LAGERS-participating employers, and possibly the employees, along with system investment returns, fund benefits through monthly contributions to the system. The employer’s contribution rate is determined by LAGERS’ actuary and is then applied to the employer’s gross monthly payroll. Because the employer contribution rate is applied to monthly payroll, the dollar amount of contributions may fluctuate month-by-month.
Establishing an Employer Rate
Each LAGERS-participating employer is assigned a unique contribution rate that is based on the demographics of its employee group and the benefits the employer has chosen. If an employer has multiple departments (general, police, fire, public safety), there will be a separate contribution rate for each department.
Employer contribution rates are determined by LAGERS’ actuary. An actuary is a person who is trained in the statistical analysis of life expectancy, market expectations, inflation, and other data important to pension plans.
The actuary begins by applying the employee demographic information and benefits chosen by the employer to the actuarial assumptions that have been adopted by LAGERS’ Board of Trustees. An actuarial assumption is an estimate about an uncertain future event, e.g., inflation or employee turnover. Contribution rates are adjusted year-to-year based on the extent by which the real-life experience during the past year differs from the assumptions. For example, if an employer experiences higher turnover than the actuary assumes in a given year, this would put downward pressure on the employer’s contribution rate for the upcoming year.
Components of an Employer Rate
Prior Service Cost Rate is the portion of the total rate that pays for the amortization of the employer’s unfunded actuarial accrued liability. This rate is paying for the employer’s original unfunded liability, benefit upgrades, and actuarial gains/losses that occur each year.
Normal Cost Rate is the portion of the total rate that pays for a year’s worth of credited service for all employees for the upcoming year.
Casualty Cost Rate is the portion of the total rate that pays for disability and duty-related death benefits.
Total Rate is the total percentage of payroll due. It is the sum of prior service cost rate, the normal cost rate, and the casualty cost rate.
Budgeting for LAGERS Rates
Although employer contribution rates can fluctuate from year to year, they are designed to remain level over time. Employer rates are updated each year with an employer’s annual actuarial valuation. This valuation is provided to each employer annually in July and will show the rates effective for the employer’s upcoming fiscal year.
Changes to an employer’s contribution rate could be the result of one of several events:
Benefit changes that are elected by each employer have an immediate effect on the contribution rate.
The investment performance of LAGERS’ portfolio. When returns from LAGERS’ investments exceed the expected (assumed) return, downward pressure is applied to employer contribution rate. The opposite is true when returns are below the expected returns in any given year.
Personnel changes within an employer that differ from the actuarial assumptions, such as an unexpected number of retirements or heavy turnover, will have an impact on employer contribution rates.
The actuarial assumptions established by LAGERS’ Board of Trustees are reviewed for appropriateness once every five years and are based on the actual experience of LAGERS participants and the economy.
LAGERS has mechanisms in place that reduce volatility in an employer’s contribution rate:
An employer contribution rate cannot increase more than 1% of payroll in a given year (unless a benefit enhancement is adopted by the employer).
To protect against normal swings in the markets, the annual investment gain or loss is smoothed over a five-year period so that rates may remain level even as the markets fluctuate.