State of Alaska Retirement Systems Presentation for Alaska

State of Alaska Retirement Systems Presentation for Alaska GFOA 2019 Annual Conference November 18, 2019 David J. Kershner, FSA, EA, MAAA, FCA Subhead Date

Purpose of the Actuarial Valuation 1. Measure plan’s funded status (assets vs. liabilities) as of each June 30 o Liabilities are based on economic/demographic assumptions that represent best estimate of future experience 2. Compare actual experience to expected experience based on the prior year’s valuation => leads to asset and liability gains/losses (more details on next slide) 3. Calculate Employer/State contribution rates necessary to meet the Board’s funding policy (2 -year lag)* 4. Evaluate trends in contributions, assets, liabilities over the last several years 5. Forms the basis for GASB 67/68/74/75 reporting *Results of 6/30/x valuation are projected two years to 6/30/x+2 for purposes of setting Employer/State Contributions for FYx+3 (e. g. , 6/30/18 valuation projected to 6/30/20 to set FY 21 contributions) 2

Actuarial Gains/Losses 1. When assets and/or liabilities are different than expected, a gain or loss occurs (gain is favorable to the plan, loss is unfavorable to the plan) 2. Asset gain/loss: actual return is more/less than assumed (the assumed return is 7. 38% effective 6/30/18, was 8%) 3. Liability gain/loss: actual experience differs from expected experience based on assumptions used to measure the liabilities, including: o Salary increases o Medical/Rx claims o Inflation o Changes in participant data (retirements, terminations, disabilities, deaths) 4. Liabilities will also increase/decrease when the actuarial assumptions are updated (the most recent assumption update was effective 6/30/18) 3

Funding Valuation vs. GASB Reporting 1. Discount rate for liabilities – generally the same* 2. Liabilities – the same unless the discount rate is different 3. Assets o funding: market-related (5 -yr smoothing); GASB: market value 4. Recognition of asset gains/losses o funding: 25 years; GASB: 5 years 5. Recognition of liability gains/losses and effects of assumption changes o funding: 25 years; GASB: average future service 6. Recognition of effects of benefit changes o funding: 25 years; GASB: immediate *Use discount rate if projected assets sufficient to cover future benefit payments. Otherwise, use blended combination of discount rate and municipal bond rate. 4

Timing for GASB Reporting 1. GASB 67/74 a. liabilities from 6/30/x valuation projected to 6/30/x+1 b. market value of assets as of 6/30/x+1 are used directly c. used for plan’s financial statements for FYE 6/30/x+1 d. example: 6/30/18 liabilities projected to 6/30/19, combined with 6/30/19 market value of assets, for plan’s FYE 6/30/19 financial statements 2. GASB 68/75 a. liabilities from 6/30/x valuation projected to 6/30/x+1 measurement date b. market value of assets as of 6/30/x+1 are used directly c. used for employer’s financial statements for FYE 6/30/x+2 reporting d. example: 6/30/18 liabilities projected to 6/30/19 measurement date, combined with 6/30/19 market value of assets, for the employer’s financial reporting for FYE 6/30/20 5

Funding vs. GASB Terminology Funding GASB #1 Liabilities Actuarial Accrued Liability Total Pension Liability (67/68) Total OPEB Liability (74/75) #2 Assets (Non-Smoothed) Fair Value Plan Fiduciary Net Position #3 Assets (Smoothed) Actuarial Value n/a #4 Unfunded Liabilities Unfunded Actuarial Accrued Liability (#1 - #3) Net Pension Liability (67/68) Net OPEB Liability (74/75) (#1 - #2) 6

Asset Gain/Loss The following is an excerpt from the 6/30/18 PERS valuation report: The plan experienced an investment gain for the year ending 6/30/18. This will lead to a decrease in: (i) Net Pension/OPEB Liability for FYE 6/30/19 reporting (ii) GASB expense beginning in FY 19 and the four following fiscal years 7

Liability Gain/Loss The following is an excerpt from the 6/30/18 PERS valuation report: The plan experienced a liability gain for the year ending 6/30/18. This will lead to a decrease in: (i) Net Pension/OPEB Liability for FYE 6/30/20 reporting (ii) GASB expense beginning in FY 20 and subsequent fiscal years (depends on average future service) 8

