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Review of Actuarial Methodology Issues

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  1. P Review of Actuarial Methodology Issues November 8, 2006

  2. Overview • Determination of Member COL Contributions for Settlement • Cost Allocation among Tiers • Employer • Member COL Contributions

  3. Member Contributions COLA COLA Valuation Based BASIC BASIC Statutory Nature Regular Settlement

  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

  5. Basic – General MembersTier 1 • 31621.5. … the normal rate of contribution … shall be such as will provide an average annuity at age 60 equal to one 200th of the final compensation of members … BASIC 31621.5

  6. Basic – General MembersTier 2 and 3 • 31621.4. … the normal rate of contribution … shall be such as will provide an average annuity at age 60 equal to one 240th of the final compensation of members … BASIC 31621.4

  7. Basic – Safety MembersTier 1 and 2 • 31639.5. The normal rate of contribution shall be such as will provide an average annuity at age 50 equal to one 200th of the final compensation… BASIC 31639.5

  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

  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

  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

  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 160th of the final compensation … BASIC AB 2063

  12. COL Contributions • 31873. Any increases in contributions shall be shared equally between the county or district and the contributing members … COLA

  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

  14. Settlement COL Contributions • Prior Methodology • Allocate COL contributions proportional to Basic using same proportion as Regular Benefits

  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

  16. COL Contributions • FCERA Board previously decided that “Any increases in contributions” means contributions for both Normal Cost and Unfunded Actuarial Accrued Liability.

  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

  18. Cost Allocation Between Tiers • Employer • Members

  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

  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

  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

  22. Alternative Approaches • Same for both tiers • Calculate and track tiers separately • Other approaches could be developed if requested

  23. Same for Both Tiers • Current approach • Simpler recordkeeping • Consistency between tiers

  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%

  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%

  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.

  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%

  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%

  29. Recommendation • Retain current allocation methodology

  30. Questions