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Old 06-09-2016, 01:15 PM
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Default Public Plan - Amortization Period vs Depletion Date

I was recently comparing a funding valuation against an accounting val for a public plan and came across something that doesn't make sense to me. The plan sponsor has an agreement to contribute based on a schedule that increases each year at a set $ amount until the plan reaches 100% funding. After that date, the sponsor will contribute an actuarially determined contribution equal to NC + 30 rolling amortization of UAAL with a minimum floor. According to the funding val, this plan achieves 100% funding in 23 years based on this contribution schedule.

What I found odd was the accounting val based on the same data projects a depletion date 48 years from the val date. As far as I can tell, both valuations are reflecting the same ER & EE contribution schedule.

How is it possible to achieve 100% funding in 23 years, then deplete assets 15 years later if required contributions are continuing to be made? Am I missing something obvious?
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Old 06-09-2016, 01:52 PM
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It might be the case that the increasing contribution schedule is deemed to not meet the requirements of the first sentence of GASB 68, paragraph 28. In that case, the projected contributions are on the basis of the most recent 5 year average contribution rate.

Also, 48 - 23 = 25, not 15.
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Old 06-09-2016, 05:14 PM
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Originally Posted by Dan Moore View Post

Also, 48 - 23 = 25, not 15.
I never said math was my strong suit
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Old 06-09-2016, 08:29 PM
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My standard is that there should not be a depletion date unless we're already talking about the inadequacy of funding policy with the client. If a depletion date does occur and we haven't been talking about it (has only happened for one plan in an agent multiemployer plan with all of the members using the same funding policy), then either we're going to recheck the projection until we find the error causing it, or we're going to identify the issue with the funding policy and discuss it with the client.

I'm guessing there's an asymptotic asset method with a 10+ year recognition period in play with AVA currently being lower than MVA and not enough of the unrecognized losses being recognized by the time the plan is fully funded, resulting in a persistent gap between MVA and remaining PVB. If this is the case, changing the asset method would resolve the issue, or it could be resolved by very minor modifications to current funding policy to commit to resetting the AVA method if it's persistently lower than MVA, or anything else that commits a small amount of additional funds in response to a persistent projected funding issue. [The PV of] Whatever is left unfunded at 48 years should be small in relation to what the employer is already committing to fund over 23 years.

Or the actuary just screwed up the projection. Or the actuary just screwed up the funding valuation.

Use of a 5-year average is not mandatory. The instructions are (off the top of my head, bear with me if I dont use GASB's exact language) to refer to a 5-year average (on an appropriate basis) when funding policy does not exist or when the employer's compliance with the policy is ambiguous. Policy declarations can be used as the basis of the projection even if the past five years are lower than required by the policy going forward. (Although if you had an employer who had issued a policy change every year for the past five years, you would start talking about using a 5-year average).

For the aforementioned agent multiemployer client, members with deviations from funding policy compliance are examined based on a five-year average of a score of where contributions were between the state minimum requirement and the system funding policy. The state minimum is satisfied by a rolling 30-year, level percent of pay amortization, and for the projection we use a blend of the amortization payment under the state minimum and the amortization payment under system policy, proportional to the 5-year averaging. For this system, only extreme offenders have had a projected depletion date (well, and one oddball corner case, although they were getting a projected depletion date even though they were contributing more than the system policy). I'll also note that all of the extreme offenders have signed on to implement changes to bring their funding back on track.

Last edited by DiscreteAndDiscreet; 06-09-2016 at 08:36 PM..
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