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tv   Government Access Programming  SFGTV  August 11, 2018 4:00pm-5:01pm PDT

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>> will everyone please rise and join us for the pledge of allegiance. i pledge allegiance to the flag of the united states of america and to the republic for which it stands, one nation, under god, indivisible, with liberty and justice for all. >> president stansbury: roll call, please. >> clerk: president? wouldn't that be an excuse rather than an absence because she's on the -- >> we knew that she would be gone and we'd normally mark it as fine but we knew that she would be gone. >> clerk: (indiscernible).
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>> present. >> clerk: (indiscernible). >> present. >> president stansbury: thank you so much. and we'll start off, we have to call our first item, item number 3 and start off with public comment. are there any members of the public that would like to address the commission with regards to going into closed session. we'll close public comment okay, great. should we call the meeting back to order? we are coming out of closed session. is there a motion not to disclose? >> so moved. >> president stansbury: there's a motion. a second? >> second. >> president stansbury: there's a second by commissioner bridges. can we take that without objection. thank you. item passes. why don't we go on to item number 4. are there -- i do have one speaker card for mr. anderson. i thought this would be a chance for anyone to address the
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commission, now is the time to do so. mr. anderson, would you like to come up first? >> hello, hi, how is everybody doing today? my name is devon anderson and i'm an employee for sfmca. i sent -- originally sent an email to mr. stansbury on july 13th as well as some of the board members as well. it's in reference to the contributions for employees that are military service members. i'm currently one year in the military and i have been employed with the city working for sfmta since august 17, 2015. since that time period i have taken 132 days of leave. and with the military rank and structure i'm an e8 or first
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sergeant and i am the top man in my unit, which requires me to be gone for an extended period of time. now i'm also -- i was also hurt while i was training, so right now i'm convalescing for my injury that i incurred in the line of duty. anyhow, when a service member is re-employed at their -- into their previous position, the pension contributions are to be made as if the service member had been continuously employed. i have not gotten those contributions added to my pension fund as of yet. also since i'm one of the miscellaneous retirement plans, the latest one, and so my understanding is that whenever i
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retire that out of the past 36 months the highest three or the highest month leads. so this law, by the way, is united... united service members' employment and re-employment act. so basically the period of time that i was gone for my annual compensation is supposed to be calculated as if i had been here. so the example is if i made $150,000 a year and i -- time worked when i was here and i made $75,000, with the time that i was on military leaving the $75,000 that is supposed to be calculated to that annual compensation and then the board is supposed to make contributions on my behalf. >> president stansbury: mr. anderson, you reached your time but i want to make sure
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that you get an answer to your question. it sounds like you have unanswered questions. >> yes. >> president stansbury: we'll get your contact information and we'll work to get you some answers. and they'll touch base with you before you leave here today. does that sound like a decent solution or at least a starting point? >> yes, yes. i haven't received an answer from anybody that i c.c.ed. >> president stansbury: i think that you and i briefly exchanged over email -- why don't you -- she's out in the hallway and she'll get your contact information and they'll work to get you an answer. >> okay, thank you for your time. >> president stansbury: okay, thank you, mr. anderson. okay, are there any other members of the public that would like to address the commission under general public comment? seeing none, we will close general public comment. next item, please. >> clerk: the minutes of the july 10th, 2018, meeting.
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>> president stansbury: anyone from the public that would like to address the commission regarding the minutes? seeing none, we'll close general public comment. is there a motion? >> a motion to stop. i'm sorry -- >> president stansbury: there's a motion and a second to adopt the minutes from the july 10 -- >> the minutes, thank you. >> president stansbury: any discussion? we can take that without objection item passes. >> clerk: item 6, the calendar. >> the adoption of item 6 for the consent calendar as written. minus under section 6b, the first sentence. >> at the request of the commissioner bridges, she's asked that we remove both travel requests from the consent calendar. so we'll adjust -- >> (indiscernible). >> yes, both -- yes, both travel requests, she's requested that they be withdrawn. >> president stansbury: we just have the matter of record.
