TACOMA EMPLOYEES' RETIREMENT SYSTEM ACTUARIAL VALUATION January 1, Mark C. Olleman

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1 TACOMA EMPLOYEES' RETIREMENT SYSTEM ACTUARIAL VALUATION January 1, 2012 By Mark C. Olleman Fellow, Society of Actuaries Member, American Academy of Actuaries and Daniel R. Wade Fellow, Society of Actuaries Member, American Academy of Actuaries

2 1301 Fifth Avenue Suite 3800 Seattle, WA USA Tel Fax May 2, 2012 milliman.com Retirement Board Tacoma Employees Retirement System 3628 South 35 th Street Tacoma, Washington Re: January 1, 2012 Actuarial Valuation Dear Members of the Board: As requested, we performed an actuarial valuation of the Tacoma Employees' Retirement System as of January 1, Our findings are set forth in this actuarial valuation. This report reflects the benefit provision and contribution rates currently in effect. In preparing this report, we relied, without audit, on information (some oral and some in writing) supplied by the System s staff. This information includes, but is not limited to, statutory provisions, employee data, and financial information. We found this information to be reasonably consistent and comparable with information used for other purposes. The valuation results depend on the integrity of this information. If any of this information is inaccurate or incomplete our results may be different and our calculations may need to be revised. All costs, liabilities, rates of interest, and other factors for the System have been determined on the basis of actuarial assumptions and methods which are individually reasonable (taking into account the experience of the System and reasonable expectations); and which, in combination, offer our best estimate of anticipated experience affecting the System. Further, in our opinion, each actuarial assumption used is reasonably related to the experience of the Plan and to reasonable expectations which, in combination, represent our best estimate of anticipated experience under the System. Future actuarial measurements may differ significantly from the current measurements presented in this report due to such factors as the following: plan experience differing from that anticipated by the economic or demographic assumptions; changes in economic or demographic assumptions; increases or decreases expected as part of the natural operation of the methodology used for these measurements (such as the end of an amortization period or additional cost or contribution requirements based on the plan's funded status); and changes in plan provisions or applicable law. Due to the limited scope of our assignment, we did not perform an analysis of the potential range of future measurements. The Board of Trustees has the final decision regarding the appropriateness of the assumptions and adopted them as indicated in Appendix A. Actuarial computations presented in this report are for purposes of determining the recommended funding amounts for the System. Actuarial computations presented in this report under GASB Statements No. 25 and 27 are for purposes of fulfilling financial accounting requirements. The computations prepared for these two purposes may differ as disclosed in our - 1 Offices in Principal Cities Worldwide

3 May 2, 2012 Page 2 report. The calculations in the enclosed report have been made on a basis consistent with our understanding of the System s funding requirements and goals. Determinations for purposes other than meeting these requirements may be significantly different from the results contained in this report. Accordingly, additional determinations may be needed for other purposes. Milliman s work is prepared solely for the internal business use of the System and its Trustees and employees (for their use in administering the Fund). To the extent that Milliman's work is not subject to disclosure under applicable public records laws, Milliman s work may not be provided to third parties without Milliman's prior written consent. Milliman does not intend to benefit or create a legal duty to any third party recipient of its work product. Milliman s consent to release its work product to any third party may be conditioned on the third party signing a Release, subject to the following exception(s): (a) The System may provide a copy of Milliman s work, in its entirety, to the System's professional service advisors who are subject to a duty of confidentiality and who agree to not use Milliman s work for any purpose other than to benefit the System. (b) The System may provide a copy of Milliman s work, in its entirety, to other governmental entities, as required by law. No third party recipient of Milliman's work product should rely upon Milliman's work product. Such recipients should engage qualified professionals for advice appropriate to their own specific needs. The consultants who worked on this assignment are pension actuaries. Milliman s advice is not intended to be a substitute for qualified legal or accounting counsel. On the basis of the foregoing, we hereby certify that, to the best of our knowledge and belief, this report is complete and accurate and has been prepared in accordance with generally recognized and accepted actuarial principles and practices. We are members of the American Academy of Actuaries and meet the Qualification Standards to render the actuarial opinion contained herein. We would like to express our appreciation to Monica Butler, Retirement System Director, and to members of her staff, who gave substantial assistance in supplying the data on which this report is based. We respectfully submit the following report, and we look forward to discussing it with you. Sincerely, Mark C. Olleman, FSA, EA, MAAA Daniel R. Wade, FSA, EA, MAAA Consulting Actuary Consulting Actuary Joint Board Enrollment # Joint Board Enrollment # MCO/DRW/nlo - 2

4 Table of Contents Page Section 1 Summary of the Findings... 1 Exhibit 1 Summary of Key Valuation Results Exhibit 2 Funding and Benefits Policy Section 2 Scope of the Report Section 3 Assets Exhibit 3 Statement of Plan Net Assets at Market Value Exhibit 4 Statement of Changes in Plan Net Assets Exhibit 5 Investment Return History Exhibit 6 Actuarial Assets Section 4 Actuarial Liabilities Exhibit 7 Actuarial Present Value of Future Benefits for Contributing Members, Former Contributing Members, and Their Survivors Section 5 Employer Contributions Exhibit 8 Normal Cost Contribution Rates as Percentages of Salary Exhibit 9 Unfunded Actuarial Accrued Liability / Funding Reserve Exhibit 10 Contribution Rate Adequacy Section 6 Accounting Information Exhibit 11 GASB Statement No. 27 Annual Pension Cost and Net Pension Obligation Exhibit 12 Schedule of Funding Progress Exhibit 13 Funding Ratios Exhibit 14 Schedule of Employer Contributions Exhibit 15 GASB Statement No. 27 Three-Year Trend Information Exhibit 16 GASB Statement No. 27 Annual Development of Pension Cost Exhibit 17 Actuarial Present Value of Accumulated Vested Plan Benefits Section 7 Actuarial Gains or Losses Exhibit 18 Analysis of Actuarial Gains or Losses Exhibit 19 Analysis of Change in Unfunded Actuarial Accrued Liability Section 8 Supplemental Information Exhibit 20 Cash Flow History and Projections Exhibit 21 Asset and Liability Volatility Ratios... 48

5 Table of Contents (continued) Appendix A Actuarial Procedures and Assumptions Exhibit A-1 Summary of Valuation Assumptions Exhibit A-2 Future Salaries Exhibit A-3 Service Retirement Exhibit A-4 Disability Exhibit A-5 Mortality Exhibit A-6 Other Terminations of Employment Among Members Not Eligible to Retire Appendix B Provisions of Governing Law Appendix C Valuation Data Exhibit C-1 Summary of Membership Data Exhibit C-2 Members Receiving Service Retirement Benefits Exhibit C-3 Members Receiving Disability Retirement Benefits Exhibit C-4 Survivors Receiving Benefits Exhibit C-5 Number of Employees and Monthly Salaries - By Age Group Appendix D Comparative Schedules Exhibit D-1 Membership Data Exhibit D-2 Contribution Rates Exhibit D-3 Historical Funding Summary Exhibit D-4 Changes in Economic Assumptions Exhibit D-5 Significant Changes in Benefits, Contributions and Assumptions Exhibit D-6 Actuarial Project Schedule Appendix E Glossary... 79

