City of San José Federated City
Employees’ Retirement System
Actuarial Valuation Report
as of June 30, 2021
Produced by Cheiron
December 2021
4a(2)
FCERS 12-16-21
TABLE OF CONTENTS
Section Page
Section I Board Summary .......................................................................................................1
Section II Assessment and Disclosure of Risk .......................................................................13
Section III Certification ...........................................................................................................23
Section IV Assets .....................................................................................................................25
Section V Measures of Liability .............................................................................................29
Section VI Contributions..........................................................................................................33
Section VII Actuarial Section of the ACFR ..............................................................................41
Appendices
Appendix A Membership Information .......................................................................................43
Appendix B Actuarial Assumptions and Methods .....................................................................53
Appendix C Summary of Plan Provisions ..................................................................................62
Appendix D Glossary of Terms ..................................................................................................70
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION I – BOARD SUMMARY
1 FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION I – BOARD SUMMARY
2 Membership
Underlying the changes in the actuarial valuation from one year to the next are changes in the membership of the System. These changes affect the liability of the System as well as contributions to the System. As shown in Ta ble I-1 below, total membership grew 1.6% from 2020 to 2021. Total active membership increased 0.9% with Tier 1 active membership declining by 7.5% while Tier 2 active membership increased by 6.6%. T otal payroll in creased by 5.1% which is significantly greater than the assumed increase rat e of 3.00%. Tier 2 now accounts for approximately 63% of active members and 58% of payroll.
Table I-1
Total Membership
June 30, 2021 June 30, 2020 % Change
Active Members
Tier 1 1,413 1,527 -7.5%
Tier 2 2,362 2,215 6.6%
Total Actives 3,775 3,742 0.9% Terminated Vested Members 1,663 1,614 3.0% Members In Pay Status 4,511 4,441 1.6% Total Membership 9,949 9,797 1.6% Annual Rate of Pay for Active Members
Tier 1 152,080$ 157,241$ -3.3%
Tier 2 206,982 184,311 12.3%
Total 359,061$ 341,552$ 5.1%
Dollar amounts in thousands
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
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SECTION I – BOARD SUMMARY
3 As shown in the chart below, the number of active members declined about 25% from 4,079 in 2009 to 3,076 in 2012. Since then, there has been a gradual increase in the number of act ive members to 3,775 in 2021. At the same time, the number of member s in pay status has increased about 54% from 2,930 in 2009 to 4,511 in 2021. As a result, the support ratio ( the ratio of the number of vested terminated and members in pay status to the number of active members ) increased from 0.89 in 2009 to 1.49 in 2012 due to the recession and has increased steadily since then to 1. 64 in 2021. As there are fewer actives to support each retiree, contributions tend to become m ore volatile and sensitive to gains and losses. This type of progression is to be expected for a maturing plan over a long period of time, but the impact of the Great Recession accelerated the trend significantly from 2009 to 2012 . Following the recession, the ratio appears to have stabilized, but there is no indication yet of a return to a lower ratio.
3,942 4,079 3,818 3,274 3,076 2,856 2,593 2,363 2,162 1,991 1,855 1,669 1,527 1,413 238 528 873 1,135 1,419 1,699 1,948 2,215 2,362
673 719 732
869 967 1,001 1,071 1,145 1,206 1,352 1,434 1,535 1,614 1,663 2,691 2,930 3,111 3,428 3,602 3,711 3,800 3,901 4,003 4,115 4,225 4,359 4,441 4,511
0.0 0.2
0.4 0.6
0.8 1.0
1.2 1.4
1.6 1.8
0 2,000
4,000
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12,000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Support Ratio
Count
Valuation Year
Historical Membership Counts
In Pay Status Vested Terminated Tier 2 Actives
Tier 1 Actives Support Ratio
Assets and Liabilities
This report measures assets and liabilities for funding purposes only. These measures are not appropriate for assessing the sufficiency of plan assets to cover the estimated cost of settling the System’s benefit obligations, and t here is a separate report for financial reporting. Table I-2 on the next page summarizes the Actuarial Liability, assets, and related ratios f or the System as of June 30, 2021 compared to June 30, 2020.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
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SECTION I – BOARD SUMMARY
4 Table I-2
Summary of Funded Status and Related Ratios
June 30, 2021 June 30, 2020 % Change
Actuarial Liability
Actives 1,119,013$ 1,093,014$ 2.4%
Deferred Vested 255,364 248,215 2.9% In Pay Status 3,188,604 3,059,854 4.2%
Total 4,562,981$ 4,401,083$ 3.7%
Market Value of Assets (MVA) 2,884,344 2,208,016 30.6% Unfunded Actuarial Liability - MVA Basis 1,678,637$ 2,193,067$ -23.5% Funding Ratio - MVA Basis 63.2% 50.2% 26.0%
Actuarial Value of Assets (AVA) 2,513,095 2,301,469 9.2% Unfunded Actuarial Liability - AVA Basis 2,049,886$ 2,099,614$ -2.4% Funding Ratio - AVA Basis 55.1% 52.3% 5.3%
FYE 2022 Expected Payroll 359,061$ 341,552$ 5.1% Asset Leverage Ratio 8.0 6.5 24.3% Actuarial Liability Leverage Ratio 12.7 12.9 -1.4% Dollar amounts in thousands
The Actuarial Liability represents the target amount of assets the plan should have in the trust as of the valuation date based o n the actuarial cost method. The Actuarial Liability grew 3.7% while the Market Value of Assets increased 30.6%. The Unfunded Actuarial Liability (UAL) measured on the Market Value of Assets decreased 23.5% from approximately $2,193 million to $1,679 million. The funding ratio on an MVA basis increased from 50.2% to 63.2%.
The asset smoothing method deferred 80% of the investment gain while recognizing 20% of the prior four years’ gains and losses, resulting in a 9.2% increase in the Actuarial Value of As sets.
The UAL measured on the Actuarial Value of Assets decreased 2.5% from approximately $2,100 million to $ 2,050 million and the funding ratio increased from 52.3% to 55.1%. The Market Value of Assets is more than t he actuaria l value, so if assumptions a re m et in the future, we expect a decrease in contribution rates as the deferred asset gains are recognized in the Actuarial Value of Assets.
The asset leverage ratio (Market Value of Assets divided by payroll) of 8.0 means that if the System experiences a 10% loss on assets compared to the discount rate of 6.625%, t he loss would be equivalent to 80% of payroll. Interest payments on such a loss would be approximately
5.3% of payroll. Because assets grew more than payroll during the year, the asset leverage ratio increased.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
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SECTION I – BOARD SUMMARY
5 As the System becomes better funded , the asset leverage ratio will increas e, and if it was 100% funded, the leverage ratio would be 12.7 (Actuarial Liability divided by payroll) . Higher asset leverage ratios indicate that a system is more sensitive to investment gains and losses. That is, the same lev el of investment gain or los s will have a greater impact on contribution rates for a system with a higher ratio than for a system with a lower ratio.
The chart below shows the historical and projected trends for assets (both market and smoothed actuarial) versus the Actuarial Liability, and also shows the progress of the funded ratios (based on the Actuarial Value of Assets) since 2012. The historical Actuarial Liability is shown in dark gray while the projected Actuarial Liability is sh own in a lighter gray. From 2012 to 2020, the funding ratio declined primarily because the System experienced lower than expected investment returns on the Actuarial Value of Assets and the assumptions used to measure the Actuarial Liability became more co nservative, including reducing assumed future investment returns from
7.5% in 2012 to 6.625% in 2020 and 2021 . The funding ratio increased in 2021 due to the exceptional investment returns of the prior year. If all assumptions are met in the future including an expected retu rn of 6.625% each year, the funded status is expected to reach about 93% by 2036.
Historical and Projected Assets and Actuarial Liability
While the funded status is expected to impro ve, the UAL is dependent on actual investme nt returns, changes in assum ptions and actuarial gains and losses, so there is potentially a wide range for the projected UAL.
More detail on the assets can be found in section IV of this report, and more detail on the measures of liability can be found in section V of this report.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION I – BOARD SUMMARY
6 Changes in Unfunded Actuarial Liability
The chart below and Table I -3 on the following page summarize the changes in the Unfunded Actuarial Liability (UAL) over the last 10 years . Five categories of changes are shown:
investment gains or losses on the Actuarial Value of Assets, liability gains or losses , assumption changes, benefit changes, and contributions.
($150)
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2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Millions
Plan Year Ending
Benefit Change Contributions Assumption Change
Liability (G)/L AVA Investment (G)/L Net Change
There have been significant assumption changes as shown by the purple bars in the chart above, including reductions in the discount rate in steps from 7.5% in 2012 to the current rate of 6.625% that have increased the measure of the UAL by a total of $501.4 million over the last 10 years.
Investment losses have contributed significantly to the growth in the UAL with 2014 and 2021 as the only year s in the last 10 in which there was an investment gain on th e Actuarial Value of Assets. In sum, investment losses have increased the UAL by about $ 416.2 million over the last 10 years.
The gains and losse s on the Actuarial Liability have varied over the last 10 years. In sum, the gains and losses on the Actuarial Liability have added roughly 134.8 million to the UAL over the last 10 years.
Actual contributions were consistently less than the normal cost plus interest on the UAL until 2019, resulting in an annual increase in the amount of the UAL as shown by the red bars in the chart above. In sum, this has added $ 43.4 million to the UAL over the last 10 years. This pattern FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
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SECTION I – BOARD SUMMARY
7 is a result of the prior po licy of a 30 -year rolling amortization that has been phased out.
Contribution rates in the future are expected to continue to exceed normal cost plus interest on the UAL and gradually pay down the UAL.
The only benefit changes in the last 10 years that affected the UAL were the elimination of the SRBR in 2012 and the changes under Measure F in 2017 and 2018.
In aggregate, the UAL has increased in 9 of the last 10 years for a total increase of approximately $1.1 billion as shown in Table I-3.
Table I-3
Changes in Unfunded Actuarial Liability
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Total Discount Rate 7.50% 7.25% 7.00% 7.00% 6.875% 6.875% 6.75% 6.75% 6.625% 6.625% Source
AVA (G)/L 119.3$ 76.5$ (39.7)$ 3.6$ 81.5$ 44.6$ 49.9$ 88.8$ 68.0$ (76.5)$ 416.2$ Liability (G)/L (6.5) (0.1) 16.9 38.2 33.0 13.7 (11.5) (23.2) 43.6 30.7 134.8 Assumptions 0.0 63.7 103.4 191.5 60.2 (15.6) 54.4 (2.9) 37.0 9.7 501.4 Benefit Changes (43.1) 0.0 0.0 0.0 0.0 13.8 1.9 0.0 0.0 0.0 (27.4) Contributions 26.8 12.4 12.2 8.8 11.8 14.0 4.0 (12.1) (20.8) (13.7) 43.4 Total Change 96.5$ 152.5$ 92.8$ 242.1$ 186.6$ 70.5$ 98.8$ 50.6$ 127.7$ (49.7)$ 1,068.3$ Dollar amounts in millions
Table I -4 on the next page breaks out the sources of the changes in UAL for the fiscal year ending June 30, 2021. The UAL decreased about $50 million since the prior year. About $76 million was due to investment gains on the Actuarial Value of Assets. The only assumption change for this valuation was an update to the mortality improvement scale. This assumption change increased the UAL by approximately $10 million. There were liability losses of about $31 million, which includes a $21 million loss due to salaries being higher than expect ed.
Finally, contributions greater than normal cost plus int erest on the UAL subtracted about $14 million from the UAL during the year.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION I – BOARD SUMMARY
8 Table I-4
Sources of FYE 2021 Change in UAL
Amount % of AL
Unfunded Actuarial Liability, June 30, 2021 2,049,886$ 44.9% Unfunded Actuarial Liability, June 30, 2020 2,099,613 46.0% Change in Unfunded Actuarial Liability (49,727)$ -1.1% Sources of Changes
Plan Changes 0$ 0.0%
Assumption Changes 9,687 0.2%
Normal Cost and Interest on UAL less Contributions (13,689) -0.3% Investment (gain) or loss on Actuarial Value of Assets (76,461) -1.7% Liability (gain) or loss
Salary experience 21,085$ 0.5%
Retirement experience 3,392 0.1%
Termination experience 4,986 0.1%
Other experience 1,273 0.0%
Total Liability (gain) or loss 30,736$ 0.7% Total Changes (49,727)$ -1.1%
Dollar amounts in thousands
Contribution Amounts and Rates
As shown in the upper left corner of the dashboard (page 1) , the total City contribution rate decreased from 58.6% for FYE 2022 to 56.5% for FYE 2023 , while the av erage member contribution remained at 7.9%. The purple bars represent the normal cost (including administrative expenses), the benefits attributable to the next year of serv ice, with the light purple paid by members 1 and the dark purple paid by the City . The light and dark gold bars represent the City c ontributions that pay for the UAL. The dark gold bars represent the interest on the Market Value UAL for the fiscal year, and the light gold bars represent the portion of the payment that actually reduces the UAL. The UAL principal payment increases from 6.3% of pay to 16.2% of pay for FYE 2023. As a result, the UAL is expected to be reduced if all assumptions are met.
