in order to fund two things for the state and teachers. It funds the enhanced COLA benefit, which we're going to go over the details of that, but it funds that first and then after that is fully funded, according to the actuary, then the reserve fund will be used to provide COLA base increases for the state and teachers retirement systems.
00:07:09:17 - 00:07:29:15
Patrick Charles
But those base increases will not occur until after the enhanced benefit is passed and been funded. So the base increases will be $1,000 base increase based on whatever the actuary determines is the amount needed and the excess benefit fund once the enhanced COLA is done.
00:07:29:17 - 00:07:52:10
Patrick Charles
Now, what are the eligibility requirements for the enhanced COLA? There's a number of different things here. It's the same for the state and teachers as it is for the locals. It's always going to be the same criteria for eligibility. First of all, the member must have retired prior to July 1st, 2020. So if someone retires in 2021, they're never going to be eligible for the enhanced COLA.
00:07:52:15 - 00:08:12:14
Patrick Charles
If someone retires in 2031, they're not going to get the enhanced COLA. The enhanced COLA is only for members who retired prior to July 1st, 2020. They must have a retirement allowance, which is 80% of the average salary in the retirement system. It says average salary in bold because we are not talking about the average benefit in the system.
00:08:12:17 - 00:08:35:16
Patrick Charles
It's the average salary of all the employees that are in the active employees that are in the retirement system, not the average pension payment or retirement allowance payment. That has been a question we've gotten a few times. Superannuation retirees. You must have 20 years of service and have been retired before July 1st, 2020. In order to be eligible for this
00:08:35:18 - 00:08:51:01
Patrick Charles
Disability.Retirees, however, do not have a minimum service requirement. You could have a disability retiree who was retired for disability in 1990 with three years of service. They would be eligible for this because they're a disability, not a super (annuation).
00:08:51:02 - 00:09:20:24
Patrick Charles
The other thing to keep in mind, and this is again a local situation, is there are three separate levels of enhanced COLA and they can each be adopted separately for the locals. For the state, all three must be funded and all three will be implemented. And so each level tier, what I call tier one, pays an extra $100 annually to any member who has been retired, from 10 to 14 years.
00:09:21:01 - 00:09:45:05
Patrick Charles
Okay, so there's a reason why it says 10 to 14. The next bullet is 15 to 19, and the last one is more than 20, because it's that $100 gets paid from years 10 to 14. If that is the only COLA enhancement that you've offered in year 15, that person stops getting the hundred dollars. You get it only for the period mentioned in the statute.
00:09:45:07 - 00:10:08:01
Patrick Charles
Tier two pays an extra $200 annually to members, with the 15 to 19 years and tier three anyone with more than 20 years of retirement. And that meets the other eligibility requirements of being retired before 2020 and having the proper pension level below the 80% salary gets $300, and that would continue for the rest of their lives.
00:10:08:03 - 00:10:28:13
Patrick Charles
Now, this is another aspect that we've harked upon a little in the memo, and that we want to really focus on. A system can adopt the enhanced COLA revisions all at once, or one at a time. You have the choice. So if you want to do an analysis, have your actuary do an analysis to determine, well, how much is the $300 COLA going to cost us?
00:10:28:19 - 00:10:58:05
Patrick Charles
What about the 200? What about the 100? Which do we think we want to do first? You can certainly do that. And you can do you can do the $300 one first if you wanted to and not pay anything to the first 20 years of retirement. But if you adopt more than one of the tiers at a time, you must fully fund both tiers or all three tiers, if that's what you do before you pay any of the tiers.
00:10:58:11 - 00:11:18:20
Patrick Charles
So if you adopt all three tiers and you have enough money to cover the third tier, no, you don't pay it until you have enough money to pay anything that was adopted. So you're going to want to have the actuary have prepared a cost analysis of each tier, so you can make a decision as to which tiers to adopt, if any.
00:11:18:21 - 00:11:37:12
Patrick Charles
Some systems I don't know that they'll adopt any of these, but you should definitely do the analysis to find out the cost. And they can possibly give you an estimate as to how long with the investment performance, what you would need to get to to fund the benefits.
00:11:37:14 - 00:11:57:07
Patrick Charles
What happens if an individual tier is adopted? So let's say that you adopt only the first tier. So you're going to pay the $100 for being retired between 10 and 14. As it says, the benefit is going to be paid to those people that have been retired with between 10 and 14 years, and it provides payment for only that specific period of time.
00:11:57:09 - 00:12:19:08
Patrick Charles
And once you reach the end of that period, that person will stop receiving any sort of enhanced COLA. They will just receive the regular COLA as they would normally. And keeping in mind that when you're getting these enhanced COLAs, it doesn't do anything to the system's original COLA. So if you have a $15,000 base, that COLA is always going to be paid to that member.
00:12:19:08 - 00:12:35:22
Patrick Charles
It's just they're going to get an add on to it of this 100 or 200 to $300.
00:12:35:24 - 00:12:42:09
Patrick Charles
It's the average salary for the entire of all that is included in the system.
00:12:42:11 - 00:12:53:04
Patrick Charles
Oh, does the average salary mean all regular comp or just base pay? It's all compensation.
00:12:53:06 - 00:12:57:14
Patrick Charles
Okay.
00:12:57:16 - 00:13:18:04
Patrick Charles
The COLA reserve fund. Now, this is another question that we've gotten a number of times already. If you adopt any of the tiers of COLA enhancement, you must adopt the COLA reserve fund. There is not an option in the legislation to allow you to pre fund the system or to take on the liability of one of these tiers or all of these tiers into your funding schedule.
00:13:18:08 - 00:13:44:19
Patrick Charles
You can only do it once. The excess benefit, excess investment gains have been accrued in the COLA reserve fund. It's very specific about that in the legislation. Once you adopt the COLA reserve fund, then 7.5% of any excess investment gain will be annually transferred to the COLA reserve fund. And your actuary will determine that amount. Now 7.5% of what.
00:13:44:24 - 00:14:11:14
Patrick Charles
So if you have a 7% investment return assumption and you get 10% return, then 7.5% of that extra 3% will be transferred into the COLA fund. That's as far as I'm going on any sort of mathematical analysis of this. John will definitely go into more detail on what that actually equates to, and maybe even some samples of how that would work, but, it was much easier when it originally said 10%.
