OAkLAnd POLiCe & FiRe - City of Oakland - Official City … | Introduction LetteRS OF tRAnSmittAL April 1, 2008 Oakland Police and Fire Retirement Board 150 Frank H. Ogawa Plaza, Suite

RetiRement AnnUAL RePORtFiscal Year ending June 30, 2007

2007

OAkLAndPOLiCe & FiRe

SYStem

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 Organization Chart ...............................................................................................................................12

SeCtiOn 2: FinAnCiAL

Independent Auditor’s Report for Years Ended June 30, 2007 and 2006 ...............................................16

Management’s Discussion and Analysis .......................................................................................................................18

Financial Statements

Statements of Plan Net Assets—June 30, 2007 and 2006 ..............................................................................24

Statements of Changes in Plan Net Assets—Years Ended June 30, 2007 and 2006 .......................25

Notes to the Financial Statements for Years Ended June 30, 2007 and 2006

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 ............................................................................................................28

5. Receivables from Retirees and Beneficiaries ..................................................................................32

6. Reserves ..............................................................................................................................................................33

7. Contingencies ...................................................................................................................................................33

8. Administration Expense ..............................................................................................................................33

Required Supplementary Information .........................................................................................................................34

Note to Required Supplementary Information .....................................................................................................34

COntentS

| 3

Cover photos: top, by Thy Bun; inset photo, 1939 Lake Merritt and Oakland Skyline, Collection of the Oakland Museum of California, City of Oakland. Board of Administration photos and por traits by Richard Morgenstein Photography. Other images cour tesy of PFRS retirees and

beneficiaries. Design and Production by Tobi Designs, tobidesigns.com.

SeCtiOn 3: inVeStment

Investment Consultant’s Report .....................................................................................................................................36

Investment Performance ......................................................................................................................................................37

List of Investment Professionals .......................................................................................................................................38

Investment Manager Fees and Other Investment Expenses ...........................................................................38

Asset Allocation as of June 30, 2007 ............................................................................................................................38

Investment Summary by Type as of June 30, 2007 and 2006 .........................................................................39

Largest Stock Holdings (by Market Value) as of June 30, 2007 .....................................................................40

Largest Bond Holdings (by Market Value) as of June 30, 2007 .....................................................................40

SeCtiOn 4: ACtUARiAL

Actuary’s Certification Letter ...........................................................................................................................................42

Summary of Assumptions and Funding Method ...................................................................................................44

Actuarial Definitions ..............................................................................................................................................................46

Actuarial Value of Assets ......................................................................................................................................................46

Expenses .......................................................................................................................................................................................46

Benefit Payment Data ...........................................................................................................................................................46

Actuarial Assumptions ..........................................................................................................................................................47

SeCtiOn 5: StAtiStiCAL

Additions to Plan Net Assets by Source for Years Ended June 30, 2007 and 2006 .......................................................................................................................................................52

Plan Deductions by Type for Years Ended June 30, 2007 and 2006 ...........................................................52

Benefit Expenses by Type for Years Ended June 30, 2007 and 2006 ..........................................................52

COntentS (COntinUed)

4 |

“ I’ve been enjoying my retirement traveling the U.S.”

Dave McArthurFire engineer, 1958–1992; Captain of the Fire department,

Fireboat Station 2Left: Bob Comella, Hose Wagon Drive. Right: Acting

Engineer David McArthur on 12 Engine, 1960

Lt. Donald Carey, left, and Dave McArthur, 1958

SeCt iOnintROdUCtiOn

1FiRe RetiRee

Introduction | 7

April 1, 2008

Oakland City Council1 Frank H. Ogawa PlazaOakland, 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, 2007. Provided 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 Manager, City Attorney, the various City Agencies and Departments and the members of their staff for their cooperation and assistance.

Respectfully submitted,

Robert P. Crawford, PresidentPolice and Fire Retirement Board

LetteRS OF tRAnSmittAL

8 | Introduction

LetteRS OF tRAnSmittAL

April 1, 2008

Oakland Police and Fire Retirement Board150 Frank H. Ogawa Plaza, Suite 3341Oakland, 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, 2007.

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 Governmental Accounting Standards Board Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans. This Statement establishes financial reporting standards for defined benefit plans and for the notes to the financial statements of defined contribution plans of state and local government 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 collection, and expenses are recorded when the corre-sponding liabilities are incurred instead of when payment is made. Amortization of bond premiums and discounts are over the life of the investment security and actuarial reserves are funded via the aggregate cost method.

AdditiOnS

Member contributions and investment income generate revenue, or additions, for the Plan. Total revenue for the fiscal year that ended June 30, 2007 was $76,211,771. In the prior fiscal year, which ended June 30, 2006, the revenue to the Plan was $42,330,899. Due to the issuance of Pension Obligation Bonds, the City contribution is deferred until July 1, 2011.

Introduction | 9

dedUCtiOnS

The principal deductions of the retirement system relate to the purpose for which it is created namely the payment of benefits. The deductions to the Plan in the fiscal year ended June 30, 2007 totaled $72,222,934. Consequently, recurring benefit payments mandated by the Plan, contributions to transfer employees, investment advisory fees and administrative expenses comprise the total deductions.