1 A small portion of the member contributions also pays a portion of the UAL.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION I – BOARD SUMMARY
9 Table I-5 and the chart on the following page summarize the member and City contribution ra tes and amounts for the fisc al years ending in 2022 and 2023. The Tier 1 UAL payment increased $1.9 million from 2022 to 2023, reflecting the expected increase in UAL payme nts and the changes in assumptions . The Tier 1 normal cost rate decreased slightly, and the Tier 1 normal cost d ollar amount decreased due to the decline in Tier 1 active members. The Tier 2 contribution amount increased primarily due to the growing Tier 2 population. In aggregate, The City’s contribution amount increased about $ 2.8 million while its contribution ra te decreased
2.10% of payroll.
Table I-5
Contribution Rates and Amounts
Throughout the Year
FYE 2023 FYE 2022 Change
Member Rates (Excluding Reclassification Payments)
Tier 1 7.41% 7.39% 0.02%
Tier 2 8.13% 8.17% -0.04%
City Contributions
Tier 1 UAL Payment 162,602$ 160,694$ 1,908$
26,903$ 27,792$ (890)$
20.29% 20.25% 0.04%
19,288$ 17,529$ 1,759$
8.13% 8.17% -0.04%
208,793$ 206,015$ 2,777$
56.46% 58.56% -2.10%
Dollar amounts in thousands
Tier 1 Normal Cost (Including
Administrative Expenses)
Tier 2 Contribution
Aggregate Contribution
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SECTION I – BOARD SUMMARY
10 $10 $18 $10 $19
$28 $17 $27 $19
$161 $163
$0
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Tier 1 Tier 2 Tier 1 Tier 2
FYE 2021 FYE 2022
Millions
Member City NC City UAL
By far, the most significant portion of the City’s contribution is the Tier 1 UAL payment which is substantially attributable to members who no longer work for the City.
The chart on the following page shows the historic al and projected aggregate member contribution rates (purple bars) and City contribution rates (gold bars) compared to the projection of member plus City contributions from the prior valuation, indicated by the red line. These contribution rates assume that all assumptions are m et. The black line shows the historic al and projected total normal cost rate. The blue line r epresents the historical and projected tread water rate. Historical rates and rates calculated through the fiscal year ending June 30, 2023 are shown in a darker shade than the projected future contribution rates.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
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SECTION I – BOARD SUMMARY
11 Historical and Projected Aggregate Contribution Rates
The aggregate City contribution rate increased from FYE 2014 through FYE 2022 primarily due to investment losses and assumption changes that increased the UAL rate , including reductions in the discount rate over t his period from 7.50% to 6.625%. Future aggregate City contribution rates are expected to decrease significantly in the next few years due to the recognition of recent investment gains, and then gradually decrease over time after that. The gradual decrease in the total rate is driven by the projected gradual decrease in total normal cost rate as Tier 2 becomes a greater proportion of the active membership and the gradual decrease in UAL rate as payroll is expected to grow slightly faster than amortization p ayments ( 3.00% vs. 2.75%). After 2037, contribution rates are expected to drop mo re rapidly as some amortization layers are fully paid off.
The chart on the following page shows historical and projected member (purple bars) and City (gold bars) contributi on amounts (assuming contrib utions throughout the year) compared to the projected amounts shown in the prior valuation. If all actuarial assumptions are exactly met, City contributions are expected to decrease over the next four years from $209 million in FYE 2023 to $193 million in FYE 2027, and then increase at a rate slower than payroll growth to a peak of approximately $220 million in FYE 2037, before declining in FYE 2038 and onwards as portions of the UAL are paid off.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
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SECTION I – BOARD SUMMARY
12 Historical and Deterministic Projection of Contribution Amounts
Section VI of this report provides additional detail on the contribution rates and the amortization schedules separately by Tier.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION II – ASSESSMENT AND DISCLOSURE OF RISK
13 Actuarial valuations are based on a set of assumptions about future economic and de mographic experience. These assum ptions represent a reasonable estimate of future experience, but actual future experience will undoubtedly be different and may be significantly different. This section of the report is intended to identify the primary risk s t o the plan, provide some backg round information about those risks, and provide an assessment of those risks.
Identification of Risks
As we have discussed with the Board, the fundamental risk to the System is that the contributions needed to pay the be nefits become unaffordable. While there are a number of factors that could lead to contribution amounts becoming unaffordable, we believe the primary risks for this System are:
• Investment risk,
• Interest rate risk, and
• Assumption change risk.
Other risks that we have not identified may also turn out to be important.
Investment Risk is the potential for investment returns to be different than expected. Lower investment returns than anticipated will increase the Unfunded Actuarial Liability (UAL) necessitating higher contributions in the f uture unless there are other gains that offset the se investment losses. The potential volatility of future investment returns is determined by the System’s asset allocation and the affordability of the investment risk is de termined by the amount of assets invested relative to the size of the City.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
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SECTION II – ASSESSMENT AND DISCLOSURE OF RISK
14 ($100)
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2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Millions
Plan Year Ending
Changes in Unfunded Actuarial Liability
Total Change AVA Investment (G)/L
The chart above shows the impact of investment gains and losses on the smoothed Actuarial Value of Assets over the last 10 years compared to the System’s total change in UAL.
Investment losses have been a significant contributor to the growth in the UAL.
Interest rate risk is the potential for interest rates to be different than expected. For public plans, short-term fluctuations in interest rates have little or no effect as the plan’s liability is usually measured based on the expected return on as sets. Longer-term trends in inter est rates, however, can have a powerful effect to the extent they affect future expected investment earnings . The chart on the following page shows the yield on a 10 -year Treasury security compar ed to the System’s assumed rate of return. The difference is a simple measure of the amount of investment risk taken. As interest rates have declined, plans faced a choice: maintain the same level of risk and reduce the expected rate of return; maintain th e same expected rate of retu rn and take on more investment risk; or some combination of the two strategies. This year there was an increase in the yield on the 10 -year Treasury , however ; if yields persist at this lower level, plans may need to reduce their expected returns even further.
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SECTION II – ASSESSMENT AND DISCLOSURE OF RISK
15 Assumption change risk is the potential for the environment to change such that future valuation assumptions are different than the current assumptions. For example, declines in interest rates over the last three decades resulted in higher investment re turns for fixed -income investments, but lower expected future returns necessitating either a change in investment policy, a reduction in discount rate, or some combination of the two. Assumption change risk is an extension of the other risks identified, but rather than capturing the risk as it is experienced, it captures the cost of recognizing a change in environment when the current assumption is no longer reasonable.
As shown in the chart on the following page, there have been substantial changes in assumptions increasing the UAL. Most of these changes are due to red ucing the discount rate from 7.5% to
6.625% over this period, but it also includes changes to demographic assumptions such as mortality and retirement rates. The reductions in the discount ra te largely reflect the impact of declining interest rates on future expected investment returns.
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SECTION II – ASSESSMENT AND DISCLOSURE OF RISK
16 ($100)
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2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Millions
Plan Year Ending
Changes in Unfunded Actuarial Liability
Total Change Assumption Changes
Plan Maturity Measures
The future financial condition of a m ature pension plan is more sensitive to each of the risks identified above than a less mature plan. Before a ssessing each of these risks , it is important to understand the maturity of the plan compared to other plans and how the maturity has changed over time.
Plan maturity can be measured in a variety of ways, but they all get at one basic dynamic – the larger the plan is compared to the contribution or revenue base tha t supports it; the more sensitive the plan will be to risk. The following measures have been selected as the most important in understanding the primary risks identified for the plan.
Support Ratio (Inactives per Active)
One simple measure of plan maturi ty is the ratio of the number of inactive members (those receiving benefits or entitled to a deferred benefit) to the number of active members. The revenue base supporting the plan is usually pro portional to the number of a ctive members, so a relatively hi gh number of inactives compared to actives indicate a larger plan relative to its revenue base as well.
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SECTION II – ASSESSMENT AND DISCLOSURE OF RISK
17 The chart above shows the distribution from the 5 th to 95 th percentile of support ratios for the plans in the Public Plans Database. The black diamond shows how San José Federated compares, and the gold diamond shows how the combined Federated and Police and Fire plans compare .
Through 2009 , the System was in the mi ddle of the distribution eve n as the support ratio increased. However, after the Great Recession, the Plan’s support ratio increased dramatically and is now in the upper quartile of the plans in the database.
Leverage Ratios
Leverage or volatility ratios measure the size of the pla n co mpared to its revenue base more directly. An asset leverage ratio of 5.0, for example, means that if the System experiences a 10% loss on assets compared to the expected return, the loss would be equivalent to 50% of payroll .
The same investment loss for a plan with an asset leverage ratio of 10.0 would be equivalent to 100% of payroll.
As the System becomes better funded, the asset leverage ratio will increase, and if it was 100% funded, the leverage ratio would equal the A ctuarial Liability (AL) leve rage ratio. The AL leverage ratio also indicates how sensitive the System is to experience gains and losses or assumption changes. For example, an assumption change that increases the AL by 5% would add a liability equivalent to about 50% of payroll if the AL leverage ratio is 10.0.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
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SECTION II – ASSESSMENT AND DISCLOSURE OF RISK
18 The charts above show the distribution from the 5 th to 95 th percentile of asset and liability leverage ratios for the plans in the Public P lans Database. The bla ck dia mond shows how San José Federated compares, and the gold diamond shows how the combined Federated and Police and Fire plans compare. As we have discussed with the Board for several years and as is shown in the charts above, the leverage ratios for th e Federated System are higher than most plans and are significantly higher when combined with Police and Fire , indicating that San José is much more sensitive to risk than most plan sponsors.
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SECTION II – ASSESSMENT AND DISCLOSURE OF RISK
19 Assessing Costs and Risks
The fundamental risk to the System is that the contributions needed to fund the benefits become unaffordable. Assessing this risk, however, is complex because there is no bright line of what is unaffordable and the contribution amounts themselves are affected not just by the experience of the System, but also by the interaction of that experience and decisions by the Board related to assumptions, asset smoothing methods, and amortization periods.
Point in Time Assessments
To assess the risks of the System independent of the contribution str ategy, ther e are two measures on which to focus: normal cost and interest cost. The normal cost represents the expected cost of the benefits attributable to the next year of service. The interest cost represents the interest on the U AL calculated using the discount rate. Combined, the normal cost plus the interest cost are referred to as the Tread Water Cost. If actual contributions are less than the Tread Water Cost , the UAL would be expected to grow; and , if actual contributions are greater than the Tread Water Cost, the UAL would be expected to shrink.
The stacked bars in the following chart show the Member and City contributions at the current discount rate compared to a discount rate 100 basis points lower.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
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SECTION II – ASSESSMENT AND DISCLOSURE OF RISK
20 Decreasing the discount rate by 100 basis points would increase the normal cost by over 3% of payroll and the interest on the UAL by over 5% of payroll. Using the current amortiz ation methods, the City contribution rate would increase by over 10% of payroll to over 66% of pay.
The recent declines in discount rates have been largely driven by declines in interest rates that affect expectations of future investment returns. If there are further declines in interest rates or if there is a desire or need to reduce investment risk that reduces expected returns, the discount rate may need to be reduced further and the normal cost and interest cost will increase.
Actual investment returns do not affect the normal cost, but they directly affect the intere st cost.
One simpl e measure o f the r isk inherent in the investment policy is the Interest Cost at Risk (ICaR), which is the amount that the interest cost would increase if the investment returns for one year were two standard deviations below the expected return. Based on t he capital market assumptions of Meketa over a 10 -year horizon, the standard deviation for the current portfolio is
14.12%, making the investment return used to determine ICaR -21.615% (6.625% – 2 x
14.12%).
The following chart shows the contribution rates for the FYE 2023, determined in this valuation report in the far left bar graph and the expected FYE 2024 contribution rates based on a 6. 625% investment rate of return for FYE 2021, in the middle of the chart. The FYE 2024 bar graph on the right shows the impact of a -21.615% return for FYE 2022. The City contribution rate for FYE 2024 in this scenario would be 57.1% of pay and expected to increase in future years as the investment loss is recognized over the 5-year smoothing period.
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SECTION II – ASSESSMENT AND DISCLOSURE OF RISK
21 Stochastic Projections
If experience has taught us anything, it is that there is a significant level of uncertainty in projections of the future. The largest source of uncertainty is the projection of investment returns.
In order to b etter understand the potential impact of investment returns on the System, we have included some stochastic projections in the dashboard and in this section of the report. The stochastic projections assume a geometric return of 6. 625% and a standa rd deviation of 14.1% (based on Meke ta’s capital market assumptions for the System’s investment portfolio ). Each projection contains 10,000 trials that are 15 years in length.
