Connecticut State Teachers’ Retirement System Retiree Health Insurance Plan Actuarial Valuation as of June 30, 2014 Cavanaugh Macdonald C O N S U L T I N G, L L C The experience and dedication you deserve October 21, 2014 Board of Directors Connecticut State Teachers’ Retirement System 765 Asylum Avenue Hartford, CT 06105 Members of the Board: The laws governing the operation of the Connecticut State Teachers’ Retirement System (the System) provide that actuarial valuations of the assets and liabilities of the System shall be made at least once every two years. We have conducted the actuarial valuation of the System’s retiree health insurance benefits (the Plan) as of June 30, 2014 and the results of the valuation are contained in the following report. In performing the valuation, we relied on data supplied by the System and performed limited tests on the data for consistency and reasonableness. The valuation was prepared based upon our understanding of Chapter 167a, Section 10-183t of the Connecticut General Statutes and the Plan’s provisions provided by the System’s staff. The normal cost and accrued liability of the System are developed using the entry age normal cost method. Under this method, the normal cost is the level percent of payroll necessary to fully fund the expected benefits to be earned over the career of each individual active member. The cost of providing the Plan’s benefits is financed on a pay-as-you-go basis as follows: active teachers pay for the Plan’s costs through a contribution of 1.25% of their annual salaries (less $500,000); retired teachers pay, through monthly premiums, for one third of the basic costs for the Connecticut State Teachers’ Retirement Board (CTRB) Sponsored Medicare Supplemental Plans; and the State of Connecticut (the State) pays for one third of the Plan’s costs through an annual appropriation in the General Fund. Additionally, the administrative costs of the Plan are financed by the State. The liabilities and information for the purpose of complying with Governmental Accounting Standards Board Statements No. 43 and No. 45 presented in this report represent the State’s portion of the cost of providing the Plan’s benefits. Based upon our interpretation of Chapter 167a, Section 10-183t(d) of the Connecticut statutes, it is assumed the State will pay for any long-term shortfall arising from insufficient active member contributions. 3550 Busbee Pkwy, Suite 250, Kennesaw, GA 30144 Phone (678) 388-1700 • Fax (678) 388-1730 www.CavMacConsulting.com Off • Bellevue, NE • Hilton Head Island, SC Offices in Englewood, CO • Kennesaw, GA In determining the System’s liabilities, future events, such as investment returns, salary increases, deaths, retirements, etc., are anticipated based upon the set of actuarial assumptions as approved by the Board. Since the previous valuation, the assumptions have been revised to reflect the recent experience of the Plan and reflect the Plan’s January 1, 2015 transition to prescription drug benefits provided through a Medicare Prescription Drug Plan (PDP). As the Plan will no longer participate in the Centers for Medicare & Medicaid Services’ (CMS) Retiree Drug Subsidy Program, the Medicare Part D subsidies implicit in the lower costs for PDPs are recognized in the liability under GASB Statements No. 43 and No. 45. The assumptions recommended by the actuary are in the aggregate reasonable related to the experience under the Plan and to reasonable expectations of anticipated experience under the Plan and meet the parameters for the disclosures under GASB Statements No. 43 and No. 45. Since the previous valuation, the assumed initial per capita health care costs, the assumed rates of health care inflation used to project the per capita costs, and the participation assumptions have been revised. This is to certify that the independent consulting actuaries are members of the American Academy of Actuaries and meet the qualification standards of the American Academy of Actuaries to render the actuarial opinion contained herein, that the valuation was prepared in accordance with principles of practice prescribed by the Actuarial Standards Board, and that the actuarial calculations were performed by qualified actuaries in accordance with accepted actuarial procedures, based on the current provisions of the Plan and on actuarial assumptions that are internally consistent and reasonably based on the actual experience of the Plan. Future actuarial results may differ significantly from the current results presented in this report due to such factors as the following: Plan experience differing from that anticipated by the economic or demographic assumptions; changes in economic or demographic assumptions; increases or decreases expected as part of the natural operation of the methodology used for these measurements (such as the end of an amortization period or additional cost or contribution requirements based on the Plan’s funded status); and changes in Plan provisions or applicable law. Since the potential impact of such factors is outside the scope of a normal annual actuarial valuation, an analysis of the range of results is not presented herein. In our opinion, if the required contributions to a qualifying trust