ReSeRVeS And FUndinG

The Police and Fire Retirement System recently concluded a new actuarial study which values the Plan as of July, 1 2007. Details regarding this new actuarial study can be found in Section 4 of this annual report.

As of July, 1 2007, the Plan is 63.7% funded with an actuarial present value of future City contri-butions 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 contributions are deferred until July 1, 2011.

inVeStmentS

The Police and Fire Retirement System Investment Policy is used as a guideline for all investment activities. The Investments Policy includes an asset allocation plan. The plan consist 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 investment management styles.

In November 2006, City voters passed Measure M, which modified 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.

Total Investment Income was $78, 869, 775 million in fiscal year 2007. GASB Statement No. 25 requires 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.

The historical rate of returns on the portfolios are as follows:

Rate of ReturnFiscal Year Ending June 30, 2007

total Returns %

1 Year 3 Year 5 YearTotal Fund 14.4% 10.0% 9.6%

10 | Introduction

tAX inFORmAtiOn

The Internal Revenue Service has ruled that the Plan qualifies under Section 401(a) of the Internal Revenue Code and is therefore not subject to tax under present income tax laws. Accordingly, 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, respectively.

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.

ACknOWLedGmentS

The compilation of this report reflects the combined efforts of the Retirement System Administrative 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 administration of the Plan.

Respectfully submitted,

Yvonne S. Hudson Manager, Retirement and Benefits

Introduction | 11

membeRS OF the bOARd OF AdminiStRAtiOn

Staff LiaisonYvonne S. hudson

Retirement and Benefits Manager

Legal Advisortracy Chriss

Deputy City Attorney 2

Community RepresentativeVacant

1 James Cooper replaced William Hubartt on September 1, 2007 2 Replaced Barbara Parker in April 2007

Jaime GodfreyVice PresidentBank Representative

John C. SpeakmanFire Department Representative

ken bullockInsurance Representative

William J. hubartt1

Alternating Police/Fire Representative

deborah edgerlyMayoral Designate

Sergeant Robert P. CrawfordPresident

Active Police Department Representative

James Cooper1

Alternating Police/Fire Representative

12 | Introduction

CitY OF OAkLAnd RetiRement SYStemS

William nolandDirector, Finance and Management Agency

Yvonne hudsonManager, Retirement and Benefits

Carol kolendaBenefits Representative

david LowAdministrative Assistant II

téir JenkinsRetirement Systems Accountant

Sandra tongAccountant II

AdminiStRAtiVe ORGAnizAtiOn ChARt

marcia meyersDirector, Office of Personnel Resource Management

(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

Introduction | 13

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:

ActuAry Bartel Associates, LLC

Auditors Macias, Gini & Company, LLP

Yano Accountancy Corporation

custodiAl service Bank of New York

A complete list of Investment Professionals is included on page 38 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.

14 | Introduction

Front Row (left to right): Judy Powers, Secretary; Irene Kotler, Vice President; Doris Miller-Perry;

Back Row (left to right): Jim Powers, Chairman; William Hubartt; Jerry Glickman, President; Roy Nason; Michael Wozniak.

Not pictured: Betty Peters.

OAkLAnd POLiCe And FiRe RetiRement ASSOCiAtiOn

membeRS OF the bOARd

S eCt iOnFinAnCiAL

2

the Oakland Police & Fire Retirement Association, inc. is a

nonprofit organization originally founded in 1949 to pro-

tect the benefits of Oakland Police and Fire retirees. today

membership is open to all retirees, including CalPeRS

retirees. every year the Association sponsors a Christmas

luncheon, holds monthly meetings, and publishes a monthly

bulletin and a directory with members’ names and contact

data, including e-mail addresses. For more information

about the Association or to become a member, please con-

tact Judy Powers at (925) 845-7179, or [email protected].

16 | Financial

indePendent AUditORS’ RePORt

Financial | 17

YeARS ended JUne 30, 2007 And 2006

18 | Financial

A 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, 2007 and 2006. We

encourage readers to consider the information presented here in conjunction with the System’s financial statements that follow this section. This management discussion and analysis are presented in the following sections:

• Organization Overview • Financial Statement Overview • Financial Analysis: Year-End Financial Condition • Financial Analysis: Changes in Net Assets • Requests For Additional Information

ORGAnizAtiOnAL OVeRVieW

The City of Oakland City Charter established the System and provides for its funding. Accord-ingly, 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 ben-efits 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 desig-nate, 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 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 ordi-nance. 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 consulting actuaries. During the years ended June 30, 2007 and 2006, 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. No contributions are due from the City to PFRS until July 1, 2011, at which time 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

mAnAGement diSCUSSiOn And AnALYSiS

Financial | 19

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.