6 Section 1 Summary of the Findings Summary We have completed the actuarial valuation of the Tacoma Employees' Retirement System as of January 1, Due primarily to the continued recognition of the large asset loss in 2008, the Funding Ratio has declined from 94.9% to 90.1% and the projected amortization period for the Unfunded Actuarial Accrued Liability (UAAL) has increased from 12.8 years to 35.0 years. This is based on the Actuarial Value of Assets (AVA) which smooths gains and losses over 4 years. As of January 1, 2012, the large 2008 loss is now fully recognized in the AVA. Since the 2011 investment return of 1.3% was lower than the 7.75% assumption, measures based on the Market Value of Assets (MVA) have also declined. Specifically, based on MVA, the Funding Ratio has declined from 95.4% to 91.3% and the projected amortization period of the UAAL has increased from 11.4 years to 27.7 years. The asset losses were partially offset by salary increases that were less than expected. The Board s Funding and Benefits Policy says the Board should consider an increase in contribution rates, but provides mixed indicators as to whether a contribution increase is necessary. Increasing total contributions from 20.00% to 20.26% as of January 1, 2013 is projected to reduce the amortization period of the UAAL from 35 to 30 years beginning January 1, This section of the report will summarize these issues. The following chart shows that the total contribution rate increased from 19.00% to 20.00% of member pay on January 1, Actual Contribution Rates as a Percent of Member Pay (Set in Tacoma Municipal Code) Employer Member Total % 8.89% 19.33% % 7.68% 16.70% % 6.44% 14.00% % 7.36% 16.00% % 8.28% 18.00% % 8.74% 19.00% 2012 and on 10.80% 9.20% 20.00% The actuarial valuation tests whether the scheduled contribution rates above are sufficient to satisfy future obligations. The next chart shows that, based on the actuarial assumptions and methods, the 20% of pay contribution rate is projected to amortize the UAAL over 35.0 years on an AVA basis and 27.7 years on an MVA basis. It also summarizes the changes in Funding Ratios between January 1, 2011 and January 1, As with the previous valuation, the MVA is slightly greater than the AVA, as deferred gains now exceed deferred losses in the calculation of the AVA. 1

7 Changes in Funding Ratios and Amortization Period (All Dollar Values in Millions) Valuation Valuation (A) Actuarial Accrued Liability $ 1,185.5 $ 1,132.9 (B) Actuarial Assets 1, ,074.8 (C) Market Assets 1, ,081.1 Unfunded Actuarial Accrued Liability Actuarial Assets [A - B] $ $ 58.1 Unfunded Actuarial Accrued Liability Market Assets [A - C] $ $ 51.8 Actuarial Assets Funding Ratio [B A] 90.1% 94.9% Market Assets Funding Ratio [C A] 91.3% 95.4% Actuarial Asset Amortization Period 35.0 years 12.8 years Market Asset Amortization Period 27.7 years 11.4 years Funding and Benefits Policy Exhibit 2 is a copy of the Board s Funding and Benefits Policy. The objective of the Funding and Benefits Policy states in part, The Funding & Benefits Policy is meant to assist in establishing a contribution rate which is relatively stable over the long term. That objective is reflected in the following interpretation of the valuation results using the guidance of the Funding and Benefits Policy. Funding Ratios from 80% to 95% suggest the Retirement Board consider an increase in the contribution rates: The January 1, 2012 Funding Ratio is 90.1% using actuarial assets and 91.3% using market assets. The Funding and Benefits Policy states that if the Funding Ratio is between 80% and 95%, the Retirement Board will consider an increase in the contribution rates. Amortization Period: The Policy states, Contribution increases should consider amortizing any Unfunded Actuarial Accrued Liability over a period of 30 years or less. Since the UAAL is projected to be amortized over 35.0 years based on the actuarial assumptions, the Board might consider increasing the 20% contribution rate. The Policy also states that Calculations based on the Market Value of Assets will also be considered. On that basis, the amortization period is 27.7 years. 20% Contribution Rate is greater than 17.34% Normal Cost Rate: The Policy states, There is a long-term goal of maintaining a Contribution Rate greater than or equal to the Normal Cost Rate so that if the Funding Reserve is lost due to adverse experience, there will not be a sudden increase in the calculated required contribution. Although the System does not currently have a Funding Reserve, the 20% of pay contribution rate is consistent with this statement and would continue to be consistent if the System had a Funding Ratio over 100%. 2

8 Long-term Funding Projections: The Policy states Long-term funding projections will also be considered. The baseline in Projection 1 shown later in this summary demonstrates that if experience in all future years matches the actuarial assumptions, including 7.75% investment returns, the Funding Ratio is projected to reach 100% by However, Projection 2 provides a downside scenario showing that adverse investment experience similar to what the System experienced in could require contribution rates to increase as high as 29.37% of pay to amortize the UAAL over 30 years. Projection 3 provides an upside scenario. Projection 1 shows the 20% of pay contribution rate is sufficient to eventually amortize the UAAL of the System if future experience follows all actuarial assumptions. However, future experience is expected to be both better and worse than the actuarial assumptions at different times and is likely to result in changes to the System s funding status. 3

9 Asset Gains and Losses Although the System is funded over a long period of time, the measurement of the System s funding status can vary widely from year-to-year due to asset returns. The following chart summarizes the System s asset returns in recent years and compares the market value gains and losses to the Actuarial Accrued Liability at the following valuation date. Returns greater than the 7.75% actuarial assumption are gains; returns less than the 7.75% actuarial assumption are losses. The AVA recognizes these market value gains and losses in four even pieces starting at the end of the year in which they occur. Gains in good years are needed to offset losses in bad years. The $451 million market value loss in 2008 was equal to 45% of the System s Actuarial Accrued Liability and is now fully recognized in the actuarial assets as of January 1, Year Market Value % Return* Market Value $ Gain / (Loss) compared to expected End of Year Actuarial Accrued Liability (AAL) Gain / (Loss) as a % of next AAL 2002 (8.9)% $ (112,800,000) $ 686,800,000 (16.4)% % $ 131,400, % % $ 60,100,000 $ 754,300, % % $ 8,500, % % $ 102,800,000 $ 895,800, % % $ (42,200,000) (4.2)% 2008 (32.0)% $ (451,000,000) $ 1,002,300,000 (45.0)% % $ 147,700, % % $ 60,200,000 $ 1,132,900, % % $ (69,900,000) $ 1,185,500,000 (5.9)% * The market value returns shown above are net of investment expenses, but not administrative expenses. They are based on the System s annual financial statements, but may have some variance from calculations performed by other parties due to methodology. 4

