To calculate the contribution rates necessary to pre-fund the plan’s benefits, an actuary uses an actuarial cost method, an asset valuation method, a funding policy, economic assumptions, and demographic assumptions. This section describes the actuarial methods we use in our valuation process. Please see Actuarial Assumptions for descriptions of our economic and demographic assumptions. Please see the Actuarial Methods and Assumptions section of the latest Actuarial Valuation Report for a list of frequently changing or new actuarial methods and assumptions. 

Actuarial Cost Methods

The future benefit obligations (or costs of the plan) are spread over the working lifetimes of the plan members based on the plan’s actuarial cost method. This, along with the plan’s funding policy, produces a future stream of contributions to pre-fund the plan’s benefits. Different cost methods allocate costs at different rates. Some allocate costs evenly as a level percentage of pay over a member’s career, while others allocate costs as an increasing percent of pay.

Actuarial cost methods, along with a plan’s funding policy, serve to:

  • Fund future benefits in a consistent manner from year to year.
  • Make up for any shortfalls in prior funding, including differences in funding when experience differs from assumptions.

The two parts of an actuarial cost method are:

  • The Normal Cost – the value of future benefits allocated to the current plan year under the actuarial cost method.
  • The Unfunded Actuarial Accrued Liability (UAAL) – the amount of past service liability that exceeds the value of the plan’s assets. A funding policy helps define how a UAAL will be addressed in future contributions.  

The Legislature is responsible for the selection of the actuarial cost and asset valuation methods as well as the funding policy. The actuarial cost methods and funding policies vary across the Washington State retirement systems and are as follows.

Public Employees’ Retirement System (PERS) Plan 1 and Teachers’ Retirement System (TRS) Plan 1: We use a variation of the Entry Age Normal (EAN) Cost Method to determine the actuarial accrued liability. Under this method, the UAAL is equal to the unfunded actuarial present value of projected benefits less the actuarial present value of future normal costs for all active members and is reset at each valuation date. The present value of future normal costs is based on the Aggregate Normal Cost rate for Plans 2/3 and the resulting UAAL is amortized over a rolling ten-year period, as a level percentage of projected system payroll. The projected payroll includes pay from Plan 2 and Plan 3 as well as projected payroll from future new entrants.

As a result of this hybrid method, employers are charged the same contribution rate, regardless of the plan in which employees hold membership.

The method is subject to maximum contribution rates prior to 2015 and minimum contribution rates thereafter. Please see RCW 41.45.150 for more information.

Law Enforcement Officers’ and Fire Fighters’ (LEOFF) Plan 1: No contributions are currently required for this plan.  Historically, a variation of the Frozen Initial Liability Cost Method was used to determine the normal cost and the actuarial accrued liability for retirement, termination, and ancillary benefits. Under this method, the UAAL is equal to the unfunded actuarial present value of projected benefits less the actuarial present value of future normal costs for all active members and is reset at each valuation date. The present value of future normal costs is based on the Aggregate normal cost rate for Plan 2 and the resulting UAAL is amortized by June 30, 2024, as a level percentage of projected system payroll. The projected payroll includes pay from Plan 2 as well as projected payroll from future new entrants.

Plans 2 and Plans 3: We use the Aggregate Cost Method to determine the normal cost and the actuarial accrued liability. Under this method, the unfunded actuarial present value of fully projected benefits is amortized over the future payroll of the active group. Plan 2 members pay 50 percent of the normal cost. The entire contribution is considered normal cost and no UAAL exists.

For TRS Plan 2, the maximum employee contribution rate is 6.59 percent plus 50 percent of the contribution rate increases from benefit improvements effective on or after July 1, 1996. The employer picks up any employee cost sharing that exceeds the employee rate maximum. Please see the Actuarial Exhibits section of the latest Actuarial Valuation Report for a table showing the current TRS Plan 2 maximum member contribution rates.

Washington State Patrol Retirement System (WSPRS): We use the Aggregate Cost Method to determine the normal cost and the actuarial accrued liability. The entire normal cost is divided equally between the employee and the employer. The maximum employee contribution rate is 7 percent plus 50 percent of the contribution rate increases from benefit improvements effective on or after July 1, 2007. The employer picks up any employee cost sharing that exceeds the employee rate maximum. Please see the Actuarial Exhibits section of the latest Actuarial Valuation Report for a table showing the current WSPRS Plans 1/2 maximum member contribution rates.

We use the Entry Age Normal (EAN) cost method to report the plans’ funded status. This method defines the normal cost as a level percentage of pay from a member’s plan entry date to retirement.

Governmental Accounting Standards Board (GASB) Statements 67 and 68 became effective after June 15, 2015, replaced the prior GASB Statements, and now require use of the EAN cost method for accounting purposes. We began reporting the EAN funded status with the June 30, 2014, Actuarial Valuation Report.

Prior to the 2014 actuarial valuation, we relied on the Projected Unit Credit (PUC) cost method to report the plan’s funded status. The PUC cost method projects future benefits under the plan, using salary growth and other assumptions, and applies the service that has been earned as of the valuation date to determine accrued liabilities. Under prior GASB rules, the PUC method was one of several acceptable measures of a plan’s funded status.

Asset Valuation Method

We use the plan’s assets to calculate contribution rates, unfunded liabilities, and the plan’s funded status. Because the market value of assets can be volatile from one year to the next, an asset valuation method is used to adjust the market value of assets and smooth the effects of short-term volatility. The adjusted assets are called the actuarial value of assets, or valuation assets.

We calculate the Actuarial Value of Assets (AVA) using an asset smoothing method. This smoothing method was adopted during the 2003 Legislative Session. Each year, beginning with the application of this smoothing method, we determine the amount the actual investment return exceeds (or falls below) the expected investment return for that valuation year. We then smooth that year’s gain (or loss) based on the scale in the table below, which is centered around the adopted investment return assumption, as well as recognize another year of prior gains and losses.

Additionally, to ensure the AVA maintains a reasonable relationship to the Market Value of Assets (MVA), a 30 percent corridor is in place. This means the AVA may not exceed 130 percent nor drop below 70 percent of the MVA in any valuation.

Annual Gain/Loss Table



Last Reviewed: 04/26/2019

Last Updated: 04/26/2019