AUGUST 2021
Asset-Liability Study
Fresno County Employees’ Retirement Association
VERUSINVESTMENTS.COM
SEATTLE 206-622-3700LOS ANGELES 310-297-1777
SAN FRANCISCO 415-362-3484
Past performance is no guarantee of future results. This document is provided for informational purposes only and is directed to institutional clients and eligible institutionalcounterparties only and is not intended for retail investors. Nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security or pursue a particular investment vehicle or any trading strategy. This document may include or imply estimates, outlooks, projections and other “forward-looking statements.” No assurance can be given that future results described or implied by any forward looking information will be achieved. Investing entails risks, including possible loss of principal. Additional information about Verus Advisory, Inc. is available on the SEC’s website at www.adviserinfo.sec.gov. Verus – also known as Verus Advisory™.
Table of contents
Introduction 3
Historical accuracy of projections
13
2021 Capital market assumptions
20
Historical plan experience 27
Enterprise risk tolerance 31
Asset mixes & monte carloanalysis
49
Deterministic modeling 58
Conclusion 66
2
Introduction
August 2021FCERA ALS 3
Session objectives— Confirm/adjust the Board’s enterprise risk tolerance
— Develop an intuitive sense of how different investment strategies lead to different ranges of outcomes for the System.
— Confirm the merits of the current approach, or alternatively, adjust course if warranted.
If a course-adjustment is necessary, Verus can refine the asset allocation mixes under consideration based on Board feedback.
August 2021
Asset / liability analysis is best used to evaluate the impact of broad strategic shifts, rather than small asset allocation adjustments
4FCERA ALS
A complex problem— Asset allocation is typically the most important decision
an investor can make
— There is an infinite number of possible asset allocation mixes
How can we address the asset allocation question to ensure we get a solution that fits?
— Disciplined, repeatable process
— Logical, intuitive framework
5August 2021FCERA ALS
Process
6August 2021FCERA ALS
Framework: type, tailor, tilt
TYPE
TAILOR
TILT
Structural
Tactical
Beta
Alpha
7
Which conversation are we having today?
August 2021FCERA ALS
Type, Tailor, Tilt‘Type’ is a beta decision
8
— What is our basic portfolio structure, or ‘type’?
— ‘Type’ of portfolio should have the greatest impact on results.
— ‘Type’ decisions are made infrequently - perhaps only once.
— An institution may not be able to change its ‘type’ due to peer risk or the expectations of its constituents.
August 2021FCERA ALS
Type, Tailor, Tilt— Now that portfolio type is decided, how are unique needs and preferences integrated?
— ‘Tailoring’ of the portfolio should have material impacts on results, but less of an impact than portfolio type
— ‘Tailoring’ decisions are also made less frequently – perhaps on an annual basis
‘Tailor’ is a beta decision, but might also involve alpha
9August 2021FCERA ALS
Type, Tailor, Tilt— The portfolio is now complete and the IPS
is decided.
— ‘Tilt’ decisions are typically more tactical in nature.
— ‘Tilts’ must be large enough in size to make a difference in performance, and governance surrounding these decisions is very important.
‘Tilt’ decisions are typically focused on alpha
10August 2021FCERA ALS
Past & present “type” discussions— In 2013, as a result of a comprehensive
Asset-Liability Study, the Board de-risked the portfolio considerably, going from 53% public equity to 36%.
— In 2018, the Board spent considerable time & energy re-evaluating that decision, and ultimately decided to re-align the portfolio more closely with peers; public equity was increased to the current target of 49%.
— In 2019, the Board sought to improve the tail-risk characteristics of the portfolio by increasing core fixed income and decreasing credit.
August 2021FCERA ALS 11
Which overall risks should FCERA accept?
12
Accept greater volatility
Accept lower risk, but also weaker performance
Make portfolio “bets” which might fail to pay off
Take on illiquidity risk, which may lead to forced selling
Rely on active managers who may fail to produce alpha
Tilt into assets with higher expected return, but forecasts may be wrong
Be truly different from peers
Over-diversify which might reduce return
Add portfolio leverage, which can change risk profile
August 2021FCERA ALS
Historical accuracy of projections
August 2021FCERA ALS 13
ACTUARIAL LIABILITY: PROJECTIONS VS ACTUAL
Liability projections
August 2021FCERA ALS
Excluding discount rate movements in early 2000, Verus liability projections have been accurate and act as a reasonable predictor of future liability within the FCERA plan.
Projected liability growth for FCERA plan ranges from 3%-3.4% in the next 5 years, declining to roughly 1.5% thereafter.
Source: Verus
14
2016Discount Rate
ChangeFrom 7.25%
To 7.00% Small changes can have large impacts
decades later
-
1
2
3
4
5
6
7
8
9
10
Billi
ons (
$)
Actual 2003 Projection 2007 Projection
2011 Projection 2016 Projection 2020 Projection
Verus’ CMAs vs. subsequent performance
8.2%8.8% 8.8% 9.2%
9.8%
12.0%
1.5%
6.0% 6.0%
10.0%
6.5% 7.0%6.1% 6.5%
2.7%
6.9% 7.1%
0.8%
3.0%1.8%
10.0%
0.7%
4.4% 4.3%
7.5%
-5.6%
3.4%
6.9%
4.8%
1.8%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
2007 CMA Next 10yr Actual
August 2021FCERA ALS
Average deviation: 3.5%
Biggest miss:
Commodities -12.1%.
Avg. deviation ex-Commodities: 2.9%
2007 projections vs. actual
15
Verus’ CMAs vs. subsequent performance
August 2021FCERA ALS
Average deviation: 3.1%
Biggest miss:
Commodities -13.3%.