are made by the employer from year to year in the future at the levels required on the basis of the successive actuarial valuations, the Plan will operate in an actuarially sound manner. Respectfully submitted, Eric H. Gary, FSA, FCA, MAAA Brian C. Nichols, EA, FCA, MAAA Chief Health Actuary Senior Actuary TABLE OF CONTENTS Section Item Page No. I Board Summary 1 II Membership Data 3 III System Assets 4 IV System Liabilities 5 V Actuarial Valuation Results 6 VI Accounting Information 7 Appendices A Membership Data 10 B Summary of Actuarial Assumptions and Methods 12 C Summary of Plan Provisions 18 D Glossary 20 Section I: Board Summary The table below summarizes the results of the June 30, 2014 actuarial valuation as compared with the prior valuation. Table I-1: Comparative Summary of Principal Results June 30, 2012 June 30, 2014 49,808 51,433 $3,652,518 $3,831,624 Number of Retirees Receiving Health Insurance Benefits 24,107 25,407 Number of Spouses Receiving Health Insurance Benefits 11,108 11,648 1,609 1,480 $0 $0 $3,048,307 $2,433,036 0.00% 0.00% 30 years 30 years Normal Cost 2.72% 2.04% Unfunded Accrued Liability 3.10% 2.36% Total Membership Active Members Number Annual Payroll Retirees and Beneficiaries Inactive Members Vested Assets Market Value Actuarial Information Unfunded Actuarial Liability (UAL) Funded Ratio Amortization Period Computed Contribution Rates 5.82% 4.40% Member 1.24% 1.24% State 4.58% 3.16% State Contribution Amount for Fiscal Year Ending June 30, 2013 $180,460 June 30, 2014 $187,227 June 30, 2015 $125,620 June 30, 2016 $130,331 All dollar amounts are in thousands Page 1 Section I: Board Summary Summary of Key Findings This report provides the annual expense required to be recognized by the State for purposes of complying with the accounting disclosure requirements of the Governmental Accounting Standards Board Statements No. 43 and No. 45. The actuarially determined employer normal cost contribution rate decreased from 1.48% as of June 30, 2012 to 0.80% as of June 30, 2014. The unfunded actuarial accrued liability decreased from $3.048 billion to $2.433 billion over the two year period. The unfunded actuarial accrued liability rate decreased from 3.10% to 2.36%. We note the following key findings:  The assumed per capita cost of basic benefits provided by the CTRB Sponsored Medicare Supplemental Plans has decreased by 22% since the prior valuation.  The valuation reflects the Plan’s January 1, 2015 transition to prescription drug benefits provided through a Medicare Prescription Drug Plan (PDP). As the Plan will no longer participate in the Centers for Medicare & Medicaid Services’ (CMS) Retiree Drug Subsidy Program, the Medicare Part D subsidies implicit in the lower costs for PDPs are recognized in the liability under GASB Statements No. 43 and No. 45.  The number of retired members, spouses of retired members, and surviving spouses of retired members currently participating in the CTRB Sponsored Medicare Supplemental Plans has increased by 16% since the prior valuation.  The assumed participation rates for the Subsidized Local School District Coverage and the CTRB Sponsored Medicare Supplemental Plans for both future retirees and current pre-65 retirees have been revised based on recent plan experience. Section II of the report provides summarized information on the membership data used in the valuation. Section III of the report covers the Plan’s assets and Section IV of the report covers the Plan’s liabilities. The results of the valuation are provided in Section V of the report and the accounting information is in Section VI. The appendices provide additional information on: A) the Plan members; B) the actuarial assumptions and methods; and C) the summary of Plan provisions. It should be noted that all information contained in this report for periods prior to June 30, 2010 was produced by a prior actuarial consulting firm. Page 2 Section II: Membership Data Data regarding the membership of the Plan for use in the valuation were furnished by the System. The following table summarizes the membership data as of June 30, 2014 and is compared with that reported for the prior valuation. Table II-1: Summary of Membership Data June 30, 2012 June 30, 2014 49,808 51,433 $3,652,518 $3,831,624 Number of Retirees Receiving Health Insurance Benefits 24,107 25,407 Number of Spouses Receiving Health Insurance Benefits 11,108 11,648 1,609 1,480 Active Members Total Number of Active Members Total Annual Compensation Retirees and Beneficiaries Inactive Members Number of Vested Inactive Members All dollar amounts are in thousands Page 3 Section III: System Assets GASB Statements No. 43 and No. 45 define plan assets as resources, usually in the form of stocks, bonds, and other classes of investments, that have been segregated and restricted in a trust, or equivalent arrangement, in which (a) employer contributions to the plan are irrevocable, (b) assets are dedicated to providing benefits to retirees and their beneficiaries, and (c) assets are legally protected from creditors of the employers or plan administrator, for the payment of benefits in accordance with the terms of the plan. As of June 30, 2014, no assets are held in a qualified trust solely to