FROM: Amy McInerny, Chief Financial Officer
SUBJECT: Ad Hoc Adjustment to the Asset Smoothing Method
RECOMMENDATION:
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Approve a Actuarially Recommended Ad Hoc Adjustment to the Asset Smoothing Method for the Actuarial Valuation as of June 30, 2024.
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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 as...
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