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In calculating the annual actuarially recommended contribution rates, the PERS actuary calculates on the basis of certain assumptions the actuarial present value of benefits that PERS will fund under the PERS Plans, which includes two components, the normal cost and the unfunded actuarial accrued liability (the "UAAL "). The normal cost represents the actuarial present value of benefits that PERS will fund under the PERS Plans that are attributed to the current year, and the UAAL represents the actuarial present value of benefits that PERS will fund that are attributed to past years. The UAAL represents an estimate of the actuarial shortfall between assets on deposit at PERS and the present value of the benefits that PERS will pay under the PERS Plans to retirees and active employees upon their retirement. The UAAL is based on several assumptions such as, among others, the rate of investment return, average life expectancy, average age of retirement, inflation, salary increases and occurrences of disabilities. In addition, the UAAL includes certain actuarial adjustments such as, among others, the actuarial practice of smoothing losses and gains over multiple years (which is described in more detail below). As a result, the UAAL may be considered an estimate of the unfunded actuarial present value of the benefits that PERS will fund under the PERS Plans to retirees and active employees upon their retirement and not as a fixed expression of the liability the PERS City owe to PERS under their respective PERS Plans. In each actuarial valuation, the PERS actuary estimates the actuarial value of the assets (the "Actuarial Value ") of the PERS Plans at the end of the fiscal year. The PERS actuary assumes, among other things, that the rate of return during that fiscal year, which assumed rate of return is established by PERS and the City has no ability to predict the assumed rate of return from time to time. The PERS actuary uses a smoothing technique to determine Actuarial Value that is calculated based on certain policies. As described below, these policies changed significantly in April 2005, affecting the Actuarial Value calculation for Fiscal Year 2006 -07 and beyond. PERS Actuarial Assumptions and Policies. As a result of the economic downturn in 2008 and 2009, PERS experienced a negative investment return of approximately 24% for its fiscal year ended on June 30, 2009. The PERS Board has adopted policies aimed at stabilizing rising employer costs and mitigating the impact of such investment declines. These policies are used to set employer contribution rates for each city. Current policies, as described in Circular Letter #200 - 056 -09 dated August 25, 2009, include, but are not limited to: • Using a 3 -year phase in for Fiscal Year 2008 -09 investment losses and allowing time for the economy to recover. This phased in approach will be achieved by temporarily relaxing the constraints on the smoothed value of assets around the actual market value of assets. This corridor which constrains the smoothed value of assets will be allowed to expand and then contract with the following conditions: 1. Increase the corridor limits for the actuarial value of assets from 80 -120% of the market value of 60 -140% of market value on June 30, 2009, which impacts the Fiscal Year 2011 -12 contribution rate. 2. Reduce the corridor limits for the actuarial value of assets to 70 -130% of market value on June 30, 2010, which impacts the Fiscal Year 2012 -13 contribution rate. 10