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PAGE 2 - EXPLANATION OF RECONCILIATION 2. CHANGE DUE TO PAYROLL EXPERIENCE: The prior service contribution rate is closely linked to the city's payroll. When the payroll changes, there is corresponding change in the contribution rate. An increase in payroll, above the actuarial assumption, reduces contribution rate. An increase in payroll of less than the actuarial assumption, or a decrease in the payroll, will cau_~e an increase in the contribution rate. The actuarial assumptions are based on the historical trends in the city itself, arc. allow the actuary to project future contributions to the retirement system. The annual valuation process allows ~-~ actuary to adjust the rate to reflect any difference between the actuarial assumption and reaNife experience. 3. CHANGE DUE TO ACTUARIAL GAINS, INCONSISTENT CONTRIBUTIONS, OR OTHER ACTUARIAL FACTORS: This is a broad category and includes changes in three areas. The first area is actuarial gain. The actuad.¢ assumptions used in the actuarial valuation process enable the actuary to project the value of the Unfunded ActuarY.-~ Liability (UAL) from the previous actuarial valuation to the current actuarial valuation. The difference between ~e projected UAL and the actual UAL is called an actuarial gain (a negative difference is an actuarial loss). This gain, c.'- loss, takes into account the differences between events (investment return, deaths, retirements, disabilities, a:-c withdrawal of member contributions) assumed on the basis of the actuarial assumptions and the corresponding re,- life events that occurred between the preceding actuarial valuation and the current one. An actuarial gain reduces prior service contribution rate, and a loss increases it. The second area in this category is inconsistent contributions. This refers to timing of the valuation and wh~- contribution rates actually take effect. A city's 2002 contribution rate is based on the valuation for the year ende.-: December 31, 2000. Thero is, therefore, a one-year period from the time the actuarial experience is recognized, the time the contribution rate is changed to reflect the actuarial experience. During this one-year lag time, 2001 in case, the city may be contributing too little or too much as a result of the actuarial experience for the year December 31, 2000. Therefore, the contribution rate must be adjusted to account for this one-year lag time. actuarial experience is better than assumed, the contribution rate can be reduced. Likewise, if actuarial experience worse than assumed, the contribution rate will be increased. The third area includes adjustments for other actuarial factors. This is usually just the effect of rounding in ~e actuarial valuation process. 4. INCREASE DUE TO PHASE-IN OF ACTUARIAL ASSUMPTION CHANGES: 5o For eligible cities that chose to phase-in the effect of changes in actuarial assumptions resulting from the 5-ye? experience study completed in 1998, this amount is an increase in the calculated rate. The 2001 rate took i~ account 40% of the effect of the assumption changes. The 2002 rate takes into account 60% of the effect; thus ~-e 2002 rate acknowledges an additional 20% of the rate increase caused by changes in the actuarial assumptions. CHANGE DUE TO EFFECT OF STATUTORY MAXIMUM AND/OR CONSERVATIVE FUNDING: This category includes two areas. The first area is the effect of the statutory maximum contribution rate. For cit~ whose combined normal cost and prior service contribution rat~s exceeded the statutory maximum, for either the 2CC- or 2002 contribution rate, or both, the actuary must reduce the prior service portion of the rate so the retirement portion of the rate equals the statutory maximum. If a city does not elect by ordinance to pay the calculatc-c contribution rate, the city will not be fully funding the cost of the plan benefits adopted. This shortfall in funding, unl~-~ offset by actuarial gains in the city's plan, must be made up in future years. The second area is the effect of conservative funding formulas used to calculate the prior service contribution rate cities with less than three contributing members. These conservative funding formulas provide for funding the prfc:T service benefits over the remaining expected working life of the contributing members. 6. CHANGE DUE TO 5-YEARVESTING: The Texas Legislature adopted a provision whereby all cities participating in TMRS will be covered by a 5-Ye'-~--- Vesting provision unless a city elects to remain at 10-Year Vesting. For most cities, the effect of this change is a- increase in the prior service rate.