CaPERS New Category Actuarial Valuation - December 31, 2024 Proposed PEPRA Safety Police Plan of the City of Lancaster
2.7% @ 57 PEPRA Safety with 3-year Final Average Compensation, 0% Prior Service CaPERS ID: 4498806845
Schedule of Plan's Amortization Bases
The schedule of the plan's amortization bases is below. Amortization bases represent sources of Unfunded Accrued Liability (UAL).
The assets, liabilities, and funded status of the plan are measured as of the date the new category is adopted: December 31, 2024.
The required employer contributions determined by the valuation are for Fiscal Year 2025-26.
Ramp Escalat- Amorti- Scheduled
Date Up/Down zation Balance Payment Balance Payment
Reason for Base Established 2025-26 Period 12/31/24 2024-25 6/30/25 2025-26 PRIOR SERVICE 12/31/24 No Ramp 0.000% N/A $0 $O $0
TOTAL $0 $0 $0 $0
If the total UAL is negative (i.e., plan has a surplus), the scheduled payment is $0, because the minimum required contribution under PEPRA must be at least equal to the normal cost.
Rate Plan belonging to the Safety Pool Page 9
CaPERS New Category Actuarial Valuation - December 31, 2024 Proposed PEPRA Safety Police Plan of the City of Lancaster
2.7% @ 57 PEPRA Safety with 3-year Final Average Compensation, 0% Prior Service CaPERS ID: 4498806845
PEPRA Member Contribution Rates
The California Public Employees' Pension Reform Act of 2013 (PEPRA) established new benefit formulas, final compensation period, and contribution requirements for "rew" employees (generally those first hired into a CalPERS- covered position on or after January 1, 2013). In accordance with Government Code Section 7522.30(b), "new members ... shall have an initial contribution rate of at least 50% of the normal cost rate." The normal cost rate is dependent on the plan of retirement benefits, actuarial assumptions and demographics of the risk pool, particularly members' entry age.
Should the total normal cost rate change by more than 1% from the base total normal cost rate, the new member rate shall be 50% of the new normal cost rate rounded to the nearest quarter percent.
The table below shows the determination of the PEPRA member contribution rates effective July 1, 2024, based on 50% of the total normal cost rate as of the June 30, 2022 valuation.
Basis for Current Rate Rates Effective July 1, 2024
Total Member Total Change Member
Rate Plan Benefit Group Name Normal Normal
Identifier Rate Change Needed Rate
Cost Cost
TBD PEPRA Safety Police Plan 27.29% 13.75% 27.51% 0.22% No 13.75% The table below shows the determination of the PEPRA member contribution rates effective July 1, 2025, based on 50% of the total normal cost rate as of the June 30, 2023 valuation.
Basis for Current Rate Rates Effective July 1, 2025
Rate Plan Total Member Total Change Member
Identifier Benefit Group Name Normal Rate Normal Change Needed Cost Cost Rate
TBD PEPRA Safety Police Plan 27.29% 13.75% 27.74% 0.45% No 13.75% Rate Plan belonging to the Safety Pool Page 10
Risk Analysis
• Future Investment Return Scenarios 12
• Discount Rate Sensitivity 13
• Mortality Rate Sensitivity 13
• Maturity Measures 14
• Funded Status - Termination Basis 16
• Funded Status - Low-Default Risk Basis 17
CaPERS New Category Actuarial Valuation - December 31, 2024 Proposed PEPRA Safety Police Plan of the City of Lancaster
2.7% @ 57 PEPRA Safety with 3-year Final Average Compensation, 0% Prior Service CaPERS ID: 4498806845
Future Investment Return Scenarios
Analysis using the investment return scenarios from the Asset Liability Management process completed in 2021 was performed to determine the effects of various future investment returns on required employer contributions. The projections below reflect the impact of the CaPERS Funding Risk Mitigation Policy. The projections also assume that all other actuarial assumptions will be realized and that no further changes in assumptions, contributions, benefits, or funding will occur.
The first table shows projected contribution requirements if the fund were to earn either 3.0% or 10.8% annually. These alternate investment returns were chosen because 90% of long-term average returns are expected to fall between them over the 20-year period ending June 30, 2043.
