RES 08175 - Laserfiche WebLink

Attachment 1 CONTRACT AMENIDMENT COST ANALYSIS - VAWATION BASIS: Tune 30, 2006 SAFETY FIRE PLAN FOR CITY OF PLEASANTON Employer Number. 327 Benefit DetcNptlon: Sectlon 2154x, Pr+e-Retlrarnent OptlonN Settlement Z iDaatl~ fteneflt Actuarial Cost Estimates in General What will this amendment cost? Unfortunatey, there is no simple answer. There are two major reasons for the complexity of the answer: Flrst, ail actuarial pkuladons, induding the ones in this cost estimate are based on a lot of assumptions about the future - demographk assumptions about ti~ percentage of your employees that will terminate, die, become disabled, and refire in each future year, and economk assumptions about what salary increases each employee receives and the most important assumption: what the assets at Ca1PER5 will earn for each year into the future until the last dollar is paid tp current members of your plan. While CaIPIRS has set these assumptions as our best estimate of the real future of your plan, it must be understood that these assumptions are very krrg term predictors and will surey not be realized each year as we go fonnrard. For example, the asset earnings for the past 15 years at CaIPERS have ranged from -7.296 to 20.196, yet the 15 year compound velum has been 10.096, well above our assumption. ^ Second, the very nature of actuarial funding produces the answer bo the question of amendment cost as the sum of two separate pieces: i. The increase in Nomwl Cost (f.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., Aarued Uablllty -representing the current value of the Increased benefit for all past servke of current members) which is expressed as a lump sum tidier amourrt. The cost is the sum of a pecent of future pay and a lump sum dollar amount (the sum of an apple and an orange if you will). To communkabe the total cost, either the Increase In Normal Cost (i.e., future percent of payroll) must be converted bo a lump sum tidier amount (in which case the resuR is called the increase in the present value of benefits), or fire Past Servke Cost (i.e., the lump sum) must be converted bo a percent of payroll (in whkh case die result is the inaease in the employer's rate). Converting the Past Service Cost lump sum bo a percent of payroll requires a spedfic 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 dont forget the first bullet point above; all of these results depend on all of the assumptions being exadiy realized. Rato Volatility As is stated above, the cost estimates supplied in this communication are based on a number of assumptions about very long term demographk and economk behavior. Even if these assumptions are exadiy realized (terminations, deaths, disabilitles, retlrements, salary growth, and investment return) there will be differences on a year m year basis. This year to year difference between actual experience and the assumptions is called gains and lenses and serve bo raise or knnrer the employers rates from year to year. So, ti~ rates will bounce around, espedaly due to the ups and downs of irnestment returns. The volatility in annual employer rates may be affeded by this amendment. The reason is that higher benefits and earlier retlrement ages require the aaumulation of more assets per member earlier in their career. Rabe volatility can be measured by the raft of plan assets to active member payroll. Higher asset to payrdl ratios produce more volatile employer rates. To see this, consider two plans, one with assets that are 4 times adaive member payrdl, and the other with assets that are 8 rimes active member payroN. In a given year, see what happens when assets rise or faN 1096 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 4096 of payroll; and for the plan with a ratio of 8, this is equivalent bo 8096 of payrol. If this gain or loss is spread over 20 years (and we oversimplify try ignoring interest on the gain or loss), then the first plan's rate changes by 296 of pay while the second plan's rate changes by 496 of pay. November 16, 2007 ~ i