The System uses the aggregate actuarial cost method for its actuarial calculations. Under this method, the excess of the actuarial present value of projected benefits of the group included in an actuarial valuation over the actuarial value of assets is allocated on a level basis over the earnings of the group between the valuation date and assumed exit date. The allocation is performed for the group as a whole, not as a sum of individual allocations. The portion of the actuarial present value allocated to a valuation year is called the normal cost. Under this method, the actuarial gains (losses), as they occur, reduce (increase) future normal costs. If the actuarial value of assets exceeds the actuarial present value of projected benefits, the normal cost is set equal to zero.

FinAnCiAL StAtement OVeRVieW

This annual report consists of three parts – management discussion and analysis (this section), the financial statements and 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 informa-tion to assist readers in determining whether the System’s finances as a whole have 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 Nets 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 mea-sure 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 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 Required Supplementary Information are found starting on pages 26 and 34, respectively.

20 | Financial

FinAnCiAL AnALYSiS: YeAR-end FinAnCiAL COnditiOn

Net assets. The System’s net assets held in trust for pension benefits were $589,093,266 and $585,104,429 as of June 30, 2007 and June 30, 2006, respectively (See Table 1)

Table 1 summarizes net assets held in trust for pension benefits as of June 30, 2007 and 2006:

table 1: Summary of Plan net AssetsAs of June 30, 2007 and 2006

June 30 Change

2007 2006 dollars PercentageAssets

Cash and deposits $ 2,965,533 $ 3,471,130 $ (505,597) (14.6)

Cash collateral—securities lending 11,091 581,555 (570,464) (98.1)

Receivables 60,451,089 82,018,916 (21,567,827) (26.3)

Investments 683,235,489 682,623,421 612,068 0.1

total assets 746,663,202 768,695,022 (22,031,820) (2.9)

Liabilities

Benefits payable $5,869,705 5,956,090 ( 86,385) (1.5)

Accounts payable 8953 4751 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

Net assets held in trust increased $3,988,837 from FY 2006 to FY 2007. The main source of this increase was an increase in investment income. The fluctuations in receivables and investments pay-able are primarily due to investment trading at year-end, where the outstanding balances represent investments either sold or purchased, but not yet settled.

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 are being recovered from the retirees through a reduction of individual retirement benefit payments over a 20-month period effective August 2006. Three years of fire holiday overpayments are estimated to total $665,078. As of June 30, 2007, the System has 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.

Financial | 21

Table 2 summarizes net assets held in trust for pension benefits as of June 30, 2006 and June 2005:

table 2: Summary of Plan net AssetsAs of June 30, 2006 and 2005

June 30 Change

2006 2005 dollars PercentageAssets

Cash and deposits $ 3,471,130 $ 34,523,910 $ (31,052,780) (89.9)

Cash collateral—securities lending 581,555 93,612 487,943 521.2

Receivables 82,018,916 76,937,051 5,081,865 6.6

Investments 682,623,421 690,471,822 (7,848,401) (1.1)

total assets 768,695,022 802,026,395 (33,331,373) (4.2)

Liabilities

Benefits payable 5,956,090 5,894,707 61,383 1.0

Accounts payable 4,751 6,513 ( 1,762) (27.1)

Investments payable 119,247,882 130,273,276 (11,025,394) (8.5)

Accrued investment management fees 723,025 360,583 362,442 100.5

Securities lending liabilities 57,658,845 50,593,612 7,065,233 14.0

total liabilities 183,590,593 187,128,691 (3,538,098) (1.9)

net assets held in trust for pension benefits

$ 585,104,429 $ 614,897,704 $ (29,793,275) (4.8)

Net assets held in trust increased $3,988,837 from FY 2006 to FY 2007, but had decreased $29,793,275 from FY 2005 to FY 2006. The main cause of the fluctuations between the three years is a result of the volatility of investment returns over the past few years. The amount of benefits payable increased as a result of the timing of the year-end payments. In FY 2006, the Retirement Board made a decision to intentionally decrease the System’s holding of cash and utilized the cash reserve to make monthly pension payments.

22 | Financial

FinAnCiAL AnALYSiS: ChAnGeS in net ASSetS

Table 3 summarizes changes in plan assets held in trust for pension benefits for the years ended June 30, 2007 and 2006:

table 3: Summary of Changes in net AssetsAs of June 30, 2007 and 2006

June 30 Change

2007 2006 dollars PercentageAdditions

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 72,222,935 72,124,174 98,761 0.1

Changes in net assets held in trust for pension benefits

$ 3,988,837 $ (29,793,275) $ 33,782,112 (113.4)

The System’s total additions were $76,211,771 in FY 2007 versus $42,330,899 in the prior year. Excluding monthly pension payment withdrawals, the System had a total annual portfolio return of 14.4% in FY 2007. This return was higher than the 8% Actuarial Expected Rate of Return.

The System paid $71,404,196 in Police and Fire Retiree pension payments. The System mem-bership is currently 1,275, which includes 3 active employees, 919 retirees and 353 beneficiaries.