10 Long-Term Funding Projections The Funding and Benefits Policy states that Long-term funding projections will also be considered. The future funding status of the System and any changes in future contribution rates will be determined by the System s experience. In the future, the System s actual investment returns, salary increases, and retirement, withdrawal, disability and death rates will all impact the funding status of the System. Investment returns are expected to cause the largest variation in the future funding status of the System. Therefore, the three projections on the following pages project the System s funding for 20 years based on three different investment return scenarios. All other experience is assumed to match the valuation assumptions. The inputs at the bottom of each page show (a) investment returns; (b) the Unfunded Actuarial Accrued Liability (UAAL) amortization period used to produce the Calculated Total Contribution Rate graph; and (c) the total contribution rate which is assumed to be paid 54% by the City and 46% by members. The inputs are shown for both the current bars in blue and the red baseline. Baseline: 7.75% Returns in All Future Years, Contribution Rate Stays at 20% of Pay The red baseline is the same in all projections. It projects experience based on 7.75% investment returns in all years and a contribution rate of 20% of pay as currently specified in the Tacoma Municipal Code. The red baseline shows a decrease in the amortization period as the 2009 and 2010 investment gains are recognized. The amortization period increases after those gains are recognized and the 2011 asset losses flow through the AVA calculation. The Funding Ratio steadily increases on an MVA basis. This is because the contribution rate exceeds the Normal Cost and allows for some of the contributions to pay the UAAL. Projection 1: 2012 Actuarial Valuation Assumption Projection 1 assumes investment returns of 7.75% in all years after 2011, no contribution increases beyond those already scheduled, and matches the Baseline. If the System s future experience matches the actuarial assumptions as shown in Projection 1, it is estimated to reach a 100% Funding Ratio in The System is not fully funded within the 20-year projection period. Projection 2: Downside Repeat of Returns from Projection 2 demonstrates a potential downside based on the assumption that the System s actual returns from 2012 through 2014 match the actual returns from 2006 to 2008, followed by 7.75% in future years. It is estimated that, under these circumstances, total contributions would be required to grade up to 29.37% of pay if the UAAL were to be amortized over 30 years. Projection 3: Upside Repeat of Returns from Projection 3 demonstrates an upside based on the assumption that the System s actual returns from 2012 through 2014 match the actual returns from 2003 to Once again, returns in years after 2014 are assumed to be 7.75%. It is estimated that under these circumstances the System would attain a Funding Ratio of 112.1% based on Actuarial Assets and 120.8% based on Market Assets at the end of the three-year period. A Funding Reserve is created and continues to grow throughout the projections. These projections demonstrate the sensitivity of the System s funding to investment returns. 5

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17 Sensitivity to Future Experience The valuation results are projections based on the actuarial assumptions. Actual experience will differ from these assumptions, either increasing or decreasing the ultimate cost. The following illustrations provide simple analyses on how the costs are affected by lowering the investment earnings assumption to 7.50% or 7.25%, the wage growth assumption to 4.00%, and the general inflation assumption to 3.00% Actuarial Sensitivity Sensitivity Valuation Run 1 Run 2 Assumptions Investment Earnings 7.75% 7.50% 7.25% Wage Growth 4.25% 4.00% 4.00% Price Inflation 3.25% 3.00% 3.00% Results Actuarial Accrued Liabilities ($Millions) $1,185.5 $1,217.2 $1,253.3 Actuarial Assets ($Millions) $1,068.3 $1,068.3 $1,068.3 Funding Ratio 90.1% 87.8% 85.2% Normal Cost Rate 17.34% 17.86% 18.80% GASB 30 year Amortization Rate 20.26% 21.67% 23.52% Amortization Period 35.0 years Does not amortize Does not amortize As the above chart indicates, the current 20% of pay contribution rate is not sufficient to amortize the UAAL with the alternate assumptions. Conclusions The 2011 market value investment return of 1.3% was less than the 7.75% assumption. Combined with the recognition of the 2008 losses this caused a decline in the Funding Ratio and a corresponding increase in the amortization period. The losses from 2008 are now fully recognized in the actuarial assets. The current Funding Ratio indicates that the Board should consider a contribution rate increase. The additional guidelines provide mixed indicators regarding whether or not a contribution rate increase is needed. It is expected that future experience such as investment returns above or below the 7.75% assumption will continue to have an important impact on the funding of the Retirement System. The table on the following page summarizes the key valuation results. The complete Funding and Benefits Policy is on the page following the key valuations results. 12

18 Exhibit 1 Summary of Key Valuation Results Percentage Valuation Valuation Change 1. Total Membership A. Contributing Members 3,038 3,112 (2.4) % B. Annuitants Currently Receiving Benefits 1,950 1, % C. Vested Terminated Members % D. Non-vested Terminated Members (7.8) % E. Total Membership 5,573 5,587 (0.3) % 2. Annual Salaries A. Annual Total ($Thousands) $ 217,566 $ 220,825 (1.5) % B. Annual Average per Active Member $ 71,615 $ 70, % 3. Average Annual Allowance Payable A. Service Retirement $ 28,592 $ 27, % B. Disability Retirement $ 15,370 $ 14, % C. Survivors & Beneficiaries $ 15,238 $ 14, % D. All Payees $ 26,183 $ 25, % 4. Actuarial Accrued Liability ($Millions) A. Active Members $ $ % B. Terminated Members $ 74.1 $ % C. Retired Members and Beneficiaries $ $ % D. Total AAL $ 1,185.5 $ 1, % 5. Value of System Assets ($Millions) A. Market Value $ 1,082.9 $ 1, % B. Smoothing Unrecognized Loss / (Reserve) $ (14.6) $ (6.3) C. Actuarial Value $ 1,068.3 $ 1,074.8 (0.6) % D. Ratio of Actuarial Value to Market Value 98.7% 99.4% 6. Funded Status ($Millions) A. Funding Reserve or (Funding Shortfall) $ (117.2) $ (58.1) (5C - 4D) B. Actuarial Funding Ratio ( 5C 4D ) 90.1% 94.9% C. Market Value Funding Ratio ( 5A 4D ) 91.3% 95.4% 7. Contribution Rates (percent of salaries) A. Total Contribution Rate 20.00% 20.00% B. Normal Cost Rate 17.34% 17.33% C. Contribution Rate minus Normal Cost Rate 2.66% 2.67% ( 7A 7B ) D. Amortization Period (Period over which 35.0 years 12.8 years Funding Reserve is projected to be depleted or Funding Shortfall is projected to be depleted by the difference between the Contributions and the Normal Costs). 13

