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Mr. Bartel explained that it is actually the three highest consecutive years, which typically are the last three. Vice-Mayor Cook-Kallio asked and Mr. Bartel confirmed that "earnings" do not include overtime wages. She asked whether there is any data regarding average earnings and years of service at retirement. Mr. Bartel said not specifically although he does have data pertaining to average pension benefits. Vice-Mayor Cook-Kallio asked and Mr. Bartel confirmed that public employees are not typically subject to Social Security withholdings. Mr. Bartel added that the final average pay is slightly reduced prior to calculating pension benefits for those who do receive Social Security benefits. Councilmember Brown requested clarification on "excess assets" as it related to pension liability and the contribution of"normal cost." Mr. Bartel explained that actuarial assets in excess of the actuarial liability occurred in the 1990s when investment returns were strong. Recent changes to the law require that any agency with excess assets continue to contribute the value of benefits being earned, known as normal cost. Mr. Bartel reviewed changes in retiree data, noting that in 1994 the City had 1 retiree for every 5 active employees. In 2011, this ratio decreased to nearly 1 retiree for every active employee although he noted that Pleasanton is not unique in this regard. He also noted that the greater the number of active employees, the greater the amount of money being invested and the greater the volatility on the investment's return. Vice-Mayor Cook-Kallio asked and Mr. Bartel confirmed that the average length of service to the City is a little over 20 years. He added that the average City benefit provided in 2011 was approximately $31,900 which is down from the last 5 year average of $38,600. He also noted that this only represents the City's portion and not the total pension benefit. Councilmember Brown asked and Mr. Bartel confirmed that the liability valuation includes terminated vested employees, those being individuals who moved on to another public agency prior to retirement. Mr. Bartel presented discussed both the actuarial and market value of assets and determination of the unfunded liability. Using actuarial values, CaIPERS determined the City's unfunded liability as of June 30, 2011 to be $57.2 million. Using a method known as asset smoothing, which mitigates investment volatility, this amount is used to determine the City's contribution rate for the following period. One of the challenges with this method is that during a period of poor investment returns, the contribution is determined using assets that are higher than market assets or those assets that are actually available. He explained that asset smoothing works extremely well in terms of smoothing volatility but not smoothing corrections and has resulted in contribution rates in recent years that were lower than they arguably should have been. Vice-Mayor Cook-Kallio requested clarification on what comprises the unfunded liability. Mr. Bartel explained that it accounts for service already rendered by both active and retired employees as well as assumptions about when active employees will retire in the future, less actuarial assets. He reported that 2001 was the last year in which the City's assets exceed its liability. Since then, the liability has continued to grow at a faster rate than assets in both an actuarial and market sense, although the gap is much greater using market values. He reviewed CaIPERS investment return assumptions, which decreased from 7.75% to 7.5% and ultimately increased the City's contribution rate. CaIPERS will automatically phase in the increase, with half to be applied in FY 2013-14 and the remainder to be applied the following year. While the City's contribution does decrease 0.8% in FY 2013-14 as a result of this phase in, it will increase 0.6% in FY 2014-15 and continue for the next 19 City Council Minutes Page 4 of 11 February 19, 2013