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2008 ANNUAL REPORT Fiscal Year Ending June 30, 2008
POLICE AND FIRE RETIREMENT SYSTEM
3
CONTENTS SECTION 1: INTRODUCTION President of the Board: Letter of Transmittal to the City Council ............................................... 7
Manager: Letter of Transmittal to the Board of Trustees ........................................................... 8
Members of the Board of Administration .................................................................................... 11
Administrative Staff .................................................................................................................... 12
Professional Services ................................................................................................................. 12
SECTION 2: FINANCIAL Independent Accountant’s Report for Years Ended June 30, 2008 & 2007 .............................. 14
Management’s Discussion and Analysis .................................................................................... 16
Financial Statements
Statements of Plan Net Assets – June 30, 2008 and 2007 ....................................................... 24
Statements of Changes in Plan Net Assets – Years ended June 30, 2008 and 2007 .............. 25
Notes to the Financial Statements for Years Ended June 30, 2008 and 2007
1. Description of the Oakland Police and Fire Retirement System ..................................... 26
2. Summary of Significant Accounting Policies ................................................................... 27
3. Contributions ................................................................................................................... 28
4. Cash, Deposits and Investments .................................................................................... 29
5. Actuarial Assumptions and Funded Status ..................................................................... 34
6. Reserves ......................................................................................................................... 35
7. Administrative Expenses ................................................................................................. 35
8. Subsequent Events ......................................................................................................... 36
Required Supplementary Information
1. Schedule of Funding Progress ........................................................................................ 37
2. Schedule of Employer Contributions ............................................................................... 37
Note to the Required Supplementary Information ..................................................................... 38
4
CONTENTS (Continued)
SECTION 3: INVESTMENT Investment Consultant’s Report ................................................................................................. 40
Investment Performance ............................................................................................................ 41
List of Investment Professionals ................................................................................................ 42
Investment Manager Fees and Other Investment Expenses .................................................... 42
Asset Allocation as of June 30, 2008 ......................................................................................... 42
Investment Summary by Type as of June 30, 2008 and 2007 .................................................. 43
Largest Stock Holdings (by Market Value) as of June 30, 2008 ................................................ 44
Largest Bond Holdings (by Market Value) as of June 30, 2008 ................................................ 44
SECTION 4: ACTUARIAL Actuary’s Certification Letter ...................................................................................................... 46
Summary of Actuarial Value, Assumptions and Funding Methods ............................................ 48
Actuarial Definitions ................................................................................................................... 50
Actuarial Value of Assets ........................................................................................................... 50
Expenses ................................................................................................................................... 50
Benefit Payment Data ................................................................................................................ 51
Actuarial Assumptions ............................................................................................................... 51
SECTION 5: STATISTICAL Benefit Expenses by Type for Years Ended June 30, 2008 and 2007 ...................................... 56
Cover Photo Courtesy of the City of Oakland
SECTION 1 INTRODUCTION
6 Introduction
7
LETTERS OF TRANSMITTAL
Introduction
March 1, 2009
Oakland City Council 1 Frank H. Ogawa Plaza Oakland CA 94612
Honorable Mayor Dellums and Members of the City Council:
In compliance with Ordinance Number 713 C.M.S., I am pleased to present the annual report of
the Oakland Police and Fire Retirement System for the fiscal year ended June 30, 2008. Pro-
vided in this report are the Plan’s Financial information, Investment Performance, Actuarial
Valuations and Statistical information for the corresponding year.
The members of the Board express their appreciation to the Mayor and City Council, City Man-
ager, City Attorney, the various City Agencies and Departments and the members of their staff
for their cooperation and assistance.
Respectfully submitted,
Robert P. Crawford, President Police and Fire Retirement System
CITY OF OAKLAND
150 FRAN K H .OG AWA PL AZ A, 3RD FL OOR · OAKLAND, CAL IFORNIA 94612 -2 021 Finance and Management Agency (510) 238-3307 Office of Personnel Resource Management FAX (510) 238-7129 Retirement Systems TDD (510) 839-6451
8
LETTERS OF TRANSMITTAL
Introduction
March 1, 2009
Oakland Police and Fire Retirement Board 150 Frank H. Ogawa Plaza, Suite 3332 Oakland CA 94612
Board of Trustees:
I am pleased to present the Annual Financial Report of the Oakland Police and Fire Retirement
System for the fiscal year ending June 30, 2008.
ACCOUNTING SYSTEM The Accompanying financial statements have been prepared in compliance with Section 2600 of
the City Charter and in accordance with the accounting and reporting principles set forth in Gov-
ernmental Accounting Standards Board Statement No. 25, Financial Reporting for Defined
Benefit Pension Plans and Note Disclosures for Defined Contribution Plans. This Statement es-
tablishes financial reporting standards for defined benefits plans and for the notes to the finan-
cial statements of defined contribution plans of state and local entities.
The method for recording revenues and expenses is on an accrual basis. Revenue is taken into
account when earned, regardless of the date of the collection, and expenses are recorded when
the corresponding liabilities are incurred instead of when payment is made. Amortization of
bond premiums and discounts are over the life of the investment security.
ADDITIONS Additions to the plan include, member contributions and investment income. Total additions for
the fiscal year that ended June 30, 2008 was a decrease of $32,541,152. In the prior fiscal year,
which ended June 30, 2007, the additions to the Plan was an increase of $76,211,771. Due to the
issuance of Pension Obligation Bonds, the City contribution is deferred until July 1, 2011.
CITY OF OAKLAND
150 FRAN K H .OG AWA PL AZ A, 3RD FL OOR · OAKLAND, CAL IFORNIA 94612 -2 021 Finance and Management Agency (510) 238-3307 Office of Personnel Resource Management FAX (510) 238-7129 Retirement Systems TDD (510) 839-6451
9
Introduction
DEDUCTIONS The Principal deductions of the retirement system related to the purpose for which it is created
namely the payment of benefits. Total deductions to the Plan in the fiscal year ended June 30,
2008 totaled $75,709,964. Recurring benefit payments mandated by the Plan and administrative
expenses comprise the total deductions.
RESERVES AND FUNDING The Police and Fire Retirement System most recent actuarial study values the Plan as of July 1,
2007. Details regarding this actuarial study can be found in Section 4 of this annual report.
As of the last actuarial valuation, dated July 1, 2007, the Plan is 63.7% funded with an unfunded
actuarial liability of $332.1 million. The funded status is defined as the difference between the
projected City liability and the actuarial value of assets. As previously mentioned, City contribu-
tion are deferred until July 1, 2011.
INVESTMENTS The Police and Fire Retirement System Investment Policy is used as a guideline for all invest-
ment activities. The Investment Policy includes an asset allocation plan. The plan consists of
five asset classes: Large, Mid, and Small Capitalization Domestic Stocks, International Stocks
and Fixed Income Instruments. In addition, the Policy also allocates among the different invest-
ment management styles.
In November 2006, Oakland voters passed Measure M, which modified the City Charter to al-
low the PFRS Board to invest in non-dividend paying stocks and to switch the asset allocation
structure form 50% equities and 50% fixed income to the Prudent Person Standard.
Total Investment Income resulted in a decrease of $32,679,927 in fiscal year 2008. The decline
in the System’s investment income coincided with the overall downturn in the U.S. financial
markets.
GASB Statement No. 25 required that investments be reported at fair value. The appreciation
(depreciation) in fair value of investments held by PFRS is recorded as an increase (decrease) in
investment income based on the valuation of investments at year-end.
10 Introduction
The historical rates of return on the portfolios are as follows:
TAX INFORMATION The Internal Revenue Service has ruled that the Plan qualifies under Section 401(a) of the Inter-
nal Revenue Code and is therefore not subject to tax under present income tax laws. Accord-
ingly, no provision for income taxes has been made in the accompanying financial statements,
as the Plan is exempt from Federal and State income taxes under the provisions of the Internal
Revenue Code, section 501 and California Revenue and Taxation Code, Section 23701, respec-
tively.
