The main purpose of this webpage is to summarize assumptions and methods needed for the Office of the State Actuary’s 2021 Valuation Projections Model. A reader can find the assumptions and methods specific to the Projections Model in their respective sections below. We also provide a high-level background and disclosures section to help clarify the differences between an Actuarial Valuation Report (AVR) and the Projections Model.

Background

On an annual basis, we produce an AVR for Washington State retirement systems. We also prepare a Projections Model for the linked AVR. Each serve their own purpose as described below.

The AVR relies on participant and financial data from a single point-in-time and set of best estimate assumptions. This is known as “closed group” analysis meaning the model assumes no new members join open plans after the measurement date. These valuations are the basis for monitoring funding progress and determining on-going contribution rates consistent with the state's funding policy. A single point-in-time measurement is helpful in tracking changes and trends across multiple AVRs. However, the AVR is limited by only providing results for a single measurement date. For estimates beyond the measurement date, we rely on our Projections Model.

Our Projections Model is like the AVR but includes additional assumptions and methodology for experience beyond the measurement date. For instance, we make assumptions for demographics of new entrants and how many new entrants annually join the retirement plans. This allows the Projections Model to estimate funding progress and contribution rates at future measurement dates. In other words, the model estimates future annual AVRs. We generally rely on two modes for the model: “deterministic” and “stochastic”. The deterministic setting assumes all future experience is consistent with our best estimate assumptions. This tells us the state of the retirement systems on an “expected” basis. The stochastic model helps us understand the impact to the retirement systems if future experience does not match our assumptions. Our stochastic modeling includes 2,000 simulations of investment returns, plan funding, and inflation. We summarize the results of our stochastic modeling in our annual Risk Assessment.

Disclosures

The 2021 Valuation Projections Model includes the 2023-25 Biennium contribution rates that were adopted by the Pension Funding Council (PFC) as well as the 2023-25 rates adopted by Law Enforcement Officers’ and Fire Fighters’ Plan 2 Retirement Board (LEOFF 2 Board). The model also includes benefit increases to PERS 1 and TRS 1 Members from 2022 Legislative Session. In addition, we assume $800 million will be appropriated to TRS 1 by the General Fund-State on June 30, 2023. Please see Economic Assumptions and Methodology sections below for additional information.

Unless noted otherwise, we rely on data, assets, assumptions, and methods from the 2021 AVR for our Projections Model. However, the AVR does not contain some assumptions and methodology that are required to run the Projections Model such as new entrant [or members hired after the measurement date] assumptions or stochastic analysis assumptions. These assumptions and methods are generally updated annually and disclosed below. We disclose the remaining assumptions and methods in the Projection and Risk Assumptions Study (PRAS) webpage since they are not updated as frequently. Please see the link to the PRAS webpage for additional supporting information.

We prepared the Projections Model to support our work products as well as proactively address stakeholder questions related to expectations for the future. We believe the set of data, assets, assumptions, and methods used for the work products that rely on the Projections Model are reasonable, but use of another set may also be reasonable and might produce different results. We expect this model will be updated during fall of each year. Kyle Stineman (ASA, MAAA) meets the Qualification Standards of the American Academy of Actuaries; he served as the reviewing and responsible actuary for the 2021 Valuation Projections Model.

Plan Growth

Our Projections Model assumes the Washington State retirement systems will be larger in the future. We use the System Growth assumption developed during the most recent PRAS to estimate the annual growth; however, the annual growth rate may differ after reflecting our Plan Choice assumption. Please see this table for a comparison of our system growth rate assumption by plan.

Please note that while an individual plan may show a negative growth rate, we still assume the plan has new entrants each year according to the Plan Choice assumptions. For instance, the number of current members assumed to exit Teachers’ Retirement System (TRS) Plan 3 is greater than the number of assumed new entrants into that plan, but overall, the entire TRS system is expected to grow.

Demographics of New Entrants

The assumed demographics of future new entrants in the Washington State retirement systems are summarized in the New Entrant Profiles tables.

Discount Rate

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. Consistent with the AVR, the discount rate assumption for projections is 7.0 percent for all systems.

Return on Assets

Our deterministic and stochastic projections rely on the total commingled trust fund (CTF) return for fiscal year 2022. For fiscal year 2022, we assume a dollar weighted return of 0.19 percent for all Washington State retirement plans. For deterministic projections, we assume a 7.0 percent return on investments each fiscal year beyond 2022.

Stochastic projections rely on a distribution of possible investment returns to calculate potential future outcomes. Our stochastic projections use a downside log-stable distribution of investment returns provided by the Washington State Investment Board (WSIB). This distribution reflects WSIB’s 2021 Capital Market Assumptions with the commingled trust fund asset allocation adopted by WSIB in October 2021. 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.

Inflation

For deterministic projections, we assume 2.75 percent inflation for all systems consistent with the AVR.

Stochastic projections rely on a distribution of possible inflation rates to calculate potential future 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. Please see the PRAS webpage for information on how we developed this distribution.

General Salary Growth

Consistent with the AVR, the general salary growth assumption is 3.25 percent. This assumption remains constant for deterministic and stochastic projections for all systems.

Nominal Revenue Growth

A nominal revenue growth assumption 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 through fiscal year (FY) 2027. We relied on the Economic and Revenue Forecast Council's GF-S Forecast as the basis of our assumption.