Assumed Annual Return Projected Employer Contributions
FY 2023-24
through 2042-43 2026-27 2027-28 2028-29 2029-30 2030-31
3.0% (5"h percentile)
Normal Cost Rate 14.0% 14.0% 14.0% 14.0% 14.0%
UAL Contribution $0 $50 $280 $800 $1,700
10.8% (95th percentile)
Normal Cost Rate 14.4% 14.2% 14.6% 14.9% 14.8%
UAL Contribution $0 $0 $0 $0 $0
Required contributions outside of this range are also possible. In particular, whereas it is unlikely that investment returns will average less than 3.0% or greater than 10.8% over a 20-year period, the likelihood of a single investment return less than 3.0% or greater than 10.8% in any given year is much greater. The following analysis illustrates the effect of an extreme, single year investment return.
The portfolio has an expected volatility (or standard deviation) of 12.0% per year. Accordingly, in any given year there is a 16% probability that the annual return will be -5.2% or less and a 2.5% probability that the annual return will be -17.2% or less. These returns represent one and two standard deviations below the expected return of 6,8%.
The following table shows the effect of a one or two standard deviation investment loss in FY 2023-24 on the FY 2026-27 contribution requirements. Note that a single-year investment gain or loss decreases or increases the required UAL contribution amount incrementally for each of the next five years, not just one, due to the 5- year ramp in the amortization policy. However, the contribution requirements beyond the first year are also impacted by investment returns beyond the first year. Historically, significant downturns in the market are often followed by higher than average returns. Such investment gains would offset the impact of these single year negative returns in years beyond FY 2026-27.
Required Projected
Assumed Annual Return for Employer Employer
Fiscal Year 2023-24 Contributions Contributions
2025-26 2026-27
(17.2)% (2 standard deviation loss)
Normal Cost Rate 13.99% 14.0%
UAL Contribution $0 $0
(5.2)% (1 standard deviation loss)
Normal Cost Rate 13.99% 14.0%
UAL Contribution $0 $0
•
CaPERS New Category Actuarial Valuation - December 31, 2024 Proposed PEPRA Safety Police Plan of the City of Lancaster
2.7% @57 PEPRA Safety with 3-year Final Average Compensation, 0% Prior Service CaPERS ID: 4498806845
Discount Rate Sensitivity
Sensitivity to the Real Rate of Return Assumption
1% Lower Current 1% Higher
As of December 31, 2024 Real Return Rate Assumptions Real Return Rate Discount Rate 5.8% 6.8% 7.8%
Price Inflation 2.3% 2.3% 2.3%
Real Rate of Return 3,5% 4.5% 5,5%
a) Total Normal Cost 34.92% 27.74% 22.31%
b) Accrued Liability $0 $0
c) Market Value of Assets $0 $0
d) Unfunded Liability/(Surplus) [(b) - (c)] $0 $0
e) Funded Ratio N/A N/A N/A
Sensitivity to the Price Inflation Assumption
1% Lower Current 1% Higher
As of December 31, 2024 Price Inflation Assumptions Price Inflation Discount Rate 5.8% 6.8% 7.8%
Price Inflation 1.3% 2.3% 3.3%
Real Rate of Return 4.5% 4.5% 4.5%
a) Total Normal Cost 29.30% 27.74% 25.06%
b) Accrued Liability $0 $0 $0
c) Market Value of Assets $0 $0 $0
d) Unfunded Liability/(Surplus) [(b) - (c)] $0 $0 $0
e) Funded Ratio N/A N/A N/A
Mortality Rate Sensitivity
10% Lower Current 10% Higher
As of December 31, 2024 Mortality Rates Assumptions Mortality Rates a) Total Normal Cost 28.10% 27.74% 27.40%
b) Accrued Liability $0 $0 $0
c) Market Value of Assets $O $0 $0
d) Unfunded Liability/(Surplus) I(b) - (c)] $0 $0 $0
e) Funded Ratio N/A N/A N/A
Rate Plan belonging to the Safety Pool Page 13
CaPERS New Category Actuarial Valuation - December 31, 2024 Proposed PEPRA Safety Police Plan of the City of Lancaster
2.7% @ 57 PEPRA Safety with 3-year Final Average Compensation, 0% Prior Service CaPERS ID: 4498806845
Maturity Measures
As pension plans mature they become more sensitive to risks. Understanding plan maturity and how it affects the ability of a pension plan sponsor to tolerate risk is important in understanding how the pension plan is impacted by investment return volatility, other economic variables, and changes in longevity or other demographic assumptions.
