Notes to the Financial Statements
June 30, 2014
Note 11 State Retirement Systems
The State sponsors three major public employee retirement systems: the State Employees' Retirement System (SERS)-consisting of Tier I (contributory), Tier II (noncontributory) Tier IIA (contributory) and Tier III (contributory), the Teachers' Retirement System (TRS), and the Judicial Retirement System (JRS). This year the State adapted the Governmental Accounting Standards Board Statement No. 67 – Financial Reporting for Pension Plans, to reflect the view that the costs obligations associated with pensions should be recorded as they are earned rather than, following the traditional view, when pension contributions are paid.
The State Comptroller's Retirement Division under the direction of the Connecticut State Employees Retirement Commission administers SERS and JRS. The sixteen members are: the State Treasurer or a designee who serves as a nonvoting ex-officio member, six trustees representing employees are appointed by the bargaining agents in accordance with the provisions of applicable collective bargaining agreements, one "neutral" Chairman, two actuarial trustees and six management trustees appointed by the Governor. The Teachers' Retirement Board administers TRS. The fourteen members of the Teachers' Retirement Board include: the State Treasurer, the Secretary of the Office of Policy and Management, the Commissioner of Education or their designees, who serve as ex-officio voting members. Six members who are elected by teacher membership and five public members appointed by the Governor. None of the above mentioned systems issue stand-alone financial reports. However, financial statements for SERS, TRS, and JRS are presented in Note No. 13.
Plan Descriptions and Funding Policy
Membership of each plan consisted of the following at the date of the latest actuarial evaluation:
|Inactive Members or their|
|Beneficiaries receiving benefits||45,803||34,310||250|
|Inactive Members Entitled to but|
|not yet Receiving Benefits||1,457||1,480||4|
State Employees' Retirement System
SERS is a single-employer defined-benefit pension plan covering substantially all of the State full-time employees who are not eligible for another State sponsored retirement plan. Plan benefits, cost-of-living adjustments, contribution requirements of plan members and the State, and other plan provisions are described in Sections 5-152 to 5-192 of the General Statutes. The plan provides retirement, disability, and death benefits, and annual cost-of-living adjustments to plan members and their beneficiaries.
The contribution requirements of plan members and the State are established and may be amended by the State legislature subject to the contractual rights established by collective bargaining. Tier I Plan B regular and Hazardous Duty members are required to contribute 2 percent and 4 percent of their annual salary, respectively, up to the Social Security Taxable Wage Base plus 5 percent above that level; Tier I Plan C members are required to contribute 5 percent of their annual salary; Tier II Plan Hazardous Duty members are required to contribute 4 percent of their annual salary; Tier IIA and Tier III Plans regular and Hazardous Duty members are required to contribute 2 percent and 5 percent of their annual salary, respectively. Individuals hired on or after July 1, 2011 otherwise eligible for the Alternative Retirement Plan (ARP) are eligible to become members of the Hybrid Plan in addition to their other existing choices. The Hybrid Plan has defined benefits identical to Tier II/IIA and Tier III for individuals hired on or after July 1, 2011, but requires employee contributions 3 percent higher than the contribution required from the applicable Tier II/IIA plan. The State is required to contribute at an actuarially determined rate. Administrative costs of the plan are funded by the State.
Teachers' Retirement System
TRS is a cost-sharing multiple-employer defined-benefit pension plan covering any teacher, principal, superintendent, or supervisor engaged in service of public schools in the State. Plan benefits, cost-of-living allowances, required contributions of plan members and the State, and other plan provisions are described in Sections 10-183b to 10-183ss of the General Statutes. The plan provides retirement, disability, and death benefits, and annual cost-of-living adjustments to plan members and their beneficiaries.
The contribution requirements of plan members and the State are established and may be amended by the State legislature. Plan members are required to contribute 6 percent of their annual salary. According to Section 10-183z of the General Statues a special funding situation requires the State to contribute one hundred percent of employer's contributions on behalf of its municipalities at an actuarially determined rate. Administrative costs of the plan are funded by the State.
