PASADENA, Calif. -- The $25 billion Los Angeles County Employees' Retirement Association will continue its current method of valuing liabilities, rather than switch to one proposed by consulting actuary Watson Wyatt Worldwide.
At their meeting last month, however, fund officials directed that $291 million of a $1.062 billion non-vested reserve be used to boost LACERA's funded level. Use of the reserve boosts the funding to 99.5% from 98.1%.
Sparks flew a bit during the March 24 meeting, as board members debated whether the reserve fund should be considered an asset and made available for paying vested benefits, or should continue to be excluded.
Underfunding potential
County Treasurer Mark Saladino said even with the reserves counted in LACERA's total assets, there is the potential for underfunding of more than $100 million. That shortfall would have to be paid solely by the county, rather than shared with plan participants like other plan costs, he added.
"I don't think the county should have to come up with an extra $100 million, especially since we have way more money than is needed," Mr. Saladino said in an interview after the board meeting. He believes the entire reserve should be free of restrictions.
But without including any part of the reserve, LACERA could have been more than $600 million unfunded, Watson Wyatt reported. If the board had adopted an alternative methodology recommended by Wyatt, the potential underfunding could have been about $2 billion.
"The likelihood that it would be needed is slim to none," Mr. Saladino said. "It's a hot issue for retirees."
In January, Watson Wyatt recommended a change in methodology that, if implemented, would have decreased normal cost about 1%, but would have lowered LACERA's funded status 5%, Marsha D. Richter, LACERA's chief executive officer, reported to the board.
New method suggested
Watson Wyatt suggested the fund change to a valuation method known as "funding to decrement." That method was described as a "more precise and modern method for funding a retirement plan's total liabilities," Ms. Richter explained in her written report to the board.
Under this method, each piece of liability would be spread over the period of time it would be expected to be earned, based on the probability of retirement at age 55 or 56.
LACERA's current method, called funding to maximum retirement age, assumes a retirement age of 70, which allows for more years of participant contributions.
Towers Perrin, LACERA's previous actuary, defended the current method, claiming it is "accurate, current and appropriate."
The board then sought independent expert analysis of the proposed methodology and advice about including various reserves in actuarial assets available for the payment of benefits.
The actuaries' reports were released at the March meeting. The three independent actuaries -- William M. Mercer, San Francisco; The Segal Co., San Francisco; and Gabriel, Roeder, Smith & Co., San Diego, Calif. -- along with Watson Wyatt, agreed that while the funding to decrement method was an acceptable funding method, it is not commonly used.
"LACERA's audit actuary and the three advisory actuaries all agree that funding to maximum retirement age is the standard method used for public sector retirement plans," the report stated.
Need strong reason
In addition, after reviewing the system's funding agreement, David L. Muir, LACERA's chief counsel, reported a change in actuarial methodology could only be justified "by a compelling reason" such as the need to bring the fund's actuarial policies into compliance with generally accepted principles of actuarial standards or to ensure the accumulation of assets needed to pay system liabilities.
At March's board meeting, Gene Wickes, a Watson Wyatt retirement practice leader, apologized to Towers Perrin and the board "about the interpretation that they are as a firm unsophisticated and their methods were unsophisticated. It's not what I said."
Basically, Watson Wyatt could do its work under either method, he said. Even though LACERA's current valuation method is fairly conservative, the funding to decrement method is an even more conservative measure when the system gets close to 100% funding levels, he told the board.
"It's all just a question of timing," he said.
The board ultimately accepted the recommendation of Ms. Richter and her staff to reject Watson Wyatt's recommendation and retain the existing method.