19 Exhibit 2 Funding and Benefits Policy Objective This policy is intended to provide guidance as to when adjustments to the Retirement System s contributions and benefits should be considered. The Funding and Benefits Policy is meant to assist in establishing a contribution rate which is relatively stable over the long term while the System provides its members superior retirement income. Policy When the Funding Ratio is: (a) Above 120% - The potential for benefit improvements will be reviewed providing the Retirement System s funding status is expected to be stable and remain stable after the improvements. (b) Between 95% and 120% - There will be no action, provided that either: 1. The Contribution Rate is greater than or equal to the Normal Cost Rate, or 2. There is a Funding Reserve which is projected to be amortized over not less than 20 years. If neither of these conditions is met, then the Retirement Board will consider an increase in the contribution rates. (c) Between 80% and 95% - The Retirement Board will consider an increase in the contribution rates. (d) Under 80% - The funding and benefits policy will be reviewed and reevaluated. Additional Guidelines (a) There is a long-term goal of maintaining a Contribution Rate greater than or equal to the Normal Cost Rate so that if the Funding Reserve is lost due to adverse experience, there will not be a sudden increase in the calculated required contribution. (b) Increases in the contribution rate may be made in small increments. (c) Requests for increases in the contribution rate should be made at least one year prior to the beginning of the financial biennium. (d) Contribution increases should consider amortizing any Unfunded Actuarial Accrued Liability over a period of 30 years or less. (e) Calculations based on the Market Value of Assets will also be considered. (f) Long-term funding projections will also be considered. Terminology (a) The Funding Ratio is calculated by dividing the System s Actuarial Value of Assets by the Actuarial Accrued Liability. (b) The Funding Reserve is the dollar amount by which the System s Actuarial Value of Assets exceeds the Actuarial Accrued Liability. (c) Unfunded Actuarial Accrued Liability is the dollar amount by which the System s Actuarial Accrued Liability exceeds the Actuarial Value of Assets. 14

20 Section 2 Scope of the Report This report presents the actuarial valuation of the Tacoma Employees' Retirement System as of January 1, A summary of the findings resulting from this valuation is presented in the previous section. Section 3 describes the assets of the System. Sections 3, 4 and 5 describe how the obligations of the System are to be met under the actuarial cost method in use. Section 6 discloses actuarial information based on the requirements of Statements No. 25 and No. 27 of the Governmental Accounting Standards Board (GASB). Section 7 provides analysis of actuarial gains and losses and the impact on the Unfunded Actuarial Accrued Liability. Section 8 provides supplemental information regarding cash flow and volatility ratios. The actuarial procedures and assumptions used in this valuation are presented in Appendix A. The current benefit structure, as determined by the provisions of the governing law on January 1, 2012, is summarized in Appendix B. Schedules of valuation data classifying the data used in the valuation by various categories of contributing members, former contributing members, and beneficiaries make up Appendix C. Appendix D provides a brief summary of the System's historical experience. Comparative statistics are presented on the System's membership, contribution rates, assets, and changes affecting actuarial valuations. Appendix E is a glossary of actuarial terms used in this report. 15

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22 Section 3 Assets In many respects, an actuarial valuation can be considered an inventory process. The inventory is taken as of the actuarial valuation date, which for this valuation is January 1, On that date, the assets available for the payment of benefits are appraised. These assets are compared with the actuarial liabilities, which are generally well in excess of the assets. The actuarial process thus leads to a method of determining what contributions by members and their employers are needed to strike a balance. This section of the report deals with the asset determination. In the next section, the actuarial liabilities will be discussed. Section 5 will deal with the process for determining required contributions, based upon the relationship between the assets and actuarial liabilities. Exhibit 3 summarizes the financial resources of the System on the valuation date. The market value of net assets available to pay pension benefits at the end of the last two years are compared and broken down by investment category. Exhibit 4 summarizes the changes in the market value of net assets available to pay benefits. The System is mature. Benefits and administrative expenses are larger than contributions. The System must now rely on investment income to pay part of its benefits and expenses. Exhibit 5 is new this year and provides the historical returns since 1980 as calculated by Milliman on a market value basis. Exhibit 6 summarizes the determination of the actuarial value of assets. The actuarial asset method smoothes market value gains and losses over a four-year period. It was adopted for the January 1, 1997 valuation, with the actuarial value of assets set equal to the market value of assets at January 1, A complete description of the method is given in Appendix A. 17

23 Exhibit 3 Statement of Plan Net Assets at Market Value December 31, 2011 December 31, 2010 Assets Cash and short-term investments $ 16,824,925 $ 14,454,526 Receivables Contributions and other receivables $ 1,549,383 $ 1,481,273 Interest and dividends 3,621,923 3,614,132 Investment Sales 2,159, ,632 Total receivables $ 7,330,369 $ 5,869,037 Investments, at fair value Equities $ 560,732,264 $ 618,033,804 Fixed income 343,851, ,960,081 Other assets 338, ,097 Real estate 48,091,411 41,445,388 Venture capital and partnerships 120,457,377 49,353,529 Securities lending collateral 40,781,263 65,161,346 Total investments $ 1,114,252,484 $ 1,165,255,245 Capital assets, net of accumulated depreciation of $2,811 and $7,564 $ 16,341 $ 19,152 Total assets $ 1,138,424,119 $ 1,185,597,960 Liabilities Refunds payable and other accrued expenses $ 5,110,721 $ 5,003,523 Investments purchased 9,626,619 34,377,360 Securities lending collateral 40,781,263 65,161,345 Total liabilities $ 55,518,603 $ 104,542,228 Net assets held in trust for pension benefits $ 1,082,905,516 $ 1,081,055,732 18

24 Exhibit 4 Statement of Changes in Plan Net Assets (Plan years ended December 31, 2011 and December 31, 2010) Additions Contributions Employer $ 22,511,500 $ 21,349,373 Plan Member 19,902,966 18,884,094 Total contributions $ 42,414,466 $ 40,233,467 Investment income Net appreciation (depreciation) in fair value of investments $ (6,104,342) $ 110,457,229 Interest & dividends 22,602,316 26,102,088 Securities lending gross income 180, ,281 Investment management fees (3,173,752) (2,688,402) Securities lending - agent fees (59,769) (73,184) Securities lending - broker rebates 19,061 (91,073) Net investment income (loss) $ 13,463,770 $ 134,006,939 Total additions (reductions) $ 55,878,236 $ 174,240,406 Deductions Benefits $ 49,836,150 $ 46,406,253 Refunds of contributions 2,437,385 2,247,556 Administrative expenses 1,754,917 1,846,765 Total deductions $ 54,028,452 $ 50,500,574 Net increase (decrease) 1,849, ,739,832 Net assets held in trust for pension benefits Beginning of year 1,081,055, ,315,900 End of year $ 1,082,905,516 $ 1,081,055,732 19

25 Exhibit 5 Investment Return History (TERS Investment Returns on Total Fund Calculated by Milliman) Period Since Ended 1 Year 5 Years 10 Years 15 Years /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/