provide benefits to retirees and their beneficiaries in accordance with the terms of the Plan. Page 4 Section IV: System Liabilities The present value of benefits is the value, as of the valuation date, of all future benefits expected to be paid to current members of the Plan. An actuarial cost method allocates each individual’s present value of benefits to past and future years of service. The actuarial accrued liability includes the portion of the active member present value of benefits allocated to past service as well as the entire present value of benefits for retirees, beneficiaries and inactive members. The unfunded actuarial accrued liability (UAAL) is the difference between the actuarial accrued liability and the actuarial value of assets. Table IV-1 shows the allocation of the present value of future benefits into components for future normal cost contributions and actuarial accrued liabilities and the determination of the UAAL as of the valuation date. Table IV-1: Calculation and Allocation of Present Value of Future Benefits Entry Age Actuarial Cost Method (1) Present Value of Future Benefits (2) Portion Covered By Future Normal Cost Contributions (3) Actuarial Accrued Liabilities (1) - (2) Active Members Service Retirement $1,900,348 $ 885,390 $1,014,958 Disability Retirement 27,279 24,613 2,666 Survivors' Benefits 28,781 19,212 9,569 189,159 164,147 25,012 Total for Active Members Inactive Members Termination 2,145,567 1,093,362 1,052,205 69,509 0 69,509 Retirees and Beneficiaries 1,311,322 0 1,311,322 $3,526,398 $1,093,362 $2,433,036 Total Actuarial Value of Assets Unfunded Actuarial Accrued Liability Funded Ratio $0 $2,433,036 0.00% All dollar amounts are in thousands The valuation shows the Plan has an actuarial accrued liability of $1,052,205,000 for benefits expected to be paid on account of the present active membership, based on service to the valuation date. The liability for retiree health insurance benefits payable to inactive members with vested pension benefits is $69,509,000. The liability on account of benefits payable to retirees amounts to $1,311,322,000. The total actuarial accrued liability of the Plan amounts to $2,433,036,000. Against these liabilities, the Plan has present assets for valuation purposes of $0. Therefore, the unfunded actuarial accrued liability is equal to $2,433,036,000. Page 5 Section V: Actuarial Valuations Results Section IV of this report presented the Plan’s total present value of future benefits allocated between the present value of future normal cost contributions and actuarial accrued liability. The portion of the active members’ present value of benefits allocated to future years of service is funded through annual normal cost contributions determined by the entry age normal actuarial cost method. Under the entry age normal actuarial cost method, the Plan’s annual normal cost rate is calculated as a percent of covered payroll, which is expected to remain level over all future years of service. The portion of the total normal cost rate in excess of the active member contribution rate is the State’s normal cost rate. The normal cost rate developed as of the valuation date is presented in Table V-1. Table V-1 also shows the State’s contribution rate that is necessary to amortize, as a level percent of active member payroll, the UAAL over a period of thirty years. Table V-1: State Contribution Rate Normal Cost Rate of Active Members by Expected Benefit Type Service Retirement 1.67% Termination 0.28% Disability Retirement 0.05% Survivors' Benefits 0.04% Total Normal Cost Rate for Active Members 2.04% Less: Active Member Contribution Rate 1.24% State Normal Cost Rate 0.80% Unfunded Actuarial Accrued Liability 2.36% State Contribution Rate 3.16% Page 6 Section VI: Accounting Information 1. Governmental Accounting Standards Board Statements No. 43 and No. 45 set forth certain items of required supplementary information to be disclosed in the financial statements of the Plan and the State. One such item is the schedule of funding progress, as shown below. Table VI-1: Schedule of Funding Progress Actuarial Valuation as of June 30 Actuarial Value of Assets (a) Actuarial Accrued Liability (AAL) (b) Unfunded AAL (UAAL) (b)-(a) Funded Ratio (a)/(b) Covered Payroll (c) UAAL as a % of Active Member Payroll [( b ) - ( a )] / ( c ) 2008 $0 $2,318,841 $2,318,841 0.0% $3,399,305 68.22% 2010 0 2,997,856 2,997,856 0.0% 3,645,974 82.22% 2012 0 3,048,307 3,048,307 0.0% 3,652,518 83.46% 2014 0 2,433,036 2,433,036 0.0% 3,831,624 63.50% All dollar amounts are in thousands All figures prior to 6/30/2010 were reported by the prior actuarial firm. 2. The following shows the schedule of employer contributions. Table VI-2: Schedule of Employer Contributions Fiscal Year Ending June 30 Annual Required Contribution Actual Contributions Percent Contributed (a) (b) (b)/(a) 2008* $116,123 $20,770 2009* 116,667 22,433 19.2 17.9% 2010* 121,334 12,108 10.0 2011* 177,063 5,312 3.0 2012* 184,145 49,486 26.9 2013* 180,460 27,040 15.0 2014 187,227 25,955 13.9 2015 125,620 N/A N/A 2016 130,331 N/A N/A All dollar amounts are in thousands * Historical information as provided in the most recent financial report. Page 7 Section VI: Accounting Information 3. The