Financial | 23

Table 4 summarizes changes in plan assets held in trust for pension benefits for the years ended June 30, 2006 and 2005:

table 4: Summary of Changes in net AssetsAs of June 30, 2006 and 2005

June 30 Change

2006 2005 dollars PercentageAdditions

Contributions - members $ 25,452 $ 24,236 $ 1,216 5.0

Contributions - City - 1 7,709,888 (17,709,888) 100.0

Total investment income 42,305,447 47,239,577 (4,934,130) (10.4)

Other income - 37,831 (37,831) 100.0

total additions 42,330,899 65,011,532 (22,680,633) (34.9)

Deductions

Benefits to members and beneficiaries 71,351,523 70,960,842 390,681 0.6

Administrative expenses 772,651 735,806 36,845 5.0

total deductions 72,124,174 71,696,648 427,526 0 .6

Changes in net assets held in trust for pension benefits

$ (29,793,275) $ (6,685,116) $ (23,108,159) 345.7

The System’s total additions were $42,330,899 in FY 2006. The change in net assets held for benefit payments for FY 2005 was a decrease of $6,685,116.

As mentioned previously, the City is currently not required to make any contributions due to a holiday period granted as part of the Pension Obligation bond issued in 1997. The City made an advance contribution of $17,709,888 to the System in FY 2005. The City transferred proceeds 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. There were no contributions made in FY 2006 and FY 2007.

ReqUeStS FOR 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:

Office of Personnel Retirement Systems City of Oakland150 Frank H Ogawa PlazaOakland, CA 94612

24 | Financial

Statements of Plan net AssetsFiscal Years Ended June 30, 2007 and 2006

2007 2006

Assets

Cash and deposits $ 2,965,533 $ 3,471,130

Cash collateral - securities lending 11,091 581,555

total cash and cash equivalents 2,976,623 4,052,685

receivAbles:

Interest receivable 2,312,164 2,303,266

Dividends receivable 276,188 263,106

Investments receivable 57,559,607 78,786,120

Member contributions 164 1,346

Retired members and beneficiaries 302,966 665,078

total receivables 60,451,089 82,018,916

investments, At fAir vAlue:

Short-term investments 31,011,258 63,566,898

Bonds 284,589,915 268,492,345

Domestic equities and mutual fund 222,460,985 204,106,927

International equities and mutual funds 103,116,549 89,323,609

Real estate mortgage loans 53,700 56,351

Securities collateral - securities lending 42,003,082 57,077,290

total investments 683,235,489 682,623,421

total assets 746,663,202 768,695,022

Liabilities

Accounts payable 8,953 4,751

Benefits payable 5,869,705 5,956,090

Investments payable 109,035,059 119,247,882

Accrued investment management fees 642,047 723,025

Securities lending liabilities 42,014,172 57,658,845

total liabilities 157,569,936 183,590,593

net assets held in trust for pension benefits $ 589,093,266 $ 585,104,429

Financial | 25

Statements of Changes in Plan net Assets Fiscal Years Ending June 30

2007 2006Additions

Contributions of plan members $ 17,505 $ 25,452

Contributions from the City - -

total contributions 17,505 25,452

investment income:

Net appreciation in fair value of investments 58,776,130 25,832,672

Interest 15,032,733 13,756,411

Dividends 5,060,912 4,582,006

total investment income 78,869,775 44,171,089

Less: Investment expenses (2,744,275) (1,974,602)

net investment income, before net securities lending income

76,125,500 42,196,487

Income from securities lending transactions 2,418,642 2,020,000

Less: Expenses from securities lending activities (2,349,876) (1,911,040)

net securities lending income 68,766 108,960

net investment income 76,194,266 42,305,447

total additions 76,211,771 42,330,899

Deductions

benefits to members And beneficiAries:

Retirement 43,015,868 43,046,461

Disability 26,138,688 26,115,649

Death 2,249,640 2,189,413

total benefits to members and beneficiaries 71,404,196 71,351,523

Administrative expenses 818,738 772,651

total deductions 72,222,934 72,124,174

Change in net assets $ 3,988,837 $ (29,793,275)

net Assets Held in trust for Pension benefits:

Beginning of year 585,104,429 614,897,704

end of year $ 589,093,266 $ 585,104,429

26 | Financial

nOteS tO bASiC FinAnCiAL StAtementS YeAR ended JUne 30, 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 – four are appointed by the Mayor, with the approval of the City Council, one is elected from the active members and two are elected from the retired members of the System. 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 MembershipAt June 30, 2007 and 2006 the System membership consisted of:

2007 2006

Retirees and beneficiaries currently receiving benefits:

Police 704 725

Fire 568 586

total 1,272 1,311

Current employees (all vested):

Police 3 3

Basic Benefit ProvisionsThe 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

Financial | 27

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.

2. SUmmARY OF SiGniFiCAnt ACCOUntinG POLiCieS

Basis of PresentationThe 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 AccountingThe 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.

Methods Used to Value InvestmentsInvestments 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:

a. Common deposit and investment risks related to credit risk;b. Concentration of credit risk; c. Interest rate risk;d. Foreign currency risk;e. Investments that have fair values that are highly sensitive to changes in interest rates; andf. Deposit and investment policies related to those risks.

28 | Financial

Use of EstimatesThe 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, 2007 and 2006, 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% per year if an employee elects to withdraw from the System upon termination of employment with the City.

