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Actuarial Valuation of Other Post - Employment Benefit Programs as of <br />April 1, 2012 for the City of Sample Citv <br />G. Choice of Actuarial Funding Method and Assumptions <br />The ultimate real cost of an employee benefit plan is the value of all benefits and other <br />expenses of the plan over its lifetime. These expenditures are dependent only on the terms <br />of the plan and the administrative arrangements adopted, and as such are not affected by <br />the actuarial funding method. The actuarial funding method attempts to spread recognition <br />of these expected costs on a level basis over the life of the plan, and as such sets the <br />"incidence of cost ". Methods that produce higher initial annual (prefunding) costs will <br />produce lower annual costs later. Conversely, methods that produce lower initial costs will <br />produce higher annual costs later relative to the other methods. GASB 45 allows the use of <br />any of six actuarial funding methods; a brief description of each is in the glossary. <br />Factors impacting the Selection of Funding Method <br />While the goal of GASB 45 is to match recognition of retiree medical expense with the <br />periods during which the benefit is earned, the funding methods differ because they focus <br />on different financial measures in attempting to level the incidence of cost, Appropriate <br />selection of a funding method contributes to creating intergenerationai equity between <br />generations of taxpayers. The impact of potential new employees entering the plan may <br />also affect selection of a funding method, though this is not a factor in this plan. <br />We believe it is most appropriate for the plan sponsor to adopt a theory of funding and <br />consistently apply the funding method representing that theory. This valuation was prepared <br />using the entry age normal cost method with normal cost determined on a level percent of <br />pay basis. The entry age normal cost method often produces initial contributions between <br />those of the other more common methods and is generally regarded by pension actuaries <br />as the most stable of the funding methods and is one of the most commonly used methods <br />for GASB 45 compliance. <br />Factors Affecting the Selection of Assumptions <br />In general, we have based the actuarial assumptions used for this valuation on the <br />assumptions used for the actuarial valuations of the respective CalPERS' retirement plans <br />covering City employees. The 7.0% discount rate used for valuing the portion of liabilities <br />expected to be funded with OPEB trust assets was selected following discussion with the <br />City and with PARS. Other assumptions, such as trend of medical costs or the percent of <br />employees who will cover dependents in retirement, were selected based on review of <br />recent plan data and our general experience. <br />Where the funding policy provides that only a portion of benefit liabilities will be prefunded <br />through a trust with the remainder funded on a pay -as- you -go basis, GASB 45 requires the <br />discount rate reflect an appropriate blend between the prefunding and pay -as- you -go <br />discount rates. We assumed a 4.0% expected return for pay -as- you -go funding; Appendix <br />1 provides details on how the blended discount rate was developed. <br />B ckmore 9 e <br />