information presented in the required supplementary schedules was determined as part of the actuarial valuation at June 30, 2014. Additional information as of the latest actuarial valuation follows. Table VI-3: Additional Information Valuation date June 30, 2014 Actuarial cost method Entry Age Amortization method Level Percent of Pay, Open Amortization period 30 years Asset valuation method Market Value of Assets Actuarial assumptions: Investment rate of return (includes inflation) 4.50% Projected salary increases (includes inflation) 3.75% - 7.00% Inflation 3.00% Claims Trend Assumption 5.75% - 5.00% Year of Ultimate Trend Contribution Trend Assumption Year of Ultimate Trend 2017 5.75% - 5.00% 2017 The assumed investment rate of return reflects the fact no assets are set aside within the System which are legally held exclusively for retiree health insurance benefits. If a qualified trust or equivalent arrangement were set up for this purpose, the investment rate of return may be increased. Page 8 Section VI: Accounting Information 4. The following shows contributions towards the Annual OPEB Cost (AOC) Table VI-4: Trend Information Fiscal Year Ending June 30 Annual OPEB Cost (AOC) Percentage of AOC Contributed 2008* $116,123 2009* 113,704 19.7 186,624 2010* 115,321 10.5 289,837 2011* 167,368 3.2 451,893 2012* 165,955 29.8 568,362 2013* 179,620 15.1 720,942 2014 192,851 13.5 887,838 17.9% Net OPEB Obligation (NOO) $ 95,353 All dollar amounts are in thousands * Historical information as provided in the most recent financial report. 5. Following is information to assist the System in the calculation of the Annual OPEB Cost (AOC) and the Net OPEB Obligation (NOO) for the fiscal year ending June 30, 2014. Table VI-5: Annual OPEB Cost and Net OPEB Obligation Fiscal Year Ending June 30, 2014 (a) Employer Annual Required Contribution $ 187,227 (b) Valuation Discount Rate (c) Interest on Net OPEB Obligation: (i) * (b) (d) Amortization Factor (e) Adjustment to Annual Required Contribution: (i) / (d) $ 26,818 (f) Annual OPEB Cost: (a) + (c) - (e) $ 192,851 (g) Employer Contributions for Fiscal Year Ending June 30, 2014 $ 25,955 (h) Increase in Net OPEB Obligation: (f) - (g) $ 166,896 (i) Net OPEB Obligation at beginning of Fiscal Year $ 720,942 (j) Net OPEB Obligation at end of Fiscal Year: (h) + (i) $ 887,838 4.50% $ 32,442 26.8830 All dollar amounts are in thousands Page 9 Appendix A: Membership Data Table A-1: Schedule of Active Participant Data as of June 30, 2014 Years of Service Under 5 AGE 5 to 9 10 to 14 15 to 19 20 to 24 25 to 29 30 to 34 35 & up Total Under 25 578 578 Avg. Pay 44,590 44,590 25 to 29 4,066 710 4,776 Avg. Pay 48,808 54,573 49,665 30 to 34 2,114 4,260 738 1 7,113 Avg. Pay 52,049 60,300 69,882 83,715 58,845 35 to 39 952 2,172 3,457 480 7,061 Avg. Pay 56,156 65,075 75,140 86,265 70,241 40 to 44 670 1,228 2,305 2,576 218 6,997 Avg. Pay 57,377 67,518 78,420 88,364 94,069 78,640 45 to 49 603 996 1,439 1,805 1,178 247 6,268 Avg. Pay 57,314 67,325 78,260 87,912 93,178 91,363 80,607 50 to 54 439 785 1,221 1,033 758 1,208 248 5,692 Avg. Pay 56,178 66,356 77,349 87,627 90,906 92,147 92,431 81,668 55 to 59 224 563 1,008 1,088 700 996 1,049 381 6,009 Avg. Pay 59,802 68,154 77,973 86,939 91,545 91,083 92,970 97,115 85,585 60 to 64 122 263 639 847 740 812 554 972 4,949 Avg. Pay 71,782 71,833 79,683 85,520 91,168 91,383 92,776 95,043 88,189 65 to 69 20 66 206 246 279 283 226 374 1,700 Avg. Pay 66,151 84,579 85,350 89,682 92,259 93,138 93,815 96,449 91,719 70 & up 4 6 22 41 33 51 46 87 290 90,438 100,39 3 93,527 Avg. Pay 109,766 79,661 79,108 88,672 99,400 91,283 Total 9,792 11,049 11,035 8,117 3,906 3,597 2,123 1,814 51,433 Avg. Pay 52,011 63,567 76,845 87,599 92,100 91,692 92,892 96,024 74,497 Table A-2: Comparative Summary of Active Data June 30, 2012 June 30, 2014 Average Age 45.2 years 44.7 years Average Service 13.9 years 13.7 years $73,332 $74,497 Average Pay Page 10 Appendix A: Membership Data Table A-3: Members Receiving Health Insurance Benefits Under the Plan June 30, 2014 Retirees Male Spouses Female Male Female Total Subsidized Local School District Coverage Ages Under 65 725 2,439 864 781 4,809 Ages 65 and Over 2,236 4,618 1,633 1,365 9,852 Total 2,961 7,057 2,497 2,146 14,661 Medical with Prescriptions 1,137 2,199 882 690 4,908 Medical with Prescriptions, Vision & Hearing 4,167 7,886 3,393 2,040 17,486 Total 5,304 10,085 4,275 2,730 22,394 8,265 17,142 6,772 4,876 37,055 CTRB Sponsored Medicare Supplemental Plans Total Table A-4: CTRB Sponsored Medicare Supplemental Plan Participation by Attained Age Retirees and Spouses Combined June 30, 2014 Medical with Prescriptions Attained Age Gender Male Under 65 4 65 - 69 273 70 - 74 311 75 - 79 305 80 - 84 475 85+ 651 Total 2,019 Female 9 388 358 471 700 963 2,889 13 661 669 776 1,175 1,614 4,908 Total Medical with Prescriptions, Vision & Hearing Attained Age Gender Male Under 65 22 65 - 69 2,366 70 - 74 2,426 75 - 79 1,381 80 - 84 831 85+ 534 Total 7,560 Female 33 3,596 2,962 1,636 912 787 9,926 Total 55 5,962 5,388 3,017 1,743 1,321 17,486 Total Attained Age Gender Male Under 65 26 65 - 69 2,639 70 - 74 2,737 75 - 79 1,686 80 - 84 1,306 85+ 1,185 Total 9,579 Female 42 3,984 3,320 2,107 1,612 1,750 12,815 Total 