00:14:11:14 - 00:14:36:18
Patrick Charles
I understand 10% pretty well. It's the breakdown of that just blows me, excess investment gain. Again, anything over the assumed rate. Now this is going to vary from system to the system. Some of you have 7.25. Some of you have seven. Some of you may be in the sixes. So what your investment gain, excess gain, could vary drastically from some systems.
00:14:36:20 - 00:14:59:20
Patrick Charles
Each year, the system actuary - that could be John or it could be private actuary - will determine and update the cost of the enhanced COLA benefit. They'll certify how much to transfer to the COLA reserve fund, if there's anything. There may be years where you don't exceed your investment gain, so you won't, or your investment return assumption, so you won't have anything to transfer.
00:14:59:22 - 00:15:27:17
Patrick Charles
And then every year, the actuary will look at that number and then look at the number that's in your reserve fund or the number that will be in there once you transfer for the year and determine if there's enough to pay the benefit. And if there is, he will certify that and then you will pay out in the following COLA cycle the next July or that July, I should say, the enhanced COLA benefit, as I mentioned, a system must adopt the COLA reserve fund.
00:15:27:17 - 00:15:51:16
Patrick Charles
If it adopts any of the enhanced COLAs, it's not permitted to absorb the liability. And you can't pay the enhanced COLA until the COLA Reserve Fund has been credited with an amount sufficient to fully fund the adopted tiers. So, again, if you're going to adopt all three tiers at once, that's great, but it's going to take you longer to fund it and longer before anyone actually sees any of these benefits.
00:15:51:18 - 00:16:11:08
Patrick Charles
Once the assets have accrued to pay for the adopted enhanced tiers, then the assets are transferred to the Pension Reserve Fund. So you're going to have these assets in the COLA reserve fund. And the reason why we have a COLA reserve fund separated, it may sound strange to just separate it out, but still invest it the same way as if it was a system asset.
00:16:11:10 - 00:16:30:07
Patrick Charles
It's for the actuarial purposes, because we're not going to count that as part of your total assets when we do your liabilities. And John will talk about that too. Now, what happens when you pay off one if you adopt one tier and you pay it off, you haven't adopted either of the other two tiers. You stop putting money into the reserve fund.
00:16:30:09 - 00:16:52:21
Patrick Charles
It becomes basically a zero balance account until you adopt another tier. This is not going to be a continuing account. Once you have paid for all of the adopted enhanced COLA benefits, you no longer have excess investment gains. According to the statute, you don't transfer anything. All of your investment gains now, just like they were before. It's just part of your system assets.
00:16:52:23 - 00:17:14:07
Patrick Charles
So if you then adopt a second tier five years later, you have to restart your COLA reserve fund. You don't erase it. It's not that you've never adopted it. It's just now you can start putting money in again. But until you have that local option to adopt, you can't keep putting money aside. Originally, the language had it that you would have that money set aside.
00:17:14:07 - 00:17:22:15
Patrick Charles
Continuing to go forward and pay for your COLA base increases the legislature removed that for the locals, that is only a state element. I saw a question in person.
00:17:22:17 - 00:17:39:17
Speaker 3
Tier one not fully funded that says look over the reserve fund and you haven't adopted anything else, would the excess go back to funded status or would it stay there until or if you adopted another tier?
00:17:39:18 - 00:17:56:05
Patrick Charles
So in case people at home can't hear the questions. Yeah. The question was if you adopt the first tier and then you have enough, you have excess money when you finish out the year and have excess money to pay off the unfunded liability associated with that. Do you transfer all of the money or just the portion to cover the benefit?
00:17:56:05 - 00:18:11:11
Patrick Charles
And the answer is you transfer it all so it goes in towards lowering your assumed liability for the rest of the system as well, because there will be situations, obviously, where you will not. When you put it in your investment gain for the year, you're going to you're not going to hit a dollar for dollar exactly what you need, right?
00:18:11:11 - 00:18:28:22
Patrick Charles
You're going to probably be over. There might be a year where you're like $5,000 under and you can't pay the benefit. Then you got to wait till next year that that could also happen. So but yes, you would transfer it all and the fund becomes a zero balance account for that until another tier is adopted.
00:18:28:24 - 00:18:36:04
Patrick Charles
Let me see. There's a couple of questions I'll just go through before John comes up.
00:18:36:06 - 00:18:47:03
Patrick Charles
I already covered the question of do you have to adopt the enhanced and the reserve fund? If you adopt a COLA enhanced COLA, you have to adopt a reserve fund.
00:18:47:05 - 00:19:11:13
Patrick Charles
Can you create and fund the reserve fund before accepting any of the tiers? No. You must have adopted one of the tiers before you can go for legislative approval to adopt the COLA reserve fund. And I didn't put it in the slide, and I probably should have. This is like any other local option in chapter 32 where you vote as a board to do it, and then you have to get local legislative body approval.
00:19:11:15 - 00:19:30:06
Patrick Charles
So that could be the city council, it could be town meeting, it could be the Board of Selectmen. I don't know, all of the permutations of local legislative bodies, but, and then the counties have a little bit different as well, because they have the county advisory groups and all that. But it's the same process for any local option that you adopt.
00:19:30:06 - 00:19:34:10
Patrick Charles
You have to go through that.
00:19:34:12 - 00:19:51:07
Patrick Charles
I think there's some more questions. Let me see. I can't whoops, I'm trying to get the I can't get it to scroll through the there's more questions but I can't get that to move.
00:19:51:09 - 00:20:00:15
Patrick Charles
There we go. That's what I was using.
00:20:12:01 - 00:20:22:13
Patrick Charles
Define 80% below average salary. If average salary is $30,000, does that mean anyone receiving 6000 or less is eligible?
00:20:22:15 - 00:20:32:10
Patrick Charles
Anyone over 6000 not eligible? It's anyone getting what's 80% of 30,000? Okay.
00:20:32:12 - 00:20:33:15
John Boorack
24!
00:20:33:17 - 00:20:51:02
Patrick Charles
24,000. That's what I thought. So it's only 24,000. The 6000 was throwing me frankly. So as long as your retirement allowance is under 24,000, you would be eligible.