Payments received under 2608 (service) of the Oakland City Charter are taxable to the recipient
since the retirement allowance is based on age and length of service. Under 2610(a) (disability),
retirement allowances are not taxable, except that the portion of a retiree’s retirement allowance
in excess of 50% of the compensation attached to the rank is taxable.
ACKNOWLEGEMENTS The compilation of this report reflects the combined efforts of the Retirement System Admini-
stration Staff, the Board of Trustees, and various professional consultants. Its intent is to provide
complete and reliable information to the beneficiaries of the Plan, to serve as a basis for making
management decisions, and to ensure compliance with legal provisions affecting the administra-
tion of the Plan.
Respectfully submitted,
Yvonne S. Hudson Manager, Retirement and Benefits City of Oakland
Total Returns % 1 Year 3 Year 5 Year Total Fund -5.8% 5.0% 7.2%
Fiscal Year Ending June 30, 2008
11
Introduction
Robert P. Crawford President
Active Police Department Representative
Jaime T. Godfrey Vice President
Bank Representative
James F. Cooper Alternating Police / Fire
Representative
Ken Bullock Insurance
Representative
John C. Speakman Fire Department Representative
Dan Lindheim Mayoral
Designate Walter L. Johnson
Community Representative
MEMBERS OF THE BOARD OF ADMINISTRATION
Staff Liaison Yvonne S. Hudson
Retirement and Benefits Manager
Legal Advisor Tracy Chriss
Deputy City Attorney
12 Introduction
PROFESSIONAL SERVICES Over the past year the Board of Administration has engaged the following consultants to assist
in making investments and in developing a sound retirement plan:
A complete list of Investment Professionals is included on page 42 of this Annual Report.
The Board meets on the last Wednesday of each month and holds special meetings as they are
necessary. The meetings are currently held at 1 Frank H. Ogawa Plaza, Oakland, California
94612. Members of the Retirement Plan and the general public may attend any of the meetings.
Current PFRS Board minutes and agendas are available online at www.oaklandnet.com.
Actuary Bartel Associates, LLC Auditors Macias, Gini & Company, LLP Yano Accountancy Corporation Custodial Service Bank of New York
(left to right): Téir Jenkins, Retirement System Accountant; David Low, Administrative Assistant II; Sandra Tong, Accountant II; Yvonne Hudson, Retirement and Benefits Manager; Carol Kolenda, Benefits Representative
CITY OF OAKLAND RETIREMENT SYSTEMS ADMINISTRATIVE STAFF
SECTION 2 FINANCIAL
14
INDEPENDENT ACCOUNTANT’S REPORT
Financial
15
YEARS ENDED JUNE 30, 2008 AND 2007
Financial
16
MANAGEMENT’S DISCUSSION AND ANALYSIS
s management of the Oakland Police and Fire Retirement System (the System), we
offer readers of the System’s financial statements this narrative overview and
analysis of the financial activities of the System for the fiscal years ended June 30,
2008 and 2007. We encourage readers to consider the information presented here in conjunction
with the System’s financial statements that follow this section. This management’s discussion
and analysis are presented in the following sections:
• Organization Overview
• Financial Statement Overview
• Financial Analysis: 2008 vs. 2007
• Financial Analysis: 2007 vs. 2006
• Requests For Additional Information
ORGANIZATIONAL OVERVIEW
The City of Oakland City Charter established the System and provides for its funding.
Accordingly, the System is an integral part of the City of Oakland (the City) and its operations
have been reported as a Pension Trust Fund in the City’s basic financial statements. The System
is a closed, single employer, defined benefit pension plan that provides retirement, disability and
survivor benefits for eligible sworn safety employees of the City. The System serves the City’s
sworn employees hired prior to July 1, 1976 who have not transferred to the California Public
Employees’ Retirement System (CalPERS). The System is governed by a board of seven
trustees; the Mayor or his designate, three Mayoral appointees approved by the City Council, an
elected active or retired members of the Police Department, an elected active or retired member
from the Fire Department, and an elected member position which alternates between the Police
Department and Fire Department membership. Trustees receive no compensation.
The System is funded by periodic employee and City contributions at actuarially determined
amounts sufficient to accumulate the necessary assets to pay benefits when due as specified by
the City Charter. Active members contribute a percentage of earned salaries, which is
determined by consulting actuaries based upon their entry age into the System. In accordance
with the City Charter, active members hired after July 1, 1951, and prior to July 1, 1976,
contribute a percentage of their earned salaries based upon entry age as determined by
A
Financial
17
consulting actuaries. During the years ended June 30, 2008 and 2007, these contributions
ranged from 5.47% to 6.05%. The City Charter limits employee contributions to 13.00% of
earned salaries. Employee contributions are refundable with interest at 4.00% if an employee
elects to withdraw from the System upon termination with the City.
In March 1997, the City issued pension obligation bonds in the amount of $417 million to pay
the City’s contributions to the System through June 2011. In accordance with an agreement
entered into at the time that Pension Obligation Bonds were issued in 1997, the City is not
expected to contribute until the 2011/12 fiscal year. Thereafter, the contribution rate will be
established based on the System's July 1, 2010 assets and liabilities. In November 2006, City
voters passed Measure M to modify the City Charter to allow the PFRS Board to invest in non-
dividend paying stocks and to switch the asset allocation structure from 50% equities and 50%
fixed income to the Prudent Person Standard.
City contributions are based on spreading costs to July 1, 2026 as a level percentage of the
City’s total uniform payroll. The System uses the Entry Age Normal Cost Method for its
disclosure and reporting pursuant to Governmental Accounting Standards Board (GASB)
Statements No. 25 and No. 50.
The System membership is currently 1,239, which includes 1 active employee, 890 retirees and
348 beneficiaries.
The following are the significant assumptions used to compute contribution requirements:
• 8.00% investment rate of return
• 3.25% inflation rate, US
• 3.50% inflation rate, Bay Area
• 4.75% post-retirement benefit increases
FINANCIAL STATEMENT OVERVIEW
This annual financial report consists of three parts – management’s discussion and analysis (this
section), the financial statements and other required supplementary information. The financial
statements include Statements of Plan Net Assets; Statements of Changes in Plan Net Assets; and
the Notes to Financial Statements.
The Statements of Plan Net Assets and the Statements of Changes in Plan Net Assets report
information to assist readers in determining whether the System’s finances as a whole have
Financial
18
improved or deteriorated as a result of the year’s activities. These statements report the net
assets of the System and the activities that cause the changes in the net assets during the year,
respectively.
The Statements of Plan Net Assets present information on all System assets and liabilities, with
the difference between the two reported as net assets held in trust for pension benefits. Over
time, increases or decreases in net assets held in trust for pension benefits may serve as a useful
indicator of whether the financial condition of the System is improving or deteriorating.
While the Statements of Plan Net Assets provide information about the nature and amount of
resources and obligations at year-end, the Statements of Changes in Plan Net Assets present the
results of the System’s activities during the fiscal year and information on the change in the net
assets held in trust for pension benefits during the fiscal year. The Statements of Changes in
Plan Net Assets measure the results of the System’s investment performance as well as its
additions from contributions and deductions for payment of benefits and administrative
expenses. The Statements of Changes in Plan Net Assets can be viewed as indicators of the
System’s progress on the set goals of fully funding all current and past service costs and
possessing sufficient additional resources to pay for current payment of contributions and
administrative and investment expenses.
The Notes to Financial Statements and Other Required Supplementary Information provide
explanations and other information that is helpful to a full understanding of the data provided in
the financial statements. The Notes to Financial Statements and Other Required Supplementary
Information are found starting on page 26 and on page 37, respectively.
Financial
19
FINANCIAL ANALYSIS: 2008 vs. 2007
Table 1 summarizes net assets held in trust for pension benefits as of June 30, 2008 and 2007:
Net assets held in trust decreased $108,251,117 from June 30, 2007 to June 30, 2008. The main
sources of this decrease were a reduction in the System’s investment income and regular
scheduled benefit payments. The reduction in System’s investment income coincided with an
overall downturn in the U.S. financial markets. The fluctuations in receivables and investments
payable are primarily due to investment trading at year–end, where the outstanding balances
represent investments either sold or purchased, but not yet settled. The System expanded its
security lending program from only a portion of the domestic holdings to its entire portfolio
including the portfolio’s international holdings. This increase resulted in an overall increase in
security lending income for the portfolio.