Judicial Retirement System
JRS is a single-employer defined-benefit pension plan covering any appointed judge or compensation commissioner in the State. Plan benefits, cost-of-living allowances, required contributions of plan members and the State, and other plan provisions are described in Sections 51-49 to 51-51 of the General Statutes. The plan provides retirement, disability, and death benefits, and annual cost-of-living adjustments to plan members and their beneficiaries.
The contribution requirements of plan members and the State are established and may be amended by the State legislature. Plan members are required to contribute 6 percent of their annual salary. The State is required to contribute at an actuarially determined rate. Administrative costs of the plan are funded by the State.
The State Treasurer employs several outside consulting firms as external money and investment managers, to assist the Chief Investment Officer, as they manage the investment programs of the pension plans. Plan assets are managed primarily through asset allocation decisions with the main objective being to maximize investment returns over the long term at an acceptable level of risk. There is no concentration of investments in any one organization that represents 5.0 percent or more of plan net position available for benefits. The following is the asset allocation policy as of June 30, 2014.
|Target||Long-Term Expected||Target||Long-Term Expected||Target||Long-Term Expected|
|Asset Class||Allocation||Real Rate of Return||Allocation||Real Rate of Return||Allocation||Real Rate of Return|
|Large Cap U.S. Equities||21.0%||5.8%||25.0%||7.3%||16.0%||5.8%|
|Developed Non-U.S. Equities||18.0%||6.6%||20.0%||7.5%||14.0%||6.6%|
|Emerging Markets (Non-U.S.)||9.0%||8.3%||9.0%||8.6%||7.0%||8.3%|
|Fixed Income (Core)||8.0%||1.3%||13.0%||1.7%||8.0%||1.3%|
|High Yield Bonds||5.0%||3.9%||2.0%||3.7%||14.0%||3.9%|
|Emerging Market Bond||4.0%||3.7%||4.0%||4.8%||8.0%||3.7%|
|Inflation Linked Bonds||0.0%||0.0%||6.0%||1.3%||0.0%||0.0%|
Deferred Retirement Option Program
Section 10-183v of the State Statue authorizes that a TRS member teacher receiving retirement benefits from the system may be reemployed for up to one full school year by a local board of education, the State Board of Education or by a constituent unit of the state system of higher education in a position (1) designated by the Commissioner of Education as a subject shortage area, or (2) at a school located in a school district identified as a priority school district. Such reemployment may be extended for an additional school year, by written request for approval to the Teachers' Retirement Board.
Net Pension Liability Required by GASB 67
The SERS net pension liability of $16.0 billion was measured as of June 30, 2014, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of that date. Detailed information about the fiduciary net position of the SERS pension plan is available in Note 13 of this report.
The TRS net collective pension liability of $10.1 billion was measured as of June 30, 2014, and the total pension liability used to calculate the net collective pension liability was determined by an actuarial valuation as of that date. The State's proportion of the net collective pension liability was based on an actuarial projection of the State's long-term share of contributions to the pension plan relative to the actuarially determined total projected contributions of the State and all participating employees. As of June 30, 2014, the State's portion was 100 percent. Detailed information about fiduciary net position of the TRS pension plan is available in Note 13 of this report.
The JRS net pension liability of $164.0 million was measured as of June 30, 2014, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of that date. Detailed information
about the fiduciary net position of the JRS pension plan is available in Note 13 of this report.
The components of the net pension liability at June 30, 2014, were as follows (amounts in millions):
|Total Pension Liability||$26,487||$26,349||$352|
|Fiduciary Net Position||10,473||16,208||188|
|Net Pension Liability||$16,014||$10,141||$164|
|Ratio of Fiduciary Net Position|
|to Total Pension Liability||39.54%||61.51%||53.38%|
The total pension liability was determined by an actuarial valuation as of June 30, 2014, using the following actuarial assumptions, applied to all periods included in the measurement:
|Actuarial Cost Method||Entry Age Normal||Entry Age Normal||Entry Age Normal|
|Amortization Method||Level percent of payroll, closed||Level percent of payroll, closed||Level percent of payroll, closed|
|Remaining Amortization Period||17 Years||20.4 years||17 Years|
|Asset Valuation Method||5-year smoothed market||4- year smoothed market||5-year smoothed market|
|Investment Rate of Return||8.00%||8.5%||8.00%|
Mortality rates were based on the RP-2000 Healthy Annuitant Mortality Table for males or females, as appropriate, with adjustments for mortality improvements based on Scale AA.
