PSPRS' unfunded actuarial accrued liability (UAAL)

The previous post referenced PSPRS' increased annual required contribution (ARC) as a factor in the city of Tucson's budget deficit.  The following table shows a breakdown of PSPRS' aggregate ARC from all its participating employers. The table, which is incomplete due to the limited data available in PSPRS' online reports, breaks down the ARC into two parts.  The normal cost represents the employer cost to fund the retirement of current workers while the unfunded actuarial accrued liability (UAAL) represents the employer cost to cover PSPRS' unfunded liability.  This UAAL percentage represents a portion of PSPRS's unfunded liability that has been amortized over 24 years.  The sum of the normal cost and UAAL represents what employers must pay to PSPRS each year.  Using 1968 for example, this meant that for every $100 in salary paid to employees, $14.49 was paid to PSPRS; in 2012 it will be $30.44 for each $100.  The following totals represent the aggregate for all participating employers, so each individual employer's ARC will vary depending on their own pension liabilities.  For example, Tucson Fire Department's ARC for the 2012 valuation year was 46.77% (31.17% of which is UAAL), which is over 16% higher than PSPRS' aggregate ARC.

Valuation		Normal				Total
Year		Cost		UAAL		ARC
1968						14.49%
1969						15.28%
1970						15.58%
1971						22.13%
1972						21.62%
1973						20.79%
1974						20.24%
1975						16.37%
1976						15.34%
1977		11.37%		4.18%		15.55%
1978						13.46%
1979						12.28%
1980		9.15%		2.71%		11.86%
1981						10.61%
1982						10.10%
1983						9.16%
1984						7.87%
1985		7.67%		0.00%		7.67%
1986						6.67%
1987						7.18%
1988						6.72%
1986						7.01%
1990		8.26%		-0.16%		8.10%
1991						8.73%
1992						8.16%
1993						7.66%
1994						7.85%
1995		9.96%		-1.85%		8.11%
1996		9.94%		-3.58%		6.36%
1997		9.92%		-4.10%		5.82%
1998		9.76%		-4.47%		5.29%
1999		10.89%		-5.68%		5.21%
2000		10.86%		-6.65%		4.21%
2001		11.21%		-7.46%		3.75%
2002		11.61%		-3.95%		7.66%
2003		10.32%		-0.27%		10.05%
2004		10.29%		2.51%		12.80%
2005		10.71%		6.38%		17.09%
2006		10.08%		6.44%		16.52%
2007		12.33%		9.38%		21.71%
2008		11.80%		8.97%		20.77%
2009		12.08%		8.81%		20.89%
2010		12.17%		10.51%		22.68%
2011		12.61%		14.57%		27.18%
2012		13.37%		17.07%		30.44%

The pattern of ARC's follows an expected path up until 2004.  Before that we can see an early period where the ARC was high as PSPRS was established and needed additional start-up funding.  Beginning in the late 1970's, we can see the ARC begin a steady decline to where PSPRS was actually overfunded, which is represented by the negative UAAL percentages.

2004 began the steady increase of the UAAL percentage from 2.51% in 2004 to 17.07% in 2012.  This included huge year-to-year jumps between 2010 and 2012.  The last decade, of course, was when we had two major market crashes.  The average ARC over all years is 12.78%, which shows that over the long run, despite PSPRS' current underfunding, employers have always paid their fair share into PSPRS.

As can be seen in Tucson, the problems with the UAAL is that it is now being paid down at a time when governments are still struggling with their budgets.  Planned amortization of the UAAL is supposed to eventually lead to lower ARC's.  The big unknown is what happens if things do not go as planned.  Lower than expected rates of returns or, even worse another major market crash, will upset the plan and worsen the current underfunding.  How much more can a city like Tucson pay to cover the UAAL?  Cross your fingers and hope we never have to find out.