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STATE OF CALIFORNIA EDMUND G. BROWN JR., Governor PUBLIC EMPLOYEES' RETIREMENT SYSTEM 1416 NINTH STREET, P.O. BOX 1953 SACRAMENTO, CALIFORNIA 95809 Telephone (916) 322-6689 Reply to Section 250 Contracts Division June 11, 1981 Mr. D.E. Bott Director of Personnel City of Santa Ana 20 Civic Center Plaza Santa Ana, CA 92701 Dear Mr. Bott: We are transmitting with this letter our actuarial report on the valuations re- quested by your agency to determine the contributions required if the contract is amended in accordance with the attached report. There are two elements to employer contribution rates -- a normal cost contribu- tion rate and a contribution rate to amortize the unfunded liabilities. The calculations show a decrease in cost due to a reduction in benefits for future employees. This decrease is recognized by comparing the normal cost contribu- tion rate for present benefits (all employees at the higher level of benefits) with the normal cost contribution rate for the proposed benefits (all employees at the reduced level of benefits). The normal cost contribution rate is the only element of the rate which is affected by the reduction in benefits for fu- ture employees because unfunded liabilities are not generated at the time new employees are hired. While the cost savings due to reduced benefits for future employees is shown by the decrease in the normal cost, any current unfunded liability or future un- funded liability which may develop must also be included in the new rate. Changes in future unfunded liability may be generated because of additional changes in benefits, changes in actuarial assumptions, or agency experience different from the actuarial assumptions. Therefore, your new rate will consist of the normal cost for your current employees at the present benefit level, the reduced normal cost for future employees and a rate to amortize any unfunded liabilities that may develop for your present or future employees. The actual decrease in employer contribution rate due to the reduced level of benefits for future employees will not be noticed until your agency begins to employ new employees on the reduced benefit level, and even then the decrease will be gradual.