Since it is the employer that bears the risk, it is appropriate to perform this analysis on a pension plan level considering all rate plans. The following measures are for one rate plan only. One way to look at the maturity level of all CaPERS and its plans is to look at the ratio of a plan's retiree liability to its total liability. A pension plan in its infancy will have a very low ratio of retiree liability to total liability. As the plan matures, the ratio starts increasing. A mature plan will often have a ratio above 60%-65%.
Ratio of Retiree Accrued Liability to
Total Accrued Liability December 31, 2024
1. Retired Accrued Liability
2. Total Accrued Liability 0
3. Ratio of Retiree AL to Total AL [(1) = (2)] N/A
Another measure of maturity level of CaPERS and its plans is to look at the ratio of actives to retirees, also alled the support ratio. A pension plan in its infancy will have a very high ratio of active to retired members. A he plan matures and members retire, the ratio declines. A mature plan will often have a ratio near or below one To calculate the support ratio for the rate plan, retirees and beneficiaries receiving a continuance are each counted as one, even though they may have only worked a portion of their careers as an active member of this rate plan. For this reason, the support ratio, while intuitive, may be less informative than the ratio of retiree liability to total accrued liability above.
For comparison, the support ratio for all CaPERS public agency plans as of June 30, 2022, was 0.77 and was calculated consistently with how it is for the individual rate plan. Note that to calculate the support ratio for all public agency plans, a retiree with service from more than one CaPERS agency is counted as a retiree more than once.
Support Ratio December 31, 2024
1. Number of Actives 3
2. Number of Retirees
3. Support Ratio [(1) = (2)] N/A
Rate Plan belonging to the Safety Pool Page 14
CaPERS New Category Actuarial Valuation - December 31, 2024 Proposed PEPRA Safety Police Plan of the City of Lancaster
2.7% @ 57 PEPRA Safety with 3-year Final Average Compensation, 0% Prior Service CaPERS ID: 4498806845
Maturity Measures (continued)
The actuarial calculations supplied in this communication are based on various assumptions about long-term demographic and economic behavior. Unless these assumptions (e.g., terminations, deaths, disabilities, retirements, salary growth, investment return) are exacily realized each year, there will be differences on a vear- to-year basis. The year-to-year differences between actual experience and the assumptions are called actuarial gains and losses and serve to lower or raise required emplover contributions from one vear to the next Therefore, employer contributions will inevitably fluctuate, especially due to the ups and downs of investment returns.
Asset Volatility Ratio
Shown in the table below is the asset volatility ratio (AVR), which is the ratio of market value of assets to payroll.
Plans that have higher AVR experience more volatile employer contributions (as a percentage of payroll) due to investment return. For example, a plan with AVR of 8 may experience twice the contribution volatility due to investment return volatility than a plan with AVR of 4. It should be noted that this ratio is a measure of the current situation. It increases over time but generally tends to stabilize as a plan matures.
Liability Volatility Ratio
Also shown in the table below is the liability volatility ratio (LVR), which is the ratio of accrued liability to payroll.
Plans that have a higher LVR experience more volatile employer contributions (as a percentage of payroll) due to changes in liability. For example, a plan with LVR of 8 is expected to have twice the contribution volatility of a lan with LVR of 4. It should be noted that this ratio indicates a longer-term potential for contribution volatility since the AVR, described above, will tend to move closer to the LVR as the funded ratio approaches 100% Contribution Volatility December 31, 2024
1. Market Value of Assets $0
2, Payroll $474,218
3. Asset Volatility Ratio (AVR) [1) / (2)] 0.0
4. Accrued Liability $0
5. Liability Volatility Ratio (LVR) [(4) / (2)] 0.0
Rate Plan belonging to the Safety Pool Page 15
CaPERS New Category Actuarial Valuation - December 31, 2024 Proposed PEPRA Safety Police Plan of the City of Lancaster
2.7% @ 57 PEPRA Safety with 3-year Final Average Compensation, 0% Prior Service CaPERS ID: 4498806845
Funded Status - Termination Basis
The funded status measured on a termination basis is an estimate of the financial position of the plan had the contract with CalPERS been terminated as of December 31, 2024. The accrued liability on a termination basis (termination liability) is calculated differently from the plan's ongoing funding liability. For the termination liability calculation, both compensation and service are frozen as of the valuation date and no future pay increases or service accruals are assumed. This measure of funded status is not appropriate for assessing the need for future employer contributions in the case of an ongoing plan, that is, for an employer that continues to provide CaPERS retirement benefits to active employees. Unlike the actuarial cost method used for ongoing plans, the termination liability is the present value of the benefits earned through the valuation date.
