Fritzie Archuleta, ASA, MAAA, Senior Pension Actuary Actuarial Office

 What do actuaries do?  The Big Picture  Setting the Employer Contribution Rate  Experience Study  What do you mean I’m Pooled?  What can I do now?  What do I look for in my report?

 An actuary puts a price on every individual life in a given plan  The price of all members in the plan is added up  We compare the total to the assets the plan has on hand  We make sure there are adequate assets to pay the benefits when they come due

 CalPERS public agency plans are pre-funded  Plan assets come from three different sources (ER Contributions, EE Contributions, Investment Returns)  Most of the benefits are paid through investment earnings  CalPERS funding method is designed to collect contributions as a level percent of payroll over the members working career

“Total dollars needed today to fully fund the pension plan for current members in the plan.”  Includes all service that either has been earned or will be earned  The number is only as accurate as our assumptions are  Good estimate at one point in time

“Annual premium cost associated with one year of service accrual.”  Factors that determine the Normal Cost ◦ Assumptions ◦ Expected investment return ◦ Entry age ◦ Plan provisions

“The value of the benefits earned to date by member currently in the plan.”  Desired level of assets to have on hand

Present Value of Benefits Accrued Liability Future NC Contributions

 Market Value of Assets: Market price that pension assets could be sold Actuarial Value of Assets  Actuarial Value of Assets: Value of assets used to set your annual contribution rate

 Why use an Actuarial Value of Assets? ◦ Market returns are too volatile, would result in volatile rates  How are Actuarial Value of Assets Determined? ◦ The formula can be found in Appendix A of your report ◦ In the 2009 valuation CalPERS modified our smoothing policy to give agencies more time to prepare for increases due to the large investment loss in

 The difference between smoothed assets and accrued liabilities

Actuarial Value of Assets Unfunded Liability Future NC Contributions Present Value of Benefits Accrued Liability Future NC Contributions

 Every employer rate is made up of two parts ◦ The normal cost or annual premium  pays for future benefit accruals ◦ The amortization bases payment  pays for any deficit or surplus accrued over the years

 The normal cost or annual premium pays for service earned in the coming year  Our funding policy is designed to keep this % level from year to year

 What events affect the normal cost %? ◦ Assumption Change – we implemented a new set of assumptions in the 2009 valuations ◦ Contract amendments ◦ Fluctuation of Aggregate Entry Age of Actives in your plan

 The amortization bases payment gets your plan back to 100% funded  How do we come up with the amortization bases payment? ◦ We compare cost of that plan to assets on hand ◦ If liability is greater, plan needs more assets to get to 100% ◦ If assets are greater, plan needs less assets to get to 100%

Salary Retirements Death Amendments Disability Investment Return Benefit Payouts Contributions LiabilitiesAssets

 Most plans today are underfunded  Each piece of UL/Surplus is attributed to different sources ◦ All gains and losses ◦ Increase in liability due to amendments ◦ Assumption/methodology changes ◦ “Fresh Start”

 Imagine a homeowner’s journey through life ◦ They buy a house for fair market value ◦ Each year the property value goes up or down (gain/loss) ◦ They take out an equity loan for college (assumption change) ◦ They may take out an equity line to remodel (amendment) ◦ Then they may decide they want one payment and consolidate all three loans (Fresh start)

These bases can be found on page 13 of your report for non-pooled plans and on page 13 of section 2 for pooled plans Amounts for Fiscal 2009/2010 Reason for Base Date Established Amortization Period Balance 6/30/07 Expected Payment 2007/2008 Balance 6/30/08 Expected Payment 2008/2009 Balance 6/30/09 Scheduled Payment for 2009–2010 Payment As Percentage of Payroll (GAIN)/LOSS06/30/0730$2,373,512$52,059$2,503,421$177,915$2,512,756$150, % PAYMENT (GAIN)/LOSS06/30/0730$(10,815,363)$(688,336)$(10,939,041)$(701,856)$(11,058,271)$(664,061)(1.853%) BENEFIT CHANGE06/30/0216$10,531,712$851,787$10,463,742$879,471$10,361,767$908, % BENEFIT CHANGE06/30/0316$677,157$54,767$672,787$56,547$666,231$58, % ASSUMPTION CHANGE06/30/0316$4,397,844$355,690$4,369,461$367,250$4,326,879$379, % METHOD CHANGE06/30/0417$(771,217)$(60,198)$(768,499)$(62,155)$(763,539)$(64,175)(0.179%) TOTAL$6,393,645$565,769$6,301,871$717,172$6,045,823$768, %