26 Exhibit 6 Actuarial Assets (January 1, 2012) Part A Determination of Recognized Investment Gains and Losses - Four-Year Smoothing A. Expected investment return $ 83,331,777 B. Actual investment return $ 13,463,770 C. Gains/(losses) [B - A] $ (69,868,007) D. Gains/(losses) 2010 $ 60,212,807 E. Gains/(losses) 2009 $ 147,711,907 F. Gains/(losses) 2008 $ (451,014,571) G. Gains/(losses) recognized at January 1, 2012 [¼C + ¼D + ¼E + ¼F]* $ (78,239,465) Part B Determination of Actuarial Assets Actuarial value of assets January 1, 2011 $ 1,074,793,815 Net cash flow $ (11,613,986) Expected investment return $ 83,331,777 Recognized investment gains(losses) $ (78,239,465) $ (6,521,674) Actuarial value of assets January 1, 2012 $ 1,068,272,141 Note: The actuarial value of assets is equal to the expected market value of assets plus a fouryear smoothing of market value gains and losses. The actuarial asset method was adopted January 1, 1997, with actuarial value of assets set equal to market value of assets at January 1, * Includes rounding adjustment. 21

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28 Section 4 Actuarial Liabilities In the previous section, an actuarial valuation was described as an inventory process, and an analysis was given of the inventory of assets of the System as of the valuation date. In this section, the discussion will focus on the commitments of the System, which are its actuarial liabilities. Exhibit 7 contains an analysis of the actuarial present value of all future benefits for contributing members, for former contributing members, and for beneficiaries. The analysis is given by type of benefit. The actuarial liabilities summarized in Exhibit 7 include the actuarial present value of all future benefits expected to be paid with respect to each member. For an active member, this value includes a measure of both benefits already earned and future benefits to be earned. Thus, for all members, active and retired, the value extends over benefits earnable and payable for the rest of their lives. If an optional benefit is chosen, the value even extends over the lives of the surviving beneficiaries. 23

29 Exhibit 7 Actuarial Present Value of Future Benefits for Contributing Members, Former Contributing Members, and Their Survivors (All Amounts in Millions) January 1, 2012 January 1, 2011 Total Total Active participants Service and early retirement $ $ Vested termination and return of member contributions Disability retirement Survivors' benefits Total $ $ Inactive and retired participants and beneficiaries Service retirement $ $ Disability retirement Survivors' benefits Terminated vested benefits Total $ $ Grand Total $ 1,484.3 $ 1,

30 Section 5 Employer Contributions In an active system, there will always be a difference between the actuarial present value of future benefits and the assets. This difference has to be funded with future contributions and investment returns. An actuarial valuation sets a schedule of future contributions that will deal with this funding in an orderly fashion. The method used to determine the incidence of the contributions in various years is called the actuarial cost method. For this valuation, the entry age actuarial cost method has been used. Under this method, or essentially any actuarial cost method, the contributions required to meet the difference between current assets and present value of future benefits are allocated each year between two elements: A Normal Cost amount, which ideally is relatively stable as a percentage of salary over the years; and Whatever amount is left over, which is used to amortize what is called the Unfunded Actuarial Accrued Liability (UAAL). The two items described above, Normal Cost and UAAL, are the keys to understanding the actuarial cost method. Let us first discuss the Normal Cost. The Normal Cost is the theoretical contribution rate that will meet the ongoing costs of a group of average new employees. Suppose that a group of new employees was covered under a separate fund from which all benefits and to which all contributions and associated investment return were paid. Under the entry age actuarial cost method, the Normal Cost contribution rate is that level percentage of pay which would be exactly right to maintain this fund on a stable basis. If experience were to follow the actuarial assumptions exactly, the fund would be completely liquidated with the last payment to the last survivor of the group. We have determined the Normal Cost rates separately by type of employee and by type of benefit for the System. We have also determined the dollar amounts corresponding to the Normal Cost rates. These are summarized in Exhibit 8. The Normal Cost rate changed very little from the previous valuation. The Normal Cost in dollar terms is expected to decrease due to the decrease in payroll. We assume that the contributions will be paid with each pay period. The term "fully funded" is often applied to a system where contributions for everyone at the Normal Cost rate will fully pay for the benefits of existing as well as new employees. More often than not, systems are not fully funded, either because of past benefit improvements that have not been completely paid for or because of actuarial deficiencies caused by experience less favorable than anticipated. Under these circumstances, a UAAL exists. 25

31 Exhibit 9 shows that the development of the UAAL. Line A shows the actuarial present value of all future benefit payments for present and former members and their survivors. Line B shows the portion that is expected to be paid from future Normal Cost contributions, both employer and employee. The remainder, the actuarial accrued liability, is shown on Line C. Line D shows the actuarial value of assets, $1,068.3 million, to be smaller than the actuarial accrued liability on Line C, $1,185.5 million. Consequently, the System has UAAL. Exhibit 10 shows that the total contribution rate, starting January 1, 2012, of 20.00% on Line C is 2.66% more than the total Normal Cost rate of 17.34% on Line D. Line F shows contributions are projected to amortize the UAAL over a 35.0 year period. Line G provides the contribution rate necessary to amortize the UAAL over a 30 year period. Lines H and I provide information on a market value basis. The assumptions for active members used in this valuation were developed in 2008 based on the System s experience in the four years and will be reviewed again in 2012 after the completion of this actuarial valuation. The retired mortality assumptions were revised in 2006 based on the System s experience in the four years and will also be reviewed later in The UAAL or Funding Reserve at any date after establishment of a system is affected by any actuarial gains or losses arising when the actual experience of the system varies from the experience anticipated by the actuarial assumptions used in the valuations. To the extent actual experience differs from the assumptions used, the actual emerging costs will differ from the estimated costs. An analysis of the System's experience is discussed in Section 7, Actuarial Gains or Losses. 26

32 Exhibit 8 Normal Cost Contribution Rates as Percentages of Salary January 1, 2012 January 1, 2011 Total Total Percentage Dollar Amount in thousands Dollar Amount in thousands Service and early retirement 13.30% 28, % 29,348 Vested termination and return of member contributions , ,543 Disability retirement Survivors' benefits Administrative Expenses , ,987 Total 17.34% 37, % 38,269 27

33 Exhibit 9 Unfunded Actuarial Accrued Liability / Funding Reserve (Dollar Amounts in Millions) January 1, 2012 January 1, 2011 A. Actuarial present value of all future benefits for present and former members and their survivors (Exhibit 7) 1, ,439.0 B. Actuarial present value of total future normal costs for present members C. Actuarial Accrued Liability [A - B] 1, ,132.9 D. Actuarial value of assets available for benefits (Exhibit 6) 1, ,074.8 E. Funding Reserve (Unfunded Actuarial Accrued Liability) [D - C] (117.2) (58.1) F. Funding ratio [D C] 90.1% 94.9% Market Value Calculations* G. Market value of assets 1, ,081.1 H. Market value funding reserve (Unfunded Actuarial Accrued Liability) [G - C] (102.6) (51.8) I. Market value funding ratio [G C] 91.3% 95.4% * The Retirement Board s Funding and Benefits Policy specifies that calculations based on the market value of assets should be considered as well as calculations based on the actuarial assets which smooth gains and losses over four years. 28