00:20:51:04 - 00:21:12:00
Patrick Charles
Okay, here's a good question. If a system adopts tier three, funds it, starts paying out those to those over 20 years. And then a few years later adopts tier two, do all payments to tier three stop while the reserve fund is is filled back up to pay for the tier two. Now, once you have funded either any of the tiers, that tier is funded, it goes forward and it keeps getting paid.
00:21:12:00 - 00:21:33:19
Patrick Charles
If you adopt a second tier, you start up the reserve fund again and then you would pay that out as soon as that's funded. But the other tier that you've already paid for, because the idea behind this is that you have fully funded this before you begin paying the benefits, actuarially speaking, you have fully funded it. So it's now just part of the system and it goes forward and will not stop.
00:21:33:19 - 00:21:46:14
Patrick Charles
There's no way to end it other than people will eventually we'll say age out of the benefit.
00:21:46:16 - 00:22:08:09
Patrick Charles
If your funding level drops, you stop paying the enhanced COLA. No. Again, once you've adopted it and you've pre funded it, it continues forever. Regardless of if the system loses 30% next year, after the year after you've done it, you're still this is still now part of your liability. It's still pre funded.
00:22:08:11 - 00:22:33:11
Patrick Charles
The other thing and I don't remember if John is covering this, but so I won't talk about too much. But when you have a 10% return you're going to have you have excess gain, okay. You're going to put money in and you're going to have money in that COLA reserve fund. And let's say you've got $100 million in there and your system earns only 6% next year, you're still crediting that account with the same investment return that you credit your normal account.
00:22:33:13 - 00:22:55:13
Patrick Charles
And then but you won't be putting any new money in because you're only at six and you're assumed rate is seven. But so there's still accounting to be done on that account. And also, if the system loses money, you're going to lose money because we're investing all of these assets as part of the system. Still, we're just accounting for them separately in order to pay for this enhanced benefit.
00:22:55:13 - 00:23:17:10
Patrick Charles
And so that it doesn't show up on your actuarial assets, but you still have to account for it throughout the whole process, which means you have investment gains or investment losses, just like you do with your normal system assets. You're not investing it in a separate fund or anything. It's all part of your systems assets. You're just creating this accounting mechanism.
00:23:17:12 - 00:23:27:07
Patrick Charles
I will now switch over to John Boorack to go over.
00:23:27:09 - 00:23:28:12
John Boorack
Yep.
00:23:28:14 - 00:23:39:11
Audience Question
The local acceptance process for one tier and later accepts second or third tier. Does that go back to the legislative body for acceptance?
00:23:39:13 - 00:23:57:08
Patrick Charles
So the question is, if you adopt one tier, you go through the legislative process and get local legislative approval. And then a few years later you adopt a second or third tier. Do you have to go through the same legislative process? Yes. Every time you adopt it, you have to go through the same legislative process. However, you do not have to re-adopt the COLA reserve fund.
00:23:57:09 - 00:24:22:24
Patrick Charles
Once you adopt the COLA reserve fund, that fund is always there. It's just going to be zero balance after you've paid off the enhanced COLA that you've adopted. So if you adopt a second one, you automatically just restart payments into it. But you do have to get approval for each tier at the local legislative body. If you adopt more than one tier at a time, you can have them vote on more than one at a time, but you have to have a separate approval for each one if it's adopted at separate time periods.
00:24:23:01 - 00:24:47:11
Audience Question
Other question this might be a question for John, but let's see if you can answer it. So you think you're $100 million example. Yeah, at least 20%. So I have $80 million in the next year in order to get back to the $100 million, I have to burn 25%, to get back to the 100. That's just the way the math works.
00:24:47:13 - 00:25:08:24
Audience Question
Are you saying that I have and that? And let's just assume that my rate of return is 6%, so I have 19% excess return to be able to put it to the side fund. Or if I only earn the same 20% back at 96 million so it's still well below what my starting point was before I first lost the 20%.
00:25:09:05 - 00:25:12:09
Audience Question
But in that example I still have surplus earnings.
00:25:12:11 - 00:25:41:04
Patrick Charles
So your excess earnings are going to be based on the year the prior year's investment return. It doesn't matter what the balance of your account was in terms of if the actuary says that you earned 9% on your investment, you're going to have 2% excess gains and you take 7.5% of that. It doesn't matter if the year before you lost 10% or 20%, it's each year is calculated separately whether or not there's excess gains.
00:25:41:06 - 00:25:45:21
John Boorack
And I'm going to go through an example of that calculation as well.
00:25:45:23 - 00:25:51:19
Audience Question
How are you going to figure out how much that's going to cost, how much excess earnings are actually going to be?
00:25:51:21 - 00:25:56:06
John Boorack
Well, we're not going to talk about that today because this is a high level discussion today.
00:25:56:08 - 00:26:06:17
Patrick Charles
I'm NEVER going to talk about that. So if there are any math questions definitely I'm making him do it. I think there's a question in the back.
00:26:06:19 - 00:26:08:07
John Boorack
I find people.
00:26:08:11 - 00:26:24:07
Audience Question
This is kind of like you can grow into this thing, right? Like if you just adopt tier one on the day, we're going to measure, I have got somebody say with six years of retirement, I'm going to measure that that person will ultimately be in tier one.
00:26:24:09 - 00:26:34:18
Patrick Charles
Correct. They will eventually, as long as they've been retired before July 1st, 2020, they will eventually get to whatever tier you've adopted, assuming there is still a benefit there.
00:26:34:20 - 00:26:44:13
Audience Question
Funding today for a bunch of people who are in the 10 to 14 years, but also prospectively including the. Correct.
00:26:44:15 - 00:27:08:19
Patrick Charles
So the question is, if you have someone that only has six years in retirement, are you calculating them for them when you determine the funding that is needed? And because these people will eventually get into the tier, and yes, you do, you have to account for them because at some point they will get to ten years, assuming that they are still alive to collect the benefit, that there's a benefit still paid on the count of that member, you will be getting that $100 from years 10 to 14.
00:27:08:19 - 00:27:25:12
Patrick Charles
So you have to account for that when your analysis is done and you're pre funding their benefit, even though they're not actually eligible for it yet. Now I'm going to turn it over to John.