68 6,623 6,057 3,793 2,918 2,935 22,394 Page 11 Appendix B: Summary of Actuarial Assumptions and Methods Investment Rate of Return Assumed annual rate of 4.50% net of investment and administrative expenses. Health Care Cost Trend Rates Following is a chart detailing trend assumptions. Trend is applied to the CTRB Sponsored Medicare Supplemental Plans’ premiums and claims. Year of Increase 2014 2015 2016 2017 and beyond Claims Trend Contributions Trend 5.75% 5.50% 5.25% 5.00% 5.75% 5.50% 5.25% 5.00% No increases are assumed for the Subsidized Local School District Coverage’s subsidy of $110 per month for a retired member, plus an additional $110 per month for a spouse, as the subsidy amount is set by statute and has not increased since July of 1996. The valuation assumes all future recipients of the subsidy receive an amount of $110 per month. Anticipated Plan Participation The assumed annual rates of member participation and spouse coverage are as follows: Participant Subsidized Local School District Coverage CTRB Sponsored Medicare Supplemental Plans Member Pre 65 61% N/A Member Post 65 23% 54% Spouse/Survivor Pre 65* 43% N/A Spouse/Survivor Post 65* 30% 40% *Percentage of participating members electing spouse coverage. Page 12 Appendix B: Summary of Actuarial Assumptions and Methods Age Related Morbidity Per capita health care costs of the CTRB Sponsored Medicare Supplemental Plans are adjusted to reflect expected cost changes related to age. The increase to the net incurred claims was assumed to be: Participant Age < 30 30 – 34 35 – 39 40 – 44 45 – 49 50 – 54 55 – 59 60 – 64 65 – 69 70 – 74 75 – 79 80 – 84 85 - 89 90 and over Annual Increase 0.0% 1.0% 1.5% 2.0% 2.6% 3.3% 3.6% 4.2% 3.0% 2.5% 2.0% 1.0% 0.5% 0.0% Annual Expected Claims of the CTRB Sponsored Medicare Supplemental Plans Assumed adult per capita health care costs were based on past experience and trended based on the assumptions. The expected value of medical and prescription drug claims of the CTRB Sponsored Medicare Supplemental Plans, age adjusted to age 65, for the year following the valuation date is $2,502.96. This amount includes medical, drug, and third-party administrative costs, and represents the amount the System pays as the full contribution amount. The average medical, drug, and administrative costs shown are normalized to age 65 and then age adjusted in calculating liabilities. For the June 30, 2014 valuation, the assumed health care claims costs are based on the premium equivalent rate provided by the System. CMC accepted all information without audit and has relied upon the sources for the accuracy of the data; however, CMC did review the information for reasonableness. On the basis of this review, CMC believes the data and information provided to be sufficiently complete and reliable, and that it is appropriate for the purposes intended. The valuation reflects the Plan’s January 1, 2015 transition to prescription drug benefits provided through a Medicare Prescription Drug Plan (PDP). As the Plan will no longer participate in the Centers for Medicare & Medicaid Services’ (CMS) Retiree Drug Subsidy Program, the Medicare Part D subsidies implicit in the lower costs for PDPs are recognized in the liability under GASB Statements No. 43 and No. 45. Page 13 Appendix B: Summary of Actuarial Assumptions and Methods Spouse Participation in Health Insurance Coverage Use of actual census data and current coverage elections for spouses of current retirees. For spouses of future retirees, it was assumed females were three years younger than their spouse. Rates of Annual Salary Increase Rates of Annual Salary Increase Assumption Years of Service 0–9 Annual Rate 7.00% 10 – 14 5.50% 15 - 19 4.00% 20+ 3.75% Active Member Decrement Rates a. Table below provides a summary of the assumed rates of service retirement. Annual Rates of Retirement Age 50 55 60 65 70 75 80 Unreduced Male 27.5% 38.5% 22.0% 36.3% 100.0% 100.0% 100.0% Female 15.0% 30.0% 20.0% 30.0% 40.0% 40.0% 100.0% Proratable Male 6.0% 20.0% 35.0% 40.0% 100.0% Female Reduced Male 2.0% 4.5% Female 2.0% 6.0% 5.4% 13.5% 10.8% 18.0% 100.0% Page 14 Appendix B: Summary of Actuarial Assumptions and Methods b. Table below provides a summary of the assumed rates of mortality while actively employed and disability. Annual Rates of Death and Disability Age 20 25 30 35 40 45 50 55 60 64 c. Pre-Retirement Mortality Male 0.0164% 0.0210% 0.0268% 0.0431% 0.0645% 0.0790% 0.1027% 0.1490% 0.2911% 0.4928% Disability Female 0.0108% 0.0109% 0.0140% 0.0249% 0.0343% 0.0527% 0.0761% 0.1316% 0.2675% 0.4539% Male 0.0455% 0.0455% 0.0455% 0.0455% 0.0715% 0.1625% 0.3250% 0.7150% 1.2805% 1.2805% Female 0.0500% 0.0500% 0.0410% 0.0410% 0.0720% 0.1200% 0.2630% 0.4380% 0.5000% 0.5000% Table below provides a summary of the assumed rates of withdrawal for active members prior to eligibility for retirement. Annual Rates of Withdrawal 10 or more years of service Years of Service 0-1 1-2 2-3 3-4 4-5 5-6 6-7 7-8 8-9 9-10 Male 14.00% 8.50% 5.50% 4.50% 3.50% 2.50% 2.40% 2.30% 2.20% 2.10% Female 12.00% 9.00% 7.00% 6.00% 5.50% 5.00% 4.50% 3.50% 3.00% 2.50% Age 25 30 35 40 45 50 55 59 Male 1.20% 1.20% 1.20% 1.20% 1.26% 1.96% 2.76% 3.00% Female 3.50% 3.50% 3.50% 2.30% 1.30% 1.25% 1.60% 1.90% Withdrawal