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technically do we have to have an amendment to what was published? >> yes. >> president stansbury: so there's a motion and does that correctly amend what we need amended? >> as long as the commissioner casciato agrees that he's moving approval of consent calendar minus the two travel requests. >> yes. >> president stansbury: there's a motion and there's a second. why don't we call for general public comment. any members of the public that would like to address the board regarding this? none, we'll close public comment. without objection? seeing none, item passes. thank you very much, next item. >> clerk: item number 7, july introduction to the standards of number 51 and 2018 reveal that this item was continued from the july 10, 2018, retirement board meeting. >> good afternoon, commissioners, bill hamark is here to discuss the new actual
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standard of practice that has impacted our actuary report and to give the reveal. >> thank you. so before i get into the new actuarial standard of practice and what -- just high level what it might mean to the system, i wanted to touch just a few things on where we ended up with last year's valuation just at a real high level, to set the context before we get into that discussion of risk and then the economic assumptions. so in the last valuation things were pretty stable, but the contribution rates before cost-sharing went down slightly for the employer and the cost-sharing level remained the same. the funded status improved slightly.
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and the system is in pretty good shape going forward. and we looked at projections. every year we look at the different scenarios and this chart shows the range of the scenarios we looked at as well as the shaded area that represents the 5th to the 95% percentile. that range is fairly wide. but all in all the general trend we had here was a slight uptick in contributions expected that then a long downward trend in contribution rates if our assumptions are met. i did want to point out that we'll be coming back on this, but that slight uptick is being driven by the way that we're amortizing the supplemental colas when they come in. and they're not being matched as well as we had anticipated with
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the asset gains and so we ended up with a slight uptick followed by a decline. so we're planning to come back later this fall with possibly ideas to that methodology to try to smooth that out. so that's the baseline that we're starting from when we look at the economic assumptions this year. that wide range is also something that is typical in public pension plans and other pension plans. and it was a driver behind the actuarial standards board to decide that we needed a standard on the assessment and disclosure of risk. it's an entirely new topic area for the standards board to address, so there are going to be some requirements that will go into your val reports.
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it's not technically effective until november 1, 2018. we already do a lot of the required information and put it in your report but i think that you'll see it consolidated and organized a little differently and some additional commentary around it but it won't be a huge change for us because we've been trying to provide you much of that information all along. just very quickly, the standard requires us to identify the risks to the plan and provide some level of assessment of those risks. it can be a very high level assessment. and then we are also to give a more detailed assessment if we think that it would be significantly beneficial. so there's a lot of discussion about what "significantly beneficial" means but we'll come
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back with that. and there's a lot of focus on maturity measures that we introduced to the board a couple years ago and the standard now will require us to disclose the maturity measures that we think are most relevant to the plan in understanding its risks. and not surprisingly the biggest risk for most public plans is investments. the other end of that is also the sponsors' growth rate because where sponsors are growing they can withstand a lot more investment risk and sponsors that are not growing are the ones that are really suffering with some of those risks. and we just wanted to hit a couple of the maturity measures to give you an idea. this is from your valuation report. one of the measures that we call the support ratio is the number
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of inactive members for each active member. and so this bar shows the growth in your active membership compared to your inactive groups and you saw this black line that started to grow after the great recession. and for you it's leveled off and actually started going down. that's not what we're seeing in most plans across the country and so it's a really good thing for this plan and it says that you have a much stronger support base to support your retirees than we're typically seeing. two of the other key ratios that we look at are the asset leverage ratio and the liability ratio. and it looked at your assets compared to your payroll. it's a kind of a proxy for the revenue. and the way to interpret it is
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if you had -- if you have a ratio of 7, which is about where yours is, and if we have a 10% investment loss that we're assuming 7.5% and if we had a minus 2.5% return and so that difference is 10%. you'd multiply that by 7 and that's equivalent of losing 70% of our payroll in assets. we make up for those losses by increasing the contribution rate as a percent of payroll. so whatever we amortize it over is that 70% of payroll. for plans where it's 14%, that same investment loss would be 140%. so it is much more difficult for those plans to deal with that loss than it would be for a plan at 7%. if you look back historically a lot of our plans were at 2% or
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3%. so we have definitely ramped up our sensitivity to investment risks. and the liability ratio shows a similar thing but related to most commonly related to assumption changes. when we change an assumption, if you have a high reliability ratio it will have a big impact on your cost and if you have a low ratio we'll have much less of an impact. this is compared to the california plans and we're around the median on the asset leverage ratio and below the median on the liability leverage ratio. if you look at us compared to plans nationally, we're higher than the median.