34 Exhibit 10 Contribution Rate Adequacy January 1, 2012 January 1, 2011 A. Employer contribution rate* 10.80% 10.80% B. Member contribution rate* 9.20% 9.20% C. Total contribution rate* 20.00% 20.00% D. Less total normal cost rate (Table 5) 17.34% 17.33% E. Excess of contribution rate over normal cost rate [C - D] 2.66% 2.67% F. Amortization period from Valuation Date 35.0 years 12.8 years G. 30 Year Amortization of Funding Shortfall on an AVA Basis, not lower than the current contribution rate % 20.00% Market Value Calculations** H. Amortization period from Valuation Date 27.7 years 11.4 years I. 30 Year Amortization of Funding Shortfall on an MVA Basis, not lower than the current contribution rate % 20.00% * The Tacoma Municipal Code specifies a total contribution rate of 16.00% in 2009, 18.00% in 2010, 19.00% in 2011 and 20.00% in 2012 and all future years. **The Retirement Board s Funding and Benefits Policy specifies that calculations based on the market value of assets should be considered as well as calculations based on the actuarial assets which smooth gains and losses over four years. 29

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36 Section 6 Accounting Information For fiscal years beginning after June 15, 1996, Governmental Accounting Standards Board (GASB) reporting standards are required for defined benefit pension plan reporting and disclosures (Statement No. 25). The System adopted the reporting standards beginning in The reporting requirements for Statement No. 25 include certain supplementary information that must be added to the financial statements. These include: (1) A Schedule of Funding Progress (2) A Schedule of Employer Contributions The Schedule of Funding Progress compares actuarial assets and liabilities of the System, based on the actuarial funding method used. The required Schedule of Employer Contributions compares the employer contributions required based on the actuarial valuation (the actuarial required contribution, or ARC) with the employer contributions actually made. The ARC must be calculated based on certain parameters required for disclosure purposes. We believe the actuarial methods and assumptions used in this valuation to determine the employer s contribution for funding purposes satisfy the GASB reporting requirements. For fiscal years beginning after June 15, 1997, GASB Statement No. 27 is required for pension accounting by state and local governmental employers. The System adopted this standard beginning in The required disclosures include the measurement of an annual pension cost (APC). The APC is equal to the employer s ARC with certain adjustments prescribed by the Statement. Exhibit 11 shows both the ARC and APC for the System. The comparability of the data from year to year can be affected by changes in actuarial assumptions, benefit provisions, accounting policies, etc. Between January 1, 2011 and January 1, 2012, no assumptions were changed. 31

37 Exhibit 11 GASB Statement No. 27 Annual Pension Cost and Net Pension Obligation Fiscal Year Ending December 31, a. Total Normal Cost Rate 17.37% 17.16% 17.16% 1b. Employee Contribution Rate (1) 7.28% 8.28% 8.74% 1c. Employer Normal Cost Rate (1a - 1b) 10.09% 8.88% 8.42% 2a. Total Employer Contribution Rate (2) 8.55% 9.72% 10.26% 2b. Amortization Payment Rate (2a - 1c) -1.54% 0.84% 1.84% 2c. Amortization Period 28 years 29 years 28 years 2d. GASB 27 Amortization Rate -2.85% -1.09% -0.63% 3. Total Annual Required Contribution (ARC) 7.24% 7.79% 7.79% Rate (3) (1c + 2d) 4. Covered Employee Payroll (4) $ 209,852,117 $ 219,643,755 $ 219,410,331 5a. ARC (3 x 4) $ 15,193,293 $ 17,110,249 $ 17,092,065 5b. Interest on Net Pension Obligation (NPO) (81,076) (295,743) (630,966) 5c. ARC Adjustment 60, , ,321 5d. Annual Pension Cost (APC) (5a + 5b + 5c) $ 15,172,465 $ 17,023,918 $ 16,917, Employer Contribution $ 17,942,356 $ 21,349,373 $ 22,511,500 7a. Change in NPO (5d - 6) (2,769,891) (4,325,455) (5,594,080) 7b. NPO at Beginning of Year (1,046,147) (3,816,038) (8,141,493) 7c. NPO at End of Year (7a + 7b) $ (3,816,038) $ (8,141,493) $ (13,735,573) (1) For 2009 the Employee Contribution Rate was 6.44% from January 1, 2009 through January 31, 2009 and 7.36% from February 1, 2009 through December 31, % is the weighted average. For 2010, the Employee Contribution Rate was 8.28%. For 2011, the Employee Contribution Rate was 8.74%. (2) For 2009 the Employer Contribution Rate was 7.56% from January 1, 2009 through January 31, 2009 and 8.64% from February 1, 2009 through December 31, % is the weighted average. For 2010, the Employer Contribution Rate was 9.72%. For 2011, the Employer Contribution Rate was 10.26%. (3) The ARC is calculated as a percent of salary with the Fiscal Year 2009 calculations based on the January 1, 2007 Actuarial Valuation and the Fiscal Year 2010 and 2011 calculation based on the January 1, 2009 Actuarial Valuation. (4) Covered Employee Payroll includes compensation paid to all active employees on which contributions were made in the year preceding the valuation date. Covered Employee Payroll differs from Active Member Valuation payroll shown in Exhibit C-1, which is an annualized compensation of only those members who were active on the actuarial valuation date. 32

38 Exhibit 12 Schedule of Funding Progress (Dollar Amounts in Millions) UAAL as a Unfunded Actuarial Funding Ratio Percentage Actuarial Actuarial Value Actuarial Accrued Accrued Liabilities Increase (Decrease) Covered of Covered Valuation Date of Assets Liabilities (AAL) (1) (UAAL) (2) Funded Ratio Over Prior Valuation Payroll (3) Payroll January 1, 1997 $ $ $ (4.8) % 7.9 % $ (4.1) % January 1, 1998 (4) (8.1) (7.0) January 1, 1999 (5) (33.8) (27.6) January 1, 1999 (6) (33.1) (0.1) (27.1) January 1, (95.0) (71.2) January 1, (53.3) (7.9) (34.6) January 1, (53.0) (0.8) (30.7) January 1, , (125.5) (71.7) January 1, , ,002.3 (95.0) (4.5) (48.1) January 1, , , (14.6) January 1, , , (4.8) (1) Actuarial present value of benefits less actuarial present value of future normal costs based on Entry Age Actuarial Cost Method. (2) Actuarial accrued liabilities less actuarial value of assets. (3) Covered Payroll includes compensation paid to all active employees on which contributions were made in the year preceding the valuation date. Covered Payroll differs from Active Member Valuation payroll shown in Exhibit C-1, which is an annualized compensation of only those members who were active on the actuarial valuation date. (4) A special actuarial valuation was performed as of January 1, (5) Results of January 1, 1999 Actuarial Valuation. (6) January 1, 1999 results adjusted for inclusion of benefit percentage in portability, removal of overtime contributions and removal of 90-day waiting period. appropriate to use for other purposes. Milliman does not intend to benefit and assumes no duty or liability to 33