The chart below shows the historical and stochastically project ed City contri bution amounts for Tier 1. The purple line represents the amounts paid historically or the amounts already determined by an actuarial valuation, and the black line shows the projected contribution amount for each year if all assumptions are m et. The colored ranges represent different percentiles of the 10,000 trials. This range is intended to convey the degree of uncertainty in the projections based on future investment returns.
Historical and Stochastically Projected Tier 1 City Contribution Amounts
The chart shows a wide range of potential Tier 1 City contribution amounts depending on actual investment returns. For example, t he range between the 5 th and 95 th percentile for FYE 2036 (based on the 2034 actuarial valuation) is from a contribu tion of $ 4 million to a contribution of $342 million. This range is largely driven by the standard deviation of the investment portfolio.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION II – ASSESSMENT AND DISCLOSURE OF RISK
22 The following chart shows the historical and stochastically projected City contri bution amounts for Tier 2. The range of contribution amounts is significantly narrower for Tier 2 than Tier 1.
Tier 2 is projected to grow quickly and assets are relatively small right now. As a result, actual investment returns have a limited impact on future contribution amounts while the rate of growth will have a larger impact.
Historical and Stochastically Projected Tier 2 City Contribution Amounts
More Detailed Assessment
A more detailed assessment is always valuable t o enhan ce the understanding of the r isks identified above. While more detail would provide some additional value, we don’t believe it is necessary to perform an in -depth analysis every year. Consequently, we recommend the Board review the less detailed ana lysis provided above annually and co nsider a mor e detailed analysis periodically and when there is a substantial change in the financial position or maturity of the plan.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION III – CERTIFICATION
23 The purpose of this report is to present the June 30, 2021 Actuarial Valuation of the City of San José Federated City Employees’ Retirement System (“System”). This report is for the use of the System and the City of San José.
In preparing our report, we relied on infor mation, some oral and some written , supplied by the Plan. This information includes, but is not limited to, the plan provisions, employee data, and financial information. We performed an informal examination of the obvious characteristics of the data for r easonableness and consistency in acc ordance with Actuarial Standard of Practice No. 23.
The price inflation, wage inflation, amortization payment growth rate, and discount rate were adopted by the Board of Administration with our input at the October 21, 2021 Board meeting.
All other assump tions were a dopted at the November 21, 2019 Board meeting bas ed on recommendations from our Experience Study covering plan experience during the period from July 1, 2015 through June 30, 2019. Please refer to the full ex perience study report for details, including the rationale for each assumption. We believe these assumptions are reasonable for the purpose of the valuation.
The liability measures and funding ratios in this report are for the purpose of establishing contribution rates. These measures are not appropriate for assessing the sufficiency of plan assets to cover the estimated cost of settling the System’s benefit obligations.
Cheiron utilizes ProVal actuarial valuation software leased from Winklevoss Technolog ies (WinTech) to calculate liabiliti es and proje ct benefit payments. We have relied on WinTech as the developer of ProVal. We have a basic understanding of ProVal and have used ProVal in accordance with its original intended purpose. We have not identified any ma terial inconsistencies in assumptions or output of ProVal that would affect this valuation.
Deterministic projections in this valuation report were developed using P-scan, a proprietary tool used to illustrate the impact of changes in assumptions, methods, plan provisions, or actual experience ( particularly investment experience) on the future financial status of the System.
P-scan uses standard roll -forward techniques that implicitly assume a stable active population.
Because P-scan does not autom atically capture how changes in one variable aff ect all other variables, some scenarios may not be consistent.
Stochastic projections in this valuation report were developed using R -scan, our proprietary tool for assessing the probability of different out comes b ased on a range of potential investment returns. We relied on Cheiron colleagues for the development of the model. The stochastic projections of investment returns assume that each future year’s investment return is independent from all other years and is identically distributed accor ding to a lo gnormal distribution. The standard deviation used in the stochastic projection of investment returns was provided by the System’s investment consultant.
Future actuarial measurements may differ significantly from t he current measurements due t o such factors as the following: plan experience differing from that anticipated by the economic or FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION III – CERTIFICATION
24 demographic assumptions; changes in economic or demographic assumptions; and , changes in plan provisions or applicable law.
This report and its contents ha ve been prep ared in accordance with generally recognized and accepted actuarial principles and practices and our understanding of the Code of Professional Conduct and applicable Actuarial Standards of Practice set out by the Actuarial Standards Board as well as applic able laws and regulations . Furthermore, as credentialed actuaries, we meet the Qualification Standards of the American Academy of Actuaries to render the opinion contained in this report. This report does not address any contractual or legal is sues. We are not attorneys, and our firm does not provide any legal services or advice.
This report was prepared for the City of San José Federated City Employees’ Retirement System for the purposes described herein. Other users of this report are not intended users as defined in the Actuarial Standards of Practice, and Cheiron assumes no duty or liability to any other user.
William R. Hallmark, ASA, EA, FCA, MAAA Steven M. Hastings, FSA, EA, FCA, MAAA Consulting Actuary Consulting Actuary
Jacqueline R. King, FSA, EA, MAAA
Consulting Actuary
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION IV – ASSETS
25 The System uses two different asset measurements : the Market Value and Actuarial Value of Assets. The market value represents the value of the assets if they were liquidated on th e valuation date. The actuarial value smooths annual investment return s over five years to reduce the impact of short-term investment volatility on employer contribution rates. The Market Value of Assets is used primarily for reporting and disclosure, and the Actuarial Value of Assets is used primarily to determine contribution rates.
This section shows the changes in the Market Value of Assets and develops the Actuarial Value of Assets.
Statement of Change in Market Value of Assets
Table IV-1 shows the changes in the Market Value of Assets for the current and prior fiscal years for each tier.
Table IV-1
Change in Market Value of Assets
Fiscal Year Ending 2021 Fiscal Year Ending 2020
Tier 1 Tier 2 Total Tier 1 Tier 2 Total
Beginning Market Value 2,108,520$ 99,496$ 2,208,016$ 2,062,866$ 69,286$ 2,132,152$ Contributions
Member 11,036 14,689 25,725 11,300 13,781 25,081 City 169,275 14,689 183,964 167,545 13,781 181,326 Total 180,311$ 29,378$ 209,689$ 178,845$ 27,562$ 206,407$ Net Investment Earnings 662,481 36,125 698,606 87,374 3,536 90,910 Benefit Payments (226,270) (935) (227,205) (215,997) (731) (216,728) Administrative Expenses (4,530) (232) (4,762) (4,568) (157) (4,725) Market Value, End of Year 2,720,512$ 163,832$ 2,884,344$ 2,108,520$ 99,496$ 2,208,016$ Estimated Rate of Return 30.6% 31.8% 30.6% 4.1% 4.3% 4.1% Dollar amounts in thousands
The net investment earnings for the year ended June 30, 2021 represent approximately a 30.6% return on the Market Value of Assets compa red to an assumed return of 6. 625%. This re turn produced an investment gain of $547.4 million for the year ending June 30, 2021. For the year ended June 30, 2020, the net investment return was approximately 4.1% (6.75% was assumed) , which produced an investment loss of $58.3 million.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION IV – ASSETS
26 Actuarial Value of Assets
To determine on-going contributions, most pension systems utilize an Actuarial Value of Assets that smooths year-to-year market value returns to reduce the volatility of contributions.
The Actuarial Value of Assets is calculated by recognizing the deviation of actual investment returns compared to the expected return (6.625% for FYE 2021, 6.75% for FYE 2020 and FYE 2019, and 6.875% for FYE 2018) over a fiv e-year period. The dollar amount of the expected return on the Market Value of Assets is determined using actual contributions, benefit payments , and administrative expenses during the year. Any difference between this amount and the actual net investment earnings is considered a gain or los s. Table IV-2 shows the calculation of the Actuarial Value of Assets separately for Tier 1 and Tier 2. For each of the last four years, it shows the actual earnings, the expected earnings, the gain or loss , and the portion of the gain or loss that is not r ecognized in the current Actuarial Value of Assets. These deferred amounts will be recognized in future years.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION IV – ASSETS
27 Table IV-2
Development of Actuarial Value of Assets Development of Actuarial Value of Assets Tier 1 Tier 2
Basic COLA Total Basic COLA Total
Market Value of Assets 1,699,881$ 1,020,631$ 2,720,512$ 140,672$ 23,160$ 163,832$ FYE 2021
Actual Earnings 417,535$ 244,947$ 662,482$ 31,044$ 5,081$ 36,125$ Expected Earnings 90,200 53,541 143,741 6,455 1,056 7,511 Investment Gain/(Loss) 327,335 191,406 518,741 24,589 4,025 28,614 Deferred (80%) 261,868$ 153,125$ 414,993$ 19,671$ 3,220$ 22,891$ FYE 2020
Actual Earnings 56,333$ 31,041$ 87,374$ 3,047$ 488$ 3,535$ Expected Earnings 92,047 51,558 143,605 4,794 768 5,562 Investment Gain/(Loss) (35,714) (20,517) (56,231) (1,747) (280) (2,027) Deferred (60%) (21,428)$ (12,311)$ (33,739)$ (1,048)$ (168)$ (1,216)$ FYE 2019
Actual Earnings 49,326$ 25,431$ 74,757$ 1,822$ 276$ 2,098$ Expected Earnings 92,402 48,569 140,971 3,290 499 3,789 Investment Gain/(Loss) (43,076) (23,138) (66,214) (1,468) (223) (1,691) Deferred (40%) (17,230)$ (9,256)$ (26,486)$ (587)$ (89)$ (676)$ FYE 2018
Actual Earnings 77,863$ 37,560$ 115,423$ 1,828$ 242$ 2,070$ Expected Earnings 92,262 45,453 137,715 2,091 275 2,366 Investment Gain/(Loss) (14,399) (7,893) (22,292) (263) (33) (296) Deferred (20%) (2,880)$ (1,578)$ (4,458)$ (53)$ (6)$ (59)$ Total Deferred Gain/(Loss) 220,330$ 129,980$ 350,310$ 17,983$ 2,957$ 20,940$ Actuarial Value of Assets 1,479,551$ 890,651$ 2,370,202$ 122,689$ 20,203$ 142,892$ Actuarial to Market Ratio 87.0% 87.3% 87.1% 87.2% 87.2% 87.2% Estimated Rate of Return 9.8% 9.8% 9.8% 10.7% 10.8% 10.7% Dollar amounts in thousands
On an Actuarial Value of Assets basis, the aggregate return for the year ending June 30, 2021 was 9.8% for Tier 1 and 10.7% for Tier 2, both more than the assumed return of 6.625%. The return for both Tiers was less than the return on the Market Value of Assets. This return on the Actuarial Value of Assets produced an investment gain of $76.5 million for the year ending June 30, 2021.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION IV – ASSETS
28 As shown in the following chart, over the last 10 years t he investment return on the Market Value of Assets has varied significantly from a high of 30.6% in 2021 to a low of -3.9% in 2012.
The geometric average return was 9.9% and 6.5% over the last 5 and 10 years, respectively. The return on the Actuarial Value of Assets is more stable than on the market value with a geometric average of 5.2% and 4.9% over the last 5 and 10 years, respectively.
Historical Rates of Return
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION V – MEASURES OF LIABILITY
29 This section p resents detailed information on liability mea sures for the System for fund ing purposes, including:
• Present value of future benefits,
• Normal cost,
• Actuarial Liability, and
• An analysis of changes in the Unfunded Actuarial Liability during the year.
Present Value of Future Benefits: The present value of future benefits represents the expected amount of money needed today if all assumptions are met to pay for all benefits both earned as of the valuation date and expected to be earned in the future by current plan members under the current plan provision s. Table V -1 below shows the present valu e of fut ure benefits as of June 30, 2021 and June 30, 2020 separately by Tier.
Table V-1
Present Value of Future Benefits
June 30, 2020
Basic COLA Total Total % Change
Tier 1
Actives 846,471$ 347,603$ 1,194,074$ 1,214,362$ -1.7% Deferred Vested 169,799 72,989 242,788 238,788 1.7% In Pay Status
Retirees 1,630,905$ 1,275,089$ 2,905,994$ 2,791,286$ 4.1% Beneficiaries 93,317 100,930 194,247 179,625 8.1% Disabled 42,450 43,868 86,318 87,494 -1.3% Total In Pay Status 1,766,672$ 1,419,887$ 3,186,559$ 3,058,405$ 4.2% Total Tier 1 2,782,942$ 1,840,479$ 4,623,421$ 4,511,555$ 2.5% Tier 2
Actives 347,280$ 63,114$ 410,394$ 342,332$ 19.9% Deferred Vested 11,305 1,271 12,576 9,427 33.4% In Pay Status
Retirees 1,727$ 318$ 2,045$ 1,449$ 41.1% Disabled 0 0 0 0 Total In Pay Status 1,727$ 318$ 2,045$ 1,449$ 41.1% Total Tier 2 360,312$ 64,703$ 425,015$ 353,208$ 20.3% Total System 3,143,254$ 1,905,182$ 5,048,436$ 4,864,763$ 3.8% Dollar amounts in thousands
June 30, 2021
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION V – MEASURES OF LIABILITY
30 Normal Cost
Under the Entry Age (EA) actuarial cost method, the present value of future benefits for each individual is spread over th e individual’s ex pected working career under t he System as a level percentage of the individual’s expected pay . The normal cost rate is determined as the value, as of entry age into the System, of each member’s projected future benefits divided by the valu e, also at entry age, of each member’s expected future salary. The normal cost rate is multiplied by current salary to determine each member’s normal cost. T he normal cost of the System is the sum of the normal costs for each individual. The normal cos t represents the expected amount of money needed t o fund the b enefits attributed to the ne xt year of service under the Entry Age actuarial cost method. Table V-2 below shows the Total norma l cost rates as of June 30, 2021 and June 30, 2020 separately by Tier. The increase in normal cost rate for each Tier is primarily attributable to the assumption changes for this valuation.
