Years Ended September 30, 2017 and 2016
Note 9 – Employee Benefits
Most employees of the University participate in the Teachers’ Retirement System of Alabama (“TRS”), a cost sharing, multiple-employer public retirement system. In addition, employees meeting eligibility requirements may participate in an optional program with the Teachers Insurance and Annuity Association – College Retirement Equities Fund (“TIAA – CREF”) or The Variable Annuity Life Insurance Company (“VALIC”). TRS is a defined benefit plan while the TIAA-CREF and VALIC programs are defined contribution plans.
Defined Benefit Plan - TRS
Plan description. The Teachers’ Retirement System of Alabama, a cost-sharing multiple-employer public employee retirement plan, was established as of September 15, 1939, under the provisions of Act 419 of the Legislature of 1939 for the purpose of providing retirement allowances and other specified benefits for qualified persons employed by State-supported educational institutions. The responsibility for the general administration and operation of the TRS is vested in its Board of Control. The TRS Board of Control consists of 15 trustees. The plan is administered by the Retirement Systems of Alabama (“RSA”). Title 16-Chapter 25 of the Code of Alabama grants the authority to establish and amend the benefit terms to the TRS Board of Control. The Plan issues a publicly available financial report that can be obtained at www.rsa-al.gov.
Benefits provided. State law establishes retirement benefits as well as death and disability benefits and any ad hoc increase in postretirement benefits for the TRS. Members of TRS are classified as either Tier 1 or Tier 2 plan members, contingent upon if their eligible service began prior to January 1, 2013. Benefits for TRS members vest after 10 years of creditable service. Tier 1 members who retire after age 60 with 10 years or more of creditable service or with 25 years of service (regardless of age) are entitled to an annual retirement benefit, payable monthly for life unless there is a return to full-time employment with a TRS or Employees’ Retirement System (“ERS”) agency, or to temporary employment in excess of specified limits. Service and disability retirement benefits are based on a guaranteed minimum or a formula method, with the member receiving payment under the method that yields the highest monthly benefit. Under the formula method, Tier 1 members of the TRS are allowed 2.0125% of their average final compensation (highest 3 of the last 10 years) for each year of service.
Act 377 of the Legislature of 2012 established a new tier of benefits (Tier 2) for members hired on or after January 1, 2013. Tier 2 TRS members are eligible for retirement after age 62 with 10 years or more of creditable service and are entitled to an annual retirement benefit, payable monthly for life unless there is a return to full-time employment with a TRS or ERS agency, or to temporary employment in excess of specified limits. Service and disability retirement benefits are based on a guaranteed minimum or a formula method, with the member receiving payment under the method that yields the highest monthly benefit. Under the formula method, Tier 2 members of the TRS are allowed 1.65% of their average final compensation (highest 5 of the last 10 years) for each year of service. Members are eligible for disability retirement if they have 10 years of creditable service, are currently in-service, and determined by the RSA Medical Board to be permanently incapacitated from further performance of duty. Preretirement death benefits are calculated and paid to the beneficiary based on the member’s age, service credit, employment status and eligibility for retirement.
Contributions. Covered members of the TRS contributed 5% of earnable compensation to the TRS as required by statute until September 30, 2011. From October 1, 2011 to September 30, 2012, covered members of the TRS were required by statute to contribute 7.25% of earnable compensation. Effective October 1, 2012, covered members of the TRS are required by statute to contribute 7.50% of earnable compensation. Tier 2 covered members of the TRS contribute 6% of earnable compensation to the TRS as required by statute. All regular employees of the University are members of the TRS with the exception of temporary employees. Contributions for covered employees are mandatory for both employee and employer.
The University’s contribution rate for the year ended September 30, 2017 was 12.01% of annual pay for Tier 1 members and 10.82% of annual pay for Tier 2 members. The University’s contractually required contribution rate for the year ended September 30, 2016 was 11.94% of annual pay for Tier 1 members and 10.84% of annual pay for Tier 2 members.
These required contribution rates are a percent of annual payroll, actuarially determined as an amount that, when combined with member contributions, is expected to finance the costs of benefits earned by members during the year, with an additional amount to finance any unfunded accrued liability. The total contribution requirement for fiscal years 2017, 2016, and 2015 is as follows:
| |
|
|
|
|---|---|---|---|
Employer Contributions | $45,024,221 | $43,303,201 | $39,092,939 |
Employee Contributions | 27,311,165 | 26,477,729 | 25,244,339 |
Total Contributions | $72,335,386 | $69,780,930 | $64,337,278 |
Pensionable salaries and wages for covered employees participating in TRS were approximately $385.9 million during fiscal year 2017 and $369.6 million during fiscal year 2016.
Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions. At September 30, 2017, the University reported a liability of $623,398,000 for its proportionate share of the collective net pension liability. The collective net pension liability was measured as of September 30, 2016 and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of September 30, 2015. The University’s proportion of the collective net pension liability was based on the employer’s share of contributions to the pension plan relative to the total employer contributions of all participating TRS employers. At September 30, 2016 the University’s proportion was 5.76%, which was an increase of 0.29% from its proportion measured as of September 30, 2015. The University’s proportionate share of the collective net pension liability at September 30, 2016 was $572,814,000.