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there's a lot of factors that go into why that is but some is the growth of the benefit and the length of the plans and how many retirees you have. >> a key thing to understand these charts is the lower the better? >> the lower the better. so in general we try to code -- hopefully you can see the differences between red and green. i apologize if you're red/green colour-blind but we try to code green meaning better and red as worse. >> okay, because the base case number on page 3 and then you look at that line, and the fact that our payroll has grown, that affects the contribution rate, correct? if the payroll drops, the contribution is going to go up
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-- so it's one of the factors. it has nothing to do with the investments and if it reverses the number of people hired, yes, the liability would drop a little bit but the contribution rates are going to still go up? >> yes. that's why i identified this sponsored growth rate on page 5. because that is a critical factor and it's one that is working in your favor right now. >> for us, yeah, many variables. thank you. >> any other questions on that before i switch topics completely and go into the economic assumptions? all right. and so we've looked at the economic assumptions every year. and we only look at the demographic assumptions like retirement rates, mortality, every five years. and so that -- we won't look at
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that again until 2020. these assumptions will be used in the 2018 valuation which determines the contributions for the fiscal year-end 2020. and so we're just looking at the economic assumptions and those are price inflation, wage inflation, and the discount rate. we'll go into them in more details. so i'm going to move on here. this provides the historical context, and it's very common for most public plans. but just to understand where we've come from, i'm going to start on the top chart in the gold line represents the yield on the 10-year treasury. and we've got it plotted every five years starting in 1987 through 2017. and you can see that it has dropped significantly from above
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8% in 1987, down to around 2% in 2012 which kind of moved up. i think that today it's very close to 3%. but, still, a significant drop over time. that level of interest rates has had an impact on how we've managed public plans. and so the bars on the top represent the assumptions that was used where the dark blue is the price inflation assumption, and then the real wage growth is the medium blue and the light blue is the difference that get you to our expected return. so back in 1987 we were an 8% expected return which was about the same as the yield on the 10-year treasury. over time we went up to 8.25% and then we have come down, down to 7.5%.
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but that stretch between our expected return and the yield on the 10-year treasury is a real cursory look at the level of investment risk that we've had to take. you can think of it as an implied risk. the bottom chart does a real simple version of an asset allocation, looking at public fixed income, public equities and everything else. and so back in 1987 when we were assuming 8%, we were doing that assuming that we'd have a portfolio that was 75% fixed income. and 25% equity. and then as we progressed, the fixed income has declined significantly to today that we're at about 6% of public fixed income. and the equity piece, the public
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equity piece, grew and then it's recently shrunk to 31% and we've brought in a lot of private assets and other -- other asset classes to try and fill it. but that's how we are making up that difference between the yield on the 10-year treasury and the expected return. and why we didn't drop the expected return all the way to 2.5% or 3%. this slide gives more recent history on the changes that we have made in the last 10 years. i won't go true those. but they're for your reference. and then the other thing that i think is helpful to just keep in the back of your mind is that
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we've had over the past 10 years the unfunded liability has increased by about $5 billion. but that has three major sourc sources. and the largest source is our assumption changes. because when we reduced the discount rate or assume people live longer it raises our measure of the liability. that's accounted for about $2.3 billion which is equivalent to 72% of the annual payroll in 2017. just to give you a scale slide. and investment losses during that period, that still covers the big investment loss. and investment losses during that period were about $1.9 billion compared to our assumptions. and then the supplemental colas are added another .9 billion. so those were the three big sources of changes to the system
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over the last 10 years. >> only $1.9 billion for investment losses? >> yes. we've had gains as well. >> okay, okay. so gains and losses? >> yeah. it's the net effect over the period. >> and the assumption changes are the mortality and that's the rate of return? >> the discount rate and the retirement rates were another significant piece. >> that's the mortality study that we did with people who are essentially living longer? >> yes. and retiring earlier. >> okay. >> that was what, last year? >> that was a couple years ago. 2015. time flies. >> okay. >> every now and then if we're