Financial
Table 1: Summary of Plan Net Assets June 30, 2008 and 2007
June 30 Change 2008 2007 Dollars Percent Assets: Cash and deposits $ 4,068,080 $ 2,965,533 $ 1,102,547 37.2 Receivables 30,122,470 60,451,089 (30,328,619) (50.2) Investments 607,557,116 683,246,580 (75,689,464) (11.1) Total Assets: 641,747,666 746,663,202 (104,915,536) (14.1) Liabilities: Current benefits payable 5,819,088 5,869,705 (50,617) (0.9) Retroactive benefits payable 4,114,900 - 4,114,900 Accounts payable 10,468 8,953 1,515 16.9 Investments payable 61,187,050 109,035,059 (47,848,009) (43.9) Accrued investment management fees 626,743 642,047 (15,304) (2.4) Securities lending liabilities 89,147,267 42,014,172 47,133,095 112.2 Total liabilities: 160,905,516 157,569,936 3,335,580 2.1 Net assets held in trust for pension benefits $ 480,842,150
$ 589,093,266 $ (108,251,116) (18.4)
20
Table 2 summarizes changes in plan net assets held in trust for pension benefits for the years
ended June 30, 2008 and 2007:
The System’s net investment (loss) income for the years ended June 30, 2008 and 2007 were
$(32,679,927) and $76,194,266, respectively. The actual annual returns for these two years
were -5.8% and 14.4%, respectively, compared to benchmark returns of -5.8% and 14.6%,
respectively, and actuarially assumed returns of 8% for both years.
The System’s benefit expenses for the years ended June 30, 2008 and 2007 were $74,979,998
and $71,404,196, respectively. On June 17, 2008, the City council approved retroactive police
pay increases. As mandated by the City Charter, retroactive payments were paid to the System’s
police retirees in September 2008. These retroactive payments are reflected in the benefit
expenses for the year ended June 30, 2008. The total retroactive police retiree payment was
$4,114,900 of which $1,112,118 was for retroactive pay increases for the period from July 1,
2006 to June 30, 2007. Had the retroactive payments been known prior to the issuance of the
June 30, 2007 financial statements, the benefit expenses for the years ended June 30, 2008 and
2007 would have been $73,867,870 and $72,516,314, respectively. Benefit expenses for the year
ended June 30, 2008 would have been $1,351,555 higher than the prior year. In the most recent
actuarial valuation dated June 1, 2007, benefits payments were projected to be $75,364,000 for
the year ending June 30, 2008 which included estimates for the retroactive pay increases.
Financial
Table 2: Summary of Changes in Net Assets For the Years Ended June 30, 2008 and 2007
June 30 Changes 2008 2007 Dollars Percent Additions: Contributions - members $ 13,796 $ 17,505 $ (3,709) (21.2) Total investment income (32,679,927) 76,194,266 (108,874,193) (142.9) Other income 124,979 - 124,979 - Total additions: (32,541,152) 76,211,771 (108,752,923) (142.7) Deductions: Benefits to members and beneficiaries 74,979,998 71,404,196 3,575,802 5.0 Administrative expenses 729,966 818,738 (88,772) (10.8) Total deductions 75,709,964 72,222,934 3,487,030 4.8 Changes in net assets held in trust for pension benefits $
(108,251,116)
$ 3,988,837 $
(112,239,953) (2,813.9)
21
Primarily because of the investment income performance and benefit expenses, the (decrease)
increase in net assets held in trust for pension benefits during the years ended June 30, 2008 and
2007 was $(108,251,117) and $3,998,837, respectively.
FINANCIAL ANALYSIS: 2007 vs. 2006
Table 3 summarizes net assets held in trust for pension benefits as of June 30, 2007 and June
2006:
Net assets held in trust for pension benefits increased $3,988,837 from June 30, 2006 to June 30,
2007. This increase reflected actual investment returns of 14.4% compared to the assumed
actuarial return of 8.0%. However, the actual return was lower than the benchmark return of
14.6%.
In FY 2006, Management of the System discovered that overpayments of retiree holiday pay
had been made to the Fire retirees and beneficiaries. Three years of overpayments were
recovered from the retirees through a reduction of individual retirement benefit payments over a
20-month period which started in August 2007. Total overpayments were $665,078. As of June
Financial
Table 3: Summary of Plan Net Assets June 30, 2007 and 2006
June 30 Change 2007 2006 Dollars Percent Assets: Cash and deposits $ 2,965,533 $ 3,471,130 $ (505,597) (14.6) Receivables 60,451,089 82,018,916 (21,567,827) (26.3) Investments 683,246,580 683,204,976 41,604 0.0 Total Assets: 746,663,202 768,695,022 (22,031,820) (2.9) Liabilities: Current benefits payable 5,869,705 5,956,090 (86,385) (1.5) Accounts payable 8,953 4,751 4,202 88.4 Investments payable 109,035,059 119,247,882 (10,212,823) (8.6) Accrued investment management fees 642,047 723,025 (80,978) (11.2) Securities lending liabilities 42,014,172 57,658,845 (15,644,673) (27.1) Total liabilities: 157,569,936 183,590,593 (26,020,657) (14.2) Net assets held in trust for pension benefits $ 589,093,266 $ 585,104,429 $ 3,988,837 0.7
22
30, 2007, the System recovered $362,112 of the overpayment, resulting in a remaining
receivable of $302,966. These overpayments are included in the System’s June 30, 2007
receivables. The collection concluded in FY 2008.
Table 4 summarizes changes in plan net assets held in trust for pension benefits for the years
ended June 30, 2007 and 2006:
The System’s net investment (loss) income for the years ended June 30, 2007 and 2006 were
$76,194,266 and $42,305,447, respectively. The actual annual returns for these two years were
14.4% and 7.4%, respectively, compared to benchmark returns of 14.6% and 6.9%, respectively,
and actuarially assumed returns of 8% for both years.
The System’s benefit expenses for the years ended June 30, 2007 and 2006 were $71,404,196
and $71,351,523, respectively. The benefit expenses for the year ended June 30, 2008 reflect
retroactive pay increases of $1,112,118 to police retirees applicable for the year ended June 30,
2007. Had the amount of the retroactive increase been known prior to the issuance of the June
30, 2007 financial statements, the benefit expenses for the Fiscal Year ended 2007 would have
been $72,516,314, an increase of $1,164,791 from the prior year.
Primarily because of the investment income performance and benefit expenses, the increase
(decrease) in net assets held in trust for pension benefits during the years ended June 30, 2007
and 2006 was $3,998,837 and $(29,793,275), respectively.
Financial
Table 4: Summary of Changes in Net Assets For the Years Ended June 30, 2007 and 2006
June 30 Changes 2007 2006 Dollars Percent Additions: Contributions - members $ 17,505 $ 25,452 $ (7,947) (31.2) Total investment income 76,194,266 42,305,447 33,888,819 80.1 Total additions: 76,211,771 42,330,899 33,880,872 80.0 Deductions: Benefits to members and beneficiaries 71,404,196 71,351,523 52,673 0.1 Administrative expenses 818,738 772,651 46,087 6.0 Total deductions 72,222,934 72,124,174 98,760 0.1
Changes in net assets held in trust for pension benefits $ 3,988,837
$
(29,793,275)
$ 33,782,112 (113.4)
23
REQUESTS FOR ADDITIONAL INFORMATION
This financial report is designed to provide a general overview of the System’s finances and to
account for the money that the System receives. Questions concerning any of the information
provided in this report or requests for additional information should be addressed to:
City of Oakland Office of Personnel Retirement Systems
150 Frank H Ogawa Plaza Oakland, CA 94612
Financial
24 Financial
Statement of Plan Net Assets For the Years Ended June 30, 2008 and 2007 2008 2007 Assets Cash held by City Treasury $ 4,068,080 $ 2,965,533 Receivables:
Interest receivable 1,166,074 2,312,164 Dividends receivable 332,294 276,188 Investments receivable 28,623,742 57,559,607 Member contributions 360 164 Retired members and beneficiaries - 302,966
Total receivables 30,122,470 60,451,089
Investments, at fair value:
Short-term investments 39,864,759 31,011,258 Bonds 148,027,816 284,589,916 Domestic equities and mutual funds 251,402,942 222,460,985 International equities and mutual funds 79,064,041 103,116,549 Real estate mortgage loans 50,291 53,700 Securities lending collateral 89,147,267 42,014,172
Total investments 607,557,116 683,246,580
Total assets 641,747,666 746,663,202 Liabilities
Accounts payable 10,468 8,953 Benefits payable -- current month 5,819,088 5,869,705 Benefits payable -- retroactive 4,114,900 - Investments payable 61,187,050 109,035,059 Accrued investment management fees 626,743 642,047 Securities lending liabilities 89,147,267 42,014,172
Total liabilities 160,905,516 157,569,936
Net assets held in trust for pension benefits $ 480,842,150 $ 589,093,266
June 30
See accompanying notes to financial statements.