Assumptions It was assumed that 30% of the vested members who terminate elect to withdraw their contributions while the remaining 70% elect to leave their contributions in the plan in order to be eligible for a benefit at their retirement date. It is assumed that eligible deferred vested participants will commence health care benefits at age 60. Page 15 Appendix B: Summary of Actuarial Assumptions and Methods Post-Retirement Mortality For healthy retirees and beneficiaries, the RP-2000 Combined Mortality Table projected forward 19 years using scale AA, with a two-year setback for males and females. A separate table of mortality rates is used for disabled retirees. The following are sample rates for the retirees and beneficiaries: Annual Rates of Death Healthy Age 50 55 60 65 70 75 80 85 Male 0.1369% 0.1986% 0.3881% 0.7659% 1.3671% 2.2802% 4.1439% 7.7020% Disabled Female 0.1015% 0.1755% 0.3567% 0.6953% 1.2224% 2.0100% 3.2898% 5.4696% Male 0.3881% 0.7659% 1.3671% 2.2802% 4.1439% 7.7020% 13.6910% 22.0697% Female 0.3567% 0.6953% 1.2224% 2.0100% 3.2898% 5.4696% 9.9435% 16.4072% Marriage Assumption For the purpose of valuing coverage under the in-service death benefit, 85% of males and 75% of females assumed to be married, with females being three years younger than their spouse. Asset Valuation Method The Plan is financed on a pay-as-you-go basis, and no methodology is needed to determine the actuarial value of assets. Actuarial Cost Method The Entry Age Normal actuarial cost method allocates the plan’s actuarial present value of future benefits to various periods based upon service. The portion of the present value of future benefits allocated to years of service prior to the valuation date is the actuarial accrued liability, and the portion allocated to years following the valuation date is the present value of future normal costs. The normal cost is determined for each active member as the level percent of payroll necessary to fully fund the expected benefits to be earned over the career of each individual active member. The normal cost is partially funded with active member contributions with the remainder funded by employer contributions. The unfunded accrued liability is determined by subtracting the actuarial value of assets from the actuarial accrued liability. Administrative and Investment Expenses The investment return assumption represents the expected return net of all administrative and investment expenses. Page 16 Appendix B: Summary of Actuarial Assumptions and Methods Payroll Growth Rate The total annual payroll of active members is assumed to increase at an annual rate of 3.75%. This rate does not anticipate increases in the number of members. Changes from Prior Valuation Since the previous valuation, the assumed initial per capita health care costs, the assumed rates of health care inflation used to project the per capita costs, and the participation assumptions have been revised. Affordable Care Act (ACA) The impact of the Affordable Care Act (ACA) was addressed in this valuation. Review of the information currently available did not identify any specific provisions of the ACA that are anticipated to significantly impact results. While the impact of certain provisions such as the excise tax on high-value health insurance plans beginning in 2018 (if applicable), mandated benefits and participation changes due to the individual mandate should be recognized in the determination of liabilities, overall future plan costs and the resulting liabilities are driven by amounts employers and retirees can afford (i.e., trend). The trend assumption forecasts the anticipated increase to initial per capita costs, taking into account health care cost inflation, increases in benefit utilization, plan changes, government-mandated benefits, and technological advances. Given the uncertainty regarding the ACA’s implementation (e.g., the impact of excise tax on high-value health insurance plans, changes in participation resulting from the implementation of state-based health insurance exchanges), continued monitoring of the ACA’s impact on the Plan’s liability will be required. Page 17 Appendix C: Summary of Plan Provisions Outlined below are the principal provisions of the system which were reflected in the results shown in this report. Covered Employees Any teacher, principal, superintendent or supervisor engaged in service of public schools, plus professional employees at State schools of higher education if they choose to be covered. Credited Service One month for each month of service as a teacher in Connecticut public schools, maximum 10 months for each school year. Ten months of credited service constitutes one year of Credited Service. Certain other types of teaching service, State employment, or war-time military service may be purchased prior to retirement, if the Member pays one-half the cost. Normal Retirement Eligibility - Age 60 with 20 years of Credited Service in Connecticut, or 35 years of Credited Service including at least 25 years of service in Connecticut. Early Retirement Eligibility - 25 years of Credited Service including 20 years of Connecticut service, or age 55 with 20 years of Credited Service including 15 years of Connecticut service. Proratable