PROPOSED CHANGES IN ACTUARIAL ASSUMPTIONS AND …

1 PROPOSED CHANGES IN ACTUARIAL ASSUMPTIONS AND METHODS FOR DETERMINING EMPLOYER CONTRIBUTIONS FOR FISCAL YEARS BEGINNING ON AND AFTER JULY 1, 2011 FOR THE NEW york city TEACHERS RETIREMENT SYSTEM office OF THE actuary February 10, 2012 office OF THE ACTUARY75 PARK PLACE . 9B FLOORNEW york , NY IOOOZ(2121 U2-5775 . F,AX: '212l, 442-5777 Ronenr C. Nonru, ACruARYR etirement BoardNew york city Teachers'Retirement System55 Water Street, 15" Fl-oorNew york , NY 10041Re: ACTUARIAL ASSUMPTIONS and MethodsDear Members:February 10, 2Ol2 PROPOSED CHANGES in Employer Contributionsand After July I, 20LL for the will be pleased to discuss this Report and answer anyquestions you may have with regard to these findings Report presentsAssumptions and Methods forfor Fiscal- Years Beginning onYork city Teachers' RetirementRCN/bsn!)

2 : Mr. GibneyMr. RumleyMr. N. Serrano8205A&M-TRS:bsRespect ful ly, Submitted,/P*t"/-4-Robert C. North, Jr., FSA,Chief ActuaryTABLE OF CONTENTS SECTION ITEM PAGE Table of Contents i List of Tables iii Acronyms v I Executive Summary 1 II Background and Introduction 20 III Philosophy for Developing an Appropriate Level of Employer Contributions 25 IV Comments on Findings and Recommendations Presented in December 2011 Hay Report and November 2006 Segal Report 29 V Development of Demographic

3 ASSUMPTIONS 31 A. Decrements from Active Service B. Mortality after Retirement VI Development of Economic ASSUMPTIONS 53 A. Background Concepts B. Consumer Price Inflation Assumption C. General Wage Increase Component of Salary Scale D. Merit Increase Component of Salary Scale E. ACTUARIAL Interest Rate Assumption F. Investment Expenses VII Other ACTUARIAL ASSUMPTIONS and Methods 102 A. Conversions into Variable Annuities at Retirement B. ACTUARIAL Cost Method and Unfunded ACTUARIAL Accrued Liabilities C. One-Year Lag Methodology D. ACTUARIAL Asset Valuation Method E. Administrative Expenses VIII Financial Impact 115 IX Findings and Proposals 117 (i)

4 TABLE OF CONTENTS APPENDIX ITEM PAGE A Recent History of Investment Returns 121 B Recent History of Economic ASSUMPTIONS Used in ACTUARIAL Valuations 122 C ACTUARIAL Interest Rate ASSUMPTIONS Used by Public Employee Retirement Systems 126 D Tables of PROPOSED Demographic and Salary Scale ASSUMPTIONS 129 E Discussion of Financial Economics, Funding and Disclosure 142 F Statement of ACTUARIAL Opinion 147 G Acknowledgements 148 (ii) LIST OF TABLES TABLE ITEM ___ PAGE IA Comparison of Active Service Decrements Probabilities of Withdrawal 33 IB Comparison of Active Service Decrements Probabilities of Ordinary Mortality and Accidental Mortality 37 IC Comparison of Active Service Decrements Probabilities of Ordinary Disability and Accidental Disability 40 ID-1 Comparison of Active Service Decrements Probabilities of Service Retirement 42 ID-2 Comparison of Active Service Decrements Probabilities of Service Retirement 43

5 IIA Post-Retirement Mortality Valuation Tables Probabilities as a Percentage of Base Table Probabilities 47 IIB Comparison Probabilities of Mortality After Service Retirement 50 IIC Comparison Probabilities of Mortality After Disability Retirement 51 IIIA Comparison of Treasury Yields as of June 30, 1999 68 IIIB Comparison of Treasury Yields as of June 30, 2004 69 IIIC Comparison of Treasury Yields as of June 30, 2009 70 IIID Comparison of Treasury Yields as of June 30, 2010 71 IIIE Comparison of Treasury Yields as of June 30, 2011 72 (iii)

6 LIST OF TABLES TABLE ITEM PAGE IV Recent Consumer Price Inflation - Fiscal Year 1990 through Fiscal Year 2011 73 V Merit Increase Component of Salary Scale 81 VI Estimated Financial Impact of PROPOSED CHANGES in ACTUARIAL ASSUMPTIONS and Methods 115 VII New york city Retirement Systems Rates of Investment Return Based on Market Value - Fiscal Year 1983 through Fiscal Year 2011 - By Retirement System 121 VIII New york city Teachers Retirement System Economic ASSUMPTIONS used in ACTUARIAL Valuations for Determining Employer Contributions 122 (iv) ACRONYMS Following is a listing of acronyms used throughout this Report.

