interoffice memorandum

.docx

School

Alabama A&M University *

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Course

ACC-450

Subject

Accounting

Date

Feb 20, 2024

Type

docx

Pages

3

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INTEROFFICE MEMORANDUM TO: ADMINISTRATORS OF THE STATE PENSION FROM: MADDOX & MUSSON LLC SUBJECT: TEACHER PENSION FUND ANALYSIS DATE: 4/29/2019 CC: PROFESSOR ROACH We were presented with a case that focused on an underfunded teacher pension fund throughout the course of 30 years (2016-2046). Throughout each different case, we were focused on each case with different scenarios to determine how good or bad each outcome was over 30 years. In order to accomplish this task, we were given different inputs and other components to calculate the teacher pension. In order to concise our analysis, we performed a what-if analysis to provide a summary of each case’s outcome to validate our findings. Base Case With the base case, the overall goal, we found, was to marginally decrease the unfunded liability annually. With all three of the other cases, the NPV reaches the negative before the ten-year mark. In this case, the Net Present Value doesn’t do so until the fifteenth year. However, the administrators are using 80% as their goal number, with regards to the asset to liability ratio and they reach it within eight fiscal periods. This is arguably the worst case due to the fact that their eventual dive into the negatives, with reference to the unfunded liability NPV, was far less expedient than the percentage climb of their assets to liability ratio.
Worst Case Based on our what-if analysis we found that the Net Present Value of the unfunded liability increased steadily, landing at $ 35,235,263,365 in year 15, while the assets to liability ratio NPV moved continually in the opposite direction, dropping by a total of 12% within the first 15 years. Although the “worst case” trend-line is the only one characterized by continuous declension, when viewed through an equity lens, it marks positive movement due to the fact that a ratio under 50% denotes financing through investment, as opposed to debt.   Aggressive Case Within this particular scenario, we were presented with different inputs from the aggressive case. A significant factor that we deem noteworthy is the fact that the final salary giveback, taken directly from the teachers’ final year salaries seem to be what fuel the drastic drop in the Net Present Value of unfunded liability, going from 12 billion to -1 billion in a span of only four years. In addition, the NPV decrease is compounded by a significant increase in the assets to liabilities ratio over the same time period. 2
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