For the years ended September 30, 2017 and 2016, the University recognized pension expense of $76.8 million and $51.2 million, respectively. At September 30, 2017 and 2016, the University reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources:
2017 |
|
|
|---|---|---|
Differences between expected and actual experience | $ - | $16,054,000 |
Changes of assumptions | 44,015,000 | - |
Net difference between projected and actual earnings on pension plan investments | 9,010,000 | - |
Changes in proportion and differences between Employer contributions and proportionate share of contributions | 46,316,000 | - |
Employer contributions subsequent to the measurement date | 45,024,221 | - |
Total | $144,365,221 | $16,054,000 |
| 2016 | Deferred Outflows of Resources | Deferred Inflows of Resources |
Differences between expected and actual experience | $ - | $3,103,000 |
Changes of assumptions | - | - |
Net difference between projected and actual earnings on pension plan investments | 37,503,000 | - |
Changes in proportion and differences between Employer contributions and proportionate share of contributions | 31,777,000 | - |
Employer contributions subsequent to the measurement date | 43,303,201 | - |
Total | $112,583,201 | $3,103,000 |
$45.0 million reported as deferred outflows of resources related to pensions resulting from University contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ending September 30, 2018. Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions in 2017 will be recognized in pension expense as follows:
| Year end September 30 | |
|---|---|
| 2018 | $21,459,000 |
| 2019 | 21,459,000 |
| 2020 | 29,160,000 |
| 2021 | 7,500,000 |
| 2022 | 3,709,000 |
| Thereafter | - |
Actuarial assumptions. The total pension liability was determined by an actuarial valuation as of September 30, 2015 using the following actuarial assumptions, applied to all periods included in the measurement:
Inflation | 2.75% |
Investment rate of return* | 7.75% |
Projected salary increases | 3.25% - 5.00% |
*Net of pension plan investment expense |
The actuarial assumptions used in the actuarial valuation as of September 30, 2015, were based on the results of an investigation of the economic and demographic experience for the TRS based upon participant data as of September 30, 2015. The Board of Control accepted and approved these changes in September 2016, which became effective at the beginning of fiscal year 2016.
Mortality rates for TRS were based on the White Collar Mortality Table projected to 2020 using Scale BB and adjusted 115% for males and 112% for females age 78 and older. The rates of disabled mortality were based on the RP-2000 Disabled Mortality Table projected to 2020 using Scale BB and adjusted 105% for males and 120% for females.
The long-term expected rate of return on pension plan investments was determined using a log-normal distribution analysis in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The target asset allocation and best estimates of geometric real rates of return for each major asset class are as follows:
| | Target Allocation | Long-Term Expected Rate of Return* |
|---|---|---|
Fixed income | 17.00% | 4.40% |
U.S. large stocks | 32.00% | 8.00% |
U.S. mid stocks | 9.00% | 10.00% |
U.S. small stocks | 4.00% | 11.00% |
International developed market stocks | 12.00% | 9.50% |
International emerging market stocks | 3.00% | 11.00% |
Alternatives | 10.00% | 10.10% |
Real estate | 10.00% | 7.50% |
Cash | 3.00% | 1.50% |
Total | 100.00% | |
*Includes assumed rate of inflation of 2.50% |
Discount rate. The discount rate used to measure the total pension liability was 7.75%. The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the current contribution rate and that the employer contributions will be made at rates equal to the difference between actuarially determined contribution rates and the member rate. Based on those assumptions, components of the pension plan’s fiduciary net position were projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability.
Sensitivity of the University’s proportionate share of the net pension liability to changes in the discount rate. The following table presents the University’s proportionate share of the net pension liability calculated using the discount rate of 7.75%, as well as what the University’s proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1-percentage point lower (6.75%) or 1-percentage-point higher (8.75%) than the current rate:
| | 1% Decrease (6.75%) | Current Rate (7.75%) | 1% Increase (8.75%) |
|---|---|---|---|
| University's proportionate share of collective net pension liability | $830,505,000 | $623,398,000 | $448,060,000 |
Pension plan fiduciary net position. Detailed information about the pension plan’s fiduciary net position is available in the separately issued RSA Comprehensive Annual Report for the fiscal year ended September 30, 2016. The supporting actuarial information is included in the GASB Statement No. 67 Report for the TRS prepared as of September 30, 2016. The auditor’s report dated September 22, 2017 on the total pension liability, total deferred outflows of resources, total deferred inflows of resources, total pension expense for the sum of all participating entities as of September 30, 2016 along with supporting schedules is also available. The additional financial and actuarial information is available at www.rsa-al.gov.
Defined Contribution Plans
As previously noted, some employees participate in the optional TIAA-CREF and VALIC programs, which are defined contribution plans. In defined contribution plans, benefits depend solely on amounts contributed plus investment earnings. All regular full-time and regular part- time employees are eligible to participate from the date of employment. The University contributes a matching amount up to 5% of the employee’s monthly contribution for regular, full-time exempt employees. The University’s contribution is funded as it accrues and, along with that of employees, is immediately and fully vested. The contribution for fiscal years 2017 and 2016, excluding amounts not eligible for matching, was approximately $21.3 million and $20.2 million, which included approximately $10.7 million and $10.1 million each from the University and its employees, respectively. Salaries and wages for covered employees participating in TIAA – CREF or VALIC were approximately $260.2 million and $239.5 million, respectively, during the fiscal years 2017 and 2016.
Compensated Absences
Certain University employees accrue vacation and sick leave at varying rates depending upon their years of continuous service and payroll classification, subject to maximum limitations. Upon termination of employment, employees are paid all unused accrued vacation at their regular rate of pay up to a designated maximum number of days. Depending on their payroll classification, some employees are also paid one-half of their unused accrued sick leave at their regular rate of pay. Accounts payable and accrued liabilities within the accompanying statements of net position includes an accrual of approximately $28.1 million and $26.6 million as of September 30, 2017 and 2016, respectively, primarily for accrued vacation and sick leave.