Table V-2
Normal Cost
June 30, 2021 June 30, 2020
Basic COLA Total Total % Change
Tier 1
Retirement 16,070$ 6,662$ 22,732$ 23,617$ -3.7% Termination 6,636 2,237 8,873 9,170 -3.2% Death 447 190 637 672 -5.2% Disability 1,020 456 1,476 1,551 -4.8% Reciprocity 521 228 749 788 -4.9% Total Tier 1 24,694$ 9,773$ 34,467$ 35,798$ -3.7% Expected Payroll 138,524$ 138,524$ 138,524$ 143,411$ -3.4% Tier 1 NC Rate 17.83% 7.05% 24.88% 24.96% -0.3%
Tier 2
Retirement 16,284$ 2,986$ 19,270$ 17,153$ 12.3% Termination 6,070 788 6,858 5,859 17.1% Death 726 118 844 753 12.1% Disability 1,188 211 1,399 1,241 12.7% Total Tier 2 24,268$ 4,103$ 28,371$ 25,006$ 13.5% Expected Payroll 189,424$ 189,424$ 189,424$ 168,259$ 12.6% Tier 2 NC Rate 12.81% 2.17% 14.98% 14.86% 0.8%
Dollar amounts in thousands
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION V – MEASURES OF LIABILITY
31 Actuarial Liability
The Actuarial Liability represents the expected amount of money needed today if all assumptions are met to pay for benefits attri buted to service prio r to the valuation date under the Entry A ge actuarial cost method. As such, i t is the amount of assets targeted by the actuarial cost method for the System to hold as of the valuation date. It is not the amount necessary to settle the obligation. Table V -3 below shows the Actuarial Liability as o f June 30, 2021 and June 30, 2020 separately by Tier.
Table V-3
Actuarial Liability
June 30, 2021 June 30, 2020
Basic COLA Total Total % Change
Tier 1
Actives
Retirement 643,754$ 261,074$ 904,828$ 912,647$ -0.9% Termination 34,921 19,379 54,300 54,093 0.4% Death 6,568 2,474 9,042 9,286 -2.6% Disability 9,938 3,953 13,891 13,963 -0.5% Total Actives 695,181$ 286,880$ 982,061$ 989,989$ -0.8% Deferred Vested 169,799$ 72,989$ 242,788$ 238,788$ 1.7% In Pay Status 1,766,672 1,419,887 3,186,559 3,058,405 4.2% Total Tier 1 2,631,652$ 1,779,756$ 4,411,408$ 4,287,182$ 2.9% Tier 2
Actives
Retirement 93,968$ 17,203$ 111,171$ 82,703$ 34.4% Termination 13,177 3,939 17,116 13,657 25.3% Death 3,557 618 4,175 3,252 28.4% Disability 3,780 710 4,490 3,413 31.6% Total Actives 114,482$ 22,470$ 136,952$ 103,025$ 32.9% Deferred Vested 11,305 1,271 12,576 9,427 33.4% In Pay Status 1,727 318 2,045 1,449 41.1% Total Tier 2 127,514$ 24,059$ 151,573$ 113,901$ 33.1% Total System 2,759,166$ 1,803,815$ 4,562,981$ 4,401,083$ 3.7% Dollar amounts in thousands
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION V – MEASURES OF LIABILITY
32 Liability (Gains) and Losses
Each year the Actuarial Liability increases with normal cost and interest and decreases due to benefit payments. In addition, any deviation in experience from the actuarial assumptions creates a gain or loss. Table V -4 below summarizes the sources of liability gains and losses for the last five years. The other category includes gains and losses on administrative expenses as well as minor demographic assumptions and data correct ions. The la rge gain in 2019 due to other sources is largely attributable to a significant one-time data correction.
Table V-4
Historical Sources of Liability (Gain) or Loss
Year Ending June 30th
Source 2021 2020 2019 2018 2017 Total
Salary increases 21,085 25,889 9,573 (9,844) 16,382 63,085 Retirement 3,392 7,873 5,626 6,454 5,941 29,286 Termination 4,986 7,077 3,285 (2,519) 1,623 14,452 Mortality 2,613 (1,330) 2,847 (2,274) (6,604) (4,748) Disability (946) 49 (945) (249) 80 (2,011) Other (394) 4,129 (43,618) (3,035) (3,748) (46,666) Total 30,736$ 43,687$ (23,232)$ (11,467)$ 13,674$ 53,398$ Dollar amounts in thousands
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION VI – CONTRIBUTIONS
33 Amortization of the Unfunded Actuarial Liability
Under the contribution allocation procedure employed by the System, there are three components to the contribu tion: the normal cost , administrative expenses, and an amortiz ation payment on the Unfunded Actuarial Liability (UAL). The normal cost rate was developed in Section V. This section develops the administrative expense and UAL contribution rates.
The difference between the Actuarial Liability and the Actuarial Value of Assets is the Unfunded Actuarial Liability. The UAL is made up of the unamortized UAL as of June 30, 2020 plus the impact of the 2021 experience and assumption changes, and the 2020 UAL payment that is made by the City on July 1, 2021.
For members who were reclassified under Measure F from Tier 2 to Tier 1, a portion of the increase in liability for the reclassification is to be paid by members. Table VI-1 below shows the outstanding amount owed by membe rs and the expected amortization payment amount. Rehires pay a fixed percentage of pay until the amount they owe has been paid. Classic members pay their portion of the UAL over 20 years (17 years remaining).
Table VI-1
Tier 1 Member UAL Amortization
Outstanding Remaining Amortization
Balance Period Payment
Employee Rehire UAL 754$ N/A 94$
Classic Employee UAL 903 17 75
Total Members 1,657$ 169$
Basic 965 98
COLA 692 71
Dollar amounts in thousands
Table VI-2 on the following page provides the payment schedule to amortize the Tier 1 UAL.
The entire UAL as of June 30, 2009 was amortized over 30 years. Subsequent actuarial gains or (losses) or method changes were amortized over 20 years and assumption changes over 25 years from the valuation in which they are first recognized.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION VI – CONTRIBUTIONS
34 Table VI-2
Tier 1 City UAL Amortization
Outstanding Remaining Amortization
Balance Period Payment
Golden Handshake 20,758$ 18 1,654$
2009 UAL 744,786 18 59,334
2010 (Gain) or Loss 38,529 9 5,269
2010 Assumption Change (50,289) 14 (4,818) 2011 (Gain) or Loss (2,382) 10 (298)
2011 Assumption Changes 164,169 15 14,930 2012 (Gain) or Loss 97,366 11 11,279
SRBR Elimination (35,781) 11 (4,145)
2013 (Gain) or Loss 63,316 12 6,840
2013 Assumption Changes 59,026 17 4,897 2014 (Gain) or Loss (22,700) 13 (2,303) 2014 Assumption Changes 98,362 18 7,836 2015 (Gain) or Loss 44,718 14 4,284
2015 Assumption Changes 200,384 19 15,373 2016 (Gain) or Loss 105,250 15 9,572
2016 Assumption Changes 59,090 20 4,377 2017 (Gain) or Loss 56,679 16 4,914
Measure F 6,768 16 587
2017 Assumption Changes (17,329) 21 (1,243) 2018 (Gain) or Loss 47,099 17 3,908
2018 Assumption Change 53,155 22 3,697 2019 (Gain) or Loss 55,066 18 4,387
2019 Assumption Change (1,700) 23 (115) 2020 (Gain) or Loss 96,608 19 7,412
2020 Assumption Change 34,536 24 2,273 2021 (Gain) or Loss (41,026) 20 (3,039) 2021 Assumption Change 9,468 25 608 7/1/2021 Payment 155,622
Total City 2,039,548$ 157,470$
Basic 1,151,136 82,705
COLA 888,412 74,765
Dollar amounts in thousands
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION VI – CONTRIBUTIONS
35 Table VI -3 below provides the payment schedule to amortize the T ier 2 UAL as of June 30, 2021. As of June 30, 20 17, all amortization layers were reset to 10 year s. Subsequent layers are amortized over 10 y ears from the valuation in which they are first recognized. The amortization payments increase 2.75% each year while payroll is expected to increase 3. 00% each year. As a result, payments are expected to become a slightly smaller percentage of combined Tie r 1 and Tier 2 payroll each year.
Table VI-3
Tier 2 UAL Amortization
Outstanding Remaining Amortization
Balance Period Payment
2013 (Gain) or Loss 34$ 6 6$
2013 Assumption Changes 0 6 0
2014 (Gain) or Loss (441) 6 (86)
2014 Assumption Changes 80 6 16
2015 (Gain) or Loss 636 6 124
2015 Assumption Changes 309 6 60
2016 (Gain) or Loss (416) 6 (81)
2016 Assumption Changes 339 6 66
2017 (Gain) or Loss (546) 6 (106)
Measure F 4,166 6 810
2017 Assumption Changes 1,227 6 239
2018 (Gain) or Loss (1,873) 7 (318)
2018 Assumption Changes 1,148 7 195
2019 (Gain) or Loss 850 8 128
2019 Assumption Changes (1,085) 8 (164) 2020 (G)/L 3,171 9 434
2020 Assumption Change 2,367 9 324
2021 (G)/L (3,106) 10 (389)
2021 Assumption Change 218 10 27
7/1/2021 Payment 1,603
Total Tier 2 8,681$ 1,285$
Basic 4,824 724
COLA 3,857 561
Dollar amounts in thousands
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION VI – CONTRIBUTIONS
36 The chart below shows the historical UAL based on the Market Value of Assets and its projected decline over the next 20 years if all assumptions are met and as scheduled amortization payments are made.
Historical and Projected Unfunded Actuarial Liability
This amortization structure results in a total UAL rate of 44.4% of payroll for FYE 2023, which is more than the amount needed to pay the projected interest on the UAL based on the Market Value of Assets (28.2% of payroll). As a result, the dollar a mount of the UAL based on the Market Value of Assets is expected to decrease during FYE 2023.
Contributions for Administrative Expenses
Beginning with FYE 202 0, contributions for administrative expenses were set equal to $500 per member (increasing 3.0 p ercent each year) . For FYE 2022, the current assumption is $530 per member. Table VI-4 on the next page shows the number of members for each tier, the contributions for administrative expenses by tier, and the administrative expense contributi on rates by tier for FYE 2023 and 2022. Tier 1 members pay 3/11 ths of the administrative expenses expected for Tier 1, and Tier 2 members pay half of the administrative expenses expected for Tier 2.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION VI – CONTRIBUTIONS
37 Table VI-4
Administrative Expense By Group
Fiscal Year Ending 2023 Fiscal Year Ending 2022
Tier 1 Tier 2 Tier 1 Tier 2
Members 6,840 3,109 6,934 2,863 Administrative Expense 3,737$ 1,699$ 3,678$ 1,519$ Member Admin Expense Rate 0.77% 0.36% 0.73% 0.35%
Basic 0.48% 0.31% 0.47% 0.30%
COLA 0.29% 0.05% 0.26% 0.05%
City Admin Expense Rate 2.05% 0.36% 1.95% 0.35%
Basic 1.28% 0.31% 1.24% 0.30%
COLA 0.77% 0.05% 0.71% 0.05%
Dollar amounts in thousands
Contribution Rates and Amounts
Tier 1 members pay 3/11ths of the total normal cost (excluding reciprocity normal cost) and administrative expenses while the Cit y pays 8/11ths of the total normal cost (e xcluding reciprocity normal cost) , all of the reciprocity normal cost , 8/11ths of administrative expenses, and the UAL payments shown above. The total contribution cannot be less than the normal cost.
For Tier 2, members and the City each pay half of the total normal cost, half of administrative expenses, and half of the UAL payments. However, the member’s UAL contribution rate cannot increase by more than 0.33% of pay each year. The City contributes any amounts in excess of this cap that woul d otherwise be contributed by the member. The member and City contribution rates each cannot be less than 50% of the normal cost rate.