Retirement Eligibility - Age 60 with 10 years of Credited Service. Disability Retirement Eligibility - 5 years of Credited Service in Connecticut if not incurred in the performance of duty and no service requirement if incurred in the performance of duty. Termination of Employment Eligibility - 10 or more years of Credited Service. Teachers’ Required Contribution 1.25% of annual salaries in excess of $500,000 is contributed for health insurance of retired teachers. State Contribution The State pays for one third of the costs through an annual appropriation in the General Fund. Administrative costs of the Plan are financed by the State. Based upon Chapter 167a, Subsection D of Section 10-183t of the Connecticut statutes, it is assumed the State will pay for any long-term shortfall arising from insufficient active member contributions. Page 18 Appendix C: Summary of Plan Provisions Retiree Health Care Coverage Any member that is currently receiving a retirement or disability benefit is eligible to participate in the Plan. There are two types of the health care benefits offered through the system. Subsidized Local School District Coverage provides a subsidy paid to members still receiving coverage through their former employer and the CTRB Sponsored Medicare Supplemental Plans provide coverage for those participating in Medicare, but not receiving Subsidized Local School District Coverage. Any member that is not currently participating in Medicare Parts A & B is eligible to continue health care coverage with their former employer. A subsidy of up to $110 per month for a retired member plus an additional $110 per month for a spouse enrolled in a local school district plan is provided to the school district to first offset the retiree’s share of the cost of coverage, any remaining portion is used to offset the district’s cost. The subsidy amount is set by statute, and has not increased since July of 1996. A subsidy amount of $220 per month may be paid for a retired member, spouse or the surviving spouse of a member who has attained the normal retirement age to participate in Medicare, is not eligible for Part A of Medicare without cost, and contributes at least $220 per month towards coverage under a local school district plan. Any member that is currently participating in Medicare Parts A & B is eligible to either continue health care coverage with their former employer, if offered, or enroll in the plan sponsored by the System. If they elect to remain in the plan with their former employer, the same subsidies as above will be paid to offset the cost of coverage. If a member participating in Medicare Parts A & B so elects, they may enroll in one of the CTRB Sponsored Medicare Supplemental Plans. Active members, retirees, and the State pay equally toward the cost of the basic coverage (medical and prescription drug benefits). There are three choices for coverage under the CTRB Sponsored Medicare Supplemental Plans. The choices and calendar year premiums charged for each choice are shown in the table below: Monthly Funding Rates for CTRB Sponsored Medicare Supplemental Plans Coverage 2010 2011 2012 2013 2014 2015 Medicare Supplement with Prescriptions $112 $125 $124 $117 $97 $91 Medicare Supplement with Prescriptions and Dental $160 $174 $173 $160 $141 $136 Medicare Supplement with Prescriptions, Dental, Vision & Hearing $165 $179 $180 $165 $146 $140 Those participants electing vision, hearing, and/or dental are required by the System’s funding policy to pay the full cost of coverage for these benefits, and no liability under GASB No. 43 and No. 45 is assumed by the Plan for these benefits. Survivor Health Care Coverage Survivors of former employees or retirees remain eligible to participate in the Plan and continue to be eligible to receive either the $110 monthly subsidy or participate in the CTRB Sponsored Medicare Supplemental Plans, as long as they do not remarry. Page 19 Appendix D: Glossary Actuarial Accrued Liability - The difference between (i) the actuarial present value of future plan benefits, and (ii) the actuarial present value of future normal costs. Sometimes referred to as "accrued liability" or "past service liability". Accrued Service - The service credited under the plan which was rendered before the date of the actuarial valuation. Actuarial Assumptions - Estimates of future plan experience with respect to rates of mortality, disability, turnover, retirement, rate or rates of investment income and salary increases. Decrement assumptions (rates of mortality, disability, turnover and retirement) are generally based on past experience, often modified for projected changes in conditions. Economic assumptions (salary increases and investment income) consist of an underlying rate in an inflation-free environment plus a provision for a long-term average rate of inflation. Actuarial Cost Method - A mathematical budgeting procedure for allocating the dollar amount of the "actuarial present value of future plan benefits" between the actuarial present value of future normal costs and the actuarial accrued liability. Sometimes referred to as the "actuarial funding method". Actuarial Equivalent - A series of payments is called an actuarial equivalent of another