25
Financial
Statement of Changes in Plan Net Assets For the Years Ended June 30, 2008 and 2007 June 30 2008 2007 Additions Contributions of plan members $ 13,796 $ 17,505 Investment income
Net appreciation in fair value of investments (46,988,146) 58,776,130 Interest 11,046,739 15,032,733 Dividends 5,571,670 5,060,912
Total investment income (30,369,737) 78,869,775 Less investment expenses (2,617,687) (2,744,275)
Net investment income before net income from securities lending activities (32,987,424) 76,125,500
Income from securities lending activities 2,515,795 2,418,642 Less expenses from securities lending activities (2,208,298) (2,349,876)
Net income from securities lending activities 307,497 68,766
Net investment income (32,679,927) 76,194,266 Other income 124,979 Total additions (32,541,152) 76,211,771 Deductions Benefits to members and beneficiaries
Retirement 45,327,546 43,015,868 Disability 27,276,297 26,138,688 Death 2,376,155 2,249,640
Total benefits to members and beneficiaries 74,979,998 71,404,196 Administrative expenses 729,966 818,738 Total deductions 75,709,964 72,222,934 Change in net assets (108,251,116) 3,988,837 Net assets held in trust for pension benefits
Beginning of year 589,093,266 585,104,429 End of year $ 480,842,150 $ 589,093,266
See accompanying notes to financial statements.
26 Financial
NOTES TO BASIC FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2008 AND 2007
1. DESCRIPTION OF THE OAKLAND POLICE AND FIRE RETIREMENT SYSTEM
The Oakland Police and Fire Retirement System (the System) is a closed, single-employer
defined benefit plan established by the City of Oakland (City) Charter. The System is governed
by a board of seven trustees; the Mayor or his designate, three Mayoral appointees approved by
the City Council, an elected active or retired member of the Police Department, an elected
active or retired member from the Fire Department, and an elected member position which
alternates between the Police Department and Fire Department membership. Trustees receive no
compensation. The System covers the City’s uniformed employees. As a result of a City
Charter amendment, known as Measure R approved by the electorate on June 8, 1976,
membership in the plan is limited to uniformed employees hired prior to July 1, 1976. All
subsequent hires are covered under the California Public Employees’ Retirement System
(CalPERS). Active members are permitted to terminate their membership in the System and
become members of CalPERS under certain conditions.
The System is exempt from the regulations of the Employee Retirement Income Security Act of
1974 (ERISA). The System is also exempt from federal income taxes and California franchise
tax.
System Membership
At June 30, 2008 and 2007, the System membership consisted of:
2008 2007 Retirees and beneficiaries currently receiving benefits:
Police 689 704 Fire 549 568
Total 1,238 1,272 Current employees (all vested):
Police 1 3
27
Basic Benefit Provisions
The City Charter establishes plan membership, contribution, and benefit provisions. The
System provides that any member who completes at least 25 years of service, regardless of age,
or completes 20 years of service and attains age 55, or has attained age 65 is eligible for
retirement benefits. The basic retirement allowance equals 50% of the compensation attached to
the average rank held during the three years immediately preceding retirement, plus an
additional allowance of 2/3-1% of such compensation for each year of service (up to ten)
subsequent to (a) qualifying for retirement and (b) July 1, 1951. However, any member retiring
at age 65 with less than 20 years of service shall receive a reduced retirement allowance based
upon the number of years of service. A member is eligible for early retirement benefits after 20
to 24 years of service with a retirement allowance based upon 40% to 48% of the compensation
attached to the average rank held during the three years preceding retirement. Additionally, a
member with 10 to 19 years of service may retire and, on or after the 25th anniversary of his/her
date of employment may receive a retirement allowance based upon 20% to 38% of the
compensation attached to the average rank held during the three years preceding retirement.
The System also provides for various death, disability and survivors’ benefits.
After retirement, benefits increase as compensation for the average rank increases. Upon a
retiree’s death, benefits are continued to an eligible surviving spouse at a two-thirds level for
service and non-duty disabled retirees and at a 100% level for retirements for duty disability.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The System is reported as a pension trust fund in the City’s basic financial statements. The
financial statements of the System present only the financial activities of the System and are not
intended to present the financial position and changes in financial position of the City in
conformity with accounting principles generally accepted in the United States of America.
Measurement Focus and Basis of Accounting
The financial statements are prepared on a flow of economic resources measurement focus using
the accrual basis of accounting. Contributions are recognized in the period in which the
contributions are due pursuant to formal commitments as well as statutory or contractual
requirements, and benefits and refunds are recognized when payable under plan provisions.
Financial
28
Methods Used to Value Investments
Investments are reported at fair value. Securities traded on a national or international exchange
are valued at the last reported sales price at current exchange rates. Mortgages are reported
based on the remaining principal balances.
The System adopted Governmental Accounting Standards Board (GASB) Statement No. 40,
Deposit and Investment Risk Disclosures – an amendment to GASB Statement No. 3, effective
July 1, 2004. GASB Statement No. 40 is designed to inform financial statement users about
deposit and investment risks that could affect a government’s ability to provide services and
meet its obligations as they become due. There are risks inherent in all deposits and
investments, and GASB believes that the disclosures required by this Statement provide users of
governmental financial statements with information to assess common risks inherent in deposit
and investment transactions. Deposit and investment resources represent significant assets of
the System, and these resources are necessary to carry out fiduciary responsibilities. Some key
changes with GASB Statement No. 40 include disclosure of:
• Common deposit and investment risks related to credit risk;
• Concentration of credit risk;
• Interest rate risk;
• Foreign currency risk;
• Investments that have fair values that are highly sensitive to changes in interest rates;
and
• Deposit and investment policies related to those risks.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles in the United States of America requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
3. CONTRIBUTIONS
In accordance with the City Charter, active members hired after July 1, 1951, and prior to July 1,
1976, contribute a percentage of their earned salaries based upon entry age as determined by
consulting actuaries. During the years ended June 30, 2008 and 2007, these contributions
ranged from 5.47% to 6.05%. The City Charter limits employee contributions to 13.00% of
Financial
Notes to Basic Financial Statements
29
earned salaries. Employee contributions are refundable with interest at 4.00% per year if an
employee elects to withdraw from the System upon termination of employment with the City.
In March 1997, the City issued pension obligation bonds in the amount of $417 million to pay
the City’s contributions to the System through June 2011. In accordance with an agreement
entered into at the time that Pension Obligation Bonds were issued in 1997, the City is not
expected to contribute until the 2011/12 fiscal year. Thereafter, the City must contribute, at a
minimum, such amounts as are necessary, on an actuarial basis, to provide assets sufficient to
meet benefits to be paid to plan members. Using the current actuarial cost method, these
contributions are based on spreading costs as a level percentage of all uniformed employees’
compensation through June 30, 2026. Budgeted administrative expenses are included in the City
contribution rates.