39 Exhibit 13 Funding Ratios (Dollar Amounts in Millions) Actuarial Accrued Liabilities for A B C D Active Members Active Inactives, (Employer- Actuarial Portion of Actuarial Accrued Liabilities Actuarial Member Retirees and Financed Value of Covered by Assets Valuation Date (1) Contributions Beneficiaries Portion) Total Assets A B C D January 1, 1997 $ $ $ $ $ % 100.0% 100.0% 101.0% January 1, % 100.0% 100.0% 101.6% January 1, 1999 (2) % 100.0% 100.0% 106.3% January 1, 1999 (3) % 100.0% 100.0% 106.2% January 1, % 100.0% 100.0% 115.7% January 1, % 100.0% 100.0% 107.8% January 1, % 100.0% 100.0% 107.0% January 1, , % 100.0% 100.0% 114.0% January 1, , , % 100.0% 100.0% 109.5% January 1, , , % 100.0% 82.2% 94.9% January 1, , , % 100.0% 64.1% 90.1% (1) See Exhibit D-5 for significant changes affecting the valuation results. (2) Results of January 1, 1999 Actuarial Valuation. (3) January 1, 1999 results adjusted for inclusion of benefit percentage in portability, removal of overtime contributions and removal of 90-day waiting period. appropriate to use for other purposes. Milliman does not intend to benefit and assumes no duty or liability to 34

40 Exhibit 14 Schedule of Employer Contributions (Dollar Amounts in Millions) Fiscal Year Ending Covered Employee Payroll (1) Actual Employer Contributions (2) Actual Employer Contribution (2) Annual Required Contribution (ARC) % (2) Percentage of ARC Contributed 12/31/2001 $ $ % 7.56% 100% 12/31/ % 7.56% 100% 12/31/ % 7.56% 100% 12/31/ % 7.56% 100% 12/31/ % 7.56% 100% 12/31/ % 7.56% 100% 12/31/ % 7.56% 100% 12/31/ % 7.24% 104% 12/31/ % (3) 7.24% 118% 12/31/ % 7.79% 125% 12/31/ % 7.79% 132% (1) Computed as the dollar amount of the actual employer contribution made as a percentage of payroll divided by the contribution rate, expressed as a percentage of payroll. (2) The actual and required employer contributions are expressed as a percentage of payroll. (3) The Employer Contribution Rate was 7.56% from January 1, 2009 through January 31, 2009 and 8.64% from February 1, 2009 through December 31, % is the weighted average. appropriate to use for other purposes. Milliman does not intend to benefit and assumes no duty or liability to 35

41 Exhibit 15 GASB Statement No. 27 Three-Year Trend Information Fiscal Year Ending Annual Pension Cost (APC) Contribution as a Percentage of APC Net Pension Obligation (NPO) December 31, 2009 $ 15,172, % $ (3,816,038) December 31, ,023, % (8,141,493) December 31, ,917, % (13,735,573) 36

42 Exhibit 16 GASB Statement No. 27 Annual Development of Pension Cost (2) = (3) = (10) = [prior yr(7)] [prior yr(7)] (4) = (7) = (6) + [prior yr (1) x interest / (9) (1) + (2) - (3) (5) (6) = (4) - (5) [prior yr(7)] (8) = (1) - (5) (9) (11)] / (9) (11) = (7) Fiscal Year Ending ARC at EOY Interest on NPO ARC Adjustment Annual Pension Cost (APC) Total Employer Change in Amort. Contributions NPO NPO Balance (1) Gain/Loss Factor Amort. Of Gain/Loss Ending Balance December 31, ,445, ,445,292 10,468,504 (1) (23,212) (23,212) (23,212) - - (23,212) December 31, ,965,855 (1,741) (1,108) 10,965,222 11,026,980 (61,758) (84,970) (61,125) (1,108) (84,970) December 31, ,827,421 (6,373) (4,058) 11,825,106 11,906,622 (81,516) (166,486) (79,201) (4,058) (166,486) December 31, ,778,427 (12,486) (7,950) 11,773,891 12,031,870 (257,979) (424,465) (253,443) (7,950) (424,465) December 31, ,773,136 (31,835) (25,399) 10,766,700 10,773,136 (6,436) (430,901) (25,399) (430,901) December 31, ,654,321 (33,395) (24,645) 11,645,571 11,654,321 (8,750) (439,651) (24,645) (439,651) December 31, ,648,249 (34,073) (25,805) 11,639,981 11,648,249 (8,268) (447,919) (25,805) (447,919) December 31, ,040,648 (34,714) (53,313) 13,059,247 13,040,648 18,599 (429,320) (53,313) (429,320) December 31, ,067,325 (33,272) (55,956) 13,090,009 13,067,325 22,684 (406,636) (55,956) (406,636) December 31, ,231,812 (31,514) (31,250) 13,231,548 13,231,812 (264) (406,900) (31,250) (406,900) December 31, ,605,935 (31,535) (32,587) 13,606,987 13,605,935 1,052 (405,848) (32,587) (405,848) December 31, ,293,329 (31,453) (22,903) 14,284,779 14,925,078 (640,299) (1,046,147) (631,749) (22,903) (1,046,147) December 31, ,193,293 (81,076) (60,248) 15,172,465 17,942,356 (2,769,891) (3,816,038) (2,749,063) (60,248) (3,816,038) December 31, ,110,249 (295,743) (209,412) 17,023,918 21,349,373 (4,325,455) (8,141,493) (4,239,124) (209,412) (8,141,493) December 31, ,092,065 (630,966) (456,321) 16,917,420 22,511,500 (5,594,080) (13,735,573) (5,419,435) (456,321) (13,735,573) (1) NPO at transition is zero. Amortization Period: Amortization Method: 30 years, Open, unless fixed rate amortizes less than 30 years Level Percentage of Projected payroll appropriate to use for other purposes. Milliman does not intend to benefit and assumes no duty or liability to 37

43 Exhibit 17 Actuarial Present Value of Accumulated Vested Plan Benefits (Dollar Amounts in Millions) Portion of Active Members Accumulated Vested Plan Benefits Actuarial Retired Inactive Vested Member Employer- Actuarial Value Covered by Actuarial Valuation Date (1) Members Members Contributions Financed Portion Total of Assets Assets January 1, 1997 $ $ 5.7 $ $ $ $ % January 1, % January 1, 1999 (2) % January 1, 1999 (3) % January 1, % January 1, % January 1, % January 1, , % January 1, , % January 1, , , % January 1, , , % (1) See Exhibit D-5 for significant changes affecting the valuation results. (2) Results of January 1, 1999 Actuarial Valuation. (3) January 1, 1999 results adjusted for inclusion of benefit percentage in portability, removal of overtime contributions and removal of 90-day waiting period. appropriate to use for other purposes. Milliman does not intend to benefit and assumes no duty or liability to 38

