12-D Report on City's liability re. firefighters' pension fund

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JOHN M. CRIDER, JR. CONSULTING ACTUARY 1701 GATEWAY BOULEVARD, SUITE 461 RICHARDSON, TEXAS 75080-3627 P.O. Box 832066 RICHAROSON, TEXAS 75083-2066 TELEPHONE 97a-690-5390 FAX 972-690-5398 January 6, 2006 Mr. Gene Anderson Director of Finance City of Paris, Texas P.O. Box 9037 Paris, Texas 75461-9037 Re: Actuarial Terminology Dear Gene: Following up our conversation, this letter discusses the terms "actuarial accrued liability," and "unfunded actuarial accrued liability. .. Although these terms have been used in actuarial valuation reports for many years, they are not well- understood by the general public or by the press. There are even individuals responsible for the administration of pension plans who do not understand these terms. It is important to distinguish between actuarial accrued liability and the present value of accrued benefits. As participants accumulate benefits under a pension plan, the plan incurs a financial responsibility. The lump sum value of benefits earned as of a given date is referred to as the "present value of accrued benefits." As a general rule, the actuarial cost methods in use today produce trust fund growth which is faster than the growth of the present value of accrued benefits. The discussion on page three of this letter covers exceptions to this rule. As an example, consider a participant who, during a given year, accumulates a monthly benefit of $100. Under representative actuarial assumptions. the present value of this benefit for a participant, currently age 25. is $425. For a participant age 60, however, the present value of $100 per month is $6,792, a much larger figure. If a plan bases its annual contributions on the value of benefits earned during the year. the cost of the plan can escalate significantly as the covered group ages. For this reason, both private-sector plans and plans which cover employees of goverIli.llental entities are required to use actuarial cost methods that produce annual costs which are more level. r - .