The City transferred proceeds of $17,709,888 during the year ended June 30, 2005 from the
Oakland Joint Powers Financing Authority Refunding Revenue 2005 Series B Bond to fund a
portion of the City’s future obligation to the System.
As of July 1, 2007 (the date of the System’s last actuarial valuation), the unfunded liability is
approximately $322.1 million.
4. CASH, DEPOSITS & INVESTMENTS
Investment Policy
The System’s investment policy authorizes investment in U.S. equities, international equities,
U.S. fixed income, instruments including U.S. Treasury notes and bonds, government agency
mortgage backed securities, U.S. corporate notes and bonds, collateralized mortgage obligations,
yankee bonds and non U.S.-issued fixed income securities denominated in foreign currencies.
The System’s investment portfolio is managed by external investment managers. During the
years ended June 30, 2008 and 2007, the System had eleven external investment managers.
The PFRS investments are also restricted by the City Charter. In November 2006, City voters
passed Measure M to amend the City Charter to allow the PFRS Board to invest in non-dividend
paying stocks and to change the asset allocation structure from 50% equities and 50% fixed
income to the Prudent Person Standard.
The System’s Investment Policy limits fixed income investments to a maximum average
duration of 10 years and a maximum remaining term to maturity (single issue) at purchase of 30
Financial
Years Ended June 30, 2008 and 2007
30
years, with targeted portfolio duration of between 3 to 8 and targeted portfolio maturity of 15
years. The System’s investment policy allows the fixed managers to invest in securities with a
minimum rating of B or higher as long as the portfolio maintains an average credit quality of
BBB (investment grade using Standard & Poor’s or Moody’s ratings).
The System’s investment policy states that investments in derivative securities known as
Collateralized Mortgage Obligations (CMOs) shall be limited to a maximum of 20% of an
account’s market value with no more than 5% in any one issue. CMOs are mortgage-backed
securities that create separate pools of pass-through rates for different classes of bondholders
with varying maturities. The fair value of CMOs are considered sensitive to interest rate
changes because they have embedded options.
The Investment Policy allows for each fixed asset manager to have a maximum of 10% of any
single security investment in their individual portfolios with the exception of U.S. government
securities, which is allowed to have a maximum of 25% in each manager’s portfolio.
Cash and Cash Deposits
As of June 30, 2008 and 2007, cash and cash deposits consisted of cash in treasury held in the
City’s cash and investment. These funds are invested according to the investment policy
adopted by the City Council. Interest earned on these pooled accounts is allocated monthly to
all funds based on the average daily cash balance maintained by the respective funds. It is not
possible to disclose relevant information about the System’s separate portion of the investment
pool. Information regarding the characteristics of the entire investment pool can be found in the
City’s June 30, 2008 basic financial statements. A copy of that report may be obtained by
contacting the City Treasurer. As of June 30, 2008, the System’s share of the City’s investment
pool totaled $4,068,080.
Interest Rate Risk
Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an
investment. As described previously, the System’s Investment Policy limits fixed income
investments to a maximum average duration of 10 years and a maximum remaining term to
maturity (single issue) at purchase of 30 years, with targeted portfolio duration of between 3 to 8
years and targeted portfolio maturity of 15 years. As of June 30, 2008 the average duration for
the System’s fixed income investment portfolio was 4.61 years, excluding fixed income short-
term investments and securities lending investments.
Financial
Notes to Basic Financial Statements
31
The following summarizes the System’s fixed income investments by category at June 30, 2008:
Fair Value Highly Sensitive to Change in Interest Rates
The terms of a debt investment may cause its fair value to be highly sensitive to interest rate
changes. The fair values of CMOs are considered sensitive to interest rate changes because they
have embedded options. The following are the System’s investments in CMOs at June 30,
2008:
Credit Risk
Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its
obligation. The following tables provide information as of June 30, 2008 concerning credit risk
of fixed income securities:
Short Term Investment Ratings
Financial
Investment Type Fair
Value
Modified Duration (Years)
Government bonds $ 72,539,875 4.93 Corporate bonds 75,487,941 4.30
Total fixed income investments $ 148,027,816 4.61
Security Name Fair Value (Millions)
Coupon Rate
Percent of Total Investments Fair Value
Commercial Mortgage Pass-Through $ 3.91 4.93% 0.76%
Investment Type S&P/Moody's
Rating Fair Value Government Agencies AAA $ 9,028,459 Commercial Paper AAA 3,315,073 Pooled Funds and Mutual Funds Not Rated 25,996,382 Money Market Bank Account* Not Rated 1,524,845 Total Short Term Investments $ 39,864,759 * The Money Market Bank Account is collateralized with AAA rated government agency securities
Years Ended June 30, 2008 and 2007
32
Long Term Investment Ratings
The System had $233,792 of fixed income securities as of June 30, 2008 that does not meet the
minimum rating of B or higher.
Concentration of Credit Risk
Concentration of credit risk is the risk of loss attributed to the magnitude of a government’s
investment in a single issuer. As of June 30, 2008, with the exception of mutual funds and
United States Government securities, no investment exceeded 5% of the System’s net assets.
Custodial Credit Risk
Custodial credit risk is the risk that, in the event of a failure of depository financial institution or
counterparty to a transaction, the inability to recover the value of deposits, investments, or
collateral securities in the possession of an outside party.
The California Government Code requires that governmental securities or first trust deed
mortgage notes be used as collateral for demand deposits and certificates of deposit at 110
percent and 150 percent, respectively, of all deposits not covered by federal deposit insurance.
As the City holds all cash and certificates of deposit on behalf of the System, the collateral must
be held by the pledging financial institution’s trust department and is considered held in the
City’s name.
The City, on behalf of the System, does not have any funds or deposits that are not covered by
depository insurance, which are either uncollateralized, collateralized with securities held by the
pledging financial institution, or collateralized with securities held by the pledging financial
institution’s trust department or agent, but not in the City’s name. The System does not have
any investments that are not registered in the name of the System and are either held by the
counterparty or the counterparty’s trust department or agent but not in the System’s name.
S&P/Moody's Rating Fair Value
Percent of Total Fair
Value AAA $ 103,275,413 69.77% AA 5,471,182 3.70% A 14,408,090 9.73% BBB 15,896,961 10.74% BB 2,640,831 1.78% B 6,101,547 4.12% C 233,792 0.16% $ 148,027,816 100.0%
Financial
Notes to Basic Financial Statements
33
Foreign Currency Risk
Foreign currency risk is the risk that changes in foreign exchanges rates will adversely affect the
fair values of an investment or deposit. The following summarizes the System’s investments
denominated in foreign currencies as of June 30, 2008:
Securities Lending Transactions
The System’s investment policy authorizes participation in securities lending transactions,
which are short-term collateralized loans of the System’s securities to broker-dealers with a
simultaneous agreement allowing the System to invest and receive earnings on the loan rebate
fee. All securities loans can be terminated on demand by either the System or the borrower,
although the average term of loans is one week.
The administrator of the System’s securities lending activities is responsible for maintaining an
adequate level of collateral in an amount equal to at least 102% of market value of loaned U.S.
government securities. Collateral received may include cash, letters of credit, or securities. If
securities collateral is received, the System cannot pledge or sell the collateral securities unless
the borrower defaults.
As of June 30, 2008 and 2007, management believes the System has minimized its credit risk
exposure to borrowers because the amounts held by the System as collateral exceeded the
securities loaned by the System. The System’s contract with the administrator requires it to
indemnify the System if the borrowers fail to return the securities (and if the collateral is
inadequate to replace the securities borrowed) or fails to pay the System for income distributions
by the securities’ issuers while the securities are on loan.
