FROM: Amy McInerny, Chief Financial Officer
SUBJECT: Ad Hoc Adjustment to the Asset Smoothing Method
RECOMMENDATION:
title
Approve a Actuarially Recommended Ad Hoc Adjustment to the Asset Smoothing Method for the Actuarial Valuation as of June 30, 2024.
body
BACKGROUND:
Over the next several years, there is a markedly non-level pattern in contribution rates as a result of past volatility in investment gains and losses. SBCERA’s actuaries from Segal noted in their Determination of Actuarial Value of Assets for Year Ended June 30, 2023 that the total unrecognized net investment loss as of June 30, 2023 was $86,020,540. Further, the valuation noted (at Footnote 2, page 22):
[The] $86.0 million net deferred loss will be recognized in the next four years, but in a markedly non-level pattern. In particular, there will be investment gains recognized in the next two years totaling about $240.5 million followed by two years of losses totaling about $326.5million, so as to ultimately recognize all of the current total net deferred loss of $86.0 million. This means that, absent any new gains or losses in the future, there will be two more years of decreases in the employer contribution rate followed by two years of increases before the $86.0 million in net deferred loss is fully recognized.
Segal has proposed an “ad hoc” smoothing to address the dip of contribution rates, in their letter dated April 9, 2024, which is attached as Exhibit A.
SBCERA Actuary and Audit Policy No. 003 (Actuarial Funding Policy), attached as Exhibit B, specifically anticipates and provides for the possibility of smoothing Investment gains and losses of each valuation in level amounts over 5 years for the calculation of the Actuarial Valuation of Assets. The policy describes both the circumstance and the manner of these ad hoc adjustments, and that it would be at the discretion of the Board and considered on the advice of the actuary.
For the June 30, 2024 valuation, the asset smoothing method that is part of the Actuarial Funding Policy could be adjusted in a manner provided for in that policy by combining the deferred gain and loss “layers” that comprise the net deferred investment loss of $86 million as determined in the 2023 valuation into a single four-year smoothing layer. This layer would then be recognized over the next four years in four level amounts.
Segal recommends that we implement this ad hoc adjustment to the asset smoothing policy per SBCERA’s Actuarial Funding Policy. The recommended ad hoc adjustment is not a change in the underlying asset smoothing method, but rather an adjustment to manage an occasional but routine result of current asset smoothing method. Additional detail and charts supporting this recommendation is included in Segal’s letter attached as Exhibit A.
Paul Angelo and Molly Calcagno from Segal will both be available at the Board meeting to answer any questions the Board may have about this recommendation.
BUDGET IMPACT:
Costs for this item are included in the current year administrative and/or non-administrative budget.
STRATEGIC PLANNING GOAL/OBJECTIVE:
Prudent Fiscal Management
STAFF CONTACT:
Amy McInerny
ATTACHMENTS:
Exhibit A: Segal Letter dated April 9, 2024
Exhibit B: Actuary and Audit Policy No. 003 (Actuarial Funding Policy)