The actuarial assumptions used in the June 30, 2014 TRS actuarial report were based on RP-2000 Combined Mortality Table RP-2000 projected 19 years using scale AA, using a two year setback for males and females for the period after retirement and for dependent beneficiaries.
The long-term expected rate of return on pension plan investments was determined using a log-normal distribution analysis in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation.
The discount rate used to measure the total pension liability increased from the prior year by .2, .6, and .5 percent to 8.0, 8.5, and 8.0 for SERS, TRS, and JRS respectively. The projection of cash flows used to determine the SERS, TRS, and JRS discount rate assumed employee contributions will be made at the current contribution rate and that contributions from the State will be made at actuarially determined rates in future years. Based on those assumptions, SERS, TRS, and JRS pension plans' fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability.
Sensitivity of the net pension liability to changes in the discount rate
The following presents the net pension liability of the State, calculated using the discount rates of 8.0, 8.5 and 8.0 percent for SERS, TRS, and JRS, as well as what the State's net pension liabilities would be if it were calculated using a discount rate that is 1-percentage-point lower or 1-percentage point higher than the current rate (amounts in thousands):
|Decrease in||Discount||Increase in|
|SERS Net Pension Liability||$19,103,880||$16,014,366||$13,416,122|
|TRS Net Pension Liability||$12,928,793||$10,128,320||$7,747,835|
|JRS Net Pension Liability||$198,590||$163,993||$134,008|
Annual Pension Cost and Net Pension Obligation Required by GASB 27
GASB Statement No. 68, Accounting and Reporting for Pensions, which determines how employers and nonemployer contributing entities will report their pension liabilities on their financial statements, is effective for years beginning after June 15, 2014. Until that statement is implemented, the State continues to report its annual pension cost and net pension obligation in accordance with GASB Statement No. 27, Accounting for Pensions by State and Local Government Employers.
The State's annual pension cost and net pension obligation for each plan for the current year were as follows (amounts in thousands):
|Annual required contribution||$1,268,935||$948,540||$16,298|
|Interest on net pension|
|Adjustment to annual required|
|Annual pension cost||1,283,458||961,030||15,607|
|Increase (decrease) in net|
|Net pension obligation (asset)|
|beginning of year||2,992,567||(491,132)||31,819|
|Net pension obligation (asset)|
|end of year||$3,007,135||$(357,015)||$31,128|
Three year trend information for each plan is as follows (amounts in thousands):
Funded Status and Funding Progress
The following is funded status information for each plan as of June 30, 2014 the most recent actuarial valuation date (amounts in thousands):
|Actuarial||Actuarial||Unfunded||UAAL as a|
|Value of||Accrued||AAL||Funded||Covered||Percentage of|
|Assets||Liability (AAL)||(UAAL)||Ratio||Payroll||Covered Payroll|
The schedule of funding progress, presented as RSI following the notes to the financial statements, presents multi-year trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits.
Defined Contribution Plan
The State also sponsors the Connecticut Alternate Retirement Program (CARP), a defined contribution plan. CARP is administered by the State Comptroller's Retirement Office under the direction of the Connecticut State Employees Retirement Division. Plan provisions, including contribution requirements of plan members and the State, are described in Section 5-156 of the General Statutes.
Unclassified employees at any of the units of the Connecticut State System of Higher Education are eligible to participate in the plan. Plan members are required to contribute 5 percent of their annual salaries. The State is required to contribute 8 percent of covered salary. During the year, plan members and the State contributed $35.8 million and $8.7 million, respectively.