44 Section 7 Actuarial Gains or Losses An analysis of actuarial gains or losses is performed in conjunction with all regularly scheduled valuations. Valuations were performed biennially prior to 2012 and will be performed annually going forward. The results of our analysis of the financial experience of the System in the three recent regular actuarial valuations are presented in Exhibit 18. Each gain or loss shown represents our estimate of how much the given type of experience caused the Unfunded Actuarial Accrued Liability (UAAL) or Funding Reserve to change in the period since the previous actuarial valuation. Please note that the first two columns include experience over a two-year period, while the last column shows one year of experience. Gains and losses shown due to demographic sources are approximate. Demographic experience is analyzed in greater detail in our periodic assumption studies. Non-recurring gains and losses in the period were from changes in the actuarial assumptions. Exhibit 19 is new this year and provides an analysis of the change in the UAAL between the prior and current valuations. It shows the Actuarial Accrued Liability (AAL), Actuarial Value of Assets (AVA) and the difference between, the UAAL. It shows the amounts at the prior valuation and the expected changes, including Normal Cost, interest, contributions, benefit payments, and administrative expenses. It then shows the deviation from expectations based on gains and losses to the asset values and liability amounts. 39

45 Exhibit 18 Analysis of Actuarial Gains or Losses (1) (Dollar Amounts in Millions) Gain/(Loss) For Period (2) Investment Income Investment Income was greater (less) than expected. Based on actuarial value of assets. $ (51.0) $ (174.3) $ (77.7) Pay Increases Pay increases were less (greater) than expected. 8.4 (13.8) 18.7 Age & Service Retirements Members retired at older (younger) ages or with less (greater) final average pay than expected (1.8) Disability Retirements Disability claims were less (greater) than expected Death-in-Service Benefits Survivor claims were less (greater) than expected Withdrawal From Employment More (Less) reservers were released by withdrawals than expected. (5.4) 1.5 (1.3) Death After Retirement Retirees died younger (lived longer) than expected. (1.9) (3.0) 1.9 Other Miscellaneous gains and losses resulting from data adjustments Membership Growth (Additional) liability for new members. (5.3) (3.2) (0.7) Total Gain or (Loss) During Period From Financial Experience $ (49.2) $ (175.5) $ (59.1) Non-Recurring Items Changes in actuarial assumptions caused a gain (loss). Changes in benefits caused a gain (loss) Composite Gain (Loss) During Period $ (43.5) $ (175.5) $ (59.1) (1) Effects related to losses are shown in parentheses. Numerical results are expressed as a decrease (increase) in the UAAL. (2) Since annual valuations were adopted in 2011, the first two columns cover two years while the final column (2011) covers one year. 40

46 Exhibit 19 Analysis of Change in Unfunded Actuarial Accrued Liability (Dollar Amounts in Millions) (a) - (b) (a) (b) Unfunded Actuarial Actuarial Actuarial Accrued Value of Accrued Liability Assets Liability January 1, 2011 Actuarial Valuation $ 1,132.9 $ 1,074.8 $ 58.1 Interest on Beginning of Year Amounts Normal Cost Contributions (42.4) Benefit Payments (Includes Return of Contributions) (52.3) (52.3) - Administrative Expenses - (1.8) 1.8 Interest on Cash Flows and Normal Cost (0.6) (0.4) (0.2) Expected January 1, 2012 Actuarial Valuation $ 1,204.1 $ 1,146.0 $ 58.1 Recognized Asset Gain/(Loss) Gain/(Loss) from (60.2) 60.2 Gain/(Loss) from (17.5) 17.5 Total Asset Gain/(Loss) - (77.7) 77.7 Liability (Gain)/Loss (18.6) - (18.6) Actual January 1, 2012 Actuarial Valuation $ 1,185.5 $ 1,068.3 $

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48 Section 8 Supplemental Information Exhibit 20 summarizes the System s historical cash flows for the last 10 years and the projected cash flows for the next 10 years. The projected cash flows are based on the actuarial assumptions as stated in Appendix A. Contributions include both employer and member contributions. The total contribution rate increased to 20.00% of pay at January 1, 2012, consistent with the Tacoma Municipal Code. The projections assume this rate continues throughout the projection period. Graphs of Exhibit 20 are on the facing page. As a retirement system becomes more mature (i.e., a greater percentage of the obligation is attributable to benefits already earned), it tends to be subject to increased volatility in the contributions needed. Specifically, for TERS, there may be significant swings in the additional revenue needed from year to year due to the actual investment return. One indicator of this potential volatility is the Asset Volatility Ratio (AVR) which is equal to the Market Value of Assets divided by total payroll. As assets grow compared to payroll, any percentage gain or loss on those assets will be larger compared to payroll. This causes any resulting changes in required contributions from those gains or losses to also be larger when measured as a percent of payroll. Therefore, plans with a high AVR will be subject to a greater level of volatility in required contributions. The AVR is a current measure since it is based on the current level of assets and will vary from year to year. The current AVR for TERS is 5.0. The AVR grew from 1.4 in 1976 to a high of 6.3 in The following chart provides an illustration of how increases in the AVR increase the volatility of contributions from asset gains and losses. A return of -2.25% is a 10% loss for TERS because it is 10% below the 7.75% investment return assumption. As shown in the chart, if a return of -2.25% is not offset by future gains and the AVR is 1.4, the loss is expected to increase contributions by 0.8% of pay if amortized over 30 years and 1.3% of pay if amortized over 15 years. However, if the AVR is 6.3, the same return is expected to increase contributions by 3.5% of payroll if amortized over 30 years and 5.8% of pay if amortized over 15 years. In both cases this assumes there is no buffer such as a reserve or an amortization period below 30 years to absorb some of the adverse experience. The total increases would be slightly larger after an adjustment for higher returns of member contributions. Approximate eventual increases in contributions for an asset return 10% below the assumption if not offset by future gains Asset Volatility Ratio = Assets / Payroll 30-Year Amortization 15-Year Amortization % of payroll 1.3% of payroll % of payroll 5.8% of payroll 43

49 The graph at the top of Exhibit 21 shows how the system matured during the last 25 years of the Twentieth Century, as represented by the increasing AVR. Over the last decade, the AVR has somewhat leveled off, although the year-to-year variance has increased. Another measure of a system s maturity is the Liability Volatility Ratio (LVR), which is equal to the Actuarial Accrued Liability divided by the total payroll. This ratio provides an indication of the longer-term potential for contribution volatility for any given level of investment volatility. In addition, this ratio provides an indication of the potential contribution volatility due to liability experience (gains and losses) and liability remeasurements (assumption changes). For TERS, the current LVR is 5.4. The graph at the bottom of Exhibit 21 shows the historical LVR since It is a similar pattern to the Asset Volatility Ratio, except the increase is more gradual and the year-to-year variance is significantly less. 44

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51 TAC 38 / TAC / MCO/DRW/nlo appropriate to use for other purposes. Milliman does not intend to benefit and assumes no duty or liability to o 46