Foreign Currency Total Fair Value Australian Dollar $ 3,434,578 Brazilian Real 146,225 British Pound 6,843,994 Canadian Dollar 3,579,329 Danish Krone 777,439 Euro 15,323,128 Hong Kong Dollar 2,829,355 Japanese Yen 7,782,172 Norwegian Kroner 370,165 Philippine Peso 627 Singapore Dollar 879,217 South African Rand 279,675 Swedish Krona 168,859 Swiss Franc 4,171,469
$ 46,586,232
Financial
Years Ended June 30, 2008 and 2007
34
The following summarizes investments in securities lending transactions and collateral received
at June 30, 2008:
5. ACTUARIAL ASSUMPTIONS AND FUNDED STATUS
The System adopted GASB Statement No. 50, Pension Disclosure – an amendment to GASB
Statements No. 25 and No. 27, effective July 1, 2007. GASB Statement No. 50 is designed to
inform financial statement users further about the System’s funded status and actuarial
assumptions.
Information regarding the funded status of the plan as of the most recent valuation date is shown
below.
Multiyear trend actuarial information is presented in the Required Supplementary Information
immediately following the notes to the financial statements.
Financial
Notes to Basic Financial Statements
Dollars in Millions
Actuarial Valuation
Date
Actuarial Accrued Liability (AAL)
Actuarial Value of Assets
Unfunded AAL
Funded Ratio
Covered Payroll
AAL as a Percentage of Covered
Payroll (a) (b) (a)-(b) (b)÷(a) (c) ((a)-(b))÷(c)
7/1/2007 $ 888.1 $ 566.0 $ 322.1 63.7% $ 0.4 80,525%
Investments in securities lending transactions: US Government and agencies $ 14,812,920 US Corporate bonds 906,156 US Equities 70,391,788 Non—US Equities 3,036,403 Total investments in securities lending transactions $ 89,147,267
Collateral received: Money Market $ 75,942,522 Certificates of deposit floating rate 3,019,095 U.S. corporate floating rate 9,047,937 Asset backed securities 3,932,679 Total collateral received $ 91,942,233
35
A summary of the actuarial methods and significant assumptions used to calculate the Annual
Required Contribution (ARC) for the current year follows:
6. RESERVES
Active Member Contributions Reserve represents total accumulated member contributions.
Additions include member contributions and investment earnings; deductions include refunds of
member contributions and transfers to the Retired Member Contribution Reserve.
Retired Member Contribution Reserve represents the total accumulated transfers from active
member contributions and investments, less payments to retired members.
Employer Reserve represents the total accumulated employer contributions for retirement
payments. Additions include contributions from the employer and investment earnings;
deductions include payments to retired members.
The aggregate total of the System’s major reserves as of June 30, 2008 and 2007 equals net
assets held in trust for pension benefits and comprises the following:
7. ADMINISTRATIVE EXPENSES
The City provides the System with accounting and other administrative services. Staff salaries
included in administrative expenses for the years ended June 30, 2008 and 2007 were $620,129
and $674,243, respectively. Other administrative expenses including accounting and audit
services, legal fees, annual report and miscellaneous expense for the years ended June 30, 2008
and 2007 were $109,836 and $144,495, respectively.
Actuarial Cost Method Entry Age Normal Cost Method Investment Rate of Return 8.00% Inflation Rate, US 3.25% Inflation Rate, Bay Area 3.50% General Pay Increases 4.75% Post-retirement Benefit Increases 4.75% Amortization Method Level Dollar Amortization Period 29 Years, Closed
2008 2007 Active member contribution reserve $930,701 $916,905 Retired member contribution reserve $61,736,583 $64,875,567 Employer reserve $418,174,866 $523,300,794
$480,842,150 $589,093,266
Financial
Years Ended June 30, 2008 and 2007
36
8. SUBSEQUENT EVENTS
Retroactive Pay Increases
On June 17, 2008, the Oakland City Council approved pay raises for all police officers
retroactive to July 1, 2006. The police officers received 2% pay raises effective July 1, 2006, an
additional 2% effective January 1, 2007, and an additional 4% effective July 1, 2007. The
System recorded $4,114,900 of retroactive benefits and related liabilities as of June 30, 2008, of
which $1,112,118 was for retroactive pay increases for the period from July 1, 2006 to June 30,
2007.
Recent Changes in the Economic Environment and Its Impact on the System
The recent turmoil in the financial market has been unprecedented. In September 2008, the U.S.
Treasury placed government sponsored enterprises Fannie Mae (Federal National Mortgage
Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) into conservatorship
and committed to provide as much as $100 billion to each company to backstop any shortfalls in
capital through 2009, which protected the principal and interest payments on their debt (bonds
issued). In addition, the federal government recently assumed control of American International
Group Inc. (AIG), the largest insurance company in the U.S.; Lehman Brothers Holdings Inc.
was seized by government regulators and its branches and assets sold to JPMorgan Chase & Co.
On October 3, 2008, the President of the United States signed into law the $700 billion
Emergency Economic Stabilization Act of 2008 in an effort to address the economic crisis.
For the quarter ending September 30, 2008 the System’s total annual portfolio return was
-10.7%. This return was below the policy benchmark of -8.8% for the same quarter.
Financial
Notes to Basic Financial Statements
37
REQUIRED SUPPLEMENTARY INFORMATION YEAR ENDED JUNE 30, 2008
The information presented in the required supplementary schedule was determined as part of the
actuarial valuations as of the dates indicated. Additional information as of the latest actuarial
valuation date of July 1, 2007, is as follows:
Financial
Schedule I: Schedule of Funding Progress Dollars in Millions
Actuarial Valuation
Date
Actuarial Accrued Liability (AAL)
Actuarial Value of Assets
Unfunded AAL
(UAAL) Funded
Ratio Covered Payroll
AAL as a Percentage
of Covered Payroll
(a) (b) (a)-(b) (b)÷(a) (c) ((a)-(b))÷(c) 7/1/2002 $875.5 $674.7 $200.8 77.1% $2.6 7,723% 7/1/2003 890.6 615.1 275.5 69.1% 0.4 68,875% 7/1/2004 890.2 621.6 268.6 69.8% 0.3 89,533% 7/1/2005 883.5 614.9 268.6 69.6% 0.3 89,533% 7/1/2007* 888.1 566.0 322.1 63.7% 0.4 80,525% *Revised actuarial assumptions and method
Schedule II: Schedule of Employer Contributions (dollars in millions)
Year Ended
June 30
Annual Required
Contributions ($) Percentage (%)
Contributed 2003 $18.2 0% 2004 24.0 0% 2005 23.6 75% 2006 23.6 0% 2007 23.6 0% 2008 28.6 0%
38
NOTE TO REQUIRED SUPPLEMENTARY INFORMATION YEAR ENDED JUNE 30, 2008
A summary of the actuarial methods and significant assumptions used to calculate the funded
status and Annual Required Contribution (ARC) for the current year follows:
Financial
Actuarial Cost Method Entry Age Normal Cost Method Investment Rate of Return 8.00% Inflation Rate, US 3.25% Inflation Rate, Bay Area 3.50% General Pay Increases 4.75% Post-retirement Benefit Increases 4.75% Amortization Method Level Dollar Amortization Period 29 Years, Closed
SECTION 3 INVESTMENT
40 Investment
INVESTMENT CONSULTANT’S REPORT
41
Investment
42 Investment
List of Investment Professionals Domestic Equity Managers: Fixed Income Managers: Barrow, Hanley, Mewhinney & Strauss Reams Asset Management Delaware Investments Seneca Capital Management Earnest Partners Franklin Portfolio Investment Consultant: NWQ Pension Consultant Alliance Roxbury Capital Management Custodian: International Equity Managers: Bank of New York New Star Institutional Managers Hansberger Global Investor Security Lending: State Street Global Advisors Bank of New York
Investment Manager Fees and Other Investment Expenses Periods ending June 30 2008 2007 Investment Manager Fees
Domestic Equity Managers $1,411,596 $1,194,005 International Equity Managers 523,567 560,238 Domestic Fixed Income Managers 397,524 558,829
Total Investment Manager Fees 2,332,687 2,313,071 Other Investment Fees
Investment Consultant 100,000 100,000 Custodian Fees 185,000 205,121
Total Other Investment Fees 285,000 305,121
Total Investment Fees $2,617,687 $2,618,193
Asset Allocations June 30, 2008
43
Investment
Investment Summary by Type Fiscal Years Ending June 30
2008 2007
Descriptions Fair Value % of
Portfolio Fair Value % of
Portfolio Equity
Materials and Services $ 78,236,084 15.1% $ 64,201,440 10.0% Consumer Non-Durables 47,369,445 9.1% 43,564,892 6.8% Financial 44,299,711 8.5% 90,702,456 14.1% Energy 41,208,561 7.9% 21,449,010 3.3% Technology 38,503,117 7.4% 32,441,578 5.1% Utilities 25,759,603 5.0% 18,254,542 2.8% Capital Goods and Services 15,014,183 2.9% 12,584,802 2.0% Transportation 9,993,264 1.9% 6,612,688 1.0% Consumer Durables 5,647,214 1.1% 2,010,769 0.3% Real Estate Investment Trusts 4,046,509 0.8% 4,021,996 0.6% Miscellaneous Equities 379,254 0.1% - 0.0%
Total Equity Income Investments $ 310,456,945 59.9% $ 295,844,171 46.1%
Fixed Income Investments Corporate Bonds $ 75,487,941 14.6% $ 109,193,640 17.0% US Government Bonds 72,539,875 14.0% 126,366,992 19.7% US Treasury - 0.0% 46,191,163 7.2% Other Government Bonds - 0.0% 2,838,120 0.4%
Total Fixed Income Investments $ 148,027,816 28.6% $ 284,589,915 44.4% Mutual Funds
International Mutual Funds $ 19,688,905 3.8% $ 29,733,363 4.6% Domestic Mutual Funds 321,133 0.1% - 0.0%
Total International Mutual Funds $ 20,010,038 3.9% $ 29,733,363 4.6% Other Investments
Short Term $ 39,864,759 7.7% $ 31,011,258 4.8% Residential Mortgage Loans 50,291 0.01% 53,700 0.01%
Total Other Investments $ 39,915,050 7.7% $ 31,064,958 4.8% Total Investments $ 518,409,849 100.0% $ 641,232,406 100.0%
Note: Table does not include investments in security lending.
