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CITY OF SAN LEANDRO <br />NOTES TO BASIC FINANCIAL STATEMENTS <br />For The Year Ended June 30, 2016 <br /> <br /> <br />NOTE 13 – PENSION PLAN (Continued) <br /> <br />Change of Assumptions – GASB 68, paragraph 68 states that the long-term expected rate of return <br />should be determined net of pension plan investment expense, but without reduction for pension plan <br />administrative expense. The discount rate of 7.50 percent used for the June 30, 2014 measurement date <br />was net of administrative expenses. The discount rate of 7.65 percent used for the June 30, 2015 <br />measurement date is without reduction of pension plan administrative expense. All other assumptions for <br />the June 30, 2014 measurement date were the same as those used for the June 30, 2015 measurement date. <br /> <br />Discount Rate – The discount rate used to measure the total pension liability was 7.65% for each Plan. <br />To determine whether the municipal bond rate should be used in the calculation of a discount rate for each <br />plan, CalPERS stress tested plans that would most likely result in a discount rate that would be different <br />from the actuarially assumed discount rate. Based on the testing, none of the tested plans run out of assets. <br />Therefore, the current 7.65 percent discount rate is adequate and the use of the municipal bond rate <br />calculation is not necessary. The long term expected discount rate of 7.65 percent will be applied to all <br />plans in the Public Employees Retirement Fund (PERF). The stress test results are presented in a detailed <br />report that can be obtained from the CalPERS website. <br /> <br />The long-term expected rate of return on pension plan investments was determined using a building-block <br />method in which best-estimate ranges of expected future real rates of return (expected returns, net of <br />pension plan investment expense and inflation) are developed for each major asset class. <br /> <br />In determining the long-term expected rate of return, CalPERS took into account both short-term and <br />long-term market return expectations as well as the expected pension fund cash flows. Using historical <br />returns of all the funds’ asset classes, expected compound returns were calculated over the short-term <br />(first 10 years) and the long-term (11-60 years) using a building-block approach. Using the expected <br />nominal returns for both short-term and long-term, the present value of benefits was calculated for each <br />fund. The expected rate of return was set by calculating the single equivalent expected return that arrived <br />at the same present value of benefits for cash flows as the one calculated using both short-term and long- <br />term returns. The expected rate of return was then set equivalent to the single equivalent rate calculated <br />above and rounded down to the nearest one quarter of one percent. <br /> <br />The table below reflects the long-term expected real rate of return by asset class. The rate of return was <br />calculated using the capital market assumptions applied to determine the discount rate and asset <br />allocation. These rates of return are net of administrative expenses. <br /> <br />76