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

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Mr. Gene Anderson January 6, 2006 Page Two Actuarial cost methods in current use start by developing an annual cost for the portion of benefits which are attributable to a given year. This figure is called the "normal cost." The normal cost is usually calculated so as to be either a level dollar amount or a level percentage of pay over the participant's career. The normal cost funds more than the benefit accrued for the year. It funds the year's share of the pension at retirement, including future salary increases, scheduled changes in rates of benefit accrual and any other factors which will affect the ultimate retirement benefit. The normal cost is one of the two streams of payments which fund a plan's retirement benefits. Once the normal cost has been calculated, an index is calculated which represents the theoretical value to which all prior-year normal costs should have grown. This theoretical figure is called the actuarial accrued liability. The actuarial value of trust fund assets is subtracted from the actuarial accrued liability, and the difference is referred to as the unfunded actuarial accrued liability. It is easy to understand why this term causes concern. On hearing the term, many people infer that a plan is underfunded and that the plan sponsor has a liability for this amount. In my opinion, actuaries, who use this term in their day~to-day work, are comfortable with this language but do not always recognize the effect it has on the general public. The unfunded actuarial accrued liability, or UAAL, is amortized over a period of years. The amortization payments represent the second of the two streams of payments which fund plan benefits. Both private-sector and governmental plan funding rules allow the amortization period to vary in length. The variable length of the amortization period serves as a plan's "shock absorber." Short- term increases and decreases in plan obligations are spread over time, and plan contribution requirements remain more stable than would olherwise be the case. The term "liability" is generaUy understood to mean a financial obligation which an individual or an organization has a legal responsibility to pay. Neither the actuarial accrued liability nor the unfunded actuarial accrued liability meet this definition of "liability." Financial Accounting Standards Board Statement No. 87, which governs financial reporting for private-sector pension plans refers to the actuarial accrued liability as the "Projected Benefit Obligation." Governmental Accounting Standards Board Statements 25 and 27 refer to the unfunded actuarial accrued liability as the "Net Pension Obligation. " Governmental Accounting Standards Board Statements 5, which was superseded by Statements 25 and 27, used the terms actuarial accrued liability and unfunded actuarial accrued liability. The Schedule of Funding Progress, which was brought forward from Statement 5 into Statements 25 and 27 still, unfortunately, uses these terms. As required by Governmental Accounting Standards Board Statement 27> (he City of Paris includes the Schedule of Funding Progress in its Comprehensive Annual Financial Report.