A more conservative investment policy and asset allocation strategy was adopted by the board for the Terminated Agency Pool. The Terminated Agency Pool has limited funding sources since no future employer contributions will be made. Therefore, expected benefit payments are secured by risk-free assets and benefit security for members is increased while limiting the funding risk. However, this asset allocation has a lower expected rate of return than the remainder of the PERF and consequently, a lower discount rate assumption.
The lower discount rate for the Terminated Agency Pool results in higher liabilities for terminated plans, most plans. The discount rate upon contract termination will depend on actual Treasury rates on the date of termination, which varies over time, as shown below.
Valuation 20-Year Valuation 20-Year
Date Treasury Rate Date
06/30/2019 Treasury Rate
06/30/2014 3.08%
06/30/2015 2.83% 06/30/2020 1.18%
06/30/2016 1.86% 06/30/2021 2.00%
06/30/2017 2.61% 06/30/2022 3.38%
06/30/2018 2.91% 06/30/2023 4.06%
As Treasury rates are variable, the table below shows a range for the termination liability using discount rates 1% below and above the 20-year Treasury rate on the valuation date. The price inflation assumption is the 20- year Treasury breakeven inflation rate, that is, the difference between the 20-year inflation indexed bond and the 20-year fixed-rate bond.
The Market Value of Assets (MVA) also varies with interest rates and will fluctuate depending on other market conditions on the date of termination. Since it is not possible to approximate how the MVA will change in different Discount Rate: 3.06% Discount Rate: 5.06%
Price Inflation: 2.50% Price Inflation: 2.50%
1. Termination Liability' $0 $0
2. Market Value of Assets (MVA) 0
3. Unfunded Termination Liability [(1) - (2)] $0 $0
4. Funded Ratio [(2) ÷ (1)] 0.0% 0.0%
The termination liabilities calculated above include a 5% contingency load. The contingency load and other actuaria ssumptions can be found in Appendix A of the Section 2 repo In order to terminate the plan, first contact our Pension Contract Services unit to initiate a Resolution of Intent to Terminate. The completed Resolution will allow a CalPERS actuary to provide a preliminary termination valuatior with a more up-to-date estimate of the plan's assets and liabilities. Before beginning this process, please consult with a CaPERS actuary.
Rate Plan belonging to the Safety Pool Page 16
CaPERS New Category Actuarial Valuation - December 31, 2024 Proposed PEPRA Safety Police Plan of the City of Lancaster
2.7% @ 57 PEPRA Safety with 3-year Final Average Compensation, 0% Prior Service CaPERS ID: 4498806845
Funded Status - Low-Default-Risk Basis
Actuarial Standard of Practice (ASOP) No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions, requires the disclosure of a low-default-risk obligation measure (LDROM) of benefit costs accrued as of the valuation date using a discount rate based on the yields of high quality fixed income securities with cash flows that replicate expected benefit payments. Conceptually, this measure represents the level at which financial markets would value the accrued plan costs, and would be approximately equal to the cost of a portfolio of low-default-risk bonds with similar financial characteristics to accrued plan costs.
As permitted in ASOP No. 4, the Actuarial Office uses the Entry Age Actuarial Cost Method to calculate the LDROM. This methodology is in line with the measure of "benefit entitlements" calculated by the Bureau of Economic Analysis and used by the Federal Reserve to report the indebtedness due to pensions of plan sponsors and, conversely, the household wealth due to pensions of plan members.