00:27:25:14 - 00:27:52:23
John Boorack
All right. Thank you Patrick. So as I just mentioned this is going to be a very high level discussion. We're not going to get into the nitty gritty of how we determine the cost of the enhanced COLA or any of that fun stuff. So I will be talking about the cost of the enhanced COLA. I will go through an example of how the excess funds accrue in the COLA Reserve Fund.
00:27:53:00 - 00:28:21:05
John Boorack
I'll show what happens when we don't account for the COLA reserve fund in your regular system assets. Then we'll show you what happens with the cost of the enhanced COLA. And for that example, I'm going to assume a system adopts all three tiers at once. And for this discussion we need to have a retirement system. And in years past I had used a retirement system called Lady Ville.
00:28:21:07 - 00:28:26:02
John Boorack
Unfortunately, Lady Ville had to be.
00:28:26:04 - 00:28:37:20
John Boorack
Decommissioned, if you will. So we have a new retirement system, which Patrick already ruined. Thank you very much, Patrick.
00:28:37:22 - 00:28:43:18
John Boorack
So I'm good with numbers, not technology. How do I advance the slides? Is it down?
00:28:43:20 - 00:28:47:00
John Boorack
Nope. Yeah. We're going to have bigger.
00:28:47:02 - 00:28:47:16
John Boorack
Stop working.
00:28:47:16 - 00:28:50:10
Speaker 3
So just.
00:28:50:12 - 00:28:59:24
John Boorack
Yeah, yeah.
00:29:00:01 - 00:29:05:18
John Boorack
Probably get it right there. I tried the arrows. That arrow. Okay.
00:29:05:20 - 00:29:17:01
John Boorack
So our new retirement system will be the WinnieLand retirement system.
00:29:17:03 - 00:29:18:05
John Boorack
With the mayor.
00:29:18:07 - 00:29:19:19
John Boorack
With the.
00:29:19:21 - 00:29:41:11
John Boorack
And to determine the cost of the enhanced COLAs, Patrick said the board's actuary will determine the cost. So fortunately, I’m the actuary for only 40 of the retirement system. So I would only be responsible for 40 of these. The private actuaries who work on the other local systems will be responsible for the calculation for each of their own clients.
00:29:41:13 - 00:30:25:21
John Boorack
As Patrick mentioned, the cost that we're developing is the lump sum cost to fully fund the enhanced COLA or the appropriate tier, whichever is adopted. It's the present value of all payments expected to be made under the enhanced COLA. It is not just the annual one year cost. Under the enhanced COLA, it will need to be recalculated each year until sufficient funds accumulate in the COLA reserve fund for systems that do actuarial valuations every other year, the actuary can use the average salary from the last completed valuation to determine the cost.
00:30:25:23 - 00:30:55:11
John Boorack
So we had done an analysis for the WinnieLand retirement system, and if only tier one is adopted, we figured the cost would be 1.26 million. If only tier two is adopted, it would be 2.73 million. If only tier three is adopted, it would be 5.84 million. In. If all three tiers are adopted at once, the total would be about $9.8 million.
00:30:55:13 - 00:31:21:22
John Boorack
So with the excess investment earnings, as we've mentioned several times, 7.5% of those excess earnings will be transferred to the COLA reserve fund. And this is determined on a market value of asset basis, not an actuarial value basis for those systems who do use an actuarial value. Most of the systems, if not all of the systems have their assumption is a return net of investment related expenses.
00:31:21:22 - 00:31:53:02
John Boorack
So this calculation will be done on a net basis. Please note that in annual report and investment reports, those numbers that are published are gross returns, not the net returns. So if your published return in annual statement is 7%, your net return will likely be less than 7%. So if your assumption is 7%, you have not met the excess investment earnings and no money would be transferred to the reserve fund.
00:31:53:04 - 00:32:24:14
John Boorack
So for this example, I'm making some very simplifying assumptions. We'll assume the net cash flow is zero, which means the net receipts equals the net disbursements. It says all cash flows are assumed to occur mid year and the investment return assumption would be 7%. Your market value of assets on January 1st, 2026 is 800,000. And for this, you can add any number of zeros to this number to get a number that's comparable to your retirement systems.
00:32:24:16 - 00:32:32:04
John Boorack
And the market value return will be 10%.
00:32:32:06 - 00:33:02:16
John Boorack
So to calculate the excess investment earnings, the actual market value on 1/1/27, 1 year later, would be $880,000. Your expected market value based on your 7% assumption would be $856,000. So your excess return is the difference between those two numbers or 24,000. And quickly, Patrick, how much is 7.5% of 24,000? Good, good. And he said he wasn't good at math.
00:33:02:18 - 00:33:12:03
John Boorack
So under this example, you would transfer $1,800 to your COLA reserve fund.
00:33:12:05 - 00:33:38:02
John Boorack
So with this chart this will hopefully answer David's question. We're showing how the COLA reserve fund would grow assuming different levels of returns. So for this example we're going to assume a 10% return, a 2% return, a 12% return, a -3% return, a 15% return and a 12% return.
00:33:38:04 - 00:33:58:15
John Boorack
So on 1/1/27, because the excess returns, we're 24,000, we take 7.5% of that or 1800. So on 1/1/27 the COLA reserve fund would have a balance of $1,800.
00:33:58:17 - 00:34:30:23
John Boorack
The following year, the excess returns would be zero because the return was only 2%. 2% is less than your 7% assumption, so there'd be no excess returns. However, your money and your COLA reserve fund would also grow at that 2%, so your $1,800 would grow to $1,836 after the second year. In the third year you return is 12% your excess returns of $44,880.
00:34:31:00 - 00:34:41:14
John Boorack
So $3,366 gets transferred to your COLA reserve fund. In addition to that fund, the prior balance growing at 12%.
00:34:41:16 - 00:35:16:17
John Boorack
So you would have a balance at that point of $5,422. And in 2029 you lose 3%. So you're going to lose 3% of that $5,422. So your balance would then be $5,260. And you have a 15% return. Excess returns would be $78,012. 7.5% of that is $5,851. So your account balance would grow to $11,900. Then you have a 12% return.
