1. P 3 Actuaries you can understand 1 Introduction to the Actuarial Valuation: Funding and Assumptions January 12, 2006 P

2. P 3 Actuaries you can understand 2 Outline Basic Concepts and Terminology Developing Contributions Economic Assumptions

3. P 3 Actuaries you can understand 3 Long Term Perspective Contributions Investment Return Benefit Payments Expenses Money In = Money Out

4. P 3 Actuaries you can understand 4 What funding methods do Contribution Timing

5. P 3 Actuaries you can understand 5 What funding methods do Contribution Smoothing

6. P 3 Actuaries you can understand 6 Funding Goal Fully paid at retirement

7. P 3 Actuaries you can understand 7 Do we have enough money?

8. P 3 Actuaries you can understand 8 Actuarial Methods Liabilities Assets Amortization Contribution Smoothing

9. P 3 Actuaries you can understand 9 Present Value (PV) The money you need now to pay, using that money and earnings on that money, benefits you expect to pay in the future.

10. P 3 Actuaries you can understand 10 Expect to Pay

11. P 3 Actuaries you can understand 11 PV of Projected Benefits (PVB) Assumptions

12. P 3 Actuaries you can understand 12 PVB

13. P 3 Actuaries you can understand 13 Allocate Costs to Time Periods

14. P 3 Actuaries you can understand 14 Actuarial Accrued Liability (AAL)

15. P 3 Actuaries you can understand 15 Asset Smoothing Methodology

16. P 3 Actuaries you can understand 16 Competing Goals Dampen Volatility Track Asset Value over the long-term

17. P 3 Actuaries you can understand 17 Current Approach Difference between expected and actual investment return spread over 5 years

18. P 3 Actuaries you can understand 18 Current Approach Expected Return –Calculate semi-annually –Base on market value –Use assumed investment return at that time Set 20% Corridor around Market Value

19. P 3 Actuaries you can understand 19 Current Approach

20. P 3 Actuaries you can understand 20 Current Approach

21. P 3 Actuaries you can understand 21 Unfunded Actuarial Accrued Liability (UAAL)

22. P 3 Actuaries you can understand 22 This Year’s Contribution

23. P 3 Actuaries you can understand 23 Member Contributions BASIC General COLA Supplemental BASIC Safety COLA Supplemental Proposed Legislation Based on Valuation From 37 Act

24. P 3 Actuaries you can understand 24 Basic – General Members Tier 1 31621.5. … the normal rate of contribution … shall be such as will provide an average annuity at age 60 equal to one 200 th of the final compensation of members … BASIC 31621.5

25. P 3 Actuaries you can understand 25 Basic – General Members Tier 2 31621.4. … the normal rate of contribution … shall be such as will provide an average annuity at age 60 equal to one 240 th of the final compensation of members … BASIC 31621.4

26. P 3 Actuaries you can understand 26 Basic – Safety Members Tier 1 31639.5. The normal rate of contribution shall be such as will provide an average annuity at age 50 equal to one 200 th of the final compensation… BASIC 31639.5

27. P 3 Actuaries you can understand 27 Basic – Safety Members Tier 2 31639.5. The normal rate of contribution shall be such as will provide an average annuity at age 50 equal to one 200 th of the final compensation… BASIC 31639.5

28. P 3 Actuaries you can understand 28 COLA Contributions 31873. Any increases in contributions shall be shared equally between the county or district and the contributing members … COLA

29. P 3 Actuaries you can understand 29 COL Contributions FCERA Board previously decided that “Any increases in contributions” means contributions for both Normal Cost and Unfunded Actuarial Accrued Liability.

30. P 3 Actuaries you can understand 30 Supplemental Contribution …to the extent undistributed earnings are unavailable in the future to make additional contributions on members’ behalf…then the employer and employee contribution rates shall be increased … Supplemental 31627

31. P 3 Actuaries you can understand 31 Supplemental Contribution Lawyers not yet in agreement Look to proposed legislation for guidance Members electing Tier 2 would not make Supplemental Contributions Supplemental 31627

32. P 3 Actuaries you can understand 32 AB 2063 – General Members …the normal rates of contribution… shall be rates that provide an average annuity at age 55 years equal to the fraction of one 160th of the final compensation … Supplemental 31627

33. P 3 Actuaries you can understand 33 AB 2063 – Safety Members The normal rates of contribution… shall be rates that will provide an average annuity at age 50 years equal to the fraction of one 160 th of the final compensation … Supplemental 31627

34. P 3 Actuaries you can understand 34 Actuarial Assumptions What are they? How do we set them? What are others doing? What are our recommendations?

35. P 3 Actuaries you can understand 35 Assumptions Best guess of what will happen in the future

36. P 3 Actuaries you can understand 36 Economic Assumptions Describe impact on money Inflation Salary Increases Return on Investments Cost-of-Living Adjustments

37. P 3 Actuaries you can understand 37 Demographic Assumptions Describe member movement from one category to another Termination Disability Retirement Death

38. P 3 Actuaries you can understand 38 Economic Assumption Model Inflation Merit & Longevity Real Investment Return COLA (limited to 3.0%) Salary Increase Investment Return

39. P 3 Actuaries you can understand 39 Annual Inflation Rate

40. P 3 Actuaries you can understand 40 Average Inflation Rate

41. P 3 Actuaries you can understand 41 Inflation Spike: 1974-1982

42. P 3 Actuaries you can understand 42 Average Inflation after Removing Spike

43. P 3 Actuaries you can understand 43 Inflation Assumptions in 37 Act Systems

44. P 3 Actuaries you can understand 44 Average Inflation Assumption in 37 Act Systems

45. P 3 Actuaries you can understand 45 Inflation Assumption Current4.00% Reasonable Range 3.00% - 5.00%

46. P 3 Actuaries you can understand 46 Investment Return Inflation Real Investment Return

47. P 3 Actuaries you can understand 47 Real Investment Return Over 90% of Real Investment Return due to asset allocation

48. P 3 Actuaries you can understand 48 FCERA Allocation Targets Stocks – Domestic38% Stocks – International18% Bonds – Global3% Bonds – Core28% Cash & Equivalents2% Private Markets11%

49. P 3 Actuaries you can understand 49 Average Annual Real Returns by Asset Class (1/1/1926-6/30/2005) Large Company Stocks7.3% Small Company Stocks9.6% Long-term Corporate Bonds3.0% Long-term Government Bonds2.5% Intermediate-term Government Bonds2.3% US Treasury Bills0.7% Ibbotson Associates, Inc.

50. P 3 Actuaries you can understand 50 Real Investment Return in 37 Act Systems

51. P 3 Actuaries you can understand 51 Average Real Investment Assumption

52. P 3 Actuaries you can understand 52 Real Investment Return Current4.16% Reasonable Range 3.50% - 4.50%

53. P 3 Actuaries you can understand 53 Nominal Investment Return in 37 Act Systems

54. P 3 Actuaries you can understand 54 Average Effective Investment Return

55. P 3 Actuaries you can understand 55 Nominal Investment Return Current8.16% Reasonable Range7.00% - 8.25%

56. P 3 Actuaries you can understand 56 Questions