FRANKFORT, Ky. (Nov. 14, 2017) — State Budget Director John Chilton will call upon Cavanaugh Macdonald to redo its analysis of the Teacher Retirement System (TRS) pension bill utilizing a more appropriate set of assumptions for comparative purposes.
Cavanaugh Macdonald’s initial analysis of the current pension proposal uses assumptions that are very different from those in its annual valuation reports, including significant changes in retirement patterns and an investment return assumption very different from the rate recently approved by the TRS Board. The request for the recalculation recognizes that there will be certain assumption changes based upon the pension proposal, but the changes by Cavanaugh MacDonald regarding assumed investment returns and future retirement patterns were significant departures from those used in prior valuations.
Furthermore, while the statutes require a 20-year analysis, the state budget director will request the analysis be extended to 30 years so that the long-term effects of the pension proposal can be modeled within the 30-year amortization period contained within the legislation.
“The actuarial assumptions in Cavanaugh Macdonald’s most recent report are significantly different from those in the actuarial calculations provided to our consultants during the planning process,” Chilton said. “In the past, a lack of realistic and rational actuarial assumptions helped obscure the distressed financial status of the plans and contributed to the long-term unsustainability of the plans. We will ask Cavanaugh Macdonald to prepare calculations with several alternative assumptions so that policymakers can make informed decisions based on scenarios that include realistic assumptions and that are satisfactorily reconciled with those that Cavanaugh Macdonald provided in the past.”
Actuarial calculations help to inform policymakers as they consider proposals in the legislative process. Neither Cavanaugh Macdonald nor any other firm sets policy for Kentucky. Firms need to provide the full scope of information necessary to help understand how the future might look. There is no one single scenario that can be known in advance, and a recalculation of the analysis based upon the request provided by Chilton will provide a more complete picture of what the possible outcomes will be realized from the pension proposal.