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Attachment 1 CONTRACT AMENDMENT COST ANALYSIS -VALUATION BASIS: dune 30, 2006 SAFETY FIRE PLAN FOR CITY OF PLEASANTON Employer Number: 327 Benefit Description: Section 21548, Pre-Retirement Optional Settlement 2 Death Benefit Actuarial Cost Estimates in General What will this amendment cost? Unfortunately, there is no simple answer. There are two major reasons for the complexity of the answer: First, all actuarial calculations, including the ones in this cost estimate are based on a lot of assumptions about the future -demographic assumptions about the percentage of your employees that will terminate, die, become disabled, and retire in each future year, and economic assumptions about what salary increases each employee receives and the most important assumption: what the assets at CaIPERS will earn for each year into the future until the last dollar is paid to current members of your plan. While CaIPERS has set these assumptions as our best estimate of the real future of your plan, it must be understood that these assumptions are very long term predictors and will surely not be realized each year as we go forward. For example, the asset earnings for the past 15 years at CaIPERS have ranged from -7.2% to 20.1%, yet the 15 year compound return has been 10.0%, well above our assumption. • Second, the very nature of actuarial funding produces the answer to the question of amendment cost as the sum of two separate pieces: The increase in Normal Cost (i.e., the increase in future annual premiums in the absence of surplus or unfunded liability) expressed as a percentage of total active payroll, and 2. The increase in Past Service Cost (i.e., Accrued Liability -representing the current value of the increased benefit for all past service of current members) which is expressed as a lump sum dollar amount. The cost is the sum of a percent of future pay and a lump sum dollar amount (the sum of an apple and an orange if you will). To communicate the total cost, either the increase in Normal Cost (i.e., future percent of payroll) must be converted to a lump sum dollar amount (in which case the result is called the increase in the present value of benefits), or the Past Service Cost (i.e., the lump sum) must be converted to a percent of payroll (in which case the result is the increase in the employer's rate). Converting the Past Service Cost lump sum to a percent of payroll requires a specific amortization period. So, the new employer rate can be computed in many different ways depending on how long one will take to pay for it. And don't forget the first bullet point above; all of these results depend on all of the assumptions being exactly realized. Rate Volatility As is stated above, the cost estimates supplied in this communication are based on a number of assumptions about very long term demographic and economic behavior. Even if these assumptions are exactly realized (terminations, deaths, disabilities, retirements, salary growth, and investment return) there will be differences on a year to year basis. This year to year difference between actual experience and the assumptions is called gains and losses and serve to raise or lower the employer's rates from year to year. So, the rates will bounce around, especially due to the ups and downs of investment returns. The volatility in annual employer rates may be affected by this amendment. The reason is that higher benefits and earlier retirement ages require the accumulation of more assets per member earlier in their career. Rate volatility can be measured by the ratio of plan assets to active member payroll. Higher asset to payroll ratios produce more volatile employer rates. To see this, consider two plans, one with assets that are 4 times active member payroll, and the other with assets that are 8 times active member payroll. In a given year, see what happens when assets rise or fall SO% above or below the actuarial assumption. For the plan with a ratio of 4, this 10 percent gain or loss in assets is the same in dollars as 40% of payroll; and for the plan with a ratio of 8, this is equivalent to 80% of payroll. If this gain or loss is spread over 20 years (and we oversimplify by ignoring interest on the gain or loss), then the first plan's rate changes by 2% of pay while the second plan's rate changes by 4% of pay. November 16, 2007 Page 1