Avg. deviation ex-Commodities: 2.4%
2008 projections vs. actual
16
8.2% 8.5% 8.7% 8.9% 9.5%
11.8%
4.0%4.8% 5.0%
6.5% 6.5%7.5%
6.5% 6.8%
2.7%
8.5% 8.7%
1.9%
5.8%
1.7%
9.9%
0.3%
3.5% 4.0%
8.0%
-6.8%
3.2%
6.1%7.3%
1.6%
-10%
-5%
0%
5%
10%
15%
2008 CMA Next 10yr Actual
Verus’ CMAs vs. subsequent performance
August 2021FCERA ALS
Average deviation: 2.9%
Biggest miss:
Commodities -10.8%
Avg. deviation ex-Commodities: 2.3%
2009 projections vs. actual
17
9.3%8.3%
9.5% 9.0%
10.5%
12.3%
3.0%
5.0%3.9%
12.0%
7.0% 7.3%6.1% 6.4%
3.0%
13.1%12.0%
6.3%
10.5%
8.0%
13.9%
0.4%
3.6% 3.5%
11.1%
-3.8%
4.9%
7.5%
12.2%
1.8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2009 CMA Next 10yr Actual
Verus’ CMAs vs. subsequent performance
August 2021FCERA ALS
Average deviation: 3.4%
Biggest miss:
Commodities -12.5%
Avg. deviation ex-Commodities: 2.8%
2010 projections vs. actual
18
8.0% 7.5%8.3% 7.8%
9.5%11.0%
3.5%4.7%
3.7%
7.1%7.8% 7.3% 7.5% 7.8%
3.3%
13.6%
11.8%
5.5%
8.7%
3.7%
13.9%
0.6%
3.4% 3.7%
7.6%
-4.7%
4.0%
10.2%
11.9%
1.8%
-10%
-5%
0%
5%
10%
15%
2010 CMA Next 10yr Actual
Verus CMAs vs. subsequent performance
August 2021FCERA ALS
Average deviation: 3.4%
Biggest miss:
Commodities -14.5%
Avg. deviation ex-Commodities: 2.6%
2011 projections vs. actual
19
6.8% 6.3%7.0% 6.5%
8.8%9.8%
3.5%4.3%
3.0%
5.5%
8.0%
5.6% 6.2% 6.5%
3.3%
13.9%
11.2%
5.5%
7.8%
3.6%
13.1%
0.6%
3.8% 3.8%
6.8%
-6.5%
4.2%
9.4%8.3%
1.7%
-10%
-5%
0%
5%
10%
15%
2011 CMAs Next 10yr Actual
Summarizing the data
August 2021FCERA ALS
Other than forecasting cash rates going to zero for much of the decade, and commodities underperformance, the projections were statically accurate.
How accurate have our CMAs been?
20
0%
2%
4%
6%
8%
10%
12%
14%
16%
Average error of our forecast +1 standard deviation +2 standard deviation
2021 capital market assumptions
August 2021FCERA ALS 21
Methodology
August 2021FCERA ALS 22
*Long-term historical volatility data is adjusted for autocorrelation (see Appendix)**The private credit premium is generated by illiquidity, issuer size, and lack of credit rating
CORE INPUTS— We use a fundamental building block approach based on several inputs, including historical data and academic research to create asset class return forecasts. — For most asset classes, we use the long-term historical volatility after adjusting for autocorrelation.— Correlations between asset classes are calculated based on the last 10 years. For illiquid assets, such as private equity and private real estate, we use BarraOne correlation
estimates.
Asset Return Methodology Volatility Methodology*
Inflation 25% weight to the University of Michigan Survey 5-10 year ahead inflation expectation and the Survey of Professional Forecasters(Fed Survey), and the remaining 50% to the market’s expectation for inflation as observed through the 10-year TIPS breakeven rate -
Cash 75% * current federal funds rate + 25% * U.S. 10-year Treasury yield Long-term volatility
Bonds Nominal bonds: current yield; Real bonds: real yield + inflation forecast Long-term volatility
International Bonds Current yield Long-term volatility
Credit Current option-adjusted spread + U.S. 10-year Treasury – effective default rate Long-term volatility
International Credit Current option-adjusted spread + foreign 10-year Treasury – effective default rate Long-term volatility
Private Credit Bank loan forecast + 1.75% private credit premium** Long-term volatility
Equity Current yield + real earnings growth (historical average) + inflation on earnings (inflation forecast) + expected P/E change Long-term volatility
Intl Developed Equity Current yield + real earnings growth (historical average) + inflation on earnings (intl. inflation forecast) + expected P/E change Long-term volatility
Private Equity US large cap domestic equity forecast * 1.85 beta adjustment 1.2 * Long-term volatility of U.S. small cap
Commodities Collateral return (cash) + spot return (inflation forecast) + roll return (assumed to be zero) Long-term volatility
Hedge Funds Return coming from traditional betas + 15-year historical idiosyncratic return Long-term volatility
Core Real Estate Cap rate + real income growth – capex + inflation forecast 65% of REIT volatility
REITs Core real estate Long-term volatility
Value-Add Real Estate Core real estate + 2% Volatility to produce Sharpe Ratio (g) equal to core real estate
Opportunistic Real Estate Core real estate + 4% Volatility to produce Sharpe Ratio (g) equal to core real estate
Infrastructure Current yield + real income growth + inflation on earnings (inflation forecast) Long-term volatility
