Official Statement Airport Commission City and County of San ...

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