ARKANSAS STATE POLICE RETIREMENT SYSTEM ANNUAL ACTUARIAL VALUATION AND THE GAIN/LOSS ANALYSIS OF EXPERIENCE JUNE 30, 2016 REPORT OF THE ANNUAL ACTUARIAL VALUATION AND GAIN/LOSS ANALYSIS OF THE ARKANSAS STATE POLICE RETIREMENT SYSTEM TABLE OF CONTENTS SECTION PAGES ITEMS 1-2 Cover letter 3 Objectives and Status 4 Other Observations A VALUATION RESULTS 1 Computed Actuarial Accrued Liabilities 2 Amortization of Unfunded Actuarial Accrued Liabilities 3-4 Computed Employer Contributions 5 Short Condition Test 6 Comments B VALUATION DATA 1-4 Benefit Provisions 5-9 Retirees, Beneficiaries and DROP Participants 10-11 Active Members 12 Development of Present Population 13 Reported Assets 14 Development of Funding Value of Assets 15 Comparison of Rates of Return and Asset Values C RESULTS OF GAIN/LOSS ANALYSIS 1 Comments 2 Derivation of Experience Gain/Loss 3-5 Gain & Losses by Risk Area 6 Investment Gain (Loss) 7 Active Members Salary Increases 8 Active Members Who Separated During the Period D ACTUARIAL METHODS AND ASSUMPTIONS 1-6 Summary of Actuarial Assumptions Used in the Actuarial Valuation E FINANCIAL PRINCIPLES 1-2 Financial Principles and Operational Techniques 3 Financing Diagram 4 Actuarial Valuation Process F 1-3 ADDITIONAL ACTUARIAL INFORMATION G APPENDIX I 1 Statutory Employer Contributions Arkansas State Police Retirement System November 11, 2016 Board of Trustees Arkansas State Police Retirement System Little Rock, Arkansas Ladies and Gentlemen: The results of the Annual Actuarial Valuation of the Arkansas State Police Retirement System as of June 30, 2016, and the Gain/Loss Analysis of Experience among Active Members from July 1, 2015 to June 30, 2016 are presented in this report. The valuation was based upon Retirement System provisions in effect on the valuation date. The purpose of the valuation and gain/loss analysis is to measure funding progress in relation to the actuarial cost method and to determine the employer contribution rates for the fiscal year beginning July 1, 2016. The results of the valuation may not be applicable for other purposes. A separate report will be issued to provide actuarial information for GASB Statements No. 67 and No. 68. This report should not be relied on for any purpose other than those described above. It was prepared at the request of the Board and is intended for use by the Retirement System and those designated or approved by the Board. This report may be provided to parties other than the System only in its entirety and only with the permission of the Board. Gabriel, Roeder, Smith & Company is not responsible for unauthorized use of this report. The signing individuals are independent of the plan sponsor. The findings in this report are based on data and other information through June 30, 2016. Future actuarial measurements may differ significantly from the current measurements 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. Due to the limited scope of the actuary’s assignment, the actuary did not perform an analysis of the potential range of such future measurements. The actuarial methods and assumptions used in the valuation are summarized in Section D of this report. The assumptions are established by the Retirement Board after consulting with the actuary. The actuarial assumptions used for the valuation produce results which, individually and in the aggregate, are reasonable. The cooperation of the administrative staff in furnishing the materials required for this valuation is hereby acknowledged with appreciation. Board of Trustees November 11, 2016 Page 2 This report has been prepared by individuals who have substantial experience valuing public employee retirement systems. To the best of our knowledge, this report is complete and accurate and was made in accordance with standards of practice promulgated by the Actuarial Standards Board and in conformance with Title 24 of the Arkansas Code. Mita D. Drazilov and Heidi G. Barry are Members of the American Academy of Actuaries (MAAA) and meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinions contained herein. Respectfully submitted, Mita D. Drazilov, ASA, FCA, MAAA Heidi G. Barry, ASA, MAAA David L. Hoffman MDD/HGB/DLH:dj 309 OBJECTIVES AND STATUS General Financial Objective. Section 24-2-701 of the Arkansas Code provides as follows: “6.01. (a) The general financial objective of each Arkansas public employee retirement plan shall be to establish and receive contributions which, expressed as percents of active member payroll, will remain approximately level from generation to generation of Arkansas citizens. More specifically, contributions received each year shall be sufficient both (i) to fully cover the costs of benefit commitments being made to members for their service being rendered in such year and (ii) to make a level payment which if paid annually over a reasonable period of future years will fully cover the unfunded costs of benefit commitments for service previously rendered.....” Benefit Changes. The most recent benefit changes were reflected in the June 30, 2009 valuation. No benefit changes have been adopted for consideration in the June 30, 2016 valuation. Assumption Changes. The economic assumptions were last updated for the June 30, 2015 valuation. Method Changes. The