Risk Parity Expected Sharpe Ratio * target volatility + cash rate Target volatility
10-year return & risk assumptions
August 2021FCERA ALS 23
Investors wishing to produce expected geometric return forecasts for their portfolios should use the arithmetic return forecasts provided here as inputs into that calculation, rather than the single-asset-class geometric return forecasts. This is the industry standard approach, but requires a complex explanation only a heavy quant could love, so we have chosen not to provide further details in this document – we will happily provide those details to any readers of this who are interested. *Return expectations differ depending on method of implementation
Asset Class Index ProxyTen Year Return Forecast Standard Deviation
ForecastSharpe Ratio Forecast (g)
Sharpe Ratio Forecast (a)
10-Year Historical Sharpe Ratio (g)
10-Year Historical Sharpe Ratio (a)Geometric Arithmetic
EquitiesU.S. Large S&P 500 5.1% 6.3% 15.7% 0.31 0.38 0.99 0.99U.S. Small Russell 2000 5.2% 7.3% 21.4% 0.23 0.33 0.51 0.58International Developed MSCI EAFE 5.2% 6.7% 17.9% 0.28 0.36 0.27 0.34International Small MSCI EAFE Small Cap 4.4% 6.7% 22.4% 0.19 0.29 0.43 0.49Emerging Markets MSCI EM 5.4% 8.3% 25.5% 0.20 0.32 0.11 0.19Global Equity MSCI ACWI 5.2% 6.6% 17.3% 0.29 0.37 0.58 0.62Private Equity* Cambridge Private Equity 9.3% 12.1% 25.7% 0.35 0.46 - -Fixed IncomeCash 30 Day T-Bills 0.2% 0.2% 1.2% - - - -U.S. TIPS BBgBarc U.S. TIPS 5-10 1.1% 1.2% 5.3% 0.15 0.18 0.66 0.67U.S. Treasury BBgBarc Treasury 7-10 Year 0.7% 0.9% 6.7% 0.07 0.10 0.67 0.68Global Sovereign ex U.S. BBgBarc Global Treasury ex U.S. 0.2% 0.6% 9.6% -0.01 0.04 0.09 0.12Global Aggregate BBgBarc Global Aggregate 1.1% 1.3% 6.1% 0.14 0.17 0.38 0.39Core Fixed Income BBgBarc U.S. Aggregate Bond 1.5% 1.6% 4.0% 0.31 0.36 1.02 1.01Core Plus Fixed Income BBgBarc U.S. Universal 2.2% 2.3% 4.0% 0.49 0.50 1.13 1.12Short-Term Gov’t/Credit BBgBarc U.S. Gov’t/Credit 1-3 Year 0.7% 0.8% 3.6% 0.14 0.16 1.23 1.22Short-Term Credit BBgBarc Credit 1-3 Year 1.0% 1.1% 3.6% 0.21 0.23 1.23 1.22Long-Term Credit BBgBarc Long U.S. Corporate 2.2% 2.6% 9.3% 0.21 0.25 0.76 0.77High Yield Corp. Credit BBgBarc U.S. Corporate High Yield 3.4% 4.0% 11.3% 0.28 0.34 0.82 0.83Bank Loans S&P/LSTA Leveraged Loan 2.9% 3.2% 9.5% 0.28 0.32 0.66 0.67Global Credit BBgBarc Global Credit 0.3% 0.6% 7.4% 0.01 0.05 0.63 0.64Emerging Markets Debt (Hard) JPM EMBI Global Diversified 5.2% 6.0% 12.7% 0.39 0.45 0.60 0.63Emerging Markets Debt (Local) JPM GBI-EM Global Diversified 4.3% 5.0% 12.2% 0.33 0.39 -0.01 0.05Private Credit Bank Loans + 175bps 4.6% 5.2% 11.2% 0.39 0.45 - -OtherCommodities Bloomberg Commodity 2.2% 3.4% 15.9% 0.13 0.20 -0.47 -0.41Hedge Funds* HFRI Fund Weighted Composite 3.8% 4.1% 7.8% 0.46 0.49 0.47 0.49Real Estate Debt BBgBarc CMBS IG 2.2% 2.5% 7.5% 0.26 0.30 1.18 1.17Core Real Estate NCREIF Property 5.8% 6.5% 12.6% 0.44 0.50 2.06 1.99Value-Add Real Estate NCREIF Property + 200bps 7.8% 9.1% 17.1% 0.44 0.52 - -Opportunistic Real Estate NCREIF Property + 400bps 9.8% 11.8% 21.6% 0.44 0.54 - -REITs Wilshire REIT 5.8% 7.5% 19.3% 0.29 0.38 0.46 0.52Global Infrastructure S&P Global Infrastructure 7.8% 9.4% 18.8% 0.40 0.49 0.28 0.35Risk Parity Risk Parity 5.2% 5.9% 10.0% 0.50 0.56 - -Currency Beta MSCI Currency Factor Index 1.2% 1.3% 3.5% 0.28 0.30 0.15 0.16Inflation 2.0% - - - - - -
-10%
-5%
0%
5%
10%
15%
20%
25%
5th to 25th 25th to 50th 50th to 75th 75th to 95th Expected Return
Range of likely 10-year outcomes
August 2021FCERA ALS 24
10-YEAR RETURN 90% CONFIDENCE INTERVAL
High Volatility Low Volatility
Source: Verus, MPI
Risk & return
Currently, the asset classes with the highest projected returns are illiquid strategies.
Increasing risk does not guarantee higher returns… but it’s a starting point
Based on the Verus 2021 Capital Market Assumptions (10 year, returns are geometric)
U.S. Large
U.S. Small
International Developed
International Small
Emerging Markets
Global Equity
Private Equity*
Cash U.S. TIPS U.S. Treasury
Global Sovereign ex U.S.
Global AggregateCore Fixed Income
Core Plus Fixed Income
Short-Term Gov’t/Credit
Short-Term CreditLong-Term Credit
High Yield Corp. CreditBank Loans
Global Credit
EMD Hard
EMD localPrivate Credit
Commodities
Hedge Funds*
Real Estate Debt
Core Real Estate
Value-Add Real Estate
Opportunistic Real Estate
REITs
Global Infrastructure
Risk Parity
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% 22.0% 24.0% 26.0% 28.0% 30.0%
Retu
rn
Risk
August 2021FCERA ALS 25
ROLLING 10-YEAR RETURNS
Public equity: a historical perspective
Past performance is not indicative of future returns….