7 ACTUARIAL Accrued ACTUARIAL Asset Valuation ACTUARIAL Asset ACTUARIAL Cost ACTUARIAL Interest ACTUARIAL Present ACTUARIAL Present Value of ACTUARIAL Standard of ACTUARIAL Standard of Practice Number Actuarially Determined Administrative Code of the city of New American Statistical Annual Required Annuity Savings city of New Consumer Price Cost-of-Living Economic Funded Employer Normal Contribution Entry Age ACTUARIAL Cost Expected Investment (v) ACRONYMS Final Final Average Frozen Initial Gabriel, Roeder, Smith & General Wage Governmental Accounting Standards Group Term Life Increasing Dollar KPMG Peat Level Dollar Market Value of Market Value-related Accumulated Benefit National Bureau of Economic New york city Board of Education Retirement New york city Employees Retirement New york city Fire Department Pension (vi)

8 ACRONYMS New york city Police Pension New york city Retirement New york city Teachers Retirement New york State and Local Retirement New york State Teachers Retirement office of the One-Year Lag Public Employment Relations Public Employee Retirement Society of Standard and Poor s 500 Stock 500 Statement of ACTUARIAL The Hay The Segal Unexpected Investment Unfunded ACTUARIAL Accrued Variable Annuity Watson Wyatt and World Trade (vii) PROPOSED CHANGES IN ACTUARIAL ASSUMPTIONS AND METHODS FOR DETERMINING EMPLOYER CONTRIBUTIONS FOR FISCAL YEARS BEGINNING ON AND AFTER JULY 1, 2011 FOR THE NEW york city TEACHERS RETIREMENT SYSTEM SECTION I - EXECUTIVE SUMMARY In accordance with the Administrative Code of the city of New york ( ACNY ) and with appropriate practice, the Boards of Trustees of the five actuarially-funded New york city Retirement Systems ( NYCRS )1 are to periodically review and adopt ACTUARIAL ASSUMPTIONS for use in the determination of employer contributions.

9 This Report proposes, as a package, CHANGES to certain ACTUARIAL ASSUMPTIONS and methods to be used to determine employer contributions payable to the New york city Teachers Retirement System ( TRS ) for Fiscal Years beginning on and after July 1, 2011 ( , beginning Fiscal Year 2012). 1 New york city Employees Retirement System ( NYCERS ) New york city Teachers Retirement System ( TRS ) New york city Board of Education Retirement System ( BERS ) New york city Police Pension Fund ( POLICE ) New york city Fire Department Pension Fund ( FIRE ) Page 2 These proposals have been designed to provide for responsible financing of TRS reasonably consistent with the concepts of intergenerational equity.

10 These proposals are appropriate for determining annual employer contributions to TRS but are not necessarily appropriate for determining the economic value of benefits, the value of benefit revisions or other purposes. This Report reflects the best judgment of the actuary regarding the appropriate financing of TRS and takes into account the two most recent ACTUARIAL experience studies and recommendations prepared by The Segal Company ( Segal ) in their Report dated November 2006 ( Segal Report ) and The Hay Group ( Hay ) in their Report dated December 2011 ( Hay Report ). Page 3 This Report also reflects the best judgment of the actuary regarding the appropriate financing of the benefits provided under legislation associated with the September 11, 2011 attack on the World Trade Center ( WTC ) ( , Chapter 104 of the Laws of 2005 ( Chapter 104/05 ) as amended by Chapter 93 of the Laws of 2005 ( Chapter 93/05 ), Chapter 445 of the Laws of 2006 ( Chapter 445/06 ) as amended by Chapter 5 of the Laws of 2007 ( Chapter 5/07 ) and Chapter 489 of the Laws of 2008 ( Chapter 489/08 )).