Tier 1 members who were rehired into Tier 2 and subsequently reclassified back into Tier 1 under Measure F pay half of the increased cost attributable to their Tier 2 service. The Board set a contribution rate of 3.0 percent of pay that applies to each individual member until they have paid off their individual UAL amount for reclassification. I n addition, Tier 2 members who were defined as classic members due to reciprocal service were reclassified as Tier 1 members under Measure F. All classic members pay an additional contribution rate to pay half of the additional liability attributable to re classifying these members. Th is contributi on rate is recalculated with each valuation. Table VI -5 shows the reclassification contribution rates applicable to classic members for FYE 2023 and 2022.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION VI – CONTRIBUTIONS
38 Table VI-5
Classic Member Contribution Rate
Fiscal Year Ending 2023 Fiscal Year Ending 2022
Basic COLA Total Basic COLA Total
Classic UAL Payment 44$ 31$ 75$ 43$ 30$ 73$ Expected Classic Payroll 6,850$ 6,983$
Classic Member Rate 0.64% 0.45% 1.09% 0.62% 0.43% 1.05% Dollar amounts in thousands
Table VI-6 shows the components of the member contribution rate s for FYE 2023 and 2022, including the average of the reclassification rates under Measure F over all Tier 1 payroll.
Table VI-6
Member Contribution Rates
Fiscal Year Ending 2023 Fiscal Year Ending 2022
Basic COLA Total Basic COLA Total
Tier 1
Normal Cost Rate 4.76% 1.88% 6.64% 4.78% 1.88% 6.66%
Admin Expense Rate 0.48% 0.29% 0.77% 0.47% 0.26% 0.73%
Regular Member Rate 5.24% 2.17% 7.41% 5.25% 2.14% 7.39% Average Reclassification Rate 0.08% 0.05% 0.13% 0.08% 0.06% 0.14% Average Member Rate 5.32% 2.22% 7.54% 5.33% 2.20% 7.53% Tier 2
Normal Cost Rate 6.41% 1.08% 7.49% 6.36% 1.07% 7.43%
Admin Expense Rate 0.31% 0.05% 0.36% 0.30% 0.05% 0.35%
UAL Rate 0.16% 0.12% 0.28% 0.26% 0.13% 0.39% Member Rate 6.88% 1.25% 8.13% 6.92% 1.25% 8.17%
Table V I-7 shows the City’s contribu tion rates and dollar amounts for FYE 2023 and 2022 assuming contributions are made throughout the fiscal year. The UAL rate is calculated as the payment shown in Tables VI -1 and VI-2 increased with one -half year of interest and divided by the projected payroll for the fiscal year. For FYE 2023, the projected payroll is $132.6 million for Tier 1 and $237.2 million for Tier 2.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION VI – CONTRIBUTIONS
39 Table VI-7
City Contribution Rates and Amounts Throughout the Year Fiscal Year Ending 2023 Fiscal Year Ending 2022
Basic COLA Total Basic COLA Total
Tier 1 UAL Payment 85,400$ 77,202$ 162,602$ 84,804$ 75,890$ 160,694$ 17,330$ 6,854$ 24,184$ 18,034$ 7,082$ 25,116$
13.07% 5.17% 18.24% 13.14% 5.16% 18.30%
1,697$ 1,021$ 2,718$ 1,702$ 974$ 2,676$
1.28% 0.77% 2.05% 1.24% 0.71% 1.95%
16,322$ 2,966$ 19,288$ 14,847$ 2,682$ 17,529$
6.88% 1.25% 8.13% 6.92% 1.25% 8.17%
120,749$ 88,044$ 208,793$ 119,387$ 86,628$ 206,015$
32.65% 23.81% 56.46% 33.94% 24.62% 58.56%
Dollar amounts in thousands
Tier 1 Normal Cost
Tier 1 Admin Expenses
Tier 2 Contribution
Aggregate Contribution
The City retains an option to make its Tier 1 contribution as a lump sum at the beginning of the fiscal year. Table VI-8 below shows the City contribution amounts for Tier 1 as of the beginning of the fiscal year assuming the Board elects to discount the amounts for one half year of interest at the valuation discount rate. Any amounts contributed after the beginning of the year should be adjusted for interest at the valuation discount rate.
Table VI-8
Estimated Tier 1 City Contribution Amounts - Beginning of Year Fiscal Year Ending 2023 Fiscal Year Ending 2022
Basic COLA Total Basic COLA Total
Tier 1
Normal Cost/Admin 18,426$ 7,627$ 26,053$ 19,113$ 7,802$ 26,915$ UAL 82,705 74,765 157,470 82,127 73,494 155,622 Total 101,131$ 82,392$ 183,523$ 101,240$ 81,296$ 182,537$ Dollar amounts in thousands
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION VI – CONTRIBUTIONS
40 Table VI-9 reconciles the change in the Tier 1 and Tier 2 member and City contributions from the contribution rates and amounts calculated in the prior valuation. The asset experience shown in the table includes investment returns, contributions, and administrative expense experience.
Exceptional investment returns resulted in a reduction in the contribution rate due to asset experience. In addi tion, higher-than-expected payroll growth caused a net reduction in the contribution rate because the UAL payment is spread over a larger payroll, but it also caused an increase in the dollar amount of the contribution because the normal cost rate is charg ed on a larger payroll.
Table VI-9
Reconciliation of Changes in Contribution Rates and Amounts City Aggregate
Member Rate Normal UAL Total Projected City
Tier 1 Tier 2 Cost Rate Rate Payroll Amount
FYE 2022 Contribution 7.53% 8.17% 12.64% 45.92% 58.56% 351,799$ 206,015$ Expected FYE 2023 7.59% 8.19% 12.15% 46.57% 58.72% 362,353 212,762 Changes Due to:
Asset experience 0.00% -0.10% 0.00% -2.23% -2.23% 362,353 (8,069) Demographic experience -0.06% 0.02% 0.15% 0.54% 0.69% 362,353 2,476 Payroll Change 0.00% -0.01% 0.00% -0.92% -0.92% 369,833 884 Assumption Change 0.01% 0.02% 0.01% 0.19% 0.20% 369,833 740 Subtotal -0.05% -0.06% 0.16% -2.42% -2.26% 369,833$ (3,969)$ FYE 2023 Contribution 7.54% 8.13% 12.31% 44.15% 56.46% 369,833$ 208,793$ Dollar amounts in thousands
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION VII – ACTUARIAL SECTION OF THE ACFR
41 The Governmen t Finance Officers Associatio n (GFOA) maintains a checklist of items to be included in the System’s Annual Comprehensive Financial Report ( ACFR) in order to receive recognition for excellence in financial reporting. The schedules in this section are listed by the GFOA for inclusion in the Actuarial Section of the System’s ACFR.
Table VII-1
Schedule of Funding Progress
Actuarial Actuarial Actuarial Unfunded AL
Valuation Value Liability Unfunded Funded Covered as a % of Date of Assets (AL) AL Ratio Payroll Covered Payroll
6/30/2021 10 2,513,095$ 4,562,981$ 2,049,886$ 55% 359,061$ 571% 6/30/2020 9 2,301,469 4,401,083 2,099,614 52% 341,552 615% 6/30/2019 8 2,228,802 4,200,708 1,971,906 53% 313,310 629% 6/30/2018 7 2,179,488 4,100,821 1,921,333 53% 298,985 643% 6/30/2017 6 2,101,435 3,923,966 1,822,531 54% 287,339 634% 6/30/2016 5 2,034,741 3,786,730 1,751,989 54% 266,823 657% 6/30/2015 4 2,004,481 3,569,898 1,565,417 56% 251,430 623% 6/30/2014 3 1,911,773 3,235,065 1,323,292 59% 234,677 564% 6/30/2013 2 1,783,270 3,013,763 1,230,493 59% 225,779 545% 6/30/2012 1 1,762,973 2,841,000 1,078,027 62% 225,859 477% Dollar amounts in thousands
1 Elimination of the Supplemental Retirement Benefit Reserve reduced the AL by $43 million 2 Reducing the discount rate from 7.50% to 7.25% and reducing wage inflation increased the AL by $64 million 3 Reducing the discount rate to 7.00% and eliminating the temporary 2% wage inflation increased the AL by $103 million 4 Demographic assumption changes increased the AL by $192 million. 5 Reducing the discount rate from 7.00% to 6.875% increased the AL by $60 million. 6 Measure F implementation increased the AL by $14 million and assumption changes decreased the AL by $16 million 7 Assumption changes, including reducing the discount rate from 6.875% to 6.75%, increased the AL by $54 million 8 Assumption changes decreased the AL by $3 million
9 Assumption changes, including reducing the discount rate from 6.75% to 6.625%, increased the AL by $37 million 10 Assumption changes increased the AL by $10 million
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
SECTION VII – ACTUARIAL SECTION OF THE ACFR
42 Table VII-2
Schedule of Funded Liabilities by Type
Actuarial Liability For
(A) (B) (C)
Retirees, Remaining
Active Beneficiaries Active
Valuation Member and Other Members' Reported
Date Contributions Inactives Liabilities Assets* (A) (B) (C) 6/30/2021 241,016$ 3,443,968$ 877,997$ 2,513,095$ 100% 66% 0% 6/30/2020 234,385 3,308,069 858,629 2,301,469 100% 62% 0% 6/30/2019 228,905 3,150,673 821,130 2,228,802 100% 63% 0% 6/30/2018 230,282 3,002,012 868,527 2,179,488 100% 65% 0% 6/30/2017 236,819 2,830,143 857,004 2,101,435 100% 66% 0% 6/30/2016 240,872 2,722,224 823,634 2,034,741 100% 66% 0% 6/30/2015 243,828 2,553,892 772,178 2,004,481 100% 69% 0% 6/30/2014 233,289 2,331,656 670,120 1,911,773 100% 72% 0% 6/30/2013 234,217 2,164,153 615,393 1,783,270 100% 72% 0% 6/30/2012 234,619 2,001,498 604,883 1,762,973 100% 76% 0% * Actuarial Value of Assets Dollar amounts in thousands Portion of Actuarial
Liability Covered
by Reported Assets
Table VII-3
Analysis of Financial Experience
Gain or (Loss) for Year Ending on Valuation Date Due To:
Actuarial Combined Total
Valuation Investment Liability Financial Non-Recurring Total Date Income Experience Experience Items Experience
6/30/2021 76,461$ (32,329)$ 44,132$ (9,687)$ 34,446$ 6/30/2020 (67,979) (32,761) (100,741) (36,981) (137,722) 6/30/2019 (88,845) (4,283) (93,129) 39,030 (54,099) 6/30/2018 (49,921) 4,702 (45,219) (56,306) (101,525) 6/30/2017 (44,650) (13,819) (58,468) 1,813 (56,655) 6/30/2016 (81,539) (29,989) (111,528) (60,233) (171,761) 6/30/2015 (3,641) (45,998) (49,639) (191,527) (241,167) 6/30/2014 39,675 (13,600) 26,075 (103,404) (77,329) 6/30/2013 (76,502) 2,899 (73,603) (63,668) (137,271) 6/30/2012 (119,331) 2,023 (117,308) 43,109 (74,199) Dollar amounts in thousands
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX A – MEMBERSHIP INFORMATION
43 Data Assumptions and Methods
In preparing our data, we relied on information supplied by the San José Department of Retirement Services. This information includes, b ut is not limited to, plan pr ovisions, employee data, and financial information. Our methodology for obtaining the data used for the valuation is based upon the following assumptions and practices:
• Records on the “Active” data file are considered to be Active if they do not have a reason for termination.
• Records on any of the data files are considered to be Inactive if they have a reason for termination of deferred vested or leave of absence/inactive. • Records on the “Retiree” and “Beneficiary/QDRO” files are considered in pay status if they do not have a date of death, are not inactive, and have not withdrawn from the plan. • All active employees are assumed to accrue a full year of service in all future years. • Service for inactives that have no service amo unt is calculated to be the t ime from date of hire to date of termination.
• The expected annual salary for Tier 1 fu ll-time active employees is calculated to be “compensation rate 2 earnable” multiplied by the expected pay periods for the year and increased by any expected pay increases.
• The expected annu al salary for Tier 1 part -time active employees and all Tier 2 act ive employees is calculated to be 80 hours multiplied by their hourly rate of pay in the pay period immediately preceding the valuation date, multiplied by the expected p ay periods for the year and increased by any expected pay increase.
• The Tier 1 annual benefit for inactives is set to be the accrued benefit provided. If an accrued benefit is not provided, then the annual benefit is calculated to be 2.5% of final compensation per year of service in Tier 1, up to a maximum of 75% of final compensation. Memb ers who terminated prior to June 30, 2001 have their final compensation adjusted for a three -year average rather than a 12-month average.
• The Tier 2 annual benefit for inactives is set to be the accrued benefit provided. If an accrued benefit is not provided, then the annual benefit is calculated to be 2.0% of final compensation per year of service in Tier 2, up to a maximum of 70% of final com pensation. The final compensation is adjusted for a three-year average.