We need to balance humility in forecasting with trying to mitigate natural behavioral biases
Source: eVestment. Monthly rolling 10-year intervals. Note: Returns as of 3/31/2021
-5%
0%
5%
10%
15%
20%
25%
1980 1985 1990 1995 2000 2005 2010 2015 2020
S&P 500 Russell 2000 MSCI EAFE MSCI Emerging Markets
Percent of 10-year periods with returns below 5%
S&P 500 11.1%
Russell 2000 7.2%
MSCI EAFE 24.0%
MSCI EM 37.8%
August 2021FCERA ALS 26
Cash US Large US Small Intl Large Intl Small EM Global Equity PE US TIPS US
Treasury
Global Sovereign
ex-USUS Core Core Plus
Short-Term
Gov't/Credit
Short-Term Credit
Long-Term Credit
US HY Bank Loans
Global Credit EMD USD EMD
LocalCommodi
tiesHedge Funds
Real Estate REITs Infrastruc
tureRisk
ParityCurrency
Beta
Cash 1.0
US Large -0.2 1.0
US Small -0.2 0.9 1.0
Intl Large -0.1 0.9 0.8 1.0
Intl Small -0.2 0.9 0.8 1.0 1.0
EM -0.1 0.7 0.7 0.8 0.8 1.0
Global Equity -0.2 1.0 0.9 1.0 0.9 0.9 1.0
PE -0.2 0.6 0.6 0.6 0.6 0.5 0.7 1.0
US TIPS 0.0 0.1 0.1 0.2 0.2 0.3 0.2 0.1 1.0
US Treasury 0.2 -0.4 -0.5 -0.4 -0.4 -0.3 -0.4 -0.2 0.7 1.0Global Sovereign ex-
US 0.1 0.2 0.1 0.3 0.3 0.5 0.3 0.0 0.6 0.3 1.0
US Core 0.1 -0.1 -0.2 -0.1 -0.1 0.1 -0.1 0.0 0.8 0.9 0.5 1.0
Core Plus 0.1 0.1 0.0 0.1 0.1 0.2 0.1 0.0 0.8 0.7 0.6 0.9 1.0Short-Term Gov't/Credit 0.4 -0.1 -0.2 0.0 -0.1 0.1 0.0 -0.2 0.6 0.7 0.5 0.8 0.8 1.0
Short-Term Credit 0.0 0.4 0.4 0.4 0.4 0.5 0.4 0.0 0.5 0.2 0.5 0.5 0.8 0.7 1.0
Long-Term Credit 0.0 0.2 0.2 0.2 0.2 0.3 0.3 0.2 0.7 0.5 0.5 0.8 0.9 0.5 0.6 1.0
US HY -0.2 0.8 0.7 0.8 0.8 0.8 0.8 0.5 0.4 -0.2 0.4 0.2 0.4 0.1 0.7 0.5 1.0
Bank Loans -0.3 0.7 0.7 0.6 0.7 0.6 0.7 0.4 0.2 -0.3 0.2 0.0 0.2 0.0 0.6 0.4 0.9 1.0
Global Credit -0.1 0.6 0.5 0.7 0.7 0.7 0.7 0.4 0.6 0.1 0.7 0.5 0.6 0.4 0.8 0.7 0.8 0.6 1.0
EMD USD -0.2 0.5 0.5 0.6 0.6 0.7 0.6 0.4 0.6 0.1 0.5 0.5 0.6 0.3 0.7 0.6 0.8 0.7 0.9 1.0
EMD Local 0.0 0.5 0.4 0.7 0.7 0.8 0.7 0.4 0.4 0.0 0.6 0.3 0.4 0.3 0.5 0.4 0.7 0.5 0.8 0.8 1.0
Commodities -0.1 0.5 0.5 0.6 0.6 0.6 0.6 0.3 0.2 -0.3 0.4 -0.1 0.0 0.0 0.3 0.1 0.6 0.5 0.5 0.5 0.6 1.0
Hedge Funds -0.2 0.8 0.8 0.8 0.9 0.7 0.9 0.6 0.2 -0.4 0.2 0.0 0.2 0.0 0.5 0.3 0.8 0.8 0.7 0.6 0.5 0.5 1.0
Real Estate -0.1 0.5 0.5 0.4 0.5 0.4 0.5 0.4 0.1 -0.1 0.1 0.0 -0.1 0.0 0.1 0.0 0.3 0.3 0.4 0.3 0.3 0.3 0.4 1.0
REITs -0.2 0.6 0.6 0.6 0.6 0.5 0.6 0.5 0.4 0.1 0.3 0.4 0.4 0.2 0.5 0.5 0.6 0.6 0.7 0.6 0.5 0.4 0.5 0.8 1.0
Infrastructure -0.2 0.8 0.7 0.8 0.8 0.7 0.8 0.7 0.4 -0.2 0.5 0.2 0.4 0.2 0.6 0.5 0.8 0.7 0.8 0.8 0.7 0.5 0.7 0.3 0.7 1.0
Risk Parity -0.1 0.6 0.6 0.7 0.6 0.6 0.7 0.3 0.4 0.0 0.4 0.2 0.5 0.3 0.6 0.5 0.8 0.6 0.7 0.7 0.6 0.6 0.7 0.0 0.5 0.7 1.0
Currency Beta 0.0 0.2 0.2 0.1 0.1 0.1 0.2 0.0 0.0 -0.1 0.1 0.0 0.1 0.0 0.1 0.1 0.2 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.1 0.2 1.0
Correlation assumptions
August 2021FCERA ALS 27
Note: Correlation assumptions are based on the last ten years. Private Equity and Real Estate correlations are especially difficult to model – we have therefore used BarraOne correlation data to strengthen these correlation estimates.
Historical plan experience
August 2021FCERA ALS 28
FCERA HISTORICAL FUNDED STATUS
Historical funded status
August 2021FCERA ALS
Actuarial funded status incorporates asset-smoothing.
Market-value funded status is more volatile.
Current funded status is approximately 80%.
Source: FCERA 2020 CAFR and Actuarial Valuations
29
0%
20%
40%
60%
80%
100%
120%
0
1
2
3
4
5
6
7
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Billi
ons
Actuarial Liability MVA AVA Mkt. FR AVA FR
FCERA HISTORICAL CASHFLOW
Historical cashflow
August 2021FCERA ALS
Net cash outflows have averaged ~$20 million a year over the recent past.
The extent of cash outflows impact tolerance for illiquidity, and overall risk tolerance.
Source: FCERA 2020 CAFR
30
(400)
(300)
(200)
(100)
-
100
200
300
400
500
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Mill
ions
($)
Benefit Payments Misc Expenses Employer Contributions
Employee Contributions Net Cashflow
FCERA HISTORICAL RETURN
Historical return
August 2021FCERA ALS
FCERA has exceeded the assumed rate in 10 of the last 18 years.
On an annualized basis, as of 3/31/21, the Fund has returned:
Source: FCERA 2020 CAFR and Historical Actuarial Valuation. Annualized returns are net of fees, other than the 20-year time frame, for which only gross data is available.
31
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Return Assumed Return
FCERA
5 years 8.8%
10 years 7.1%
15 years 6.5%
20 years 7.2%
Enterprise risk tolerance
August 2021FCERA ALS 32
Enterprise risk tolerance in context— Properly assessing Enterprise Risk Tolerance has
important and practical implications for investment strategy development.
— It involves assessing the Plan’s ability and the Board’s willingness to accept risk.
— Although the Board’s fiduciary duty is to the Members, understanding how the County’s financial situation impacts its ability to make contributions cannot be overlooked.