 The bottom line: annual payment by employer is sum of normal cost plus or minus the amount needed to bring actual assets back in line with accrued liability Your CalPERS Employer Contribution Rate Normal Cost Dollars needed + Amortization Bases of Unfunded Liability Expected Payroll of Active Employees = ÷

Actuarial Value of Assets Unfunded Liability Future NC Contributions Present Value of Benefits Accrued Liability Future NC Contributions Actuarial Value of Assets Unfunded Liability Future Contributions CY Normal Cost CY Amortization

“Looking in the rear view mirror to drive forward.”  Some key results ◦ People are living longer ◦ Miscellaneous employees are retiring sooner than we expected ◦ Safety employees are retiring later than we expected ◦ Higher salaries for people with longer service

“Looking in the rear view mirror to drive forward.”  Translation to numbers… ◦ Agencies under the and can expect roughly a 0.4% increase to their rate ◦ Agencies under the AB616 formulas can expect an increase anywhere from 1.5% to 3.0% of pay ◦ Safety plans can expect an increase anywhere from 1.5% to 3.5% of pay

Concepts that are unique to pooling  Sharing the risk ◦ Normal cost  All employers will eventually have the same net cost  Surcharges account for additional optional benefits ◦ Gains and losses (UL/Surplus)  Shared by all in the pool since June 2003

Concepts that are unique to pooling  More than just 2 components to your rate ◦ Normal cost components  Net employer normal cost  Optional benefit surcharges  Normal cost phase-out ◦ Amortization Bases component  Risk pool’s amortization base  Agency’s side fund

Side Fund-What is it?  Represents the remaining balance of your unfunded Liability from June 30, 2003 ◦ Behaves like a mortgage account ◦ Plan Charges 7.75% ◦ Payments are on a set amortization schedule ◦ Agency has complete control over the balance

What Can I do now?

 3 most common solutions to cutting costs ◦ Reduce or eliminate Employer Paid Member Contributions ◦ Implement Cost Sharing ◦ Open up a Second Tier

 Side fund payoff option for pooled plans ◦ Pooled plans can opt to pay off their side fund ◦ Rate will automatically be reduced ◦ Side fund balance will not return without agency’s consent

What Do I Look For in My Report?

Future Contribution Rates The exhibit below displays the required employer contribution rate and Superfunded status for 2011/2012 along with estimates of the contribution rate for 2012/2013 and 2013/2014 and the probable Superfunded status for 2012/2013. The estimated rate for 2012/2013 is based solely on a projection of the investment return for fiscal 2009/2010, namely 11.0%. The estimated rate for 2013/2014 uses the valuation assumption of 7.75% as the investment return for fiscal 2010/2011. See Appendix D, “ Investment Return Sensitivity Analysis ”, for rate projections under a variety of investment return scenarios. Please disregard any projections that we may have provided to you in the past. Employer Contribution rates for 3 Fiscal Years Fiscal YearEmployer Contribution RateSuperfunded? 2011/ %NO 2012/ % (projected)NO 2013/ % (projected)N/A Member contributions (whether paid by the employer or the employee) are in addition to the above rates. The estimates for 2012/2013 and 2013/2014 also assume that there are no future amendments and no liability gains or losses (such as larger than expected pay increases, more retirements than expected, etc.). This is a very important assumption because these gains and losses do occur and can have a significant impact on your contribution rate. Even for the largest plans, such gains and losses often cause a change in the employer ’ s contribution rate of one or two percent and may be even larger in some less common instances. These gains and losses cannot be predicted in advance so the projected employer contribution rates are just estimates. Your actual rate for 2012/2013 will be provided in next year ’ s report. Cover page Non Pooled Report

Page 5 Non Pooled Report Required Contributions

Appendix D-1 Non Pooled Report

Cover page Section 1 Pooled Report

Page 3 Section 1 Pooled Report

Page 5 Section 1 Pooled Report

Appendix E-5 Section 2 Pooled Report