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getting these articles and stuff regarding chicago and that there is a terrible positions and that the pensions are out in really bad positions and they circulate among our memberships and our retirees, what could we say to our memberships, about the health of the plan in a simple version that -- and how concerned should we be about what's happening in other places and how that will effect us here if those pension systems collapse? >> so, yeah, illinois has always been brought up, whether it's chicago or any of the other funds. and kentucky is brought up a l
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lot. one of the most significant things in those places is that the employers have not made the contributions recommended by the actuary. i was just at a conference in san diego and the director of the illinois teachers system got up to note that this was the 80th consecutive year that they had not received the contribution recommended by the actuary. and so the plans out here in california, all of them except for calsters, i believe, are required to contribute the amount recommended by the actuary. and that has been a very significant factor in maintaining the health of these plans because it forces the contributions to come, even if,
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you know, not necessarily the most convenient time to contribute more -- more money to the plan. >> has calsters contributed? >> they've contributed but -- >> yeah, for years -- well, their contributions were just a fixed percent of pay in state statute. and so it did not -- it did not adjust with their experience. when they didn't get the investment returns they were anticipating, the contributions did not increase. and so they were on a very perilous path until the reforms, what, two years ago? and so they've put in a ramp-up in state contributions and school district contributions to try and repair that. so they're on a much better schedule now but what got them into that situation was, you know, having that fixed
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contribution rate that didn't adjust with their experience and then they had a bad experience. >> president stansbury: how many calsters or teachers reciprocity over... >> we actually had our teachers had to make an election back in 1953 or something -- 1973 -- whether they wanted to continue with us or whether they wanted all of their service credit transferred to calster. last time we looked we had probably less than five or six teachers that were still employed and active members and had not retired. i haven't seen the latest file for the actuaries, but i wouldn't be surprised if they're all gone because they would have had to have worked another 40 years. so, i mean, how much teachers are in the school districts?
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i don't know if they're members of calster. >> president stansbury: i'm trying to figure how many of our members? >> very, very few because they had to make the choice and most of them i believe elected to go to cals telephonters at the tim. we had a few -- most of them long careers, at the time they had to make the election they wanted to stay with the stfers. >> the other piece they would add to that to to show what san francisco has done significantly is back here on page 2. in the contribution graph, we have that light blue line that shows normal interest on the u.a.l. and you have to contribute that much to pay for the benefits that are being earned and the interest on the unfunded so it's not expected to grow. there were a lot of plans that got into trouble because they were persistently contributing less than that, year after year
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after year. you can go below it on a temporary basis to try and get time to adjust your contributions but if you're persistently below that, it's likely that unfunded is going to grow and become a larger and larger burden. and to a certain extent that is what calpers ran into and has gotten them into their situation. they had a 30-year rolling ammortization period they were using on their unfunded which gets them persistently below that. so they recognize it and they're not doing that anymore, so they're climbing out, but that's part of what got them into the situation they were in. >> president stansbury: so our calpers members, workforce, what do we see for them in terms of anxiety levels?
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>> the only calpers members that are city employees at this point in time are deputy sheriffs and institutional police officers hired before 2012, or 2010 -- 2012. because the city and the pension reform basically brought all new hires from the -- in the sheriff's department as well as in the institutional police officers and to miscellaneous safety plan that we administer. i -- we don't deal with those folks because when it comes time to retire they have to go to calpers. i will say that calpers has discovered that we're not -- the city is not adding any new deputy sheriffs into that plan so the city is dealing with the concept of now that is a closed pool plan.
