1. Board Retreat – Oct 20, 2011 FCERA 2011 Retirement Board Retreat October 20, 2011 Paul Angelo, FSA Andy Yeung, ASA The Segal Company, San Francisco 5155948v2

2. FCERA 2011 Board Retreat – Actuarial Topics Slide 2 Outline of Discussion Part One  Financial Impact of Salary Reductions  Different types of salary reductions  Impact on Retirement Benefits  Impact on Actuarial Valuation – Costs and Liabilities  Current Actuarial Topics  Model funding policies  Update on GASB Exposure Drafts Part Two  Employer Contribution Equity Policy

3. FCERA 2011 Board Retreat – Actuarial Topics Slide 3 Different kinds of salary reductions  Individual salary reductions  Base salary reductions or furloughs (forced part-time),  Other reductions (e.g., lower shift premiums)  Permanent or temporary  Explicitly temporary or temporary in practice  Workforce reductions  Through layoffs, attrition (hiring freeze) or both  Permanent or temporary  Explicitly temporary or temporary in practice

4. FCERA 2011 Board Retreat – Actuarial Topics Slide 4 Remember:  Basic question #1: will individual salary reductions actually reduce future benefit payments  Basic question #2: will total payroll reductions affect the timing of future contributions C + I = B + E Contributions + Investment Income equals Benefit Payments + Expenses

5. FCERA 2011 Board Retreat – Actuarial Topics Slide 5 Salary Reduction: Impact on Benefits  Individual salary reductions (not layoffs)  Policy option for temporary reductions: no impact  Continue to pay employer and member contributions on unreduced (full time) salary  Continue to calculate benefit on unreduced salary  Permanent reductions mean lower projected benefits  Short term impact more certain than longer term  Use current final average salary to calculate benefit until salary increases resume in the future  May accelerate retirements due to smaller future benefit increases

6. FCERA 2011 Board Retreat – Actuarial Topics Slide 6 Salary Reduction: Impact on Costs  Employer contribution = Normal Cost + amortization of Unfunded Actuarial Accrued Liability (UAAL)  For both Normal Cost and UAAL payments:  First calculate as a dollar amount  Then divide by payroll to get NC rate and UAAL rate  These two cost components behave differently when payroll is reduced  Must consider impact on each component separately  Generally similar impact whether individual salary or workforce reductions (assuming they are permanent)

7. FCERA 2011 Board Retreat – Actuarial Topics Slide 7 Actuarial Value of Assets Unfunded Actuarial Accrued Liability Amortization of Unfunded Actuarial Accrued Liability Normal Cost Present Value of Future Normal Costs Annual Cost

8. FCERA 2011 Board Retreat – Actuarial Topics Slide 8 Salary Reduction: Impact on Costs  Only considering permanent salary reductions  Individual salary or workforce reductions  Normal cost impact  Normal Cost rate generally unchanged  Normal Cost dollars reduced  Unchanged rate applied to smaller payroll  UAAL cost rate impact  UAAL dollars relatively unchanged (see next slide)  UAAL cost rate increased  Unchanged dollars spread over smaller payroll

9. FCERA 2011 Board Retreat – Actuarial Topics Slide 9 Salary Reduction: Impact on Costs  Impact of (permanent) salary reduction on UAAL amount – depends on type of salary reduction  Actuarial gain from individual salary reductions OR layoffs will reduce the UAAL somewhat  No gain if workforce reduced by attrition  Final UAAL rate impact depends on whether UAAL reduction or UAAL rate increase (prior slide) is greater  Rate impact determined in the following valuation after pay reduction is reflected in the data

10. FCERA 2011 Board Retreat – Actuarial Topics Slide 10 Q U E S T I O N S

11. FCERA 2011 Board Retreat – Actuarial Topics Slide 11 Current Actuarial Topics  Model funding policy for California Public Pension Plans  GASB Exposure Draft update

12. FCERA 2011 Board Retreat – Actuarial Topics Slide 12 Employer Contribution Equity Policy  FCERA is a cost-sharing multiple employer plan  Different Normal Cost Rate by General/Safety and by tier to recognize different benefit level  Different UAAL Rate by General/Safety only  Contribution rates developed using actuarial assumptions based on experience from all General/Safety employers  Actuarial gains/losses from deviation between actual and assumed experience will decrease/increase UAAL  Change in UAAL Rate from deviation in experience shared by all employers within General/Safety

13. FCERA 2011 Board Retreat – Actuarial Topics Slide 13 Employer Contribution Equity Policy  Policy adopted by FCERA in 2010  Process to review deviation between actual and assumed experience by employer.  Examples include:  Reduction of an employer’s aggregate payroll overtime  Deviance of compensation practices at an employer  Higher incidences of service connected disability experience at an employer  Exclusions: demographic changes (e.g., mortality experience) outside of an employer’s control

14. FCERA 2011 Board Retreat – Actuarial Topics Slide 14 Employer Contribution Equity Policy  Policy requirements:  FCERA staff to review experience at each employer at the same time as the triennial experience analysis  Board to consider magnitude of deviation  Conduct further review  Direct actuary to adjust contribution rate requirements for specific employers to reflect deviations

15. FCERA 2011 Board Retreat – Actuarial Topics Slide 15 Employer Contribution Equity Policy  Possible event for upcoming review:  Salary reductions only for County employees and not by the other employers

16. FCERA 2011 Board Retreat – Actuarial Topics Slide 16 Q U E S T I O N S