The City contributes, at a minimum, such amounts as are necessary, on an actuarial basis, using the aggregate actuarial cost method, to provide assets sufficient to meet benefits to be paid to plan members. The City is required to fund all liabilities for future benefits for all members by June 30, 2026. In order to do so, the City makes contributions at rates established by consulting actuaries based upon plan valuations using various assumptions as to salary progression, inflation, and rate of return on investments. The City’s contributions are based on a level percentage of all uniformed employees’ compensation. Significant actuarial assumptions used to compute actuarially determined contribution requirements are the same as those used to compute the pension benefit obligation.

The City issued pension obligation bonds in the amount of $417,173,300 to fund the System during the year ended June 30, 1998 and, as a result, no employer contributions are required through the year ending June 30, 2011.

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.

4. CASh, dePOSitS And inVeStmentS

Investment PolicyThe 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 invest-ment portfolio is managed by external investment managers. During the years ended June 30, 2007 and 2006, the number of external investment managers was eleven and nine, respectively.

nOteS tO bASiC FinAnCiAL StAtement

Financial | 29


The PFRS investments are also restricted by the City Charter. In November 2006, City voters passed Measure M, which amended 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 years, with targeted portfolio duration of between 3 to 8 years and targeted portfolio maturity of 15 years. The System’s investment policy allows the fixed income managers to invest in securities rated below BBB with a minimum rating of B (non investment grade using Standard & Poor’s or Moody’s ratings) as long as the portfolio maintains an average credit quality of BBB.

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 DepositsAs of June 30, 2007 and 2006, cash and cash deposits consisted of cash in treasury held in the City’s cash and investment pool. 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, 2007 basic financial statements. A copy of that report may be obtained by contacting the City Treasurer. As of June 30, 2007, the System’s share of the City’s investment pool totaled $ 2,965,533.

Interest Rate RiskInterest 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, 2007 the average duration for the System’s fixed income investment portfolio was 5.16 years, excluding fixed income short-term investments and securities lending investments. The following summarizes the System’s fixed income investments by category at June 30, 2007:

30 | Financial


investment type Fair Valuemodified duration

(Years)Government Bonds

US Government Agencies 126,366,992 4.17

US Government Bonds 46,191,163 5.30

total Government bonds 172,558,155

Corporate and Other Bonds

Corporate Bonds 109,193,640 6.37

Other Government Bonds 2,838,120 0.71

total Corporate and Other bonds 112,031,760

$ 284,589,915 5.16

Fair Value Highly Sensitive to Change in Interest RatesThe 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 as of June 30, 2007:

Security name Coupon RateFair Value (millions)

Percent of total investments Fair Value

Commercial Mortgage Pass-Through 4.51% $17.46 2.58%

Credit Risk Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligation. The following table provides information as of June 30, 2007 concerning credit risk of fixed income securities.

S&P/moody’s Rating Fair ValuePercent of

total Fair ValueAAA $ 217,066,188 76.27%

AA 5,945,705 2.09%

A 12,886,605 4.53%

BBB 21,303,732 7.49%

BB 11,953,054 4.20%

B 10,897,416 3.83%

Not Rated 4,537,215 1.59%

$ 284,589,915 100.00%

Financial | 31


Concentration of Credit RiskConcentration of credit risk is the risk of loss attributed to the magnitude of a government’s invest-ment in a single issuer. As of June 30, 2007, with the exception of mutual funds and United States Government securities, no investment exceeded 5% of the System’s net assets.

Custodial Credit RiskCustodial 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 mort-gage 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 pledg-ing 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 System and are either held by the counterparty or the counterparty’s trust department or agent but not in the System’s name.

Foreign Currency RiskForeign 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, 2007:

total Fair Value

Foreign currency:

Australian Dollar $ 3,531,628

Canadian Dollar 3,113,874

Swiss Franc 7,487,573

Danish Krone 793,001

Euro 20,522,370

British Pound Sterling 11,399,791

Hong Kong Dollar 4,058,269

Japanese Yen 11,810,579

Norwegian Krone 671,696

Philippines Peso 609

Swedish Krona 772,245

Singapore Dollar 995,684

$ 65,157,318

32 | Financial

Securities Lending TransactionsThe 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% (105% for international) 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, 2007 and 2006, 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.

The following summarizes investments in securities lending transactions and collateral received at June 30, 2007:

Investments in securities lending transactions:

US Government and agencies $ 38,788,649

US equity 3,225,523

total investments in securities lending transactions $ 42,014,172

Collateral received:

Cash $ 11,091

Corporate bonds 25,000,000

Repurchase agreements 18,140,000

total collateral received $ 43,151,091

5. ReCeiVAbLeS FROm RetiReeS And beneFiCiARieS

Management of the System determined that overpayments of retiree holiday pay had been made to certain Fire retirees and beneficiaries. The overpayments are being recovered from the retirees over a 20-month period effective in August 2006, through a reduction of retirement benefit payments. Non-interest bearing receivables from retirees with an aggregate amount of $665,078 was recorded on the System’s financial statements as of June 30, 2006. As of June 30, 2007, The System has recovered $362,112 of the overpayment, resulting in a remaining receivable of $302,966.