44 Investment
Largest Stock Holdings (by Market Value) As of June 30, 2008
Stock Shares Market Value 1 EXXON MOBIL 62,400 $5,499,312 2 GENERAL ELECTRIC 119,300 3,184,117 3 MICROSOFT 110,600 3,042,606 4 CONOCOPHILLIPS 29,300 2,765,627 5 OCCIDENTAL PETROLEUM CORP 26,400 2,372,304
6 CHESAPEAKE ENERGY CORP 35,100 2,315,196
7 XTO ENERGY INCCOM 33,275 2,279,670 8 CUMMINS INC. 34,800 2,280,096
9 JOHNSON & JOHNSON COMPANY 33,700 2,168,258 10 HEWLETT PACKARD COMPANY 47,800 2,113,238
Largest Bond Holdings (by Market Value) As of June 30, 2008
Description Interest
Rate Maturity
Date Market Value
1 FNMA TBA 30YR 5.40% 1/17/2033 $20,090,670 2 FEDERAL NATIONAL MORTGAGE ASSOC 5.01% 1/30/2032 18,356,193 3 UNITED STATES TREAS NOTES 3.14% 12/15/2012 11,276,490 4 GNMA I TBA 30YR 5.41% 4/29/2034 10,725,003 5 WELLS FARGO MORTGAGE 4.96% 11/3/2034 7,528,265 6 WACHOVIA BANK COMMERCIAL MORTGAGE 5.12% 1/27/2038 4,877,479 7 FEDERAL HOME LOAN MORTGAGE CORP 4.41% 10/21/2022 3,257,737 8 U S TREASURY BONDS 6.25% 8/15/2023 3,130,296 9 FEDERAL HOME LOAN BANK 3.12% 5/25/2010 2,306,934 10 BANK AMERICA CORPBANK 5.42% 8/8/2047 2,049,959
Note: The schedules above do not reflect holdings in index funds. A complete list is available upon request.
SECTION 4 ACTUARIAL
46
ACTUARY’S CERTIFICATION LETTER
Actuarial
47
Actuarial
48
SUMMARY OF ACTUARIAL VALUE, ASSUMPTIONS AND FUNDING METHODS
T he Oakland Police and Fire Retirement System is a closed defined benefit pension plan. It
was closed to new members on June 30, 1976. The bulk of the plan is comprised of retir-
ees and beneficiaries.
The valuation as of June 30, 2007 was the first valuation performed by Bartel Associates. There
were changes in methodologies and assumptions. Most significantly, the mortality assumptions
and the postretirement benefit increase assumptions were modified. Also, the actuarial asset
methodology was changed from market value to a smoothed market value; this is intended to
facilitate the budget process by smoothing contribution rates. These changes were adopted by
the Board of Retirement at their January and February 2008 meetings.
Over the course of the last two years since the prior valuation, the plan realized actuarial gains
for both assets ($26.2 million) and liabilities ($9.1 million). However, the assumption changes
increased the liability by $20.4 million and the asset methodology change decreased the asset
value by $23.1 million, resulting in a total plan Unfunded Actuarial Liability (UAL) of $322.1
million as compared to the expected UAL of $314.0 million. The plan’s funded ratio is 63.7%, a
decrease from 69.6% in the prior valuation of July 1, 2005.
The City is not expected to make contributions to the plan until the 2011/12 fiscal year. In 1997
the City sold Pension Obligation Bonds and deposited the proceeds into the plan in an amount
equal to the expected City contributions from March 1997 through June 2011. In the June 30,
2007 valuation, the projected employer contribution for fiscal year 2011/12 was estimated at
$39.0 million, or 24% of payroll. Market fluctuations in the interim will influence this rate.
Estimated City Contributions Valuation Assumptions
Valuation Date July 1
Investment Returns
Wage Growth
Annual Required City Contribution Amount
Starting July 1, 2011 20031 0.08 0.0450 $44 million 20041 0.08 0.0450 $40 million 20051 0.08 0.0450 $37 million 20072 0.08 0.0475 $39 million
1 Valuation studies performed by Milliman Actuaries 2 Valuation studies performed by Bartel Associates
Actuarial
49
The table below is a summary of the results of the June 30, 2007 valuation. For comparison,
City contribution rates have been shown for the 2008/09 fiscal year. In accordance with an
agreement entered into at the time that Pension Obligation Bonds were issued in 1997, the City
is not expected to contribute until the 2011/12 fiscal year. See notes following the table for a
description of terms.
None of the information provided in this section takes into account the fund’s investment returns
since July 1, 2007. As of this writing we expect investment losses since that time will decrease
the funded ratio and increase the projected 2011/12 contribution amount significantly.
Valuation Summary July 1, 20051 July 1, 2007 % Change Participant Counts Actives 3 3 0.0% Terminated Vested - - 0.0% Service Retirees 706 643 -8.9% Disability Retirees 346 328 -5.2% Beneficiaries 351 357 1.7% Total 1,406 1,3312 -5.3% Actuarial Liabilities (Amounts in $000’s) Present Value of Projected Benefits $883,637 $900,670 1.9% Assets (Amounts in $000’s) Market Value of Assets $614,898 $589,093 -4.2% Annual Rate of Return since prior valuation 7.0% 10.5% Actuarial Value of Assets $614,898 $566,040 -7.9% Annual Rate of Return since prior valuation 7.0% 9.0% Plan Funded Status (Amounts in $000’s) Actuarial Liability $883,637 $888,136 0.5% Actuarial Value of Plan Assets 614,898 566,040 -7.9% Unfunded Actuarial Liability $268,739 332,096 19.9% Funded Ratio 69.6% 63.7% Projected FY 2011-12 City Contribution (Amounts in $000’s) Annual Amount $37,000 $39,000 5.4% Expected Total Police & Fire Payroll NA 164,589 As a % of Total Police & Fire Payroll 26% 24% City Contribution for following fiscal year (Amounts in $000’s) Fiscal year 2006/07 2008/09 Annual Amount NA $26,617 Expected Total Police & Fire Payroll NA 143,199 As a % of Total Police & Fire Payroll NA 19% 1 July 1, 2005 valuation performed by Milliman Actuaries 2 Includes spouse covered under qualified domestic relations orders
Actuarial
50
ACTUARIAL DEFINITIONS
The Present Value of Projected Benefits (PVPB) is the present value of all future benefits for
current plan participants.