Assumption Changes The following is an excerpt from the 6/30/18 PERS valuation report: The plan experienced an increase in liabilities due to assumption changes for the year ending 6/30/18. This will lead to an increase in: (i) Net Pension/OPEB Liability for FYE 6/30/20 reporting (ii) GASB expense beginning in FY 20 and subsequent fiscal years (depends on average future service) 9

PERS GASB 68/75 Employer Allocation Methodology 1. Based on present value of future contributions through FY 39 (the year PERS was projected to reach 100% funding based on closed 25 -year unfunded liability amortization method that was established 6/30/14) 2. The relative magnitude of an employer’s projected contributions depends on the size of their employees’ payroll relative to total plan payroll 3. GASB 68 example ($000’s) PV ER Contributions FY 19 -FY 39 (6/30/17 measurement date based on 6/30/16 valuation) All Employers Employer #1 Employer #2 $5, 405, 622 $193, 541 $363, 853 3. 58% 6. 73% $187, 032 $344, 710 3. 95% 7. 27% FYE 6/30/18 allocation % PV ER Contributions FY 20 -FY 39 (6/30/18 measurement date based on 6/30/17 valuation) FYE 6/30/19 allocation % $4, 739, 431 The increase in allocation % for both employers means their employees represented a larger share of total plan payroll in the 6/30/17 valuation vs. the 6/30/16 valuation 10

Illustration of Unfunded Liability “Layered” Amortization PERS ($000’s) 11

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Employer reporting for PERS Pension and OPEB Alaska GFOA 2019 Annual Conference — November 18, 2019

Pension and OPEB amounts Pension OPEB 1. Net Pension liability 1. Net OPEB liability (asset) 2. Deferred outflows of resources 3. Deferred inflows of resources 4. Pension expense 4. OPEB expense © 2019 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 904383 14

Employer amounts for Pension and OPEB Total pension and OPEB amounts of the plan Allocation by employer Allocation to governmental activities and proprietary funds Economic resources measurement focus Allocation method: How is liability expected to be settled? © 2019 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 904383 15

Schedule of allocations and pension and OPEB amounts by employer ARCHT Pension — Allocated based on present value of projected future contributions Net pension and OPEB liabilities/ asset Retiree medical plan — Allocated based on current year contributions Occupational death and disability — Allocated based on same proportion as the Retiree Medical Plan — For 2019, ODD will be allocated based on current year contributions © 2019 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 904383 16

Allocation calculation Pension and OPEB amounts Employer % Employer Pension and OPEB amounts Repeat for each plan © 2019 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 904383 17

PERS CAFR crosswalk to employer allocation Excerpt from PERS CAFR 2018 (4) Net Pension Liability – Defined Benefit Pension Plan The components of the net pension liability of the participating employers at June 30, 2018 were as follows (in thousands): Total pension liability $ Plan fiduciary net position Excerpts from Actuarial GASB 68 Report 2018 Employers’ net pension liability $ Plan fiduciary net position as a percentage of the pension liability 102 Southwest Region SD 103 Annette Island SD 104 Bering Strait SD 105 Chatham SD 106 Alaska Municipal League 299 Alaska Gasline Development Corporation Nonemployer 999 Total State of Alaska B A/B=C C*D=E Employer proportion* Total pension liability Plan fiduciary net position Net pension liability Total deferred outflows Total deferred inflows 2, 373, 188, 000. 00 50. 05611% 7, 145, 861, 151 4, 658, 559, 511 2, 487, 301, 640 54, 933, 077 (85, 955, 116) (127, 158) A Subtotal Same concept for Deferred Inflows and Outflows FY 2018 Present value of future contributions Employer number Employer name State of Alaska (Employer and Nonemployer) 4, 969, 027 65. 19% State of Alaska Public employees’ retirement system Schedule B – Employers’ allocation of net pension liability as of 6/30/2018 101 14, 275, 702 (9, 306, 675) 0. 10196% E 14, 555, 565 9, 489, 125 5, 066, 441 267, 356 1, 944, 000. 00 0. 04100% 5, 853, 541 3, 816, 065 2, 037, 476 80, 762 (51, 137) 14, 821, 000. 00 0. 31261% 44, 627, 231 29, 093, 570 15, 533, 661 1, 169, 798 (389, 864) 1, 221, 000. 00 0. 02575% 3, 676, 530 2, 396, 819 1, 279, 711 84, 947 (32, 118) 431, 00000% 1, 207, 776 846, 051 451, 724 30, 813 (11, 337) 3, 875, 000. 00 0. 08173% 11, 667, 939 7, 606, 611 4, 061, 328 89, 696 (185, 457) 4, 207, 997, 000. 00 88. 79081% 12, 675, 511, 212 8, 263, 471, 969 4, 412, 039, 244 168, 310, 652 (136, 273, 197) 531, 434, 000. 00 11. 20919% 1, 600, 190, 788 1, 043, 203, 031 556, 987, 756 12, 301, 303 (59, 308, 582) 4, 739, 431, 000. 00 100. 00000% 14, 275, 702, 000 9, 306, 675, 000 4, 969, 027, 000 180, 611, 955 (195, 581, 779) 4, 834, 000. 00 C D All amounts are determine without rounding. Rounded amounts are displayed. © 2019 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 904383 18

