Subject: Supplemental Retiree Benefit Reserve
Approval of proposed Supplemental Retiree Benefit Reserve (SRBR) and referral to City Administration for implementation.
BACKGROUND
The Board of Administration for the Police and Fire Department Retirement Plan approved a request from the Association of Retired San Jose Police Officers and Firefighters to have their actuary evaluate a SRBR plan that they had developed on August 2, 2001. In addition, the Board asked its actuary to assess the impact on the plan fund balance, funded ratio and contribution rates. The actuary completed their report and it was presented to the Board at their September 6, 2001 meeting. The Board approved the report and authorized it to be sent to City Council.
The proposed SRBR would begin with funding equal to ten percent of the Plan’s Pre-funded Actuarial Accrued Liability (PAAL) as of June 30, 1999. The balance of the PAAL at that date was $191,103,000. Therefore, the SRBR would have initial funding of $19,100,000. The June 30, 1999 date was chosen because it represents a date close to the beginning of the Association’s discussion of a supplemental benefit and, before the PAAL was reduced by benefit improvements for active members.
Each plan year after June 30, 1999, the amount allocated to the SRBR would be increased with interest at the smoothed market rate of return earned by the Plan. However, the application of interest earnings to the SRBR would be limited to positive earnings. The principal portion of the SRBR on which interest would be applied would be the average monthly balance of the SRBR after payment of any benefits. In addition, the SRBR would receive 10% of the Plan’s excess earnings. Excess earnings are earnings above the Plan’s assumed rate of 8%. No reduction to SRBR would occur from negative excess earnings.
Benefit payments are proposed to begin after fiscal year 2001-2002. Any payments would be taken from interest earnings only. The principal amount and excess earnings would be left to grow.
Not applicable.
Not applicable.
Due to the PAAL reduction, which was already recognized as a surplus in the June 30, 1999 actuarial valuation, there would be an impact on the City’s contribution rate. The overall City’s contribution rate is predicted to decrease, however, with the SRBR, would not decrease to the same extent as if SRBR were not implemented. There is no impact to the current City’s contribution rate. The impact will be for fiscal year 2002-2003 in which the City’s contribution rate would reflect an additional 1.1%, which would result in a budget impact of approximately $1,809,000.
Not applicable
EDWARD F. OVERTON
Secretary, Board of Administration