00:35:16:18 - 00:35:44:00
John Boorack
One second, you have a 12% return in your excess returns would be $56,000 and change. You'd transfer 7.5% of that. So at that point, your balance on the COLA reserve fund would be $17,533. Now with this example, we haven't estimated what the cost of the enhanced COLA is yet. We're just showing how the COLA reserve fund would grow with the excess investment earnings.
00:35:44:02 - 00:35:47:06
Audience Question
Actuary passes on a smoothing schedule.
00:35:47:08 - 00:35:52:21
John Boorack
We ignore that. We're only using the market value at the end of each year.
00:35:52:22 - 00:36:03:09
John Boorack
You use the market value to determine how much money to transfer into the COLA reserve fund, but the board would still use the smoothing value for funding purposes.
00:36:03:10 - 00:36:09:23
Audience Question
Yeah, it it. [inaudible]
00:36:10:00 - 00:36:30:24
Audience Question
On that same point, when we calculate this being for we’re using all market value, including the including the reserve fund. So the gain that we're going to calculate there is going to be a different gain that we would use in our smoothing method.?
00:36:31:01 - 00:36:39:03
John Boorack
Correct. For the determinant of your excess funds, you're using the entire assets of the plan, not just the funding assets.
00:36:39:05 - 00:36:39:24
Audience question
So at the end of the day...
00:36:39:24 - 00:36:57:07
John Boorack
...the question was, for this purpose of determining the excess returns to calculate to the COLA reserve fund, do we just look at the funding assets or do we look at the entire assets of the system, and you look at the entire assets of the system to determine.
00:36:57:08 - 00:37:08:14
Audience Question
So we're really transferring more than 7.5% of the excess for funding, because we're now incorporating the balance of the reserve fund in that transfer calculation?
00:37:08:16 - 00:37:09:18
John Boorack
So the question was.
00:37:09:24 - 00:37:11:14
Audience Comment
Yeah, I got my cool little microphone here!
00:37:11:16 - 00:37:15:16
Audience comment
Okay.
00:37:15:18 - 00:37:25:02
John Boorack
So yeah, for the purpose of the excess earnings, you're looking at the entire funds of the plan to determine what to move over.
00:37:25:04 - 00:37:27:14
Audience Question
But for actuarial valuation...
00:37:27:16 - 00:37:31:19
Bill Keefe
Can we speak into the microphone?
00:37:31:21 - 00:37:32:17
[inaudible]
[...]
00:37:32:19 - 00:37:41:02
Audience Question
But for the actual valuation smoothing method, would it simply be the amounts excluding the reserve fund?
00:37:41:04 - 00:38:06:01
John Boorack
We can get into this. That's higher level stuff than what's really needed for this. The actuaries can have a pow wow after this to talk about how that' smoothing will work. But the the every, everyday ordinary people working at the retirement systems don't need to know about that smoothing. So we can talk about that afterwards. If you guys would like any other questions
00:38:06:03 - 00:38:11:00
Audience Question
John, can this be a ref go ever go negative if you have a couple of bad years.
00:38:11:02 - 00:38:21:14
John Boorack
Now the COLA reserve will only go to zero. It can never go negative. I can't tell if we have questions from the audience, so.
00:38:21:16 - 00:38:27:01
Natacha Dunker
We do.
00:38:27:03 - 00:38:28:03
Patrick Charles
Right here.
00:38:28:05 - 00:38:28:15
John Boorack
I don't know.
00:38:28:15 - 00:38:30:10
John Boorack
Which ones are new.
00:38:30:12 - 00:38:31:03
John Boorack
Patrick, what.
00:38:31:03 - 00:38:33:05
John Boorack
Was the last one that you answered?
00:38:33:07 - 00:38:33:13
John Boorack
Oh.
00:38:33:13 - 00:38:35:22
John Boorack
It must be that one because it was $6,000.
00:38:35:24 - 00:38:40:00
Patrick Charles
Yeah, exactly.
00:38:40:02 - 00:38:46:12
John Boorack
The system I think that was ansswered t0o.
00:38:46:14 - 00:38:46:21
John Boorack
Yeah.
00:38:46:21 - 00:38:57:17
John Boorack
Okay. That question was answered. Funding level drops. Do you stop paying his COLA? That was answered.
00:38:57:19 - 00:39:03:16
John Boorack
Then Lauren Elliott, the cap one.
00:39:03:18 - 00:39:27:02
John Boorack
So there is a cap to the enhancement... So the question is so there is a cap to the enhancement funding. Once you reach fully funded status you stop funding the separate reserve. Is that maximum amount set aside calculation done by PERAC? It would be done by the systems actuary, not necessarily PERAC.
00:39:27:04 - 00:39:42:13
John Boorack
Have there been any preliminary studies or surveys showing how many communities are leaning towards adopting the local option regarding these COLAs? Not that I'm aware of - are you aware of any?
00:39:42:15 - 00:40:05:06
John Boorack
It seems like it could be an additional financial liability on a system. Well, it would be an additional liability. But the idea with the COLA reserve fund is that you're setting aside money to, to fund it so the municipality doesn't have to come up with the funding for it.
00:40:05:08 - 00:40:20:15
John Boorack
Next question. Once voted, payments starts once the tier is fully funded, after it has been voted on and approved by the legislative body.
00:40:20:17 - 00:40:26:10
John Boorack
So the ones questioning the math.
00:40:26:12 - 00:40:26:19
John Boorack
Sorry.
00:40:26:20 - 00:40:35:16
Audience Comment
That was me.
00:40:35:18 - 00:40:43:19
John Boorack
No, the math is correct.
00:40:43:21 - 00:41:18:09
John Boorack
So what's the realistic expected timeline for funding? I'll talk about that a little bit later. Does the gross liability associated with the enhanced COLA benefit become recognized upon adoption, or upon fully funded the coal reserve when benefits begin to pay? I'm not sure who asked that question. So for funding purposes, the liability will not be recognized until it is fully funded with the money in the COLA reserve.
00:41:18:11 - 00:41:39:01
John Boorack
There's still a question about how it gets handled for GASBE accounting purposes. And that's beyond the scope of this particular presentation. Okay, so that's the last online question.
00:41:39:03 - 00:41:58:07
John Boorack
Okay. So now what we're showing with this chart here is the difference between the market value and the value of assets used for funding purposes, along with the funding status of the plan, before reflecting the cost of the enhanced COLA.
