Official Statement Airport Commission City and County of San ...
Official Statement Airport Commission City and County of San ...
Official Statement Airport Commission City and County of San ...
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long-term wage/inflation assumption <strong>and</strong> a long-term consumer price index assumption. At its November 2008<br />
meeting, after review <strong>of</strong> the analysis <strong>and</strong> recommendation prepared by the consulting actuarial firm, the Retirement<br />
Board reduced the long-term investment earnings assumption from 8.00% to 7.75%. The Retirement Board did not<br />
change the other two long-term economic assumptions, leaving the long-term wage/inflation assumption at 4.50%<br />
per annum <strong>and</strong> the consumer price index assumption at 3.25% per annum. These economic assumptions along with<br />
periodic demographic studies are utilized to prepare the valuation <strong>of</strong> the plan each year. The latest report as <strong>of</strong><br />
June 30, 2009 was issued in January 2010. Upon receipt <strong>of</strong> the consulting actuarial firm’s valuation report,<br />
Retirement System staff provides a recommendation to the Retirement Board as to the Retirement Board’s<br />
acceptance <strong>of</strong> the consulting actuary’s valuation report. In connection with such acceptance, the Retirement Board<br />
acts to set the annual employer contribution rates required by the Retirement System as detailed in the report.<br />
The actuary <strong>and</strong> the Retirement Board determine the actuarially required contribution amounts using three<br />
related calculations:<br />
First, the normal cost is established for the Retirement System. The normal cost <strong>of</strong> the system<br />
represents the portion <strong>of</strong> the actuarial present value <strong>of</strong> benefits that the Retirement System will be expected<br />
to fund that is attributable to a current year’s employment. The Retirement System uses the entry age<br />
normal cost method, which is an actuarial method <strong>of</strong> calculating the anticipated cost <strong>of</strong> pension liabilities,<br />
designed to fund promised benefits over the average future life <strong>of</strong> the Retirement System members.<br />
Second, the contribution calculation takes account <strong>of</strong> the amortization <strong>of</strong> a portion <strong>of</strong> the amount<br />
by which the actuarial value <strong>of</strong> Retirement System liabilities exceeds the actuarial value <strong>of</strong> Retirement<br />
System assets, such amount being known as an “unfunded accrued actuarial liability” or “UAAL.” If the<br />
actuarial value <strong>of</strong> assets exceeds the actuarial value <strong>of</strong> liabilities, the contribution amount is adjusted to<br />
reflect this excess by decreasing it in an amount equal to the excess <strong>of</strong> actuarial assets over actuarial<br />
liabilities, divided by the present value <strong>of</strong> projected salaries for the next 15 years.<br />
The UAAL is the difference between estimated liabilities <strong>and</strong> the value <strong>of</strong> smoothed plan assets<br />
<strong>and</strong> can be thought <strong>of</strong> as a snapshot <strong>of</strong> the funding <strong>of</strong> benefits as <strong>of</strong> the valuation date. There are a number<br />
<strong>of</strong> assumptions <strong>and</strong> calculation methods that bear on each side <strong>of</strong> this asset-liability comparison. On the<br />
asset side, the actuarial value <strong>of</strong> Retirement System assets is calculated using a five-year smoothing<br />
technique, so that gains or losses in asset value are recognized over that longer period rather than in the<br />
immediate time period such gain or loss is identified. As for calculating the pension benefit liability,<br />
certain assumptions must be made about future costs <strong>of</strong> pension benefits to generate an overall liability<br />
amount. If the Retirement System’s results are better or worse than the estimated UAAL, the result is<br />
called an actuarial gain or loss, respectively, <strong>and</strong> under the Actuarial Methods Policy <strong>of</strong> the Retirement<br />
Board any such gain or loss is amortized over a 15-year period. Similarly, if the estimated liabilities<br />
change due to changes in the aforementioned assumptions, the effect <strong>of</strong> such changes is also amortized over<br />
a 15-year period.<br />
Third, after calculating the normal cost <strong>and</strong> the adjustment for UAAL, the actuary amortizes<br />
supplemental costs for the various member benefit plans. Supplemental costs are additional costs resulting<br />
from the past service component <strong>of</strong> Retirement System benefit increases. In other words, when the Charter<br />
is amended to extend additional benefits to some or all beneficiaries <strong>of</strong> the Retirement System, the<br />
Retirement System’s payment liability is increased by the amount <strong>of</strong> the new benefit earned in connection<br />
with the service time already accrued by the then-current beneficiaries. These supplemental costs for each<br />
beneficiary are amortized over no more than 20 years.<br />
The actuary combines the three calculations described above to arrive at a total contribution<br />
requirement for funding the Retirement System in that fiscal year. This total contribution amount is<br />
satisfied from a combination <strong>of</strong> employer <strong>and</strong> employee contributions. Employee contributions are<br />
m<strong>and</strong>ated by the Charter. Sources <strong>of</strong> payment may be the subject <strong>of</strong> collective bargaining agreements with<br />
each union or bargaining unit. The employer contribution is established by Retirement Board action each<br />
year <strong>and</strong> is expressed as a percentage <strong>of</strong> salary applied to all wages covered under the Retirement System.<br />
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