August 2021FCERA ALS 33
Ability
Will
ingn
ess
Naive Capitalizing
DefensiveProtective
Risk Tolerance
FCERA MEMBER POPULATION
Plan demographics
August 2021FCERA ALS
As of June 30, 2020, there were 7,873 active members, 7,838 inactive members, and 4,014 vested terminated members.
For every 1 active employee there are 1.51 inactive employees.
Since 2016, the active population has grown by 7.8% while in-actives have grown by 14.8%.
Source: Segal - FCERA Actuarial Valuation Report as of June 30, 2020
34
7,297 7,353 7,458 7,676 7,873
3,289 3,411 3,627 3,873 4,014
7,032 7,200 7,445 7,651 7,838
1.51
0.50
0.70
0.90
1.10
1.30
1.50
1.70
-
5,000
10,000
15,000
20,000
25,000
2016 2017 2018 2019 2020
Active Vested Terminated Retired Ratio of non-active to actives
HISTORICAL CONTRIBUTIONS AS A % OF COVERED PAYROLL
Historical employer contributions
August 2021FCERA ALS
Losses from the 2008 Great Financial Crisis resulted in subsequently higher contributions.
Over the last 5 years, the ratio has moved closer to its 2015 level.
Source: Brown Armstrong – 2020 Fresno County CAFR as of June 30, 2020
35
24.7%
48.5%
0%
10%
20%
30%
40%
50%
60%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Peer group
August 2021FCERA ALS
For the purposes of this study, a peer group was created by identifying four counties within the SACRS county system that are similar in population, geographic location, household income, and sources of economic revenue. Fresno county’s peer group includes:
— Sacramento County
— Contra Costa County
— Kern County
— Ventura County
To ensure ‘fair’ comparisons, financial data was collected and reviewed from each county’s most recent CAFR. With that said, we also recognize that each county has unique characteristics that make perfect comparisons impossible.
Source: U.S. Consensus Bureau as of 2019
36
1937 Act Systems PopulationMedian Household
Income
Los Angeles 10,039,107 $ 68,044
San Diego 3,338,330 $ 78,980
Orange 3,175,692 $ 90,234
San Bernadino 2,180,085 $ 63,362
Alameda 1,671,329 $ 99,406
Sacramento 1,552,058 $ 67,151
Contra Costa 1,153,526 $ 99,716
Fresno 999,101 $ 53,969
Kern 900,202 $ 53,350
Ventura 846,006 $ 88,131
San Mateo 766,573 $ 122,641
San Joaquin 762,148 $ 64,432
Stanislaus 550,660 $ 60,704
Sonoma 494,336 $ 81,018
Tulare 479,997 $ 49,687
Santa Barbara 446,499 $ 74,624
Merced 277,680 $ 53,672
Marin 258,826 $ 115,246
Imperial 181,215 $ 47,622
Mendocino 86,749 $ 51,416
Credit ratings
August 2021FCERA ALS
Fresno’s credit ratings are similar its peer counties
Sources: Each County’s respective CAFR, BLS.GOV; Respective credit ratings sourced from Western Asset Management Company.Note: Contra Costa County per capita income as of June 2018.
37
— Fresno County has been assigned high general credit ratings from 2 of the 3 national rating agencies: Moody’s Baa2 S&P AA
— Credit ratings are generally specific to certain types of debt issued by municipality. Fresno’s largest outstanding debts consists of pension obligation bonds, tobacco tax bonds, and
revenue bonds. Higher credit ratings lead to a lower cost of borrowing for the plan sponsor.
County Moody's S&PMarket Value Funded Status
Actuarial Value of Assets (000s)
Total County Revenue (000s) Population
Per Capita Income
Average Unemployment Rate (FY2019)
CAFR As of Date
Fresno Baa2 AA 82.7% $ 5,226,009 $ 1,757,231 999,101 $ 43,084 8.8% 6/30/2020
Sacramento Aa3 A+ 80.6% $ 10,074,345 $ 3,562,287 1,552,058 $ 55,266 6.8% 6/30/2020
Contra Costa Aa2 AA+ 90.6% $ 9,128,669 $ 3,738,705 1,153,526 $ 82,506 6.3% 6/30/2020
Kern Aa3 AA 64.4% $ 4,508,458 $ 1,848,241 900,202 $ 38,592 10.1% 6/30/2020
Ventura Aa1 AA+ 89.6% $ 6,044,036 $ 2,147,905 846,006 $ 62,343 5.8% 6/30/2020
ASSETS AND LIABILITIES
Balance sheet by county
August 2021FCERA ALS
Fresno County’s operations are generally smaller relative to the peer counties.
The accrued pension liability is 45% of total assets and 2nd highest amongst its peers.
Source: County CAFR’s as of 6/30/20. Includes both governmental and business-type activities.Note: Proportionate share of the pension liability excludes pension obligation bonds
38
30%
15%
45%
52%
17%
0%
10%
20%
30%
40%
50%
60%
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Sacramento Contra Costa Fresno Kern Ventura
Mill
ions
($)
Total Assets Total Liabilities Pension Liability as a % of Total Assets
“TRUE” COST OF PENSION LIABILITY
County’s pension liability
August 2021FCERA ALS 39
PENSION LIABILITY PER CAPITA
Source: County CAFR’s as of 6/30/20
-
500
1,000
1,500
2,000
2,500
3,000
Sacramento Contra Costa Fresno Kern Ventura
Mill
ions
($)
Pension Obligation Bonds Outstanding
County Share of Net Pension Liability
$2,623
$678
$1,282
$1,984
$659
0
500
1,000
1,500
2,000
2,500
Sacramento Contra Costa Fresno Kern Ventura
($)
Net Pension Liability Per Capita Pension Obligation Bond Per Capita
REVENUES BY COUNTY
County revenues
August 2021FCERA ALS
Fresno County’s total revenue for fiscal year end 2020 was $1.76 billion.
The “true” pension cost (county’s proportionate share of the pension liability + POBs outstanding) was $1.28 billion.
Source: County CAFR’s as of 6/30/20
40
$3,562$3,739
$1,757 $1,848
$2,14874%
18%
73%
107%
31%
0%
20%
40%
60%
80%
100%
120%
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Sacramento Contra Costa Fresno Kern Ventura
Pens
ion
Cost
/Rev
enue
Mill
ions
($)
Total Revenues Pension Liability as a % of Revenues
CONTRIBUTIONS BY COUNTY
County contributions
August 2021FCERA ALS
Relative to county revenue, FCERA had the second highest contributions but still inline with its peer group.