• We assume any member found in last year’s “Retiree” file and not in this year’s file is deceased without a beneficiary and should be removed from the valuation data. • We assume all dece ased members with payments co ntinuing to a benefi ciary have already been accounted for in the “Retiree” file.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX A – MEMBERSHIP INFORMATION
44 Table A-1
Active Member Data
June 30, 2021 June 30, 2020 % Change
Tier 1
Count 1,413 1,527 -7.5%
Average Current Age 51.2 50.7 1.0% Average Eligibility Service 18.2 17.8 2.2% Average Benefit Service 17.6 17.2 2.3% Annual Expected Pensionable Earnings 152,079,775$ 157,240,775$ -3.3% Average Expected Pensionable Earnings 107,629$ 102,974$ 4.5% Tier 2
Count 2,362 2,215 6.6%
Average Current Age 39.0 38.5 1.3% Average Eligibility Service 3.7 3.1 19.4% Average Benefit Service 3.6 3.1 16.1% Average Expected Pensionable Earnings 87,630$ 83,211$ 5.3% Total
Count 3,775 3,742 0.9%
Average Current Age 43.5 43.5 0.0% Average Eligibility Service 9.1 9.1 0.0% Average Benefit Service 8.8 8.8 0.0% Average Expected Pensionable Earnings 95,116$ 91,275$ 4.2%
Table A-2
Schedule of Active Member Data
Valuation
Date
Active
Count
Annual
Payroll
Average
Annual Pay
Percent Change
in Average Pay
2021 3,775 359,061,000$ 95,115$ 4.2% 2020 3,742 341,552,000 91,275 5.4% 2019 3,617 313,310,000 86,622 3.0% 2018 3,554 298,985,000 84,126 -0.2% 2017 3,410 287,339,000 84,264 4.1% 2016 3,297 266,823,000 80,929 4.2% 2015 3,236 251,430,000 77,698 3.3% 2014 3,121 234,677,000 75,193 3.0% 2013 3,094 225,779,000 72,973 -0.6% 2012 3,076 225,859,000 73,426 5.0%
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX A – MEMBERSHIP INFORMATION
45 Table A-3
Payee Member Data
June 30, 2021 June 30, 2020 %Change
Retired
Count 3,783 3,719 1.7% Average Age 70.0 69.8 0.3% Average Annual Benefit 54,995$ 53,469$ 2.9% Service Disability
Count 116 118 - 1.7% Average Age 67.9 66.8 1.6% Average Annual Benefit 40,109$ 39,024$ 2.8% Non-Service Disability
Count 68 70 - 2.9% Average Age 67.7 66.9 1.2% Average Annual Benefit 35,070$ 34,415$ 1.9% Beneficiaries & SADROs
Count 544 534 1.9% Average Age 75.2 75.0 0.3% Average Annual Benefit 31,177$ 29,421$ 6.0% Total
Count 4,511 4,441 1.6% Average Age 70.6 70.3 0.4% Average Annual Benefit 51,439$ 49,893$ 3.1%
Table A-4
Schedule Of Retirees And Beneficiaries Added To And Removed From Rolls % Increase Average
Period Count
Annual
Allowances Count
Annual
Allowances Count
Annual
Allowances Count
Annual
Allowances
in Annual
Allowances
Annual
Allowances
2020-2021 4,441 221,575$ 188 9,246$ 118 5,090$ 4,511 232,043$ 4.7% 51$ 2019-2020 4,359 210,350 208 9,499 126 4,596 4,441 221,575 5.3% 50 2018-2019 4,225 198,157 230 10,394 96 3,634 4,359 210,350 6.2% 48 2017-2018 4,115 187,714 223 9,133 113 3,994 4,225 198,157 5.6% 47 2016-2017 4,003 177,751 225 8,843 113 3,894 4,115 187,714 5.6% 46 2015-2016 3,901 168,917 212 7,907 110 3,904 4,003 177,751 5.2% 44 2014-2015 3,800 159,124 200 8,266 99 3,122 3,901 168,917 6.2% 43 2013-2014 3,711 150,934 194 7,274 105 3,405 3,800 159,124 5.4% 42 2012-2013 3,602 142,063 198 7,036 89 2,360 3,711 150,934 6.2% 41 2011-2012 3,428 129,869 250 14,158 76 1,964 3,602 142,063 9.4% 39 Dollar amounts in thousands
Removed from Rolls End of PeriodBeginning of Period Added to Rolls FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX A – MEMBERSHIP INFORMATION
46 Table A-5
Inactive Member Data
June 30, 2021 June 30, 2020 %Change
Tier 1
Terminated Vested / Reciprocal
Count 868 912 -4.8% Average Age 48.7 48.2 1.0% Average Annual Benefit 19,009$ 18,411$ 3.2% Average Contribution Balance with Interest 70,616$ 67,356$ 4.8% Non-Vested Terminated
Count 66 67 -1.5% Average Age 46.8 45.9 2.0% Average Annual Benefit 2,632$ 2,893$ -9.0% Average Contribution Balance with Interest 14,174$ 14,802$ -4.2% Total
Count 934 979 -4.6% Average Age 48.6 48.0 1.3% Average Annual Benefit 17,851$ 17,349$ 2.9% Average Contribution Balance with Interest 66,627$ 63,760$ 4.5% Tier 2
Terminated Vested / Reciprocal
Count 266 230 15.7% Average Age 39.8 38.5 3.4% Average Annual Benefit 4,907$ 4,387$ 11.8% Average Contribution Balance with Interest 18,529$ 16,444$ 12.7% Non-Vested Terminated
Count 463 405 14.3% Average Age 38.1 38.1 0.0% Average Annual Benefit 1,979$ 1,786$ 10.8% Average Contribution Balance with Interest 8,095$ 7,105$ 13.9% Total
Count 729 635 14.8% Average Age 38.8 38.2 1.6% Average Annual Benefit 3,047$ 2,728$ 11.7% Average Contribution Balance with Interest 11,902$ 10,487$ 13.5% Total
Count 1,663 1,614 3.0%
Average Age 44.3 44.2 0.2% Average Annual Benefit 11,362$ 11,597$ -2.0% Average Contribution Balance with Interest 42,638$ 42,801$ -0.4% If not provided in the data, benefit is calculated using the data assumptions outlined in Appendix A.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX A – MEMBERSHIP INFORMATION
47 Table A-6
Distribution of Active Member Counts as of June 30, 2021 Years of Benefit Service
Age Under 1 1 to 4 5 to 9 10 to 14 15 to 19 20 to 24 25 to 29 30 to 34 35 to 39 40 and up Total Under 25 30 42 0 0 0 0 0 0 0 0 72 25 to 29 99 275 20 0 0 0 0 0 0 0 394 30 to 34 64 352 140 3 0 0 0 0 0 0 559 35 to 39 37 231 168 57 7 0 0 0 0 0 500 40 to 44 29 169 139 89 56 39 0 0 0 0 521 45 to 49 20 123 85 61 68 126 10 0 0 0 493 50 to 54 7 86 89 58 75 136 43 4 0 0 498 55 to 59 16 82 57 45 40 97 21 6 0 0 364 60 to 64 10 50 47 50 20 38 7 6 2 0 230 65 to 69 5 18 25 12 15 30 9 5 0 1 120 70 and up 0 2 3 7 6 3 3 0 0 0 24 Total Count 317 1,430 773 382 287 469 93 21 2 1 3,775 Distribution of Average Expected Salaries as of June 30, 2021 Years of Benefit Service
Age Under 1 1 to 4 5 to 9 10 to 14 15 to 19 20 to 24 25 to 29 30 to 34 35 to 39 40 and up Total Under 25 70,571$ 69,769$ 0$ 0$ 0$ 0$ 0$ 0$ 0$ 0$ 70,103$ 25 to 29 69,961 75,811 81,167 0 0 0 0 0 0 0 74,613 30 to 34 78,474 80,077 92,634 89,342 0 0 0 0 0 0 83,088 35 to 39 83,326 83,289 97,399 104,295 115,130 0 0 0 0 0 90,873 40 to 44 85,463 92,055 103,615 100,063 108,872 100,314 0 0 0 0 98,566 45 to 49 80,471 98,702 101,347 107,004 103,856 108,507 123,604 0 0 0 103,168 50 to 54 87,275 99,994 107,747 106,771 106,177 106,312 111,254 91,045 0 0 105,547 55 to 59 96,504 97,246 104,180 105,293 103,866 111,143 117,654 130,653 0 0 105,453 60 to 64 96,625 102,268 106,206 111,221 117,495 101,823 103,311 95,789 147,881 0 106,284 65 to 69 98,562 104,567 101,020 108,272 101,900 109,764 99,491 122,311 0 59,064 104,894 70 and up 0 97,660 158,915 97,311 93,598 100,956 107,131 0 0 0 105,795 Avg. Salary 78,393$ 85,782$ 100,251$ 105,021$ 106,351$ 107,225$ 112,158$ 111,161$ 147,881$ 59,064$ 95,116$
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX A – MEMBERSHIP INFORMATION
48 Chart A-1
0 8 88
222
298 340
231
131 76 1972
394
551 412
299
195 158
133
99 44
5 0
100
200
300
400
500
600
<25 25 - 29 30 - 34 35 - 39 40 - 44 45 - 49 50 - 54 55 - 59 60 - 64 65 - 69 70+ Count
Age Group
Active Count Distribution
Tier 1 Tier 2
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX A – MEMBERSHIP INFORMATION
49 Table A-7
Retirees and Disabled by Attained Age and Benefit Effective Date as of June 30, 2021 Age
Under 50 50 to 54 55 to 59 60 to 64 65 to 69 70 to 74 75 to 79 80 to 84 85 to 89 90 and up Total Prior to 1995 0 0 1 3 6 8 16 92 98 105 329 1996 0 2 0 0 1 1 1 16 6 0 27 1997 0 0 1 0 0 1 11 28 6 3 50 1998 0 0 1 0 2 2 19 9 12 0 45 1999 0 0 0 0 2 5 33 16 5 4 65 2000 0 0 0 0 1 7 48 13 4 0 73 2001 0 0 0 1 2 4 40 21 3 1 72 2002 0 0 0 1 1 32 54 24 5 1 118 2003 0 0 1 1 3 53 27 19 3 1 108 2004 1 0 2 2 12 64 24 13 2 0 120 2005 0 0 0 2 11 76 38 20 4 1 152 2006 1 1 3 3 17 67 35 14 1 0 142 2007 0 0 1 3 33 66 23 11 1 2 140 2008 0 1 0 5 61 42 31 9 2 0 151 2009 0 2 2 9 64 35 22 5 0 0 139 2010 0 0 0 17 101 52 26 5 1 0 202 2011 0 2 2 31 155 92 38 9 1 1 331 2012 0 0 5 51 82 45 21 8 0 0 212 2013 0 1 2 81 21 29 7 1 0 0 142 2014 1 1 6 94 22 16 6 0 0 0 146 2015 0 0 14 101 29 16 3 2 0 0 165 2016 0 1 20 97 21 27 2 0 1 0 169 2017 0 2 45 80 34 14 5 0 0 0 180 2018 1 1 82 43 28 18 7 2 0 0 182 2019 0 10 103 39 28 12 2 0 0 0 194 2020 0 11 89 38 17 4 2 0 0 0 161 2021 0 10 96 19 21 5 1 0 0 0 152 Total 4 45 476 721 775 793 542 337 155 119 3,967 Average Age at Retirement/Disability 57.6
Average Current Age 69.9
Average Annual Pension 54,218$
Benefit Effective
Fiscal Year End
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX A – MEMBERSHIP INFORMATION
50 Table A-8
Distribution of Retirees, Disabled Members,
and Beneficiaries as of June 30, 2021
Age Count Annual Benefit
Under 50 17 448,470$
50 to 54 55 3,510,480
55 to 59 494 25,711,104
60 to 64 776 41,086,292
65 to 69 848 45,869,409
70 to 74 878 48,830,188
75 to 79 621 32,129,914
80 to 84 420 19,617,481
85 to 89 216 8,335,122
90 and up 186 6,504,062
Total 4,511 232,042,522$
Chart A-2
0 100
200
300
400
500
600
700
800
900
1,000Count
Count Distribution
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX A – MEMBERSHIP INFORMATION
51 Chart A-3
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
Benefit in Millions
Benefit Distribution
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX A – MEMBERSHIP INFORMATION
52 Table A-9
Change in Plan Membership
TIER 1
Actives
Vested
Terminated /
Reciprocal
Non-Vested
Terminated Retirees Disabilities
Beneficiary/
SADRO Total
June 30, 2020 1,527 912 67 3,706 188 534 6,934 New Entrants 0 0 0 0 0 0 0 Rehires 15 (13) (1) (1) 0 0 0 Non-Vested Terminated (1) 0 1 0 0 0 0 Vested Terminated / Reciprocals (33) 33 0 0 0 0 0 Return of Contributions (1) (13) (3) 0 0 0 (17) Disabilities 0 (1) 0 (1) 2 0 0 Retirements (94) (52) 0 146 0 0 0 Deaths (2) 0 0 (85) (6) 36 (57) Beneficiary Deaths 0 0 0 0 0 (26) (26) Tier Adjustment 0 2 0 0 0 0 2 Miscellaneous Adjustments 2 0 2 0 0 0 4 June 30, 2021 1,413 868 66 3,765 184 544 6,840 TIER 2
June 30, 2020 2,215 230 405 13 0 0 2,863 New Entrants 286 2 22 0 0 0 310 Rehires 31 (4) (27) 0 0 0 0 Non-Vested Terminated (81) 0 81 0 0 0 0 Vested Terminated / Reciprocals (45) 45 0 0 0 0 0 Return of Contributions (37) (4) (18) 0 0 0 (59) Disabilities 0 0 0 0 0 0 0 Retirements (4) 0 (1) 5 0 0 0 Deaths (3) 0 0 0 0 0 (3) Beneficiary Deaths 0 0 0 0 0 0 0 Tier Adjustment 0 (2) 0 0 0 0 (2) Miscellaneous Adjustments 0 (1) 1 0 0 0 0 June 30, 2021 2,362 266 463 18 0 0 3,109 TOTAL
June 30, 2020 3,742 1,142 472 3,719 188 534 9,797
New Entrants 286 2 22 0 0 0 310
Rehires 46 (17) (28) (1) 0 0 0
Non-Vested Terminated (82) 0 82 0 0 0 0
Vested Terminated / Reciprocals (78) 78 0 0 0 0 0
Return of Contributions (38) (17) (21) 0 0 0 (76)
Disabilities 0 (1) 0 (1) 2 0 0
Retirements (98) (52) (1) 151 0 0 0
Deaths (5) 0 0 (85) (6) 36 (60)
Beneficiary Deaths 0 0 0 0 0 (26) (26)
Miscellaneous Adjustments 2 (1) 3 0 0 0 4
June 30, 2021 3,775 1,134 529 3,783 184 544 9,949
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX B – ACTUARIAL ASSUMPTIONS AND METHODS
53 Actuarial Assumptions
The price inflation, wage inflation , amortization payment growth , and discount rate s were adopted by the Board of Admin istration with our input at the October 21, 2021 Board meeting.
