Be careful what you wish for regarding the asset valuation method. The 90% vs. 95% issue is probably the most mistated issue I have seen from CalPERS yet. This appears to me to be a "phantom change" in actuarial assumptions in that it misleads us into believing that there are long term benefits to this change. According to the actuarial valuations CalPERS sends out to all participating agencies, "the CalPERS Board has adopted a resolution providing for a ONE-TIME INCREASE in the actuarial value of assets from 90% of market value to 95% of market value for the calculation of the July 1,2000 through June 30,2001 employer rate (just this ONE YEAR)." HOW IS IT CALCULATED? The asset valuation method is outlined in the valuation under Appendix "A", Statement of Actuarial Methods and Assumptions. It is calculated by BRINGING FORWARD THE PRIOR YEAR'S Actuarial Value of Assets and contributions received and benefits paid during the year at the assumed actuarial rate of return. The Actuarial Value of Assets is then computed as the "Expected Value of Assets" by adding one third of the difference between the Actuarial Value of Assets and the actual Market Value of Assets as of the valuation date. This new value is used for valuation purposes so long as it falls within a "band" of 90% to 110% of the market value of the assets as of the valuation date. This proposed one-time change in assumption changes the "band" for the one year to 95% to 110%. After the one year it reverts back to a "band" of 90% to 110%. WHY IS THIS IMPORTANT? If you PERMANENTLY increase your employer's normal cost contribution by increasing benefits to get the "95%" valuation you are trading a permanent cost increase for a ONE YEAR change in assumptions. The following year's valuation for July 1, 2001 through June 30, 2002 will be determined using the current actuarial assumption "band" of 90% to 110% for determination of the Expected Value of Assets. Thus, the "increase" from 90% to 95% only effects the valuation for the one year while encouraging permanent increases in normal cost. The 95% change in assumption for the one year only increases the Actuarial Value of Assets brought forward from the prior year by 5% (starting point increased by 5%). THERE IS NO LONG TERM BENEFIT TO THIS CHANGE IN ASSUMPTION. I just received our valuation through June 30, 1999 in the last couple of days and it reinforces the statements above. I believe we should be discouraging our members from recommending permanent benefit improvements to take advantage of this change in assumption because the cost increase (in many cases depending upon what the benefit improvements are) will not be offset by the one-time 5% change in the asset valuation method. The only benefit of this provision is that if your agency was already considering improving retirement benefits anyway then the cost of the benefit improvement is decreased by the one-time 5% change in assumptions. Read your valuation assumptions carefully under the section entitled "Asset Valuation Method" and let me know if you agree with me. Marc Puckett Director of Finance City of Costa Mesa --- You are currently subscribed to members as: [email protected] To unsubscribe send a blank email to [EMAIL PROTECTED]