Financial | 33


6. ReSeRVeS

Reserves are established from member and employer contributions and the accumulation of invest-ment income after satisfying investment and administrative expenses. The System’s major reserves are as follows:

Active Member Contribution Reserve represents total accumulated member contributions. Addi-tions 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 pay-ments. Additions include contributions from the employer and investment earnings; deduc-tions include payments to retired members.

Market Stabilization Reserve represents unrealized gains and losses recognized in the financial statements as a result of reporting investments at fair value.

The aggregate total of the System’s major reserves as of June 30, 2007 and 2006 equals net assets held in trust for pension benefits and comprises the following:

2007 2006Active member contribution reserve $ 916,905 $ 899,553

Retired member contribution reserve 64,875,567 68,038,616

Employer reserve 467,860,182 496,362,061

Market stabilization reserve 55,440,612 19,804,199

$589,093,266 $ 585,104,429

7. COntinGenCieS

The Retirement System has become the plaintiff in a recently filed lawsuit. A divorced plaintiff remarried his original spouse. The plaintiff claims that upon the Retiree’s death that the spouse should be eligible for a continuance in benefit payments. The lawsuit was filed in October 2007 and has not yet reached trial. The Retirement System believes that the ultimate outcome of this particular action, even if unfavorable, would not have a material impact on the Retirement System’s financial assets.

8. 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, 2007 and 2006 were $674,243 and $513,240, respectively. Other administrative expenses including accounting and audit services, legal fees, annual report and miscellaneous expense for the years ended June 30, 2007 and 2006 were $144,495 and $259,411, respectively.

34 | Financial

ReqUiRed SUPPLementARY inFORmAtiOn


Schedule of employer Contributions (dollars in millions)

Year ended June 30,Annual Required Contribution ($)

Percentage (%) Contributed

2000 - -

2001 - -

2002 - -

2003 - -

2004 - -

2005 - -

nOte tO ReqUiRed SUPPLementARY inFORmAtiOn


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 valu-ation date of July 1, 2005, is as follows:

The System uses the aggregate actuarial cost method for its actuarial calculations. Under this method, the unfunded actuarial accrued liability is not identified or separately amortized. For this reason, a schedule of funding progress is not required when the aggregate actuarial cost method is used. Instead, the excess of the actuarial present value of projected benefits of the group included in the actuarial valuation over the actuarial value of assets is allocated on a level basis over the earnings of the group between the valuation date and assumed exit. The allocation is performed for the group as a whole, not as a sum of individual allocations. The portion of the actuarial present value allocated to a valuation year is called the normal cost. Under this method, the actuarial gains (losses), as they occur, reduce (increase) future normal costs. If the actuarial value of assets exceeds the actuarial present value of projected benefits, the normal cost is set equal to zero.

The System uses fair value as its asset valuation method.

Actuarial assumptions1:Investment rate of return 8.0%

Cost-of-living adjustments 3.0%

Inflation rate 3.5%

1 Assumptions based on previous Actuary Valuation performed by Milliman Actuaries dated July 1, 2005.

Introduction | 35

Rick and Neil SandersSandy Sandershusband: Richard Sanders

Fire engineer, 1972–1997; died in the line of duty

Station 21

Son Neil Sanders, OFD

Rick Sanders

“ PFRS has allowed me to stay in my home and take care of my family. Our son always wanted to be a fireman and he now serves on the OFD.”

FiRe beneFiCiARY

S eCt iOninVeStment

3

36 | Investment

inVeStment COnSULtAnt’S RePORt

Investment | 37

OPFRS — Total Fund

-5.00%

0.00%

5.00%

10.00%

15.00%

20.0%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

12 month Annualized Return for 10 Years10-Year Investment Performance from 6/30/1998–6/30/2007

10-Year Annualized Return 1998 - 2007: 8.2%Source: PFRS Investment Consultant: Pension Consulting Alliance

38 | Investment

Asset Allocations

June 30, 2007

Domestic Equities 34.5%

Cash 0.5%

InternationalEquities 16.0%

DomesticFixed Income 49.0%

June 30, 2007

Domestic Equities 34.5%

Cash 0.5%

InternationalEquities 16.0%

DomesticFixed Income 49.0%

domestic equity mAnAgers:Barrow, Hanley, Mewhinney & StraussDelaware InvestmentsEarnest PartnersFranklin PortfolioNWQRoxbury Capital Management

internAtionAl equity mAnAgers: New Star Institutional ManagersHansberger Global InvestorState Street Global–MCSI

