Office of the State Actuary: LEOFF Plan 2 posts $22 billion in assets; projections show short-term funded status gains

Olympia — The Office of the State Actuary told the Law Enforcement Officers' and Fire Fighters' Plan 2 Retirement Board on Oct. 22 that the plan’s market assets were about $22.08 billion on the June 30, 2024, valuation date and that recent market gains and actuarial smoothing should lift funded status in the coming years.

Mitch DeCamp of the Office of the State Actuary led the board through the 2024 valuation highlights and a projections update, saying, “The investment return was 7.95%.” He described that result as higher than the plan’s 7% assumed return and said the actuarial value of assets recognized $255 million of previously deferred investment gains while leaving roughly $1.02 billion still deferred.

The valuation snapshot and why it matters

DeCamp emphasized that a valuation is a point-in-time snapshot of plan measures — assets, membership data and liabilities — taken as of 06/30/2024. He said the actuarial value of assets used for smoothing and contribution calculations was about $21.06 billion (dollars in millions on the report’s table). The actuary reported that deferred gains of about $1.02 billion remain to be recognized in future years; $255 million of past deferred gains were recognized in 2024.

Participant experience pushed some measures down

DeCamp said participant data showed notable departures from current assumptions: average reported salaries rose about 10% in 2024 versus an assumed 5.5%, and there were roughly 200 more retirements than assumed. He said those two items — higher salary growth and higher retirements — together accounted for most of the valuation’s negative plan experience. DeCamp also noted CPI-based inflation for 2024 was 3.61% and explained the plan’s COLA rule: cost-of-living adjustments are capped at 3%, with any excess (0.61% for 2024) banked for future years when inflation is below 3%.

Projections and the effect of a strong 2025 return

Using the 2024 valuation as a starting point and assuming future experience matches current plan assumptions, the actuary projected funded status rising from the 2024 level through 2028 as the deferred investment gains are recognized. DeCamp said the model projects the funded status to settle around the mid-100% range by the end of the decade under those assumptions.

DeCamp added the office ran a second projection that included the actual 06/30/2025 investment return (about 9.5%). "One year of investment experience changes, say, the 2029 funded status from 105 to 108%," he said, to illustrate how a single year’s returns can materially alter multi-year projections.

No contribution-rate changes in this off-cycle valuation

DeCamp reminded the board that this was an off-cycle valuation and that the actuary did not calculate new contribution rates in this report: “We are not gonna talk about contribution rates today because this is an off cycle valuation.” He also noted the board has adopted contribution rates through 2029 under its four-year adoption policy, but those adopted future rates can still be revised at the board’s 2025 rate-setting valuation next summer.

Questions from trustees and employers about salary incentives and assumptions

Trustees and other meeting participants pressed the actuary on how recruitment and retention incentives — hiring bonuses and other incentive pay increasingly used by employers — are treated in the data and projections. DeCamp said the actuary relies on the salary reported to the Department of Retirement Systems (DRS) and explained that DRS determines whether a payment is pensionable based on the contract language and how the payment is structured (for example, whether it is for services rendered or is a true signing bonus). He said the actuary and DRS track total reported salary but do not break a single year’s salary down into component parts (overtime, incentives, specialty pay) for the valuation.

Policy context and next steps

DeCamp said the Office of the State Actuary is recommending changes to some economic and demographic assumptions — including retirement rates and salary growth — based on recent experience, and that the board will have an opportunity to adopt those assumption changes at its December meeting. He also cautioned board members not to read single-year projections as a license to reduce contributions, noting that projections can and will change as actual experience emerges.

What the board heard

In sum, the actuary described the plan as in a healthy position based on the 2024 measurement: funded status remained above 100%, market returns for the measurement period exceeded assumptions, and deferred gains should raise measured funded status as they are recognized. At the same time, higher-than-assumed salary growth and retirements reduced funded status and are factors the actuary said the board should consider when reviewing recommended changes to assumptions and future rate-setting.

The board will receive the 2025 actuarial valuation next summer to inform the formal 2025 rate-setting process; the actuary recommended the board consider adopting the updated economic and demographic assumptions at the board’s December meeting so those assumptions would be available for the 2025 valuation process.