00:41:58:09 - 00:42:29:10
John Boorack
So I'm not going to go through every line on this. But notice for the first few years as the COLA reserve is building, there's a small change to the funded ratio of the plan. But it's very minimal. And as we'll see in a slide or to, when we get down to 2031 and 2032 on this slide, the difference is 0.8% in the funded ratio and 1.1%.
00:42:29:12 - 00:42:40:20
John Boorack
But that does not take into account when the enhanced COLA would be fully funded.
00:42:40:22 - 00:43:08:14
John Boorack
So on this next slide, again we're showing the accumulation of the COLA reserve fund. And for this purpose the cost of the enhanced COLA. And we're assuming it's $9.8 million every year. We know that's not the, the case. People are going to die off. The average salary is going to increase. But for this purpose here, we assumed again, a level cost for the enhanced COLA.
00:43:08:16 - 00:43:19:00
John Boorack
And we'll see in 2031, the cost of the enhanced COLA is $9,800. And the cost.
00:43:19:02 - 00:43:43:12
John Boorack
The money in the reserve fund in that year is $11,900. So at that point, there is enough money to fully fund the enhanced COLA. So at that point in time, again, we're assuming all three tiers of the enhanced COLA were adopted. So the entire balance in the COLA reserve fund gets moved over to the front assets for the funding purpose of the retirement plan.
00:43:43:12 - 00:44:08:00
John Boorack
And then in the following year, there's no money in your COLA reserve fund. So the two value of assets, the assets for funding purposes and the total market value are the same.
00:44:08:02 - 00:44:36:07
John Boorack
So now we're going back to showing what the liability of the plan is, the unfunded liability using the assets for funding purposes. And the assets for the total market value of assets. So as you can see, in 2029 and 2030, the difference in funded ratio, between using all of the assets and just the assets for funding purposes, which would be the market value less.
00:44:36:07 - 00:45:08:07
John Boorack
The COLA reserve is 0.4% to the funded ratio. In 2031, the entire cost of the enhanced COLA, there are sufficient assets in the COLA reserve fund to fund that. So now we recognize that enhanced COLA as part of our unfunded liability, we transfer all of the assets. So our asset values are the same. Beginning in 2031 where your funded ratio would be 76.3% and 82.2%.
00:45:08:09 - 00:45:31:04
John Boorack
So in this example, by setting aside money in the COLA reserve fund, you see that the difference between your system’s funded ratio, without the COLA reserve fund and with the COLA reserve fund, it's it's very it's really quite small on an overall basis.
00:45:31:06 - 00:45:37:03
John Boorack
Yep.
00:45:37:05 - 00:46:03:00
John Boorack
So the first question is if you adopt tier one, that is for those retired 10 to 14 years and it takes five years to fully fund, then how many years, if any, would this group receive an enhanced COLAs? It would depend at the time the enhanced COLA for tier one is fully funded. It would depend how many years of retirement that group has.
00:46:03:02 - 00:46:13:07
John Boorack
If everyone starts off with 14 years of service and it takes five years to fully fund the no one would get the tier one benefit.
00:46:13:09 - 00:46:31:09
John Boorack
The next question is why limited to retirees prior to 7/1/2020? That was just the date in the legislation.
00:46:31:11 - 00:46:59:19
John Boorack
Is the regular compensation for active members of the system? Yes. As part of each valuation, um, the actuaries, determine demographic information for the active employees, it would be 80% of that average salary.
00:46:59:21 - 00:47:01:06
Speaker 6
Okay.
00:47:01:08 - 00:47:02:06
John Boorack
Any questions?
00:47:02:07 - 00:47:11:08
Speaker 6
Yep.
00:47:11:10 - 00:47:42:16
Audience Question
So you mentioned once fully funded, the COLA reserve fund gets transferred to the the the assets and liabilities go to the regular funded status. What happens if there's a significant market downturn. So is it once fully funded all we will it ever be suspended if the if the funded status of the plan deteriorates, that will become an additional liability to the town to make up for the shortfall on the on the liability that was transferred over.
00:47:42:20 - 00:47:52:17
Audience Question
Yep. Okay. Thank you.
00:47:52:19 - 00:48:17:21
Audience Question
As the actuary, I'm not thinking about investment losses. I'm thinking about experience. Once this thing I want to caution to use the word fully funded. That's the snapshot. Fully funded. But I could have an assumption change. I could have a COLA base increase that's going to be much larger or larger. I don't know about much. I haven't analyzed it on this enhanced COLA.
00:48:17:23 - 00:48:36:09
Audience Question
So there's future stuff that's going to happen. That's all going to get rolled into the regular funding of the plan. All of those changes, people living longer than expected, an assumption changed to a different investment return or different mortality or a COLA based increase.
00:48:36:11 - 00:48:57:18
John Boorack
The idea of this legislation was to build up a fund. So at the point in time, a benefit is fully funded. If we change our assumptions and people live longer, that'll run through the gain loss of the system. But there's no need to create an additional liability that would need to be funded through the COLA reserve fund.
00:48:57:20 - 00:49:00:05
Audience comment
But it is understood there's.
00:49:00:06 - 00:49:02:13
Audience comment
Emerging experience.
00:49:02:13 - 00:49:03:02
Audience comment
Or.
00:49:03:04 - 00:49:21:05
Audience question
assumption changes or anything that's going to make it not fully funded. I'm thinking sheriff's liability for the county. Everybody thought that was fully funded, you know, 20 years ago. But I have a lot of clients with $50 million unfunded liabilities of retired sheriffs.
00:49:21:07 - 00:49:22:21
Audience Question
So you're not crazy
00:49:22:23 - 00:49:24:13
John Boorack
about the word fully funded?
00:49:24:15 - 00:49:32:01
Audience Comment
Fully Funded. Yeah. I don't like that. I don't like that funded one because it's it's funded on that status on that.
00:49:32:03 - 00:49:32:16
John Boorack
On that day.
00:49:32:17 - 00:49:39:10
Audience comment
Correct. Yeah.
00:49:39:12 - 00:49:47:03
John Boorack
Any other questions?
