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be required in addition to paying a fixed debt service payment and be more costly in the <br />long run. <br />While continuing the current "pay -as- you -go" is the simplest method in the short run, in <br />the long run, it will result in greater cost as shown in Chart 1 on page 7. The "pay -as- <br />you-go" option does not transfer assets into an irrevocable trust and therefore does <br />nothing to reduce the UAAL. GASB #45 requires that assets be transferred into an <br />irrevocable trust to reduce the UAAL. In order to pre -fund the liability the ARC is <br />contributed annually to a trust. The ARC is composed of two parts; the normal cost and <br />the UAAL. The ARC is the actuarial determined level of employer contribution that <br />would be required on a sustained, ongoing basis to systematically fund both the normal <br />cost and the UAAL. The normal cost is the cost of benefits being earned by active <br />employees each year. The UAAL is the amount owed for past service cost for active <br />and retired employees as of the valuation date. The ARC includes the normal cost and <br />an amortized portion of the UAAL not to exceed a 30 year period. If an employer funds <br />less (or more) than the ARC, the difference is a liability (or asset) known as the net <br />OPEB obligation. As shown on Chart 1, after the UAAL has been paid in 30 years, then <br />the ARC would consist of only the normal cost. <br />Pre funding the OPEB liability would allow the City to allocate funds for the express <br />purpose of funding future OPEB costs with investment earnings being used to reduce <br />the ARC. Further, pre- funding typically involves making longer term investments which <br />result in greater investment earnings that will reduce the amount of taxpayer dollars <br />used for this purpose. This would also allow the City to maintain its favorable bond <br />rating and although pre- funding the ARC is initially more costly than continuing the pay <br />as- you -go strategy, it is less costly over the entire 30 year period. Finally, pre- funding <br />involves an irrevocable trust fund which once established, is used only for pre- funding <br />OPEB costs. Chart 1 highlights a comparison of the "pay -as- you -go" approach and pre <br />funding. <br />Page 8 of 13 <br />