All other assumptions were adopted at the November 21, 201 9 Board meeting based on recommendations from our experience study covering plan exp erience through June 30, 201 9.
Please refer to the full experience study report for details, including the ratio nale for each assumption.
1. Discount Rate
6.625%. The Board expects a long-term rate of return of 7.1% based on Meketa’s 2021 20-year capital market assumptions and the System’s current investment policy. A margin for adverse deviation was used to improve the probability of achieving the discount rate.
2. Wage Inflation and Payroll Growth
3.00%, compounded annually.
3. Amortization Payment Growth
2.75%, compounded annually.
4. Price Inflation
2.25%, compounded annually.
5. Administrative Expenses
$530 per member for FYE 2022, increasing at the wage inflation assumption of 3.00% per annum.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX B – ACTUARIAL ASSUMPTIONS AND METHODS
54 6. Salary Increase Rate
In addition to the wage inflation c omponent of 3.00% shown above , the following merit component is added based on an individual member’s years of service:
Table B-1
Salary Merit Increases
Years of Service Merit/ Longevity Years of Service Merit/ Longevity 0 3.75% 8 1.00
1 3.00 9 0.85
2 2.50 10 0.70
3 2.15 11 0.55
4 1.85 12 0.45
5 1.60 13 0.30
6 1.40 14 0.20
7 1.20 15+ 0.10
7. Rates of Termination
Rates of termination are shown in the following Table B-2.
Table B-2
Rates of Termination
Years of Service Termination Rate Years of Service Termination Rate 0 15.00% 8 5.50
1 12.75 9 4.75
2 11.75 10 4.25
3 10.75 11 4.00
4 9.75 12 3.75
5 8.75 13 3.50
6 7.75 14 3.25
7 6.50 15+ 3.25
Termination rates do not apply once a member is eligible for retirement.
8. Rate of Reciprocity
30% of terminat ing employees that are assumed to subsequently work for a rec iprocal employer and receive 3.00% pay increases per year.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX B – ACTUARIAL ASSUMPTIONS AND METHODS
55 9. Rates of Refund
Tier 1:
Rates of vested terminated and reciprocal employees electing a refund of contributions are shown in the following Table B-3.
Table B-3
Rates of Refund
Years of
Service Under Age 35 Ages 35 - 44
Ages 45 and
Older
0-4 100.00% 100.00% 100.00%
5 25.00 15.00 18.00
6 20.00 12.50 15.00
7 20.00 10.00 12.00
8 20.00 10.00 9.00
9 20.00 10.00 6.00
10 20.00 10.00 3.00
11 17.50 10.00 0.00
12 15.00 10.00 0.00
13 10.00 10.00 0.00
14 10.00 7.50 0.00
15 10.00 5.00 0.00
16 10.00 2.50 0.00
17+ 10.00 0.00 0.00
Refund rates do not apply once a member is eligible for retirement.
Tier 2:
Vested terminated and reciprocal employees are expected to take a refund if it exceeds the actuarial present value of their deferred benefit payment.
10. Deferred Vested Member Retirement Age
Tier 1 termi nated vested members are assumed to retire from age 57 and Tie r 2 terminated vested members are assumed to retire at age 62.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX B – ACTUARIAL ASSUMPTIONS AND METHODS
56 11. Rates of Retirement for Tier 1 Members
Rates of retirement for Tier 1 members are based on age acco rding to the following Table B-4 – Tier 1.
Table B-4 – Tier 1
Rates of Retirement by Age and Service
Age
Less than 15 Years
of Service
15 or more Years
of Service and less
than 30 Years of
Service
30 or more Years
of Service
50 0.0% 0.0% 70.0%
51 0.0 0.0 70.0
52 0.0 0.0 70.0
53 0.0 0.0 70.0
54 0.0 0.0 70.0
55 10.0 35.0 50.0
56 10.0 20.0 45.0
57 10.0 20.0 40.0
58 5.0 15.0 35.0
59 5.0 15.0 30.0
60 5.0 15.0 30.0
61 10.0 20.0 30.0
62 15.0 20.0 30.0
63 20.0 20.0 30.0
64 20.0 20.0 30.0
65 20.0 20.0 30.0
66 25.0 30.0 30.0
67 25.0 35.0 30.0
68 25.0 35.0 30.0
69 25.0 35.0 30.0
70 & over 100.0 100.0 100.0
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX B – ACTUARIAL ASSUMPTIONS AND METHODS
57 12. Rates of Retirement for Tier 2 Members
Rates of retirement for Tier 2 members are based on age and service as shown in the following Table B-4 – Tier 2. These rates are based on CalPERS retirement rates for its 2.0% at age 62 formula with adjustments based on professional judgment for differences between the CalPERS benefits and the benefits provided to Tier 2 members.
Table B-4 – Tier 2
Tier 2 Rates of Retirement by Age and Service
Years of Service
Age 5 – 10 11 – 20 21 – 25 26 – 34 35 +
55 3.0% 5.0% 7.0% 10.0% 15.0%
56 2.0% 3.5% 4.0% 7.0% 10.5%
57 2.5% 4.5% 5.0% 8.5% 12.75%
58 3.0% 5.5% 7.0% 11.0% 16.5%
59 3.5% 7.0% 9.0% 13.5% 20.25%
60 – 61 4.0% 8.5% 10.0% 14.5% 21.75%
62 7.5% 12.5% 17.5% 25.0% 100.0%
63 – 69 5.0% 10.0% 15.0% 25.0% 100.0%
70 & over 100.0% 100.0% 100.0% 100.0% 100.0%
13. Rates of Disability
Disability rates are equal to the 0.973 times the CalPERS 2017 non -industrial disability incidence rates for miscellaneous state agencies, blended 55% male and 45% female. Sample disability rates of active members are provided in Table B-5.
Table B-5
Rates of Disability at Selected Ages
Age Disability
25 0.0272
30 0.0303
35 0.0613
40 0.1366
45 0.2519
50 0.3240
55 0.2631
60+ 0.2191
45% of disabil ities are assumed to be duty related, and 55% are assumed to be non -duty related.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX B – ACTUARIAL ASSUMPTIONS AND METHODS
58 14. Base Rates of Mortality
Base mortality rates are based on the sex -distinct employee and retiree mortality tables shown below.
Table B-6
Base Mortality Tables
Category Male Female
Healthy
Annuitant
0.995 times the 2010 Public
General Mortality Table (PubG -
2010) for Healthy Retirees
0.960 times the 2010 Public
General Mortality Table (PubG -
2010) for Healthy Retirees
Healthy Non -
Annuitant
0.992 times the 2010 Public
General Mortality Table (PubG -
2010) for Healthy Employees
1.084 times the 2010 Public
General Mortality Table (PubG -
2010) for Healthy Employees
Disabled
Annuitant
1.051 times the CalPERS 2009
Ordinary Disability Mortality
Table
0.991 times the CalPERS 2009
Ordinary Disability Mortality
Table
15. Rates of Mortality Improvement
Future mortality improvements are reflecte d by applying the most recent projection scale issued by the Society of Actuaries on a generational basis from the base year of 2010 for the Pub2010 tables and 2009 for the CalPERS tables. The p rojection scale us ed for the June 30, 2021 valuation is MP-2021.
16. Family Composition
Percentage married is shown in the foll owing Table B -7. Male retirees are assumed to be three years older than their pa rtner, and female retirees ar e assumed to be two y ears younger than their partner.
Table B-7
Percentage Married
Gender Percentage
Males 80%
Females 60%
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX B – ACTUARIAL ASSUMPTIONS AND METHODS
59 17. Changes Since the Last Valuation
The assumed rate of mortality improvement was updated from MP-2020 to MP-2021.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX B – ACTUARIAL ASSUMPTIONS AND METHODS
60 Contribution Allocation Procedure
The contribution allocation procedure primarily consists of an actuarial cost method, an asset smoothing method, and an amortization method as described below. All components of the contribution allocation procedure were establis hed prior to the June 30, 2010 actuarial valuation except as specifically noted below.
1. Actuarial Cost Method
The Entry Age actuarial cost method was used for active employees, whereby the normal cost is computed as the level annual percentage of pay requ ired to fund all benefits between each member’s date of hire and last assumed date of employment. The Actuarial Liability is the difference between the present value of future benefits and the present value of future normal costs. Or, equivalently, it is t he accumulation of no rmal costs for all periods prior to the valuation date. The no rmal cost and Actuarial Liability are calculated on an individual basis. The sum of the individual amounts is the normal cost and Actuarial Liability for the System. The Actuarial Liability for the System represents the target amount of assets the System should have as of the valuation date according to the actuarial cost method.
2. Asset Valuation Method
For the purpose of determining contribution rates and amounts, an Actuarial Value of Assets is used that dampens the volatility in the Market Value of Assets, resulting in a smoother pattern of contribution rates.
The Actuarial Value of Assets is calculated by recognizing 20% of the difference in each of the prior four years of actual investment returns compared to the expected retu rn on the Market Value of Assets.
3. Amortization Method
The Unfunded Actuarial Liability is the difference between the Actuarial Liability and the Actuarial Value of Assets.
The Tier 1 Unfunded Actuarial Liability as o f June 30, 2009 is amortized as a level percentage of Tier 1 pay over a closed 30 -year period commencing June 30, 2009. Tier 1 actuarial gains and losses and plan changes are amortized over 20-year periods and Tier 1 assumption changes are amortized over 2 5-year periods beginning with the valuation date in which they first arise. Effective June 30, 2017, all prior assumption amortization base periods were increased by 5 years so they have the same remaining period as if they had origina lly been amortized over 25 years. Amortization payments are scheduled to increase 2.75% each year.
The Tier 2 Unfunded Actuarial Liability as of June 30, 2017 is amortized over a closed 10-year period. Future Tier 2 actuarial gains and losses , assumption changes, and plan FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX B – ACTUARIAL ASSUMPTIONS AND METHODS
61 changes will be amortized over 10-year periods beginning with th e valuation date in which they first arise. Amortization payments are scheduled to increase 2.75% each year.
4. Contributions
The Board adopted a policy in 2010 and modified it in 2015 setting the City’s contribution to be the UAL contribution amount report ed in the actuarial valuation plus the greater of the normal cost dollar amount reported in the actuarial valuation (adjusted for interest based on the time of the contribut ion) and the dollar a mount determined by applying the normal cost as a percent of p ayroll reported in the actuarial valuation to the actual payroll for the fiscal year. The City and Member contributions determined by a valuatio n become effective for the fiscal year commencing one year after the valuation date. Contributions are generally made on a payroll-by-payroll basis although the City retains an option to make its contribution as of the beginning of the year.