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and the calpers is requiring a much higher contribution rate related to those folks because the active payroll, sort as bill was indicating, there's no growth in the active payroll, other than the pay increases. and there's no new employees who have a 20-year career ahead of them to be making contributions to help fund the benefits. and so the city is going through the process of trying to expedite the payments to calpers. so i think that the anxiety is on the side of the city because it's now an escalating contribution rate on behalf of those folks who still find themselves covered by calpers. but they believe that long-term, everyone will actually be covered by spurs and they felt that they were more comfortable with that. they truly believe, and there's reason to believe, that we manage the plan as well as invest the money better and it's
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cheaper for the city. and so we have a limited group of folks. and i still think that there's probably thousands in that group that are calpers members and i haven't seen that number either. >> president stansbury: do you think -- do you thank w think te going to then move to a situation that we did with the airport and -- not there? >> well, actually, i always remind karen because she was at the city's stearn office when we -- attorney's office when we drafted these plans that don't have any members in it because they can negotiate, for example, -- the sheriffs could negotiate a transfer into the sfers plan for i think only prospective service. but that has to be done through m.o.u. and through negotiations and the city has never really approached them. so the city thought of everything and basically said that we will provide a mechanism to allow through negotiation for
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the sheriffs that find themselves at calpers to move into the sfers. but i don't recall the details but i think that it's for prospective service only, because, certainly, sfers can accept the liability and guarantee that there will be a transfer from calpers, which we did with the airport police. we ensured it covered the liability for those folks, airport police, who were transferring back and forth. but that could still come depending on the situation. >> president stansbury: i kind of wanted to get it out on the table so it's in everyone's mind and in the discussion, because i think, you know, calfers and the anxiety levels there go up, you know, we do have a workforce
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that is concerned about what's going to go on and, you know, so i think that it's important, just at least to be aware of it at this point in time. >> um-hmm. >> another question? >> before i ask my question, the circumstances with the airport police transfers are totally different than the situation now? >> right. >> that's a big issue. i would be willing to bet any money that the city saves with the newer sheriff examples in the lower benefit structure, any money they save there will only help to contribute to the increases they'll wind up paying to calfers. i wanted to ask a question about page 14 where you talked about the supplemental coal a colas af the biggest components. there's the other piece of the supplemental cola that is not resolved yet. do you have a ballpark figure on what that might be? >> i know what you're talking
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about. >> i don't want any sticker shock. we have no way yet to know how the court case would go but i'd like to anticipating some. >> we had worked up some estimates like two years ago, but i don't remember the number. >> it might be at the bond disclosures but i don't have that at the tip of my -- >> i can look that up and get it. >> and the smaller population, the lower dollar base, and it's still -- >> you're correct. >> whether they moved the needle, -- >> i think when the lawsuit was filed against the retirement board that the number that the comptroller used was $100 million. but that was before we had to pay at least 2, if not 3 additional supplemental colas. and then the retroactive cost of paying those and sort of accumulating those and compounding those. so, i mean, i believe that the city believed at the time that they filed the lawsuit that it
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was at least in the realm of $100 million in additional liability that they'd be assume figure they paid that group. >> and that's true. our estimates were done before the last couple supplemental colas. >> right. and didn't include compounding interest. >> right, right. >> i'm sorry, can i ask one last question about 14. so we're looking at the line item, and we're talking investment? >> yes. >> and losses? >> investment gain and losses on the actuarial gain of assets. so it's on the smooth value. so it can take five years for it all to flow through. >> okay, thank you. that makes more sense. >> i'm sorry, i should have clarified that. >> no, i know better. thank you.