Additional relevant schedules Excerpts from Actuarial GASB 68 Report 2018 Footnote disclosures State of Alaska Public employees’ retirement system Schedule B – Employers’ allocation of net pension liability as of 6/30/2018 Employer number Employer name Net pension liability as % of covered payroll Net pension liability 1% Decrease (7. 0% Discount rate) Net pension liability 1% Increase (9. 0% Discount rate) 101 State of Alaska (Employer and Nonemployer) 2, 487, 301, 640 54, 933, 077 (85, 955, 116) 102 Southwest Region SD 5, 066, 441 267, 356 (127, 158) 103 Annette Island SD 2, 037, 476 80, 762 (51, 137) 104 Bering Strait SD 15, 533, 661 1, 169, 798 (389, 864) 105 Chatham SD 1, 279, 711 84, 947 (32, 118) State of Alaska Public employees’ retirement system Schedule C – Employers’ allocation of pension amounts as of 6/30/2018 Deferred outflows of resources Employer number Employer name 101 State of Alaska (Employer and Nonemployer) 102 Difference between Net expected pension and actual Employer liability proportion* expercience Changes in Changes assumptions in benefits Difference between projected and actual investment earnings Changes in proportion and differences between employer contributions Total deferred outflows Difference between expected and actual Changes in experience assumptions 2, 487, 301, 640 50. 05611% – – – 54, 933, 077 (62, 426, 389) Southwest Region SD 5, 066, 441 0. 10196% – – – 111, 894 155, 456 267, 356 (127, 158) – 103 Annette Island SD 2, 037, 476 0. 04100% – – – 44, 999 35, 764 80, 762 (51, 1137) – 104 Bering Strait SD 15, 533, 661 0. 31261% – – – 343, 067 826, 731 1, 169, 798 (389, 864) – 105 Chatham SD 1, 279, 711 0. 02575% – – – 28, 263 56, 685 84, 947 (32, 118) – © 2019 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 904383 19 –

Deferred inflows and outflows Layers of amortization Amortization period from Actuary reports Contributions after measurement date Excerpts from Actuarial GASB 68 Report 2018 State of Alaska Public employees’ retirement system Schedule D – Employers’ allocation of recognition of deferred outflows/inflows as of 6/30/2018 Employer number Employer name FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Thereafter (16, 087, 698) 30, 037, 170 (42, 563, 011) (2, 408, 500) – – 170, 618 61, 183 (86, 698) (4, 906) – – 41, 859 24, 605 (34, 866) (1, 973) – – 873, 201 187, 588 (265, 814) (15, 042) – – Chatham SD 60, 513 15, 454 (21, 899) (1, 239) – – Alaska Municipal League 22, 188 5, 455 (7, 730) (437) – – 101 State of Alaska (Employer and Nonemployer) 102 Southwest Region SD 103 Annette Island SD 104 Bering Strait SD 105 106 Example: Sum all years = $140, 197 which agrees to net inflows and outflows on slide 5. Does not include deferred outflows for contributions subsequent to measurement date, which generally comes from Employer records. © 2019 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 904383 20

Change in liability at employer Beginning liability (asset) Current year expense (+) Change in deferred inflows/outflows (+/-) Ending liability (asset) Payments (-) © 2019 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 904383 21

Sources of information for disclosures PERS CAFR Resolutions for contribution rates Actuary reports prepared for GASB 67 & 68 and 74 & 75 Audited GASB 68 and 75 Employer Allocation Schedules © 2019 KPMG LLP, a Delaware limited liability partnership and the U. S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 904383 22

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