AgdaPkt 2006-05-08 - Laserfiche WebLink

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6.10 Page 2 This past year PERS has changed how it amortizes several liabilities in a manner that has resulted in a significant decrease in the City's required contribution for FY2006/07 and, presumably, in years beyond. In the past all liabilities (except "gains/losses") were amortized over a fixed period of time with the eventual goal of extinguishing each liability at a fixed date in the future - in much the same way that a traditional residential mortgage is paid. Gainsllosses were paid off at the rate of 10% per year. The PERS Board of Directors approved several changes in the actuarial methodology used to calculate the FY2006/07 employer rates including using a "rolling 30-year amortization" to amortize certain líabilities resulting from "gains/losses" and "payment losses." The rolling 30-year amortization results in a lower contribution from the employer as no principal is scheduled to be paid each year - only interest. Not only does this arrangement result in the principal amount of the liability not being paid, but it results in negative amortization as the interest paid on this liability is 6% while the PERS interest assumption on investment returns is 7.75%. Accordingly the unfunded liability will grow at 1.75% annually if CalPERS interest and salary assumptions are realízed and no changes are made. Since the 1.75% negative amortization or growth in the unfunded liability is less than inflation and will likely be less than payroll growth, the unfunded liabilíty as a percentage of payroll should decline although the real dollar value will be increasing. In theory this liability will be reduced or eliminated should the investment returns realized by PERS exceed the 7.75% actuarially assumed rate of return. Given that this past year PERS has also changed their asset smoothing period from three years to fifteen years we believe it will take longer for employers to obtain the benefits of actual investment returns exceeding assumed investment returns because generally only 1/15th of such excess will initially be added to the actuarial value of the plan's assets. The effect of this change is more pronounced on the City's safety plan due to the nature and source of the liabilities within this plan. The table below compares the employer contribution rates for both the safety and miscellaneous plans for FY 2005/06 and FY 2006/07: Normal cost Liability amortization Employer Contributions - Percent of Payroll Safety Plan Miscellaneous Plan 2005/06 2006/07 2005/06 2006/07 17.5% 17.7% 7.5% 7.4% 19.1% 11.9% 3.7% 3.0% 36.6% 29.6% 11.2% 10.4% The following table translates these contribution rates into dollar amounts and shows the savings the City should realize in FY2006/07 compared to FY2005/06: Normal cost Liability amortization Employer Contributions - $ Safety Plan Increased Costs/(Savings) 2005/06 2006/07 $2,997,806 $3,144,471 3,281,475 2,110,229 $6,279,281 $5.254,700 146,665 (1 ,171 ,246) (1,024,581 ) 2