Question:  The interest that is charged on our prior service liability each year is greater than the payments we are making. How will this affect our ability to pay off our liability?

Answer:

The prior service contribution rates are based on a level percentage of payroll over the entire 40-year amortization period. This means that the contribution rate will remain constant, but the actual contributions will increase each year as the salaries of covered employees increase.

During the early years, the salary base used to calculate contributions is low, and the contributions are less than the interest charges. Each year as covered wages increase, the contributions also grow until, in approximately the 20th year, the contributions are higher than the interest assessment. The contributions begin to reduce the liability until the end of 40 years, when the liability has been totally paid.

The actuarial assumption of 4.1% annual salary growth is used.