The total con tribution rate is the sum of the normal cost rate , assumed administrative expenses, and the UAL rate. Under Measure F, the total contribution rate cannot be less than the normal cost rate. The normal cost rate is determined by dividing the total normal cos t determined under the actuar ial cost method by th e payroll expected for members active on the valuation date. The UAL payments are adjusted for interest from the valuation date to the date of expected payment in the following fiscal year. The UAL rate is determined by dividing the UA L payments by the tot al expected payroll for the year (including members active on the valuation date and new entrants expected to replace active members who are expected to leave employment).
For Tier 1, members contribute 3/ 11ths of the normal cost rate (including administr ative expenses, but excluding reciprocity), and the City pays the remainder of the total contribution rate. Tier 1 members who were rehired into Tier 2 and then returned to Tier 1 under Measure F also pay half of the increased cost attributable to their Tier 2 service.
For Tier 2, the members and the City each pay h alf of the total contribution rate. However, the member’s UAL contribution rate cannot increase by more than 0.33% of pay each year.
The City co ntributes any amounts in exce ss of this cap that w ould otherwise be contributed by the member.
5. Changes Since the Last Valuation
None.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX C – SUMMARY OF PLAN PROVISIONS
TIER 1
62 1. Membership Requirement
Participation in the Plan is immediate upon the first day of full-time employment for members h ired before September 30, 201 2, including members that are rehired after September 30, 2012 and had prior servic e under Tier 1 and did not take a return of contributions. In addition, any person accepting employment on or after September 30, 2012 who is otherwise eligible for this plan and who was a “classic” member in another California public retirement system with which this plan has reciprocity, and who has a break in service of less than six months from that covered employment and employment with the C ity, shall be a Tier 1 member of this plan.
2. Final Compensation
Members who separated from city service prior to June 30, 2001
The highest average annual compensation earnable during any period of three consecutive years.
Members who separated from city service on or after June 30, 2001
The highest av erage annual compensation earnable during any period of twelve consecutive months.
3. Credited Service
One year of service credit is given for 1,739 or more hours of Federated city service rendered in any ca lendar year. A partial year ( fraction with the num erator equal to the hours worked , and the denominator equal to 1,739) is given for each calendar year with less than 1,739 hours worked.
4. Member Contributions
Member
The amount needed to fund 3/11 ths of b enefits accruing for the curr ent year . These contributions are credited with interest at 3.0% per year, compounded annually.
Employer
The Employer contributes the remaining amounts necessary to maintain the soundness of the Retirement System.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX C – SUMMARY OF PLAN PROVISIONS
TIER 1
63 5. Service Retirement
Eligibility
Age 55 with five years of service, or any age with 30 years of service.
Benefit – Member
2.5% of Final Compensation for each year of credit ed service, subject to a maximum of 75% of Final Compensation.
Benefit – Survivor
50% of the service retirement benefit paid to a qualified survivor.
6. Service-Connected Disability Retirement
Eligibility
No age or service requirement.
Benefit – Member
2.5% of Final Compensation for each year of credited service , subject to a minimum of 40 % and a maximum of 75% of Fina l Compensation . Workers’ Compensation benefits are generally offset from the service-connected benefits under this system.
Benefit – Survivor
50% of the disability retirement benefit paid to a qualified survivor.
7. Non-Service Connected Disability Retirement
Eligibility
Five years of service.
Benefit – Member
Members who were hired prior to September 1, 1998:
The amount of the service -connected benefit reduced by 0.5% for each year that the disability age preceded 55.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
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APPENDIX C – SUMMARY OF PLAN PROVISIONS
TIER 1
64 Members who were hired on or after September 1, 1998:
20% of Final Compensation, plus 2% of Final Compensation for each year of credited service between six and 16 years, plus 2.5% of Final Compensation for each year of credited service in excess of 16 years, subject to a maximum of 75% of Final Compensation.
Benefit – Survivor
50% of the disability retirement benefit paid to a qualified survivor.
8. Death Before Retirement
Less than five Years of Service, or No Qualified Survivor
Lump sum benefit equal to t he accumulated refund of all employee contr ibutions with interest, plus one month of salary for each year of service, up to a maximum of six years.
Five or more Years of Service
2.5% of Final Compensation for each year of credited service, subject to a maximum of 75% of Final Compen sation. Benefit is su bject to a minimum of 40% of Final Compensation if member dies while an active employee. The benefit is payable until the spouse or registered domestic partner marries or establishes a domestic partnership. If the member was age 55 with 20 years of service at death, the benefit is payable for the lifetime of the member’s spouse or registered domestic partner.
9. Withdrawal Benefits
Less than five Years of Service
Lump sum benefit equal to the accumulated employee contributions with interest.
Five or more years of credited service
The amount of the service retirement benefit, payable at age 55.
10. Additional Post-retirement Death Benefit
A death benefit p ayable as a lump sum equal to $5 00 will be paid to a q ualified survivor upon the member’s death.
11. Post-retirement Cost-of-Living Benefit
Benefits are increased every April 1 by 3.0%, regardless of actual inflation.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX C – SUMMARY OF PLAN PROVISIONS
TIER 1
65 12. Changes Since the Last Valuation
None.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX C – SUMMARY OF PLAN PROVISIONS
TIER 2
66 1. Membership Requirement
Any person who is hired, reh ired or reinstated by the Cit y on or after Septemb er 30, 2012 except those who elect to participate in a defined contribution plan, had prior service under Tier 1 and did not take a return of contributions, or had prior service as a “classic” member in a reciprocal system with less than a six month break in service.
2. Final Compensation
The average annual compensation earnable during the highest three consecutive years of service. Final compensation only includes base pay, excluding premium pay and any othe r additional compensation.
3. Credited Service
One year of service credit is given for 2,080 or more hours of Federated city service rendered in any calendar year. A partial year (fraction with the numerator equal to the hours worked, and the denominator eq ual to 2,080) is given for ea ch calendar year with less than 2,080 hours worked.
4. Member Contributions
50% of total Tier 2 contributions to the pension plan, including, but not limited to administrative expenses, normal cost , and Unfunded Actuarial Liability. However, the member’s UAL contribution rate c annot increase by more than 0.33% of pay each year. The City contributes any amounts in excess of this cap that would otherwise be contributed by the member.
The member contribution rate cannot be less than 50% of the normal cost rate.
5. City Contributions
50% of total Tier 2 contributions to the pension plan, including, but not limited to administrative expenses, normal cost, and Unfunded Actuarial Liability. In addition, the City contributes any UAL amoun ts in excess of the member UA L cap until the membe r rate covers 50% of the UAL rate.
The City contribution rate cannot be less than 50% of the normal cost rate.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX C – SUMMARY OF PLAN PROVISIONS
TIER 2
67 6. Unreduced Service Retirement
Eligibility
Age 62 with five years of service.
Benefit – Member
2.0% of Final Compensation for each year of credited service attributable to Tier 2, subject to a maximum of 70% of Final Compensation.
Benefit – Survivor
50% of the service retirement benefit paid to a qualified survivor.
7. Early Service Retirement
Eligibility
Age 55 with five years of service.
Benefit – Member
Benefit reduced by a factor of 5% for each year the member retires before age 62.
The early retirement reduction is applied to the benefit after the application of the maximum of 70% of final compensation.
8. Service-Connected Disability Retirement
Eligibility
No age or service requirement.
Benefit – Member
2.0% of Final Compensation for each year of credited service, subject to a minimum of 40% of Final Compensation and a maximum of 70% of Final compensation, less t he amounts specified in Section 3.28.1330 and Section 3.28.1340.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX C – SUMMARY OF PLAN PROVISIONS
TIER 2
68 9. Non-Service Connected Disability Retirement
Eligibility
Five years of service.
Benefit – Member
2.0% of Final Compensation for each year of credited service attributable to Tier 2, subject to a minimum of 20% of Final Comp ensation and a maximum of 70% of Final Compensation less the amounts specified in Section 3.28.1330 and Section 3.28.1340.
10. Death Before Retirement
Less than five Years of Service, or No Qualified Survivor
Lump sum bene fit equal to the accu mulated refund of all employee contributions with interest, plus one month of salary for each year of service, up to a maximum of six years.
Five or more Years of Service
2.5% of Final Compensation for each year of credited service, subject to a maximum of 70% of Final Compensation. Benefit is subject to a minimum of 40% of Final Compensation if member dies while an active employee. The benefit is payable until the spouse or registered domestic partner mar ries or establishes a domesti c partnership. If the member was age 55 with 20 years of service at death, the benefit is payable for the lifetime of the member’s spouse or registered domestic partner.
11. Withdrawal Benefits
Less than five years of credited service
Lump sum benefit equal to the accumulated employee contributions with interest.
Five or more years of credited service
The amount of the service retirement benefit reduced for early retirement, and payable when retirement eligibility is reached.
12. Benefit Forms
Annuity benefits are paid i n the f orm of a 50% joint and survivor annuity or an actuarially equivalent annuity with 75% or 100% continuance to a survivor.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX C – SUMMARY OF PLAN PROVISIONS
TIER 2
69 13. Post-retirement Cost-of-Living Benefit
Benefits are increased every April 1 by the change in the December CPI-U for San José-San Francisco-Oakland, subject to a cap based on years of service as shown in the table below.
Years of Service Maximum COLA
At least 1, but less than 11 1.25%*
At least 11, but less than 21 1.50%
At least 21, but less than 26 1.75%
At least 26 2.00%
*1.5% for members hired before Measure F effective date
The first COLA after retirement shall be prorated based on the number of months retired.
14. Changes Since the Last Valuation
None.
Note: The summary of ma jor plan provisions is design ed to outline principal plan benefits. If the Department of Retirement Services should find the plan summary no t in accordance with the actual provisions, the actuary should immed iately be alerted so the proper provisions are valued.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX D – GLOSSARY OF TERMS
70 1. Actuarial Liability
The Actuarial Liability is the difference between the present value of future benefits and the present value of total future normal costs. This is also referred to as the “accrued liability” or “actuarial accrued liability.” The Actuarial Liability represe nts the targeted amount of assets a plan should have as of a valuation date according to the actuarial cost method.
2. Actuarial Assumptions
Estimates of future experience with respect to rates of mortality, disability, turnover , retirement rate or rates of investment in come, and salary increases. Demographic actuarial assumptions (rates of mortality, disability, turnover , and retirement) are generally based on past experience, often modified for projected changes in conditions. Economic assumptions (price inflation, wage inflation, and investment income) are generally based on expectations for the future that may differ from the Plan’s past experience.
3. Actuarial Cost Method
A mathematical budgeting procedure for allocating the dollar amount of the present value of future benefits between future normal cost and Actuarial Liability.
4. Actuarial Gain (Loss)
The difference between actual experience and the anticipated experience based on the actuarial assumptions during the period between two actuarial valuation dates.
5. Actuarial Present Value
The amount of funds currently required to provide a payment or series of payments in the future. It is determined by discounting future payments at the discount rate and by probabilities of payment.
6. Actuarially Determined Contribution
The p ayment to the System as determined by the actuary using a contribution allocation procedure. It may or may not be the actual amount contributed to the System.
7. Amortization Method
A method for determining the amount, timing, and patte rn of payment s of the Unfunded Actuarial Liability.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX D – GLOSSARY OF TERMS
71 8. Asset Valuation Method
The method used to develop the Actuarial Value of Assets from the Market Value of Assets typically by smoothing investment returns above or below th e assumed rate of return over a period of time.
9. Contribution Allocation Procedure
A procedure typically using an actuarial cost method, an asset valuation method, and an amortization method to develop the actuarially determined contribution.
10. Discount Rate
The rate of interest used to discount f uture b enefit payments to determine the actuarial present value. For purposes of determining an actuarially determined contribution , the discount rate is typically based on the long-term expected return on assets.
11. Funded Status or Funding Ratio
The Market or Actuarial Value of assets divided by the Actuarial Liability . For purposes of this report, the funded status represents the proportion of the actual assets compared to the target established by the actuarial cost method as of the valuati on date. These measures are for contribution budgeting purposes and are not appropriate for assessing the sufficiency of plan assets to cover the estimated cost of settling the plan’s benefit obligations.
12. Normal Cost
The port ion of the present value of future benefits allocated to the current year by the actuarial cost method.
13. Present Value of Future Benefits
The actuarial present value of all benefits both earned as of the valuation date and expected to be earned in the fut ure by current plan members b ased on curren t plan provisions and actuarial assumptions.
14. Unfunded Actuarial Liability (UAL)
The Unfunded Actuarial Liability is the difference between Actuarial Liability and either the Market or the Actuarial Value of Assets. This value is sometimes r eferred to as “unfunded actuarial accrued liability.” It represents the difference between the actual assets and the amount of assets expected by the actuarial cost method as of the valuation date.
FEDERATED CITY EMPLOYEES’ RETIREMENT SYSTEM
JUNE 30, 2021 ACTUARIAL VALUATION REPORT
APPENDIX D – GLOSSARY OF TERMS
72