Actuarial Funding Method: The actuarial cost method used for funding purposes in this valua-
tion is the Aggregate Cost Method. Under the Aggregate Cost method, the excess of the Actuar-
ial Present Value of Projected Benefits (PVPB) of the group over the Actuarial Value of Assets
is called the Unfunded Accrued Liability (UAL) and is allocated on a level basis over the earn-
ings of the group as a whole. That portion of the Actuarial Present Value allocated to a valuation
year is called the Normal Cost. Under this method, the actuarial (gains)/losses will (reduce)/
increase future Normal Costs. When no active members remain, the UAL is amortized over a
period of years.
For funding purposes in accordance with the City Charter, the UAL is amortized to July 1, 2026.
The UAL is amortized as a level percent of total City pay for all Safety employees, whether cov-
ered by this system or by CalPERS and will be fully amortized by 2026.
ACTUARIAL VALUE OF ASSETS
In the past, the Actuarial Value of Assets had always been set equal to the Market Value of As-
sets. Beginning with the June 30, 2007 valuation, the Actuarial Value of Assets is determined by
a method that will gradually recognize changes in market value over time. The new method rec-
ognizes 1/5 of the difference between market value and an expected actuarial value of assets
each year.
The expected actuarial value is equal to the prior year’s actuarial value adjusted for the year’s
cash flows and with interest credited at the actuarially assumed investment return rate (8%). The
new method was implemented so that it applied to investment performance following the last
valuation date, which was July 1, 2005. In addition, the Actuarial Value of Assets must stay
within a corridor of 10% around the Market Value of Assets.
EXPENSES
Investment expenses are assumed to be paid by earnings in excess of the assumed rate of return.
Administrative expenses are based upon the budgeted amount for FY 2008 and are incorporated
Actuarial
51
in annual recommended contributions. For purposes of projecting FY 2011/12 contributions
they are assumed to increase in line with Bay Area CPI at the rate of 3.5% per year.
BENEFIT PAYMENT DATA
The City provided the current benefit payment amounts for all police and fire retirees and bene-
ficiaries currently receiving payments. In addition, reduction amounts for Fire retirees and bene-
ficiaries were provided. In FY 2006, the System discovered that overpayments of retiree holiday
pay had been made to Fire retirees and beneficiaries. It was agreed that three years of overpay-
ments would be recovered by a reduction in individual retirement benefit payments over a 20-
month period effective August 2006. The last of the reduction amounts will be recovered in
April 2008. The Present Value of Projected Benefits takes these reductions into account.
Benefits have been adjusted for the new police collective bargaining agreement effective July 1,
2006.
ACTUARIAL ASSUMPTIONS
The following assumptions were used in the valuation:
Retirement
When this valuation was performed, two of the three remaining active police members were no
longer working. These two members are assumed to have retired immediately. The following
rates of retirement apply only to the remaining active Police member:
Discount rate 8%
Inflation 3.25% , US 3.50%, Bay Area
Post-Retirement Increases (Based on Salary Increases for Rank at Retirement)
3.50% Inflation 1.25% Productivity
Total 4.75% The total in the prior valuation of June 30, 2005 was 4.5%.
In accordance with their recent bargaining agreement, police are assumed to receive annual benefit increases of 4% as of July 1, 2007, 2008, and 2009.
Termination And Pre-retirement Disability and Mortality None
Actuarial
Years of Service Rate Years of Service Rate
33 35% 37 70%
34 40% 38 80%
35 50% 39 90%
36 60% 40 100%
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Healthy Mortality (for service retirees and beneficiaries)
RP-2000 Table with ages setback 1 year for males. The same rates are used for pre-retirement
and post-retirement mortality. Sample rates are as follows:
In the prior valuation, the 1983 Group Annuity Mortality table for males and females was used.
Disabled Mortality (for disability retirees)
Age Male Female 40 0.1% 0.1% 50 0.2% 0.2% 60 0.6% 0.5% 70 2.0% 1.7% 80 5.8% 4.6%
Actuarial
Age Male Female 40 41.2 43.2
45 36.5 38.4
50 31.7 33.6
55 27.1 28.9
60 22.6 24.4
65 18.4 20.1
70 14.6 16.2
75 11.2 12.7
80 8.3 9.7
85 5.9 7.1
90 4.1 5.2
95 3.0 4.0
100 2.3 3.3
105 2.0 2.6
110 2.0 2.1
Age Male Female 40 38.3 42.8
45 33.8 38.3
50 29.3 33.8
55 25.1 29.4
60 20.8 25.2
65 16.7 21.1
70 13.1 17.3
75 10.1 13.7
80 7.7 10.4
85 5.7 7.5
90 4.1 5.3
95 2.9 3.5
Life Expectancies for healthy retirees and beneficiaries are based on the RP-2000 table for males and females with ages setback 1 year for males.
Life Expectancies for disabled retirees are based on the CalPERS Industrial Disability table with ages setback 2 years.
53
CalPERS Industrial Disability with ages setback 2 years. In the prior valuation, 120% of the
1983 Group Annuity Mortality table for males was used.
Participant Data Summary
Following summarizes participant demographic information for the July 1, 2005 and July 1,
2007 actuarial valuations. July 1, 2005 information is from the prior actuary. July 1, 2007 data
was provided by the City. Data was checked for reasonableness, but not audited.
Actuarial
July 1, 2005 July 1, 2007 Police Fire Total Police Fire Total Participant Counts Actives 3 - 3 3 - 3 Service Retirees 418 288 706 386 257 643 Disability Retirees 185 161 346 180 148 328 Beneficiaries 168 183 351 171 186 357
Total 774 632 1,406 740 591 1,3311 Actives Average Age 60.5 - 60.5 62.5 - 62.5 Average Service 34.8 - 34.8 36.8 - 36.8 Salary
Total (000’s) $433 - $433 $433 - $433 Average 144,400 - 144,400 144,400 - 144,400
All Inactives Average Age 68.7 73.4 70.8 70.0 74.4 72.0 Average. Monthly Benefit $4,218 $4,618 $4,398 $4,1843 $4,8962 $4,501 Retirees Average Age 65.9 73.1 68.9 67.4 73.9 70.0 Average. Monthly Benefit $4,380 $5,025 $4,643 $4,4073 $5,3692 $4,792 Disabled Retirees Average Age 67.4 67.9 67.6 68.4 69.0 68.7 Average. Monthly Benefit $4,489 $4,799 $4,633 $4,4023 $5,0922 $4,713 Beneficiaries Average Age 77.1 78.7 77.9 77.7 79.4 78.6 Average. Monthly Benefit $3,518 $3,817 $3,674 $3,4533 $4,0862 $3,782 1 Includes spouses covered under qualified domestic relations orders 2 Amount is prior to reductions for previous overpayments of retiree holiday pay 3 Amount does not include the most recent increases granted under the new police collective bargaining
agreement effective July 1, 2006.
54 Actuarial
SECTION 5 STATISTICAL
56
Benefit Expense by Type Fiscal Years Ending June 30
2008 2007
Type of Retirees # of
Retirees Gross
Amount # of
Retirees Gross
Amount Police
Service Allowance 444 $ 26,348,466 457 $ 24,442,801 Disability Allowance 223 13,226,459 225 12,083,746 Death Allowance 22 1,272,722 22 1,148,800
TOTAL: 689 $ 40,847,647 704 $ 37,675,347 Fire
Service Allowance 303 $ 18,979,080 313 $ 18,573,068 Disability Allowance 227 14,049,838 236 14,054,941 Death Allowance 19 1,103,433 19 1,100,841
TOTAL: 549 $ 34,132,351 568 $ 33,728,850 TOTAL POLICE & FIRE: 1,238 $ 74,979,998 1,272 $ 71,404,196
Statistical