Source: Actuarial Valuation Reports 2020. CCERA Actuarial Valuation report as of 2019
41
$401
$437
$289
$332
$294
11%12%
16%
18%
14%
0%
5%
10%
15%
20%
-
50
100
150
200
250
300
350
400
450
500
Sacramento Contra Costa Fresno Kern Ventura
Cont
ribut
ions
as a
% o
f Rev
enue
Annu
al C
ontr
ibut
ions
(m
illio
ns $
)
Contributions Contributions as a % of Revenue
LONG-TERM OUTSTANDING DEBT BY TYPE
Debt structure
August 2021FCERA ALS
Fresno County has ~63% of its total outstanding debt in pension obligation (PO) bonds. Compared to its peers:
― Sacramento: 28%
― Contra Costa: 29%
― Kern: 32%
― Ventura: 0%
Fresno has ~$227 million in PO bonds outstanding; this amount is 10% of total assets.
Source: County CAFR’s as of 6/30/20
42
Pension Obligation Bonds, 63.3%
Tobacco Tax Bonds, 24.6%
Lease Revenue Bonds, 10.5%
Water Systems Bonds, 0.7%
Capital Leases, 0.78%
TOTAL LONG-TERM DEBT AS A PERCENTAGE OF REVENUE
Debt vs. revenue, population
August 2021FCERA ALS 43
TOTAL DEBT PER CAPITA
Source: County CAFR’s as of 6/30/20
50%
12%
20%
30%
18%
0%
10%
20%
30%
40%
50%
60%
Sacramento Contra Costa Fresno Kern Ventura
Sacramento Contra Costa Fresno Kern Ventura
$2,338
$863
$1,415
$2,624
$1,248
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
Sacramento Contra Costa Fresno Kern Ventura
Net Pension Liability Per Capita Total Debt Per Capita
TOTAL LONG-TERM DEBT TO ASSESSED VALUE OF PROPERTY
Debt vs assessed property values
August 2021FCERA ALS
Debt, relative to assessed value of property is in the middle amongst its peers.
This indicates a reasonable level of leverage.
Source: County CAFR’s as of 6/30/20
44
$1,797
$444 $359
$555
$397
1.0%
0.2%
0.4%
0.6%
0.3%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Sacramento Contra Costa Fresno Kern Ventura
Mill
ions
($)
Total Long-Term Debt Long Term Debt as a % of property values
ACTIVE MEMBER POPULATION BY PLAN
Member population
August 2021FCERA ALS
FCERA has the lowest number of active members and the highest ratio of inactive-to-active members.
Since contributions are driven by the active population, this suggests a lower risk tolerance relative to peers.
Source: County CAFR’s as of 6/30/20
45
12,650
10,075
7,873
9,3268,644
1.31
1.33
1.51
1.27 1.24
1.0
1.1
1.2
1.3
1.4
1.5
1.6
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
SCERS CCCERA FCERA KCERA VCERA
Inac
tive-
activ
e ra
tio
Activ
e M
embe
rs
Active Members Ratio of inactive to active
EMPLOYER CONTRIBUTIONS AS A % OF PAYROLL
Contributions
August 2021FCERA ALS
Fresno had the highest number of contributions as a percentage of payroll.
This potentially gives the county relatively less flexibility to increase future contribution amounts.
Source: County CAFR’s as of 6/30/20
46
26.3%
32.4%
48.5%44.8%
28.3%
0%
10%
20%
30%
40%
50%
60%
Sacramento Contra Costa Fresno Kern Ventura
MARKET VALUE FUNDED STATUS
Funded status
August 2021FCERA ALS
FCERA’s actuarial funded status is in the middle of its peers.
Source: County Actuarial Valuation Reports 2020. CCERA Actuarial Valuation report as of 2019
47
81%
91%
83%
64%
90%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
SCERS CCCERA FCERA KCERA VCERA
Mar
ket V
alue
Fun
ded
Stat
us
Strategic asset allocation vs. peers
40% 41%
49%
37%
51%
22% 23%
26%24%
15%14%
6%
11%
19%
14%13%
17%
14%
10%
20%
10% 10%
0%
10%
0%1%3%
0% 0% 0%0%
10%
20%
30%
40%
50%
60%
SCERS CCCERA FCERA KCERA VCERA
Allo
catio
n
Equities Fixed Income Real Assets Private Markets Alternative Investments Cash
August 2021FCERA ALS
FCERA has the highest relative allocation to public markets which includes a 49% allocation to public equities and 26% to fixed income.
Source: FCERA, SCERS, KCERA, and VCERA CAFR as of June 30, 2020; CCCERA CAFR as of December 31, 2020Note: CCCERA ‘s fixed income allocation is in high quality, short duration securities used to produce monthly cash flows.
48
Summary - ERT— Overall, Fresno county enjoys favorable financial conditions thanks in part to its
agriculturally driven economy which is the largest in terms of total value in California.
— The county’s credit rating on its long-term debt from national rating agencies Moody’s and S&P are of high quality.
— Long-term debt obligations are reasonable. Total debt to assessed value of property is 0.4% indicating a solid tax base relative to debt burden.
— The county’s pension plan is a relatively low burden as per capita indicators are favorable. Although the pension plan is relatively less favorable from an income and balance sheet perspective, this is primarily attributable to Fresno’s relatively smaller economy.
— The ratio of inactive-to-active members has been trending higher and is highest relative to its peers.
This suggests that the plan should assume a lower risk tolerance compared to peers.
— The pension plan’s actuarial funded status has steadily increased over the past ten years in part to the county’s ability to consistently increase contributions.
— The financial health of the sponsor gauges the Ability to accept risk. Willingness is determined by the Board.