As shown below, the discount rate used for the LDROM is 4.82%, which is the Standard FTSE Pension Liability Index' discount rate as of June 30, 2023, net of assumed administrative expenses.
Selected Measures on a Low-Default-Risk Basis December 31, 2024 Discount Rate 4.82%
1. Accrued Liability'- Low-Default-Risk Basis (LDROM)
a) Active Members $0
b) Transferred Members
C) Separated Members
d) Members and Beneficiaries Receiving Payments
e) Total $0
2. Market Value of Assets (MVA)
3. Unfunded Accrued Liability - Low-Default-Risk Basis [(1e) - (2)] $0
4. Unfunded Accrued Liability - Funding Policy Basis
5. Present Value of Unearned Investment Risk Premium [(3) - (4)] $0 The difference between the unfunded liabilities on a low-default-risk basis and on the funding policy basis represents the present value of the investment risk premium that must be earned in future years to keep future contributions for currently accrued plan costs at the levels anticipated by the funding policy.
Benefit security for members of the plan relies on a combination of the assets in the plan, the investment income generated from those assets, and the ability of the plan sponsor to make necessary future contributions. If future returns fall short of 6.8%, benefit security could be at risk without higher than currently anticipated future contributions.
The funded status on a low-default-risk basis is not appropriate for assessing the sufficiency of plan assets to cover the cost of settling the plan's benefit obligations (see Funded Status - Termination Basis), nor is it appropriate for assessing the need for future contributions (see Funded Status - Funding Policy Basis).
This index is based on a yield curve of hypothetical AA-rated zero coupon corporate bonds whose maturities range from 6 months to 30 years. The index represents the single discount rate that would produce the same present value as discounting a standardized set of liability cash flows for a fully open pension plan using the yield curve. The liability cash flows are reasonably consistent with the pattern of benefits expected to be paid from the entire Public Employees Retirement Fund for current and former plan members. A different index, hence a different discount rate, may be needed to measure the DROM for a subset of the fund, such as a single rate plan or a group of retirees. if plan assets were invested entirely in the AA fixed income securities used to determine the discount rate of 4.82%, above based on the assumptions used for plan funding. Removing future COLAs from the measurement would understate the statutory obligation,
Rate Plan belonging to the Safety Pool Page 17
CaPERS New Category Actuarial Valuation - December 31, 2024 Proposed PEPRA Safety Police Plan of the City of Lancaster
2.7% @ 57 PEPRA Safety with 3-year Final Average Compensation, 0% Prior Service CaPERS ID: 4498806845
Participant Data
The table below shows a summary of your plan's member data upon which this valuation is based:
December 31, 2024
Reported Payroll $474,218
Projected Payroll for Contribution Purposes $487,496
Number of Members
Active
Transferred
Separated :
Retired
List of Class 1 Benefit Provisions
This plan has the additional Class 1 Benefit Provisions:
• None
Rate Plan belonging to the Safety Pool Page 18
CalPERS New Category Actuarial Valuation - December 31, 2024 Proposed PEPRA Safety Police Plan of the City of Lancastel
2.7% @ 57 PEPRA Safety with 3-year Final Average Compensation, 0% Prior Service CaPERS ID: 4498806845
Plan's Major Benefit Options
Shown below is a summary of your agency's proposed major optional benefits. A description of principal standard and optional plan provisions can be found in Appendix B of Section 2.
Benefit Group
Benefit Provision Police
Benefit Formula 2.7% @57
Social Security Coverage No
Full/Modified Full
Employee Contribution Rate 13.75%
Final Average Compensation Period Three Year
Sick Leave Credit Yes
Non-Industrial Disability Standard
Industrial Disability Standard
Pre-Retirement Death Benefits
Optional Settlement 2W Yes
1959 Survivor Benefit Level Level 4
Special Yes
Alternate (firefighters) No
Post-Retirement Death Benefits
Lump Sum $2000
Survivor Allowance (PRSA) No
COLA 2%
* 1959 Survivor Benefit is provided by a separate program and will be billed separately.
Rate Plan belonging to the Safety Pool Page 19
Section 2
CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYSTEM
Section 2 may be found on the CalPERS website
(www.calpers.ca.gov) in the Forms and
Publications section