Following FY 2027, long-term projections for GF-S revenue grow based on the sum of our assumptions for inflation, population growth, and real revenue growth. Please see the PRAS webpage for additional detail.

Assumed Funding Sources

Where an individual works determines how their contributions are allocated from the various sources used to fund retirement benefits. The Projected GF-S Fund Splits table summarizes our assumption for what percent of total employer contributions, for each system, will be allocated from General Fund-State, Non-General Fund-State, and Local Government accounts. The PERS, PSERS, and WSPRS assumptions were developed using data from Office of Financial Management (OFM), Washington State Patrol, and Department of Retirement Systems. TRS and SERS assumptions were informed by input from Senate, House, and OFM staff.

These Fund Split assumptions were most recently reviewed during the 2022 Legislative Interim. This table should not be used to reflect actual obligations for any funding source. We use long-term assumptions to produce our short-term budget impacts. Therefore, our short-term budget impacts will likely vary from estimates produced from other short-term budget models.

PERS 1 and TRS 1 UAAL Contribution Rates

Under current law, the PERS 1 and TRS 1 unfunded actuarial accrued liability (UAAL) rates have two components:

• Base UAAL Rates: The UAAL, excluding the unfunded cost of any Plan 1 benefit improvements (see below), is amortized over a rolling ten-year period, as a level percentage of projected system payroll. All employers of PERS, SERS, and PSERS members contribute towards the PERS 1 UAAL, while all employers of TRS members contribute towards the TRS 1 UAAL.
• Base UAAL rates include minimum contribution rates to ensure complete amortization of the UAAL.
• Employees do not make Plan 1 UAAL contributions.
• Amortization of Past Benefit Improvements: The expected cost of benefit improvements enacted after June 30, 2009, is amortized over a fixed ten-year period, as a level percentage of projected system payroll. These rates are collected in addition to Base UAAL rates.

Based on current law and rate-setting practices, the minimum contribution rates apply to Base UAAL rate calculations until the actuarial value of assets equals one hundred percent of the actuarial accrued liability (AAL) during a rate-setting valuation. For purposes of this calculation, we exclude the unfunded cost of any outstanding plan 1 benefit improvements.

Contribution rates to amortize the expected cost of a Plan 1 benefit improvement cease after the completion of the 10-year amortization period. As a result, it is possible that rates to amortize benefit improvements could continue after Base UAAL rates cease.

It is possible for the Plan 1 UAAL to re-emerge in our Projections Model. In that case, we assume the current Plan 1 funding policy will also resume. Employers would resume paying Base UAAL rates including minimum contribution rates if applicable.

$800 Million Appropriation to TRS 1

Under Engrossed Substitute Senate Bill (ESSB) 5092, the General Fund-State is scheduled to appropriate $800 million to fund the TRS 1 UAAL. Given this is in current law, our Projections Model assumes this payment will occur on June 30, 2023 and will be an additional contribution, over and above, the standard normal cost and UAAL rates collected over retirement system salaries.

LEOFF Plans 1 and 2 Law Changes from 2022 Session

Legislation in the 2022 session expanded benefits for all members of LEOFF Plans 1 and 2. SSB 5791 (C 168, L 2022) increased members benefits in LEOFF 1 while SHB 1701 (C 127, L 2022) increased the benefits in LEOFF 2.

Consistent with the law changes, our Projections Model assumes lump sum disbursements occur in January 2023. In addition, the model relies on the actual value of the LEOFF 2 Benefit Improvement Account on June 30, 2022 as the amount transferred into the LEOFF 2 trust fund.

Plan 3 Total Allocation Portfolio (TAP) Annuities

The Projections Model includes assets, benefit payments, and liabilities for Plan 3 TAP annuities that have been purchased by members. The model does not forecast future purchases of Plan 3 TAP annuities.

Approach to UAAL in LEOFF 1 Retirement Plan

As of the most recent AVR, LEOFF Plan 1 does not have any unfunded liabilities so contributions to the plan are not required under current law. If UAAL emerges then it is intended to be amortized by June 30, 2024.

A LEOFF 1 UAAL can occur beyond June 30, 2024 under our stochastic projections. When this occurs within the model, we assume the UAAL will be amortized, through contributions from the GF-S exclusively, over a ten-year rolling period of total LEOFF retirement system salary. This assumed funding method is similar to the current funding method for PERS 1 and TRS 1 except we do not assume a minimum contribution rate for LEOFF 1.

Comments on Projections Model

As required under ASOP 56 - Modeling, we share comments in the 2021 Actuarial Valuation Report related to our reliance on the ProVal® software developed by Winklevoss Technologies. Please see the 2021 AVR for disclosures related to the software created by an external source.

Using Microsoft Excel, our office created a Projections Model for developing measurements as of a future point in time. The model relies on output from ProVal software as well as assumptions, methods, data, and assets disclosed on this webpage. The output was reviewed for reasonableness by comparing results to simplified estimates done in Microsoft Excel. A limitation of our deterministic Projections Model is if experience is materially different from our expectations. Stochastic analysis can be run in the Projections Model to demonstrate how the investment experience and choices made by policy makers can deviate from our expectations; however, the model does not perform analysis on potential changes in demographic experience.

Last Reviewed: 05/16/2023

Last Updated: 10/18/2022