series of payments if the two series have the same actuarial present value. Actuarial Present Value - The amount of funds presently required to provide a payment or series of payments in the future. It is determined by discounting the future payments at a predetermined rate of interest, taking into account the probability of payment. Age-Related Morbidity - Assumed increase to the net incurred claims related to the increase in age. Amortization - Paying off an interest-bearing liability by means of periodic payments of interest and principal, as opposed to paying it off with a lump sum payment. Annual OPEB Cost (AOC) - An accrual-basis measure of the periodic cost of an employer’s participation in a defined benefit OPEB plan. Annual Required Contributions of the Employer (ARC) - The employer’s periodic required contributions to a Defined Benefit OPEB Plan, which is the basis for determining an employer’s Annual OPEB Cost. Entry Age Normal Actuarial Cost Method - A method under which the Actuarial Present Value of the Projected Benefits of each individual included in an Actuarial Valuation is allocated on a level basis over the earnings or service of the individual between entry age and assumed exit age(s). The portion of this Actuarial Present Value allocated to a valuation year is called the Normal Cost. The portion of this Actuarial Present Value not provided for at a valuation date by the Actuarial Present Value of future Normal Costs is called the Actuarial Accrued Liability. Experience Gain (Loss) - A measure of the difference between actual experience and that expected based upon a set of actuarial assumptions during the period between two actuarial valuation dates, in accordance with the actuarial cost method being used. Health Care Cost Trend Rates - The annual assumed rate of increase for both claims and contributions. Implicit Rate Subsidy - The differential between utilizing a blend of active and non-Medicare retiree experience for cost of benefits, and utilizing solely the expected retiree experience. Blending a lower cost active cohort with retirees results in an implicit rate subsidy for the retirees of the entire group. Page 20 Appendix D: Glossary Level Dollar Amortization Method - The dollar amount to be amortized is divided into equal dollar amounts to be paid over a given number of years; part of each payment is interest and part is principal (similar to a mortgage payment on a building). Because payroll can be expected to increase as a result of inflation, level dollar payments generally represent a decreasing percentage of payroll; in dollars adjusted for inflation, the payments can be expected to decrease over time. Level Percentage of Projected Payroll Amortization Method - Amortization payments are calculated so that they are a constant percentage of the projected payroll of active plan members over a given number of years. The dollar amount of the payments generally will increase over time as payroll increases (e.g., due to inflation); in dollars adjusted for inflation, the payments can be expected to remain level. Net OPEB Obligation (NOO) - The cumulative difference since the effective date of this Statement between Annual OPEB Cost and the employer’s contributions to the plan, including the OPEB liability (asset) at transition, if any, and excluding (a) short-term differences and (b) unpaid contributions that have been converted to OPEB-related debt. Normal Cost - The annual cost assigned, under the actuarial funding method, to current and subsequent plan years. Sometimes referred to as "current service cost". Any payment toward the unfunded actuarial accrued liability is not part of the normal cost. Other Postemployment Benefits (OPEB) - Postemployment benefits other than pension benefits. Other postemployment benefits (OPEB) include postemployment healthcare benefits, regardless of the type of plan that provides them, and all postemployment benefits provided separately from a pension plan, excluding benefits defined as termination offers and benefits. Pay-As-You-Go - A method of financing a plan under which the contributions to the plan are generally made at about the same time and in about the same amount as benefit payments and expenses becoming due. Plan Termination Liability - The actuarial present value of future plan benefits based on the assumption that there will be no further accruals for future service and salary. The termination liability will generally be less than the liabilities computed on a "going concern" basis and is not normally determined in a routine actuarial valuation. Sponsor - The entity that established the plan. The sponsor generally is the employer or one of the employers that participate in the plan to provide benefits for their employees and employees of other employers. Substantive Plan - The terms of an OPEB plan as understood by the employer(s) and plan members. Unfunded Actuarial Accrued Liability - The difference between the actuarial accrued liability and valuation assets. Sometimes referred to as "unfunded accrued liability". Valuation Assets - The value of current plan assets recognized for valuation purposes. Generally based on book value plus a portion of unrealized appreciation or depreciation. Page 21