To:

From:

Re:

AC Transit Employees' Retirement System

Staff Report 17-263

(510) 891-7257 fax (510) 891-7169

retirement@actransit.org

AC Transit Board of Directors November 2017

Jeffrey Lewis - Chair, AC Transit Retirement Board

2017 Semi-Annual Report (#2)

I am writing this report less than a month after our Joint Meeting. The Retirement Board provides the District Board with two written reports a year. The first report of 2017 focused on investment results. This report will cover the following:

1) The recently approved Actuarial Valuation. 2) An update on investment performance. 3) Staffing. 4) PEPRA and the Plan Amendment.

At the November meeting, Claudia Allen was sworn in as a new Retirement Board member. Having the CFO on the Board will be helpful in dealing with many of the issues that impact both AC Transit and the Retirement System.

Joint Meeting The Joint Meeting provided a good forum for our Boards to discuss the key retirement issues that impact the District and the Retirement System. The discussion of the funded ratio, District contribution, and PEPRA covered most of the retirement issues that confront our respective Boards. If any District Board member still has questions pertaining to the Joint Meeting or any other topic pertaining to the Retirement System, I encourage them to contact Hugo Wildmann or me.

Recently Approved Actuarial Valuation At its October 4th meeting, the Retirement Board approved the 2017 actuarial valuation. This decision completed a process that began in the spring. As in prior years, the General Manager and CFO were involved in providing feedback to the Retirement Board. The Retirement Board approved a projected District contribution of $54 million for the District's 2017/18 fiscal year. This contribution is based on the assumption that the District's pensionable payroll will be $170 million during the current fiscal year. The District's contribution can be broken down into two components: 1) the normal cost (plus expenses); and 2) the amortization of the unfunded liability. The normal cost is the cost of providing one additional year's accrual of future benefits to the current workforce; while the amortization of the unfunded liability is the payment required to close the gap betweep. the current funding level and full funding. For the current fiscal ye~, the normal cost is projected at $23.8 million (14.01 % of pensionable payroll), while the

The AC Transit Employees' Retirement System is dedicated to providing a secure and predictable source of retirement income tor eligible employees, retirees and beneficiaries

1600 Franklin Street Oakland, CA 94612

1 of 4

2017 Semi-Annual Report #2

amortization of the unfunded liability plus expenses will be $30.2 million. 54% of the District's contribution is a result of amortizing the unfunded liability.

As was discussed at the Joint Meeting, the Retirement Board decided to reduce the actuarially assumed rate of return from 7 .25% in the current valuation to 7 .125% in the 2018 valuation and to 7.0% in the 2019 valuation. The Board made this decision after extensive discussion with our Actuary and our Investment Consultant. Retirement boards around the state are reducing their assumed rates of return, as we all are dealing with reduced bond yields and reduced expectations for equity returns. Of course, no one knows for sure what future returns will be, but the Retirement Board decided that it was prudent to reduce the assumed rate of return starting next year.

Funded Ratio As was discussed at the Joint Meeting, the funded ratio of the Plan on an actuarial value of assets basis decreased slightly from 68. 7% to 68.0%, while the funded ratio on market value improved from 63.3% to 65.9%. The reason for the difference in these two funded ratios is the smoothing methodology we discussed at the Joint Meeting.

Projections The 2017 Actuarial Valuation included two sets of projections, one projecting

contributions in dollars over the next ten years under the three scenarios described below and th~ second projecting plan assets and plan funded ratio over the next ten years under the three scenarios. We are hoping these projections are helpful to the District. These projections are approximations and are the result of numerous assumptions which we all know will not be met; however, they should provide the District with an early indication of the possible changes to the District's required contribution and the funded ratio of the Plan in the upcoming years. The projections assume the following:

1) Baseline - all assumptions, including the investment return, are met. 2) 0% return in 2017, 7.00% thereafter, all other assumptions are met. (The actual

investment return for 2017 is discussed on the next page. Barring some major market meltdown between now and the end of the year, it will not be zero.)

3) A 5% return from 2017-2021, 7.0% thereafter, all other assumptions are met.

l.1hk 1-:,

P1 lljl'l frd ( 011fr1b111111111, rn \111111111, 1 l'roll'l h·d ( 1rn1111111111111 t O " ol P.I\, oll 1

't',11 (>11111.· , lnl P .l\t 1111 ll.1,d11a· 1-.1111" .. II"" R,· 1111 11 ~" u 1 \'llll 11 111 Jl.1,dt1H' i- .llll" ,, 0°,. ,~,·111r11 .:;;u u I durn in

(\ 111 \l,1111111, I .,II u.ir-i Ill !III" !II I - :11! I nll "''" ,, '" 2u 1- 2111- -llll 1