00:49:47:05 - 00:50:15:18
John Boorack
So we talked about the once assets are sufficient to fund any of the tiers of the enhanced COLA, the entire COLA reserve fund would be balanced. Again, this is for the locals. It's not like that for the state or the teachers. Then the cost attributed to the enhanced COLA now becomes part of the actuarial accrued liability for funding purposes.
00:50:15:20 - 00:50:46:22
John Boorack
Okay. And I've gotten several questions on how the enhanced COLA would actually be paid. So I have I'll call it a simple example here that shows how the enhanced COLA would be paid. So I'm assuming for this example that the enhanced COLA would be payable immediately, even though it hasn't been funded yet, but you can change the number in the year column to whatever number you want to make it applicable to your case.
00:50:46:24 - 00:51:17:24
John Boorack
So you have a person who's been retired for ten years meets all of the other eligibility requirements. The average salary from the system's most recent actuarial valuation is $50,000. The annual benefit for this retiree before COLAs is $49,000. The system has a COLA base of $15,000. Assuming a 3% COLA would be $450 in regular COLA and $100 for the enhanced COLA.
00:51:18:01 - 00:51:41:06
John Boorack
So after the COLA, both COLAs are paid, the annual benefit would be $49,550. In the next year, since a valuation hasn't been performed, we use the same $50,000 for the average salary and for the average salary that should say, 80% of the average salary.
00:51:41:08 - 00:51:57:17
John Boorack
The annual benefit is the $49,550. Again, you'll receive the 450 regular COLA and the $100 enhanced COLA. So your benefit would be, 50,100.
00:51:57:19 - 00:52:26:07
John Boorack
Then the following year, you have a valuation and the average salary only grows to 50,500. So in that case you would get both the regular COLA and enhanced COLA. So at that point, your benefit after the coal would be $50,650. That is now greater than 80% of the average salary, the 50,500. So in that case, you only get the regular, COLA, the $450.
00:52:26:09 - 00:52:50:02
John Boorack
Then to make the example easier for myself, I made the 80% of the average salary much higher than the benefit. So you receive both the, regular COLA and the enhanced COLA. And if you go down the list, you'll see in every year you get the regular $450, the enhanced COLA beginning in year 15, that $100 increases to $200 every year.
00:52:50:04 - 00:53:12:14
John Boorack
After year 20, you get $300 every year, and that would continue until the benefit ceases to be paid.
00:53:12:16 - 00:53:30:13
Audience Question
John, if your retirement allowance was beneath the COLA base for your system, would the enhanced COLA be added to the pension. So your COLA, your regular COLA would be based on both the your allowance plus the enhanced COLA.?
00:53:30:15 - 00:53:46:21
John Boorack
I want to say the answer is yes. The enhanced COLA becomes part of your base retirement, just like the regular COLA does. So it's just it's just an extra COLA payment made to certain eligible retirees.
00:53:46:23 - 00:54:14:07
John Boorack
Okay. So in conclusion, as Patrick had mentioned, the treatment for the COLA reserve fund is different for the state and teacher systems than it is for the local systems. The local systems can only use the COLA Reserve fund to fund the enhanced COLA as shown. There's little variance in the funded ratio. While the COLA reserve fund accumulates to pay off the enhanced COLA.
00:54:14:09 - 00:54:56:06
John Boorack
And there was a question that was asked earlier about how long it would take. The rough rule of thumb is that you need to exceed your assumed return by approximately 15 to 18% in aggregate, to accumulate sufficient funds in the COLA reserve. That's a rule of thumb. It's not a rule. And it varies based on the funded ratio of the system, and based on past returns for PRIT, we would expect it would take between 4 to 6 years to be able to fund the enhanced COLA.
00:54:56:08 - 00:55:01:21
John Boorack
So maybe another question.
00:55:01:23 - 00:55:12:01
Bill Keefe
Before you jump on questions.
00:55:12:03 - 00:55:36:13
Bill Keefe
Okay. Two quick things we had mentioned in the memo. The general ledger number for for the accounting side of things, expect that this calendar year that will be coming. And then also we anticipate that there will be a legislative fix, on the local adoption of the enhanced COLA. It's obviously mirrors the language of the state and in the state
00:55:36:13 - 00:56:04:14
Bill Keefe
it's automatic. 10 to 14 is 100 bucks, 15 to 19 it’s 200, over 20 years retired, there's 300. It didn't contemplate that maybe only the tier one, the ten year retirement might get adopted. And I don't think that anybody would think it's wise to just fund that $100 or 10 to 14 years retired and then stop. So I think the legislative action would be that it would be ten years retired, ongoing.
00:56:04:16 - 00:56:32:05
Bill Keefe
If you adopted level two, it would be 15 years retired ongoing. Obviously, if you adopted all three or if you did one, two, two, three, it would go 10 to 14, 15 to 19. So on. If you only adopted 1 or 2, it would be ten years plus or 15 years plus. So hopefully that makes sense. I'll turn it back to John and Patrick for questions.
00:56:32:07 - 00:56:55:16
John Boorack
So one of the questions pointed out before I did, that the average salary was $50,000, 80% of that should be 40,000. So yeah, the title of the slide should say 80% of the average salary is 50,000 to make the rest of the math work. And then the last question is how is the market value handled if valuations are completed every two years?
00:56:55:18 - 00:57:19:06
John Boorack
Well, your board's actuary would know what the market value of assets is at the end of each year, so they would make that determination each year.
00:57:19:08 - 00:57:19:15
John Boorack
Again.
00:57:19:15 - 00:57:21:11
John Boorack
I'm good with numbers, not technology.
00:57:21:17 - 00:57:25:19
John Boorack
I don't know who I don't know where the pointer is. One more question.
00:57:25:19 - 00:57:36:20
John Boorack
last one.
00:57:36:22 - 00:57:44:12
John Boorack
So unfortunately Patrick no, that's not the last question. There are a question or two.
00:57:44:14 - 00:57:45:09
John Boorack
Well, now I can't read.
00:57:45:09 - 00:57:50:19
Speaker 6
The question.
00:57:50:21 - 00:58:17:04
John Boorack
The question was is so is that 4 to 6 years for any particular tier or the entire, COLA? My guess is it's 4 to 6 years. At standard PRIM returns, what PRIM has returned on average for the past few years for all three, not just one. And then the last question is, so this enhanced COLA benefit is only and ever available to persons retired before July 1st, 2020.
