The discount rate, or valuation interest rate, is the rate we use to determine the present value of future salaries and present value of future benefits. The discount rate assumption for projections is 7.50 percent for all systems except the Law Enforcement Officers’ and Fire Fighters Retirement System (LEOFF) Plan 2 (7.40 percent).
Return on Assets
Our deterministic and stochastic projections recognize the market value of assets for actual returns through June 30, 2018. For deterministic projections, we assume a 7.50 percent return on investments each fiscal year beyond 2018 (7.40 percent for LEOFF 2).
Stochastic projections rely on a distribution of possible investment returns in order to calculate potential outcomes. Our stochastic projections use a downside log-stable distribution of investment returns provided by the Washington State Investment Board. The
Investment Return distribution provides a summary of the range of investment returns we might expect in a single year. The range of returns we expect over a longer period will vary from the distribution of returns for a single year.
For deterministic projections, we assume 2.75 percent inflation for all systems.
Stochastic projections rely on a distribution of possible inflation rates in order to calculate potential outcomes. The
Inflation distribution provides a summary of the range of inflation rates we might expect in a single year. The range of inflation we expect over a longer period will vary from the distribution of inflation for a single year.
General Salary Growth
The general salary growth assumption is 3.50 percent for deterministic and stochastic projections for all systems.
Nominal Revenue Growth
Nominal revenue growth is used to project General Fund-State (GF-S) revenues over the next 50 years.
We use the
Short-Term GF-S Forecast table to project revenue into the future. We relied on the
Economic and Revenue Forecast Council's GF-S Forecast as the basis of our assumption.
Our long-term projections for GF-S revenue are assumed to grow as a result of three of our assumptions [inflation + population growth + real revenue growth = nominal revenue growth] following fiscal year (FY) 2023. Please see the
RAAS report for additional detail.