P 3 Actuaries you can understand 1 Review of Actuarial Methodology Issues November 8, 2006 P

P 3 Actuaries you can understand 2 Overview Determination of Member COL Contributions for Settlement Cost Allocation among Tiers –Employer –Member COL Contributions

P 3 Actuaries you can understand 3 Member Contributions BASIC Regular COLA BASIC Settlement COLA Valuation Based Statutory Nature

P 3 Actuaries you can understand 4 Basic Accumulation toward target benefit at target retirement age Based on: –Benefit structure –Salary increase assumption –Life expectancy at retirement –Rate of Return assumption Varies by Age at Entry

P 3 Actuaries you can understand 5 Basic – General Members Tier … 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

P 3 Actuaries you can understand 6 Basic – General Members Tier 2 and … 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

P 3 Actuaries you can understand 7 Basic – Safety Members Tier 1 and 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

P 3 Actuaries you can understand 8 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 … BASIC 31627

P 3 Actuaries you can understand 9 Settlement Contribution Lawyers not yet in agreement Look to proposed legislation for guidance Members in Tier 2 or 3 would not make Settlement Contributions BASIC 31627

P 3 Actuaries you can understand 10 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 … BASIC AB 2063

P 3 Actuaries you can understand 11 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 … BASIC AB 2063

P 3 Actuaries you can understand 12 COL Contributions Any increases in contributions shall be shared equally between the county or district and the contributing members … COLA

P 3 Actuaries you can understand 13 Regular COL Contributions Determine total Basic contributions projected for year –General and Safety together –All tiers together Determine total COL contributions required for year Allocate COL contributions proportional to Basic

P 3 Actuaries you can understand 14 Settlement COL Contributions Prior Methodology –Allocate COL contributions proportional to Basic using same proportion as Regular Benefits

P 3 Actuaries you can understand 15 Settlement COL Contributions Proposed Methodology –Determine total Basic Settlement contributions projected for year General and Safety together –Determine total COL Settlement contributions required for year –Allocate COL Settlement contributions proportional to Basic

P 3 Actuaries you can understand 16 COL Contributions FCERA Board previously decided that “Any increases in contributions” means contributions for both Normal Cost and Unfunded Actuarial Accrued Liability.

P 3 Actuaries you can understand 17 Settlement COL Contributions Proposed Methodology –Need to allocation Settlement Reserves for calculation purposes Basic vs COL – Propose allocating proportional to liabilities each valuation Employers vs Members – Propose using approach similar to allocation of Regular COL Contributions –Allocate POB contributions, amortized, to Employer –Remaining reserves get split 50/50

P 3 Actuaries you can understand 18 Cost Allocation Between Tiers Employer Members

P 3 Actuaries you can understand 19 Employer Cost Allocation Between Tiers Total required contribution will be the same each year Employer previously stated they preferred receiving a single contribution rate for each Classification (General and Safety) –Easier calculation –No need for separate reserves / recordkeeping

P 3 Actuaries you can understand 20 Member Cost Allocation Between Tiers Regular Contributions –Basic is statutory –COL requires allocation decision Settlement –Members in Tier 2 or 3 would not make Settlement Contributions

P 3 Actuaries you can understand 21 Calculating COL Contributions Proposed Principles –Tier 1 + Tier 2 + Tier 3 contributions = half COL cost –Fair to all employees –Doesn’t require unreasonable recordkeeping

P 3 Actuaries you can understand 22 Alternative Approaches Same for both tiers Calculate and track tiers separately Other approaches could be developed if requested

P 3 Actuaries you can understand 23 Same for Both Tiers Current approach Simpler recordkeeping Consistency between tiers

P 3 Actuaries you can understand 24 Same for Both Tiers Example (simple numbers not based on this year’s rates) Tier 1 –Basic Rate:4.0% –COL load factor: 90% –COL Rate:3.6% –Settlement Basic:1.0% –COL load factor: 80% –COL Rate:0.8% –TOTAL RATE:9.4%

P 3 Actuaries you can understand 25 Same for Both Tiers Example (simple numbers not based on this year’s rates) Tier 2 and 3 –Basic Rate:3.0% –COL load factor: 90% –COL Rate:2.7% –Settlement Basic:0.0% –COL load factor: 80% –COL Rate:0.0% –TOTAL RATE:5.7%

P 3 Actuaries you can understand 26 Calculate and Track Separately Alternate approach for discussion Would allocate past UAAL to Tier 1. Would require additional tracking of COL contribution and benefit payments by tier. Relationship of Tier 1, Tier 2, and Tier 3 rates will vary in the future based on experience, investment return, demographic makeup of groups.

P 3 Actuaries you can understand 27 Calculate and Track Separately Example (simple numbers not based on this year’s rates) Tier 1 –Basic Rate:4.0% –COL load factor: 100% –COL Rate:4.0% –Settlement Basic:1.0% –COL load factor: 80% –COL Rate:0.8% –TOTAL RATE:9.8%

P 3 Actuaries you can understand 28 Calculate and Track Separately Example (simple numbers not based on this year’s rates) Tier 2 and 3 –Basic Rate:3.0% –COL load factor: 50% –COL Rate:1.5% –Settlement Basic:0.0% –COL load factor: 80% –COL Rate:0.0% –TOTAL RATE:4.5%

P 3 Actuaries you can understand 29 Recommendation Retain current allocation methodology

P 3 Actuaries you can understand 30 Questions