fixed income mAnAgers: Reams Asset ManagementSeneca Capital Management

investment consultAnt: Pension Consultant Alliance

custodiAn: Bank of New York

security lending: Bank of New York

List of investment Professionals

investment manager Fees and Other investment expensesPeriods ending June 30

2007 2006Investment Manager Fees

Domestic Equity Managers $ 1,194,005 $ 842,782

International Equity Managers 610,109 265,077

Domestic Fixed Income Managers 630,282 562,564

total investment manager Fees 2,434,396 1,670,423

Other Investment Fees

Investment Consultant 104,607 125,000

Custodian Fees 205,273 179,178

total Other investment Fees 309,880 304,178

total investment Fees $ 2,744,275 $1,974,601

Investment | 39

investment Summary by typeFiscal Years Ending June 30

2007 2006

descriptions Fair Value % of Portfolio Fair Value % of PortfolioEquity

Financial $ 90,702,456 14.1% $ 81,576,486 13.0%

Materials and Services 64,201,440 10.0% 57,728,967 9.2%

Consumer Non-Durables 43,564,892 6.8% 40,709,655 6.5%

Technology 32,441,578 5.1% 29,987,084 4.8%

Energy 21,449,010 3.3% 19,517,440 3.1%

Utilities 18,254,542 2.8% 14,157,770 2.3%

Capital Goods and Services 12,584,802 2.0% 10,417,150 1.7%

Transportation 6,612,688 1.0% 5,431,284 0.9%

Real Estate Investment Trusts 4,021,996 0.6% 2,785,707 0.4%

Consumer Durables 2,010,769 0.3% 2,115,604 0.3%

total equity income investments $ 295,844,171 46.2% $ 264,427,147 42.3%

Fixed Income Investments

US Government Agencies $ 126,366,992 19.7% $ 111,943,856 17.9%

Corporate Bonds 109,193,640 17.0% 106,133,643 17.0%

US Treasury 46,191,163 7.2% 50,414,847 8.1%

Other Government Bonds 2,838,120 0.4% - 0.0%

total Fixed income investments $ 284,589,915 44.4% $ 268,492,345 42.9%

Mutual Funds

Domestic Mutual Funds $ - 0.0% $ 1,070,217 0.2%

International Mutual Funds 29,733,363 4.6% 27,933,173 4.5%

total international mutual Funds $ 29,733,363 4.6% $ 29,003,390 4.6%

Other Investments

Short Term $ 31,011,258 4.8% $ 63,566,898 10.2%

Residential Mortgage Loans 53,700 0.0% 56,351 0.0%

total Other investments $ 31,064,958 4.8% $ 63,623,249 10.2%

total investments $ 641,232,407 100.0% $ 625,546,131 100.0%

Note: Table does not include investments in security lending.

40 | Investment

Largest Stock holdings (by market Value)As of June 30, 2007

market Value Shares Stock1 $ 4,110,120 49,000 EXXON MOBIL

2 2,618,352 68,400 GENERAL ELECTRIC

3 1,984,164 32,200 JOHNSON & JOHNSON

4 1,950,914 66,200 MICROSOFT

5 1,905,025 18,100 INTERNATIONAL BUSINESS MACHINES

6 1,680,086 16,600 CUMMINS

7 1,540,241 16,700 IMPERIAL TOBACCO GROUP

8 1,420,850 18,100 CONOCOPHILLIPS

9 1,397,025 17,500 WELLPOINT

10 1,391,526 70,600 ORACLE

Largest bond holdings (by market Value) As of June 30, 2007

market Value

maturity date

interest Rate description

1 $ 19,116,035 5/15/09 4.88% UNITED STATES TREAS NOTES

2 15,627,697 9/1/34 5.50% FNMA TBA (30 YEAR)

3 12,038,595 9/1/34 4.50% FEDERAL NAT’L MTGE ASSN POOL #725866

4 9,645,836 2/1/37 5.50% FEDERAL NAT’L MTGE ASSN POOL #928139

5 7,507,928 8/25/34 4.89% WELLS FARGO MTG BACKED SECS

6 6,972,750 2/15/17 4.63% UNITED STATES TREAS NOTES


8 5,848,833 8/1/34 5.00% FNMA TBA SINGLE FAM (30 YEAR)

9 5,841,666 8/1/34 6.00% FNMA TBA SINGLE FAM (30 YEAR)


Note: The above schedules do not reflect holdings in index funds. A complete list is available upon request.

Introduction | 41

SeCt iOnACtUARiAL

4

Jack Richardson started with OPd 1945, retired in 1970

“ I’m thankful that my brothers insisted that I join the force. I learned how to live, be with people, enjoy life. Now that I’m retired, I love getting that check every month. I have to be the luckiest person alive.”

POLiCe RetiRee

42 | Actuarial

ACtUARY’S CeRtiFiCAtiOn LetteR

Actuarial | 43

44 | Actuarial

SUmmARY OF ASSUmPtiOnS And FUndinG methOd

The Oakland Police and Fire Retirement System is a closed defined benefit pension plan. It was closed to new members on June 30, 1976. There are only three remaining active members, and the bulk of the plan is comprised of retirees and beneficiaries.