00:58:17:05 - 00:58:28:20
John Boorack
Yes, that is correct. What is the logic of that? It's in the legislation. Nothing for anyone retired after July 1st, 2020. No.
00:58:28:22 - 00:58:53:01
Patrick Charles
Let me just chime in on that. I believe the logic for that is that you all all have the option of doing COLA base increases, so newer retirees will be retired and getting the higher bases that many of you have already adopted, and so they won't have lost as much purchasing power as someone who retired in 2010 or 2000.
00:58:53:05 - 00:59:17:23
Patrick Charles
The fact that 2020 is used is sort of a little odd, because those people are so recently retired, they haven't lost the purchasing power. When the COLA Commission was discussing this issue, it was about people that had already been retired for ten, 15, 20 and in some cases 30 years. And yes, if you retired in 1990, your purchasing power is next to nothing compared to what a 2020 retiree would have today.
00:59:17:24 - 00:59:41:24
Patrick Charles
Right? So that was the logic is it's to get those people that have been retired for the longest, that have lost a lot of purchasing power. You don't lose as much purchasing power as COLA bases go up, which is one of the things that's going to be part of the state issue, where the state is now finally going to have a mechanism to get a COLA base increase, because keep in mind, many of your systems out there have adopted base increases above the 13 or $12,000 base.
00:59:42:01 - 01:00:01:12
Patrick Charles
The state has been at 13 for over a decade, and it's never moved. But now there will be at some point, assuming we don't lose a lot of money every year, we will actually finally have base increases, which will negate some of the necessary the necessity of enhanced COLAs.
01:00:01:14 - 01:00:02:19
Patrick Charles
I think.
01:00:02:21 - 01:00:07:24
Patrick Charles
Yep.
01:00:08:01 - 01:00:11:17
Audience Question
Have another one question.
01:00:11:19 - 01:00:45:17
Audience Question
So since you were talking about rationale, I hope this is not off bounds. But why only investment earnings? And as Linda pointed out, you can have mortality improvements. You could have 5% excess investment returns in a year, but your liability could grow by an excess of 5% and your funded status would effectively be unchanged. So why just focus on the asset side of the equation and not the asset and liability side of the equation?
01:00:45:19 - 01:00:55:06
John Boorack
Again, that's a higher level discussion for this particular group. We can talk about that afterwards.
01:00:55:08 - 01:00:59:00
John Boorack
Did you just close it?
01:00:59:02 - 01:01:01:12
John Boorack
I don't know where my cursor is. [...]
01:01:01:14 - 01:01:02:12
John Boorack
Yeah I don't.
01:01:02:14 - 01:01:09:18
John Boorack
I don't know enough.
01:01:09:20 - 01:01:22:13
John Boorack
Just a couple more.
01:01:22:15 - 01:01:39:07
John Boorack
That question has already been answered. You have to fully fund the we're going to call it fully fund, despite the fact that some of the actuaries might not like that particular term. You have to fully fund the entire enhanced COLA.
01:01:39:09 - 01:01:58:19
John Boorack
Does every year need to be fully funded in order to pay that year? Let's say it is funded for a few years and then returns a low for consecutive years and the reserve fund is depleted. We've already talked about that. You cannot pay the enhanced COLA until the, value of the enhanced COLA is fully funded in the COLA reserve fund.
01:01:58:19 - 01:02:17:13
John Boorack
At that point in time, you transfer the money from the COLA reserve fund to your pension assets, and then you would pay the enhanced COLA until the retiree, no longer receives the benefit.
01:02:17:15 - 01:02:52:11
John Boorack
And then the last question is if over time, a retiree’s allowance is increased to at least 80% of the average salary, do they cease to receive the COLA enhancement in subsequent years? And the answer is yes. We've gone over that in one of the slides that in the year that the, annual benefit was, more than 80% of the average salary, then there was no enhanced COLA paid, but just a regular COLA.
01:02:52:13 - 01:03:14:22
Audience Question
John, are you anticipating, when you're trying to identify who's in that the like today when I'm measuring this, that the average salaries are going to go up every year, kind of like a 401-A17 salary, you know, it's going to go up. We gotta measured against something. We're not just measuring against today's average salary, are we?
01:03:15:02 - 01:03:16:23
John Boorack
Again, that's a higher level discussion.
01:03:16:24 - 01:03:20:24
Audience Comment
No it's not. This is very important.
01:03:21:01 - 01:03:33:20
John Boorack
Again that's of interest to Linda and me and possibly David and some of the other actuaries. I'm sure if I ask some of my former PERAC colleagues like Bob Shaw, does Bob Shaw care about this?
01:03:33:22 - 01:03:39:07
John Boorack
You better not!
01:03:39:09 - 01:03:40:15
John Boorack
But yeah, we can discuss that.
01:03:43:11 - 01:03:44:07
John Boorack
Well, we can talk about.
01:03:44:07 - 01:03:50:04
John Boorack
It afterwards.
01:03:50:06 - 01:04:25:17
Natacha Dunker
All right. So for those of you online, thank you so much for attending. You will receive a survey. For those of you here I forgot to print paper surveys for you. So you're you're off the hook. But please submit your surveys. And board members who are online will automatically receive your three credits in approximately one week. Anyone who was not able to attend we did record the session, so it will be available on the website at a later date, and board members will be able to receive credits by watching the recording.
01:04:25:19 - 01:04:35:13
John Boorack
So if anyone has any other questions were asked, feel free to reach out to the emails on page 27. Patrick Charles!
01:04:35:15 - 01:04:36:01
Natacha Dunker
And I'm.
01:04:36:01 - 01:04:37:14
Natacha Dunker
Sorry, Bill.
01:04:37:16 - 01:04:41:14
Natacha Dunker
Oh, and go to MACRS!
01:04:41:16 - 01:05:02:14
Natacha Dunker0
Our education memo came out today. Yesterday, I should know I wrote it, but, it has all the information for the upcoming webinars trainings. We have our new administrative training on November 4th in Woburn, and then MACRS will be in Quincy later this year. All right. Thank you everyone.