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lensions & Market Volatili A government's 'e[ Penslon Liability is calculated by sub[racting the market value of its pension plan assets fmm the estimated arrmunt of po nisi.wl 1*nelfils, When using the n-.arkel value cif pension plan assets, the Net PenAon Liability +gill fluctuate based upon market conditicm- Some argue that because Net Plension tiabilily is a coaiTgwwnt of a gomnments Net Position lasrsets minus liabi€itiesl, fluctuations in market values would result in great volatility in the Net Position. To avoid such fluctuatium, the Covernmental Accounting, Standards Board allows, governments to atmortize the fluctuation in market values otrer Nme. Truth in Accounting, heliews that the Net Position should not be shielded ire i'n market il'u tuations. Users of the financial report, especially taxpayers, need to understand the reality of pensickn plan investrsrents. We highlight that reporting, including, the marker ralue in the pension liability does not cause great volatifih, in a governmen6 Net l'osilion. Reality does. Taxpayem need to understand this volatility acid the risk taken asn to WA-i-rnmunis, which in turn is a risk to taxpayv*. Therefore. our money needed to pay gills is calculated rasing the market value of pension assets without any arimrtiaatkm (A the unrealized gains in market value. We "od That for most cities in fiscal year 2021 p-mion assess" i ncr,wasecl dra,-natically, because of strong markets. The mulling pension lia6i I icy and money needed to pay hilts dex-reased equally dramatically_ In reviewing cities whose pension plans' fnamial reports fur fiscal year 2022 were available, we usually found that these unrea.li;ted gains either t#"vped greatly cx svvitchecd tip uorealized Imes,. Therefore, we spat "t cities' pension liabilities and money needed to pay bills will increase when we issue our next Financial State of Ihe Cities. In fir in 5OMe 66(-s we fcxind that Ih4 dramatic gains ci 2021 resulted in their pension plans appearing to be rnrerfunded, laui irlvewtnk•rit 14A" in ?'W-) hrcts[rght their pen-.iim plash lack to an unckwhinded status. Foe' example, on Junk 30, 2020. Los Ailgeles Hire and Police Pension System reported a Net Pension Liability of 2.57 billion. in fiscal year 2021 its pension assets experienced unrealized gainstA 32.560%which caused the pension system to appear to 1>0 ovedunded by $2.7 billion. In liscll }ear 2022 the funds' pension asset value experienced unrealized lus". of 7.23'1/6, which played a large part in bringing the system back to an underfunded status veiih a hc•I P nsian Liability of $6,48.8 million. This highlight_; the volatility and risk surrounding pension plan assets and ccwresponding pensions liabilities. Taxpayers can only hope that when pension plan investments roved to be sold to pay frx benefilsr the market value of thow investments #will Iw high, If ", taxpayers will he on the hark ttt pay higlser taxis * cr ww the promised benefits. As in time case of a few cities, pension plans should be overfunded during market upturns, 5n they ran weather downturms in the markcm. Elected officials nvy see this temporary; unrealized awrfu„ded status as an oppoqun ity to rrfluce pension contributions andior increase benefits. 5ueh actions are rips advisable, lwcause of fulare downturns in the markets, as happened in 2022. The 2022 dmynturn is switching many overfunded pension plans back into an underfunded poll on, ' For many cities prior year (2020) amounts were used to calculate their pension liability, including Ihe rowkel value of pension assets. WhenTruith in Accpunling researchers could find the 2021 year numbers, we used those slumbers for nur 2021 calculations. Because of the high market valuations that occurred in 2021. the use of outdated numbers greatly affected the cities' pension liability numbers. �i WOO 6 -0-amnam6h, I hope that you find the above information useful for your discussion tonight and in the future. I believe that our city Finance Dept is great btw. I don't think they are trying to hide things or are playing accounting tricks (some of the Truth in Accounting language above implies that). We are fortunate that we have a great finance team which also provides me hope that they can help be part of the solution here with your guidance. Thank you for each of your attention to our city. Your time is much appreciated. MROscubergwr I Tim Johnson, CPA cA""ud*L Partner 13