The FSRP requirements state that the amortization period should not exceed 30 years. Under the current fixed rate contribution structure, to achieve a 30-year amortization period, the City’s contribution rate would have to go up to 23.92% effective with the 12/31/2023 actuarial valuation (to meet the FSRP requirement at the valuation date) and then to 28.92% by 12/31/2026. The contribution rate increase can be explained as follows:
Without significant asset returns of over 7.3% over the next couple of years, and as the remaining difference in the smoothed actuarial value of assets and the market value of assets are recognized, the City's ongoing contribution commitment is expected to need to continue to increase further with each valuation through the 12/31/2026 actuarial valuation when the 2022 asset loss will be fully recognized in the actuarial value of assets. If other losses emerge, such as actual investments being less than the 7.3% assumed or demographic experience resulting in increased liabilities compared to the assumptions, the City's ongoing contribution commitment would have to be increased further to ensure an amortization period that does not exceed 30 years. Note that changing the funding arrangement could include increasing the member rate, in part or in whole, instead of the City's rate. However, due to the liability impact related to the refund of contributions with terminations, the equivalent increase for the members will be slightly higher than that calculated assuming that the City is paying the additional contribution. As outlined by the PRB, this type of fix would be more of a band-aid than a long-term solution. The Fund had tried this back in 2003 and then again 2011-2016.
Additionally, considering the increasing fund costs and the potential for an amortization period near 30 years, we could find ourselves in a precarious situation, especially if we grant a COLA under our current ad hoc COLA structure, in the near future. Therefore, we must consider targeting a lower minimum amortization period, which would require even higher increases in the funding arrangement. A 25-year amortization period, for example, would necessitate the contributions to increase to 25.01% of pay beginning with the 12/31/2023 actuarial valuation. And that is with continuing to assume that all future COLAs are 0%. Similar to the 30-year amortization period case, once the 2022 asset loss is fully recognized, it is projected that the increase in the funding arrangement would need to increase further, by another 5% of pay, plus further adjustments based on any other experience gains and losses that emerge to ensure that the amortization period continues not to exceed a 25-year amortization period.
The actuarially determined employer contribution model (ADEC), which the City has expressed would be considered for AFRF as well, offers a more permanent solution to ensuring AFRF does not trigger an FSRP. It would carve out the legacy liability to be paid off on a closed 30-year basis (like a fixed 30-year mortgage). Moving forward, under this ADEC model, the City's contribution rate would also adjust to address any future gains and losses, subject to the specifics of the adopted funding policy.