This is the first year that a valuation has been performed by the current actuaries, Bartel Associ-ates. There have been changes in methodologies and assumptions. Most significantly, the mortal-ity assumptions and the postretirement benefit increase assumptions have been modified. Also, the actuarial asset methodology has 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 opposed 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. The projected employer contribution for fiscal year 2011/12 is estimated at $39.0 million, or 24% of payroll, which is less than the contribution rate prior to the issuance of the Pension Obligation Bonds. Market fluctuations in the interim may influence this rate.

estimated City Contributions

Valuation dateJuly 1

Valuation Assumption Annual RequiredCity Contribution Amount

Starting July 1, 2011investment

ReturnsWage

Growth20031 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 | 45

Valuation SummaryJuly 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 spouses covered under qualified domestic relations orders

The table below is a summary of the results of the 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.

46 | Actuarial

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 Actuarial 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 earnings 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, UAL is amortized to July 1, 2026 as a level percent of total City pay for all Safety employees, whether covered by this system or by CalPERS. The Unfunded Actuarial Liability (UAL) will be fully amortized by 2026 under this methodology.

ACtUARiAL VALUe OF ASSetS

In the past, the Actuarial Value of Assets has always been set equal to the Market Value of Assets. Beginning with the current valuation year, the Actuarial Value of Assets will be a method that will gradually recognize changes in market value over time. The new method recognizes 1/5 of the dif-ference 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 is being implemented so that it applies 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 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 beneficia-ries currently receiving payments. In addition, reduction amounts for Fire retirees and beneficiaries 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 overpayments would

Actuarial | 47

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 Pres-ent 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:

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

RetirementWhen 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:

Years of Service Rate Years of Service Rate33 35% 37 70%

34 40% 38 80%

35 50% 39 90%

36 60% 40 100%

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

Age male Female40 0.1% 0.1%

50 0.2% 0.2%

60 0.6% 0.5%

70 2.0% 1.7%

80 5.8% 4.6%

In the prior valuation, the 1983 Group Annuity Mortality table for males and females was used.

48 | Actuarial

Life ExpectanciesLife Expectancies for healthy retirees and beneficiaries are based on the RP-2000 table for males and females with ages setback 1 year for males.

Age male Female40 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

Life Expectancies for disabled retirees are based on the CalPERS Industrial Disability table with ages setback 2 years.

Age male Female40 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

Disabled Mortality (for disability retirees)CalPERS Industrial Disability with ages setback 2 years. In the prior valuation, 120% of the 1983 Group Annuity Mortality table for males was used.

Actuarial | 49

Participant Data SummaryFollowing 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 pro-vided by the City. Data was checked for reasonableness, but not audited.

July 1, 2005 July 1, 2007

Police Fire total Police Fire totalParticipant 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


Disabled Retirees

Average Age 67.4 67.9 67.6 68.4 69.0 68.7


Beneficiaries

Average Age 77.1 78.7 77.9 77.7 79.4 78.6


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.

50 | Actuarial

Introduction | 51

Verna Rose Kelseyhusband: Charles “Skip” kelsey. Retired from the

Oakland Police department in 1984; died in 2006.AFCM Charles “Skip” Kelsey,

NAS Alameda,1990

“ After my husband retired, we traveled in Australia, New Zealand, Europe and all over the U.S. I continue to run a British car parts business which we ran together.”

POLiCe beneFiCiARY

S eCt iOnStAtiSt iC AL

5

52 | Statistical

Additions to Plan net Assets by SourceFiscal Years Ending June 30

Fiscal Year

employee Contributions

employer Contributions

net investment income1 Other income total

2006 $ 25,452 - $ 42,305,447 - $ 42,330,899

2007 17,505 - 76,194,266 - 76,211,771

1 Total Investment Income less Investment expenses.

Plan deductions by typeFiscal Years Ending June 30

Fiscal Year

Service Allowances

disability Allowances

industrial death

Allowancesdeath

benefitsWithdrawal of Contributions

Administration Costs

total deductions

2006 $ 43,046,461 $ 26,115,649 $ 2,175,913 $ 13,500 - $ 772,651 $ 72,124,174

2007 43,015,868 26,138,688 2,232,640 17,000 - 818,738 72,222,934

benefit expenses by typeFiscal Years Ending June 30

type of Retirees

2007 2006

# of Retirees Gross Amount # of Retirees Gross AmountPolice

Service Allowance 457 $ 24,442,801 472 $ 24,165,532

Disability Allowance 225 12,083,746 231 12,075,244

Death Allowance 22 1,148,800 22 1,128,652

total 704 $ 37,675,347 725 $ 37,369,428

Fire

Service Allowance 313 $ 18,573,068 323 $ 18,880,929

Disability Allowance 236 14,054,941 243 14,040,405

Death Allowance 19 1,100,841 20 1,060,761

total 568 $ 33,728,850 586 $ 33,982,095

total Police & Fire 1,272 $ 71,404,196 1,311 $ 71,351,523

Oakland Police & Fire Retirement SystemCity of OaklandOffice of Personnel150 Frank Ogawa Plaza, 3rd FloorOakland, CA 94612

Documents

OAkLAnd POLiCe & FiRe - City of Oakland - Official City … | Introduction LetteRS OF tRAnSmittAL April 1, 2008 Oakland Police and Fire Retirement Board 150 Frank H. Ogawa Plaza, Suite