2017 170.0 54.0 54.0 54.0 31.8% 31.8% 31.8% 2018 175.1 57.4 58.1 57.6 32.8% 33.2% 32.9% 2019 180.4 61.5 63.0 62.1 34.1% 34.9% 34.4% 2020 185.8 64.1 66.3 65.3 34.5% 35.7% 35.2% 2021 ,191.3 66.0 69.0 68.1 34.5% 36.0"/o 35.6% 2022. 197.1 68.0 71.8 714 34.5% 36.4% 36.2% 2023 2030 70.1 74.0 74.5 34.5% 36.5% 36.7% 2024 .. 209.1 72.3 76.3 n.5 34.6% 36.5% 37.1% 2025 215.4 74.5 78.6 80.3 34.6% 36.5% 37.3% 1,026 221.8 76.8 81.0 83.0 34.6% 36.5% 37.4% 2027 228.5 79.2 83.5 85.6 34.7% 36.6% 37.5%

2

2 of 4

2017 Semi-Annual Report #2

I ahl,· 1-<, l'ro_jc,·tcd \ctuarial \"r" (S i 11 \Ii Ilion,) l'roj,·ctctl l·umktl l{atio f '"''''/I iahilitk,)

1'1 ojcctcd

,c:ir \ctuarial I iahi_!lt~ • Ba,l'lin,• (7.011% 11°/o l{cturn 5°/o l"l'flll'II in Ba,elinc (7.110% O'Y., l{eturn S0/o rl'llll II ill

(Sin \hllions) all ~cars I in 201" 21117-21121 all ~c:u·, I in20l" 20 I '7.2112 I

2017 903.0 614.2 614.2 614.2 680% 68.0% 68.0"/o 2018 946.0 647.l 638.8 644.7 68.4% 67.5% 68.2%

2019 989.7 676.3 657.1 668.3 68.3% 66.4% 67.5%

2020 1,021.6 711.4 681.9 694.7 69.6% 66.8% 68.0"/o 2021 1,053.5 758.5 719.4 729.9 72.0"/o 68.3% 69.3%

2022 1,085.4 806.6 758.6 763.1 74.3% 69.9% 70.3%

2023 1,117.4 8574 809.6 801.3 76.7% 72.5% 71.7% 2024 1,149.6 911.2 864.0 846.0 79.3% 75.2% 73.6%

2025 1,182.2 %8.0 921.6 897.1 81.9% 78.0% 75.9% 2026 1,215.4 1,028.5 983.1 955.3 84.6% 80.9% 78.6%

2027 1,249.5 1,093.2 1,048.8 1,021.0 87.5% 83.9% 817%

The Retirement Board is happy to provide the District with projected results under any scenario requested. If you would like to discuss these projections, please contact Hugo Wildmann.

Investment Results When writing about investment results in these reports, I have consistently mentioned that the focus of the Retirement Board is on the long-term. We all know that in the short­term, markets will go up and down, but over the long-term, we expect equity markets to go up. As of the date of this report, the approximate investment return for calendar year 2017 is 11 %. Over the 12-month period that ended 9/30/17, the Plan returned 12.7% and outperformed its benchmark. These returns are a good deal above our actuarially assumed rate ofreturn of 7.25%. Nevertheless, as was mentioned at the Joint Meeting, it is reasonable to expect that roughly one year out of every three or four years will produce a negative return for the Plan and that close to 40% of years will produce a return below our actuarially assumed rate. As I have mentioned on numerous occasions, the fact that the Plan will have a year ( or several years in a row) of returns below the actuarially assumed rate is not necessarily a reason for alarm or a time to implement changes to the investment portfolio. It is usually a time to take a long-term view and wait out the cyclical nature of the markets. The last eight calendar years have produced positive returns for the U.S. equity markets. Few market participants expect the next eight years to produce returns similar to the prior eight years. If 2017 ends with a positive return, we will have seen nine consecutive years of positive returns.

As much as we would like the performance of the past 12-months to continue, I think we should all prepare ourselves for the inevitable market decline. As part of our periodic rebalancing activities, we have continued to rebalance in order to keep our asset allocation from shifting away from our long-term investment targets.

Staffing After over a decade of the Retirement System being staffed by the same three employees, we have had turnover in the past 18 months. We replaced a long-time employee with an employee who departed within a year. The Department has also been impacted by the departure of two long-time District payroll employees who were very familiar with PeopleSoft and would often provide support to the Department. In a four-person

3

3 of 4

2017 Semi-Annual Report #2

department, staff turnover has a significant impact on productivity. At its November meeting, the Retirement Board discussed the current and future staffing needs of the Department. This topic will be discussed again in December. Hugo Wildmann and Claudia Allen, in her role as CFO, have had one meeting pertaining to staffing and have another meeting planned. Hugo and Claudia are discussing staffing and how the District and Retirement System can work together on several upcoming projects.

PEPRA and the Plan Amendment At its November meeting, the Retirement Board reviewed the PEPRA Plan amendment and a memo written by Richeda and Hugo Wildmann. The Retirement Board requested several changes to this memo before it is forwarded to the General Counsel. It appears the District and the Retirement System will soon begin implementing PEPRA for non­represented employees. Much needs to be done on this front and the complexities of implementing an employee contribution for the first time should not be understated. We have begun working on a preliminary basis on this implementation and will need District resources to successfully and efficiently implement PEPRA.

Please feel free to call me, Jeffrey Lewis (463-3900), or Hugo Wildmann (891-4889), if you would like to discuss this report or request additional information.

4

4 of 4