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pension funding plan determines exactly how much the employer and employee should contribute each <br />year to ensure that the benefits being earned will be securely funded in a systematic fashion. <br />Plan assets come from three distinct sources including employee contributions, employer contributions <br />and investment income. See Figure 1, "Funding a Pension Plan," Attachment A. <br />Because actuarial assumptions are for the long term, demographic and economic assumptions can vary <br />from actual experience. There are many moving parts such as mortality experience (how long retirees <br />live, for example), retirement rates, disability incidences, salary growth, investment returns and more. An <br />actuarial plan valuation is therefore prepared each year to true -up contributions levels to better match <br />actual experience. <br />Discussion: <br />The most recent actuarial report presents the results of the June 30, 2013 California Public Employees' <br />Retirement System (Cal PERS) valuation of both the Miscellaneous and the Public Safety Plans for the <br />City of Newport Beach. The date of the valuation - June 30, 2013 - is noteworthy in that it is now 16 1/2 <br />months in arrears, but it is also the best formal information we have. This report sets the fiscal year 2015- <br />16 required contribution rates. <br />Changes Impacting the Valuation Results <br />On April 17, 2013, the California Public Employees' Retirement System (CaIPERS) Board of <br />Administration adopted new amortization and smoothing policies. The change became effective with the <br />current valuation (June 30, 2013) that sets the 2015 -16 contribution rates. With this change, CalPERS now <br />employs an amortization and smoothing policy that will pay for all gains and losses over a fixed 30 -year <br />period with the increases or decreases in the rate spread directly over a 5 -year period. Prior to this <br />change, CalPERS employed an amortization and smoothing policy which spread investment returns over <br />a 15 -year period with experience gains and losses paid for over a rolling 30 -year period. This policy <br />resulted in a negative amortization of the City's unfunded liability (e.g., the unfunded liability would <br />continue to grow year after year under the previous policy). <br />The former rate smoothing policy also employed the use of an Actuarial Value of Assets (AVA) <br />methodology to set contribution rates. The AVA represented a moving average, of sorts, intended to <br />smooth out the everyday ups and downs of the market. While the AVA was known to reduce rate volatility, <br />it also tended to understate the long term funding risk in extreme market conditions. The AVA <br />methodology lagged significantly behind the Market Value of Assets (MVA). During the course of the <br />recession, the AVA strayed so far from the MVA, it became clear that the AVA was no longer a viable or <br />responsible option. Despite recent positive investment returns, the elimination of the AVA, created an <br />asset adjustment (and in increase in unfunded liability) of nearly $80 million. <br />Chart 1, "Asset Value History," in Attachment A, depicts the two asset values over time and the gap that <br />was created during the past recession. <br />Key Valuation Results <br />Net of positive investment returns, annual contributions and benefit payments, the City's unfunded pension <br />liability decreased $17 million from $275 million to $258 million despite the $80 million adjustment <br />mentioned above. The components of the unfunded liability are displayed in Table 1, in Attachment A. <br />The accrued liability is the value of benefits earned to date by members currently in the plan. When a <br />plan's Market Value of Assets (MVA) is less than its Accrued Liability, the difference is the plan Unfunded <br />Liability. The "Normal Cost" represents the annual pension cost of service for the upcoming fiscal year for <br />active employees. If an Unfunded Liability exists, the plan will have to pay contributions exceeding the <br />normal cost of the plan to pay -down the Unfunded Actuarial Liability (UAL). This amount is associated <br />with past service periods and is due regardless of whether any further service credit is earned. Based on a <br />current attribution analysis of the UAL, 70% of the UAL is attributable to plan participants no longer <br />employed by the City. <br />Seventy percent (70 %) is an important statistic - it means, among other things, that current employees are <br />paying for the retirement costs of past employees. It also means that 70% of the UAL problem is set inP7 -2 <br />