actuarial cost method and amortization method were last updated for the June 30, 2013 valuation in conjunction with the completed experience study. ASPRS Status. Based upon the results of the June 30, 2016 actuarial valuation, ASPRS continues to satisfy the general financial objective of level contribution financing. ASPRS Reserve Strength. As a by-product of achieving level contribution financing, actuarial accrued liabilities usually become more and more funded over a period of years. The funded ratio of ASPRS has been adversely affected by the market downturn in late 2008 and early 2009 (as has virtually all other public employee retirement systems in the country). On a funding value of assets basis, the System has a 71% funded ratio. On a market value of assets basis, the System has a 67% funded ratio. Employer Contribution Rates. Based upon experience through June 30, 2016, the State Police contribution rate will be 48.57% of covered payroll for the fiscal year beginning July 1, 2016. Arkansas State Police Retirement System -3- OTHER OBSERVATIONS General Implications of Contribution Allocation Procedure or Funding Policy on Future Expected Plan Contributions and Funded Status Given the System’s contribution allocation procedure, if all actuarial assumptions are met (including the assumption of plan earning 7.50% on the actuarial value of assets), it is expected that: 1) The total employer contribution rate as a percentage of pay will decrease to the level of the Tier 2 normal cost as time passes and Tier 1 members terminate employment and are replaced. 2) The unfunded actuarial accrued liabilities will be fully amortized after 23 years, and 3) The funded status of the plan will increase gradually towards a 100% funded ratio. Limitations of Funded Status Measurements Unless otherwise indicated, a funded status measurement presented in this report is based upon the actuarial accrued liability and the actuarial value of assets. Unless otherwise indicated, with regard to any funded status measurements presented in this report: 1) The measurement is inappropriate for assessing the sufficiency of plan assets to cover the estimated cost of settling the plan’s benefit obligations. 2) The measurement is dependent upon the actuarial cost method which, in combination with the amounts of future contributions will most certainly differ from those assumed in this report due to future actual experience differing from assumed experience based upon the actuarial assumptions. A funded status measurement in this report of 100% is not synonymous with no required future contributions. If the funded status were 100%, the plan would still require future normal cost contributions (i.e., contributions to cover the cost of the active membership accruing an additional year of service credit). 3) The measurement would produce a different result if the market value of assets were used instead of the actuarial value of assets, unless the market value of assets is used in the measurement. Arkansas State Police Retirement System -4- SECTION A VALUATION RESULTS COMPUTED ACTUARIAL ACCRUED LIABILITIES AS OF JUNE 30, 2016 (2) (3) (1) Portion Actuarial Total Covered By Accrued Present Future Normal Liabilities Actuarial Present Value of Value Cost Contributions (1) - (2) Future benefits to be paid to current retirees, beneficiaries, future beneficiaries of current retirees, and current DROP members (not including DROP reserve) $309,109,290 $ 3,073,590 $306,035,700 Age and service benefits based on service likely to be rendered by present active members (including DROP reserve) 136,750,771 42,170,260 94,580,511 Separation benefits likely to be paid present active and inactive members 9,929,520 5,780,093 4,149,427 Disability benefits likely to be paid present active members 7,425,352 4,521,606 2,903,746 Death-in-service benefits likely to be paid on behalf of present active members 1,771,183 701,607 1,069,576 Total $464,986,116 $56,247,156 $408,738,960 Valuation assets 289,236,857 Unfunded actuarial accrued liabilities $119,502,103 Arkansas State Police Retirement System A-1 AMORTIZATION OF UNFUNDED ACTUARIAL ACCRUED LIABILITIES (UAAL) JUNE 30, 2016 Remaining Description Years Amount Active Member UAAL Act 1071 of 1997# 23 $ 97,183,217 Remainder - Tier One 23 19,926,241 - Tier Two 23 2,392,645 Total Active 119,502,103 Total UAAL $119,502,103 # See page G-1. Arkansas State Police Retirement System A-2 COMPUTED EMPLOYER CONTRIBUTION RATES AS OF JUNE 30, 2016 EXPRESSED AS PERCENTS OF ACTIVE MEMBER PAYROLL Contributions Expressed as Percents of Covered Payroll* Weighted Contributions for Tier 1 Tier 2 Average Normal Cost Age and Service Annuities 16.67 % 16.27 % 16.34 % Separation Benefits 2.07 % 2.08 % 2.07 % Disability Benefits 1.55 % 1.71 % 1.68 % Death-in-Service Annuities 0.31 % 0.26 % 0.27 % Administrative Expenses 0.70 % 0.70 % 0.70 % Total 21.30 % 21.02 % 21.06 % Unfunded Actuarial Accrued Liabilites@ 92.06 % 0.78 % 27.51 % Total Computed Employer Contribution Rate 113.36 % 21.80 % 48.57 % * Covered payroll includes all active members, including DROP participants. Valuation payroll totals $29,448,593. @ Unfunded actuarial accrued liabilities were amortized over a closed 23 year period. Arkansas State Police Retirement System A-3