August 2021FCERA ALS 49
Asset mixes & monte carloanalysis
August 2021FCERA ALS 50
Setting expectations
August 2021FCERA ALS
2021 return projections vs. 2020 return projections
Note: year-over-year change of the select group of asset classes above is based on the 2020 CMA methodology
51
-0.4% -0.5%
-1.8%
-2.8%
-2.2%
0.5%
-1.1% -1.0%
0.0%
-0.7%-0.5%
-1.0%-0.8%
0.1%
-2.4%
-1.1%
0.2%
-1.4%-1.3%
-0.2%
-0.8%
0.6%
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
Asset allocation mixes
August 2021FCERA ALS 52
Intended to demonstrate: "30% equity" portfolio
"40% equity" portfolio "Peer" mix
More diversification,
similar risk
"60% equity" portfolio
Heavy private markets/real
assetsLeverage Strategy
Private markets + more inflation
protection
Option 1 Option 2 Current Option 3 Option 4 Option 5 Option 6 Option 7Domestic Equity
US Large 15 18 22.5 21 28 20 25 20US Small 3 4 5.5 4 7 4 5 4
18 22 28 25 35 24 30 24International Equity
International Developed 8 11 12.5 12 15 12 12 12International Developed Small 2 3 3 2 3 3 3 3Emerging Markets 2 4 5.5 4 7 5 5 5
12 18 21 18 25 20 20 20Total Equity 30 40 49 43 60 44 50 44
Core Fixed Income 23 17 15 13 12 16 20 12Global Sovereign 3 3 4US TIPS 5 5 4 5 7High Yield Corp. Credit 2 2 2 2 1 0Bank Loans 2 2 2 2 1Emerging Market Debt (Local) 5 3 3 3 3 3 3 3
Total Fixed Income 40 32 26 24 15 19 30 22Real Assets
Core Real Estate 7 6 4 4 4 5 4 5Value Add Real Estate 1.5 1.5 1.5 1.5 1.5 2 1.5 2Opportunistic Real Estate 1.5 1.5 1.5 1.5 1.5 2 1.5 2Infrastructure 5 5 4 4 4 5 4 5
15 14 11 11 11 14 11 14Alternatives
Risk Parity 8 10Private Equity 7 6 6 6 6 11 6 10Private Credit 8 8 8 8 8 12 8 10
15 14 14 22 14 23 24 20Total 100 100 100 100 100 100 115 100
Forecast 10 Year Return (%) 4.9 5.1 5.3 5.4 5.6 5.8 5.8 5.6Standard Deviation (%) 9.7 11.0 12.1 11.5 13.5 12.5 12.8 12.2Return/Std. Deviation 0.50 0.46 0.43 0.47 0.42 0.46 0.46 0.46Sharpe Ratio 0.51 0.48 0.46 0.49 0.45 0.49 0.49 0.491th percentile ret. 1 year -15.3 -17.4 -19.3 -18.1 -21.3 -19.4 -19.9 -19.1
BARRAONE RISK DECOMPOSITION: 1-YEAR PROJECTED VOLATILITY & BREAKOUT
Risk decomposition
August 2021FCERA ALS
Option 4 is less diversified by risk factor given the 60% allocation to public equity.
Option 6 has slightly more diversification relative to other options, due to leverage.
Source: MSCI BarraOne
53
72% 78% 82% 79%86% 81% 80% 81%
-20%
0%
20%
40%
60%
80%
100%
120%
Option1 Option2 Current Option3 Option4 Option5 Option6 Option7
Equity Credit Rates Inflation Currency Risk Selection Risk
SCENARIO ANALYSIS
Scenario analysis
August 2021FCERA ALS
Option 4 exhibits more tail risk, due to the 60% allocation to public equity.
Source: MSCI BarraOne
54
-45% -40% -35% -30% -25% -20% -15% -10% -5% 0%
2007-2009 Subprime and Credit Crisis
2006 Emerging Market Crash
2001 Sept 11
2000-2003 Tech Crash & Recession
1994 US Rate Hike
1989-1990 Nikkei Stock Price Correction
1987 Market Crash (Aug. to Nov.)
Option1 Option2 Current Option3 Option4 Option5 Option6 Option7
STRESS TEST
Stress test
August 2021FCERA ALS
Option 6 has more interest rate exposure relative to other options.
55
-16% -14% -12% -10% -8% -6% -4% -2% 0%
USD +20%
Global Equity -20%
Global Credit Spreads +100 bps
Global Interest Rate +200bps
Option1 Option2 Current Option3 Option4 Option5 Option6 Option7
50TH PERCENTILE OUTCOME: MARKET VALUE ASSETS FUNDED RATIO BY MIX
Median funded status projections
August 2021FCERA ALS
The options with the highest return projection result in the best median outcomes.
FCERA AL Study is synchronized to the 2020 Actuarial Valuation but then adjusted to include a 6.5% discount rate, 2.5% inflation assumption, and the most recent market value of assets effective 2021.
56
Option 1
Option 2
Current
Option 3
Option 7Option 4
Option 6Option 5
85%
87%
89%
91%
93%
95%
97%
99%
2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Option 1 Option 2 Current Option 3 Option 4 Option 5 Option 6 Option 7
MARKET VALUE OF ASSETS FUNDED RATIO: END OF YEAR 10
Range of funded ratio outcomes
August 2021FCERA ALS 57
FCERA AL Study is synchronized to the 2020 Actuarial Valuation but then adjusted to include a 6.5% discount rate, 2.5% inflation assumption, and the most recent market value of assets effective 2021.
50%
70%
90%
110%
130%
150%
170%
190%
Option 1 Option 2 Current Option 3 Option 4 Option 5 Option 6 Option 7
MVA
Fun
ded
Ratio
(%)
Option 1 Option 2 Current Option 3 Option 4 Option 5 Option 6 Option 7
Best Case (95%) 126.2% 137.0% 147.9% 145.0% 164.7% 159.3% 161.6% 154.5%
Upper Quartile (75%) 100.8% 105.2% 109.6% 109.0% 116.5% 115.6% 116.3% 113.2%
Median Outcome (50%) 89.6% 91.1% 92.5% 93.3% 95.5% 97.0% 97.2% 95.6%
Lower Quartile (25%) 79.6% 78.9% 78.5% 80.0% 79.1% 81.5% 81.1% 80.8%
Worst Case (5%) 67.8% 65.2% 62.9% 65.2% 61.0% 65.0% 64.1% 65.0%
EMPLOYER CONTRIBUTION: END OF YEAR 10 (% OF PAY)
Range of employer contribution outcomes
August 2021FCERA ALS 58
FCERA AL Study is synchronized to the 2020 Actuarial Valuation but then adjusted to include a 6.5% discount rate, 2.5% inflation assumption, and the most recent market value of assets effective 2021.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Option 1 Option 2 Current Option 3 Option 4 Option 5 Option 6 Option 7
Option 1 Option 2 Current Option 3 Option 4 Option 5 Option 6 Option 7
Worst Case (95%) 70.1% 73.0% 75.7% 73.1% 77.9% 73.7% 74.5% 73.9%
Upper Quartile (75%) 49.7% 50.0% 50.5% 48.5% 49.9% 47.1% 47.3% 47.8%
Median Outcome (50%) 28.1% 24.0% 21.1% 19.4% 16.7% 16.4% 16.2% 16.8%
Lower Quartile (25%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Best Case (5%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Deterministic modeling
August 2021FCERA ALS 59
CONTRIBUTIONS AND RETURN NECESSARY FOR FULL FUNDING IN 15 YEARS
Required return framework
August 2021FCERA ALS
The blue line represents the combination of contributions & returns that result in achieving a 100% funded status, assuming the same annual contribution amount each year.
