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Information about the unfunded accrued liability (UAL)

January 23, 2015

Every year there is a restatement of the unfunded accrued liability (UAL) based upon a number of factors. Some factors such as strong investment earnings and employer contributions reduce the UAL while others add to it. Events in FY 2014 that resulted in a change in the UAL from the previous year include the following:
  • Cost method changed to entry age normal. TRSL is actuarially funded, which means many factors (past, present, and projected) are taken into account to determine the costs associated with providing a TRSL benefit. There are many acceptable methods by which to project costs. In 2014, the Legislature passed Act 571 which changed TRSL’s cost method to entry age normal. As a result the costs for providing a benefit (normal cost) will be more level allowing for increased budget stability. Changing the cost method resulted in an increase in the calculated UAL of $881.1 million.
  • Lowered discount rate to 7.75%. In 2014, the Public Retirement Systems’ Actuarial Committee (PRSAC) approved lowering TRSL’s discount rate (assumed rate) from 8.0% to 7.75%. In doing this, TRSL now has a lower target rate of return to meet in order to actuarially fund the system. Future investment gains relative to the assumed rate will be greater, and future investment losses will be smaller. Lowering the discount rate added $570.9 million to the UAL.
  • Experience account deposit. By law, a portion of TRSL’s excess investment returns above its target rate of return are deposited into the experience account to pay for cost-of-living adjustments (COLAs), now called permanent benefit increases (PBIs). TRSL investments performed extremely well last fiscal year, enabling the retirement system to pay PBIs. Furthermore, the investment gains were such that another $170.3 million was added to the experience account.
  • Interest on UAL. The UAL is debt owed to TRSL by the state, and the debt has interest. For FY 2014, interest was $907.8 million. With Act 497 of 2009, the Legislature re-amortized the UAL, creating more level payments that include principal and interest.
It’s important to note that the costs associated with the entry age normal and the 7.75% discount rate were partially offset by nearly $700 million in investment gains from FY 2014. Also, TRSL’s investment gains and losses are smoothed over a five-year period, so only one-fifth of the gains realized in FY 2014 were applied to the UAL. TRSL has $1.5 billion in reserve for application in the next four years. 

In summary, had PRSAC and the Legislature not taken the approach of changing to a more conservative actuarial cost method and a more conservative discount rate, the UAL would have gone down by more than $800 million. But with these changes, the retirement system and its stakeholders will enjoy greater financial stability in the long term.
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