Estimated figures calculated by Verus.
60
203.472
175.705
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0
50
100
150
200
250
300
350
6.00% 6.25% 6.50% 6.75% 7.00% 7.25%
Empl
oyer
Con
trib
utio
n
Mill
ions
Discount Rate & Attained Return
100% Funding EOY 15 2021 Employer Contribution 6.50% Return Target
For instance, if the discount rate and realized return is reduced to 6.25%, the 15-year annual contributions required to fully fund the plan increase from $175M/year to $203M/year
FUNDED STATUS PROJECTION: 6.5% RETURN
Baseline Projection: 6.5% Return
August 2021FCERA ALS 61
CASHFLOW PROJECTION: 6.5% RETURN
FCERA AL Study is synchronized to the 2020 Actuarial Valuation but then adjusted to include a 6.5% discount rate, 2.5% inflation assumption, and the most recent market value of assets effective 2021.
75%
80%
85%
90%
95%
100%
105%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
Billi
ons
Actuarial Liability Market Assets (Funding)
Market Value Funded Ratio
0%
10%
20%
30%
40%
50%
60%
0
50
100
150
200
250
300
350
400
2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
Cont
ribut
ion
as %
of P
ay
Mill
ions
Expected Employee Conts. ($)
Employer Cont. ($)
Employer Contribution as % of pay
FUNDED STATUS PROJECTION: -15% YR1 6.5% THEREAFTER
Drawdown Projection: -15% Year 1
August 2021FCERA ALS 62
CASHFLOW PROJECTION: -15% YR1 6.5% THEREAFTER
FCERA AL Study is synchronized to the 2020 Actuarial Valuation but then adjusted to include a 6.5% discount rate, 2.5% inflation assumption, and the most recent market value of assets effective 2021.
0%
20%
40%
60%
80%
100%
120%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
Billi
ons
Actuarial Liability Market Assets (Funding)
Market Value Funded Ratio
0%
10%
20%
30%
40%
50%
60%
0
50
100
150
200
250
300
350
400
450
2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
Cont
ribut
ion
as %
of P
ay
Mill
ions
Expected Employee Conts. ($)
Employer Cont. ($)
Employer Contribution as % of pay
FUNDED STATUS PROJECTION: 5.30% RETURN
5.3% Return Projection
August 2021FCERA ALS 63
CASHFLOW PROJECTION: 5.30% RETURN
FCERA AL Study is synchronized to the 2020 Actuarial Valuation but then adjusted to include a 6.5% discount rate, 2.5% inflation assumption, and the most recent market value of assets effective 2021.
83%
84%
85%
86%
87%
88%
89%
90%
91%
92%
93%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
Billi
ons
Actuarial Liability Market Assets (Funding)
Market Value Funded Ratio
0%
10%
20%
30%
40%
50%
60%
0
50
100
150
200
250
300
350
400
2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
Cont
ribut
ion
as %
of P
ay
Mill
ions
Expected Employee Conts. ($)
Employer Cont. ($)
Employer Contribution as % of pay
FUNDED STATUS PROJECTION: 5.80% RETURN
5.8% Return Projection
August 2021FCERA ALS 64
CASHFLOW PROJECTION: 5.80% RETURN
FCERA AL Study is synchronized to the 2020 Actuarial Valuation but then adjusted to include a 6.5% discount rate, 2.5% inflation assumption, and the most recent market value of assets effective 2021.
80%
82%
84%
86%
88%
90%
92%
94%
96%
98%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
Billi
ons
Actuarial Liability Market Assets (Funding)
Market Value Funded Ratio
0%
10%
20%
30%
40%
50%
60%
0
50
100
150
200
250
300
350
400
2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
Cont
ribut
ion
as %
of P
ay
Mill
ions
Expected Employee Conts. ($)
Employer Cont. ($)
Employer Contribution as % of pay
BASELINE PROJECTION: CASHFLOW AT A 6.5% RETURN
Baseline projection – cash flows
August 2021FCERA ALS
As the plan matures, benefit payments will exceed contributions and the plan will become more cash-flow negative.
FCERA AL Study is synchronized to the 2020 Actuarial Valuation but then adjusted to include a 6.5% discount rate, 2.5% inflation assumption, and the most recent market value of assets effective 2021.
65
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
0
100
200
300
400
500
600
700
2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040
Mill
ions
Employer Cont. ($) Expected Employee Conts. ($)
Funding Expected Bft Pymts Outflow as % of Expected Assets (rhg)
Conclusion
August 2021FCERA ALS 66
Summary observations— Capital market assumptions continue to be affected by expectations of a low-return
environment, with global equity and core fixed income expected to return just 5.2% and 1.5%, respectively, per year over the next 10 years
— Based on this, we observe the following:
Of 7 asset mixes modeled, expected returns range from 4.9% - 5.8% with expected volatility (risk) ranging from 9.7% - 13.5%
If current actuarial assumptions hold and a 6.5% return is realized, the Plan will become fully funded in roughly 10 years.
The current allocation mix is expected to generate a 5.3% return over the next 10 years. If the 5.3% return projection is realized, the Plan will achieve a peak funded status of 93% and then decline to 88%.
Mixes that increase expected return generally rely on leverage (risk parity, or explicit leverage), or larger allocations to private markets strategies (illiquidity).
August 202167FCERA ALS