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>> okay. so we'll start with price inflation because it's kind of the foundation for the other assumptions. you can think of wage inflation as being price inflation plus a real wage growth component and you can think of the expected return as a price inflation plus a real return compound. our current assumptions, 3%, it does not have a direct impact on our valuation. the only place that we use it directly is to set our cola assumption, not supplemental cola, but the basic cola. and the basic cola is capped at 2%. which is below 3%. so it doesn't really have a direct impact, it has an impact more as it impacts the other assumptions. and you will see this theme as we go through all of the
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saw.ions and we tend to look at historical data and -- assumptions and we tend to look at historical data but we look at any current market data that we have and any forward looking forecasts, we can look at. and a variety of sources where possible. for inflation we'll look at break-even inflation and i'll go through that. there's a survey of the economic forecasters and we look at investment consultants and the federal reserve policy has an impact. looking at historical, there was a period that many of you are aware of in the 1970s and 1980s with very high inflation but pretty much since that time inflation has been much lower levels and persistently lower
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levels. and this has 180 large public plans across the country and the bars represent the distribution between the fifth percentile assumption in that database. and the indictments represent what our assumptions have been historically. and you can see that there's been an obvious movement downward in those price inflation assumptions. and right now, actually, as of 2016, 3% was the median assumption nationally. i think that drops to 2.75% with the latest data. if we look at california
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systems, they've followed a similar pattern but are slightly lower. we have four plans that are at 2.5% out of about 36 plans that we looked at in the state of california. and there's only one plan at 3.25% but there are a lot of plans at 3%. >> 3.225%? >> yeah. so 23 of the 39 systems in our survey were at 3%. i think that a lot of them are considering moving or have moved to 2.75%. so if we look at market expectations, one measure is the break-even inflation rate, which is simply the difference between a conventional treasury bond
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yield and a treasury inflation protected security yield. the idea being that if you bought one and you sold the other that you're left with essentially a bet on inflation. and so this is the break-even amount of inflation over -- the amount of inflation over the time period that would make that break-even. and it's interesting to me actually that the difference between five years and 20 years is virtually nothing in terms of the break-even amount. it's bounced around a little bit but then very low levels in the last two years. we look at a complete range of 1.75% for five-year inflation last year to 2.13% for 20-year inflation this year. so that number has been very l low. here we've got the chart that
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shows the distribution of our different sources. so the federal reserve published the pro-forecasters inflation for the next 10 years. there's at least one who is up at 3.50% but over three-quart ergs of them are below 2 -- quarter of them are below 2.50%. >> none of this matters if it's above 2%, correct? >> correct. if we adopt an assumption of 2% we might have a discussion. but as long as we're above 2%, it's not going to have a direct impact. but generally you can see across these different groups most of the assumptions are below 3%, 2.5% to 2.25%, and the
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difference being in the public plan database somebody out there is assuming 4.5%. i'm not sure how they do that, but someone is doing that. >> we -- just for timing purposes, can we move forward to wage inflation? >> yep. >> we're still far away from any sort of -- >> let me just hit the last bullet on this slide is that we suggest that you consider reducing this assumption to 2.75% from 3%. so wage inflation, i was going to go through very quickly. there's some data here but let me get to the punch line of the data. which is -- that price inflation data was all national price inflation. if you look at bay area, that bay area inflation has been about 50 basis points higher
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than the national inflation. now if you look at national data on local government wages, they've been growing by about 50 basis points above national inflation. but here it's only been 25 basis points above bay area inflation. so there's some compression there between those two -- two pieces. but we're suggesting, particularly if we just drop the price inflation down to 2.75% and we keep our job inflation at 3.5%, to increase that spread to 75 basis points, recognizing that we've had higher inflation here in the bay area and some impact on -- that's offset somewhat by not as much real wage growth locally.
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now that may -- that may -- that dynamic may change a little bit over time but we think that spread is justified here. so that's all i had on wage inflation. any questions on that before we get into the main... okay. so before we get into the expected return i wanted to return to our graphic for a moment. to point out that there's either contributions or investment earnings. so when we're setting the expected investment return what we're really doing is setting our expectations and budget for how we split things, split the costs, between the contribution and the investment returns.
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and if we're wrong in any direction we'll have to adjust contributions in the future either up or down. and that's the impact of our analysis and the expected return is the most powerful single assumption here and going to emphasize that the contributions over time will depend on your actual investment returns, and not what we decide here. what we decide here will affect the timing and how level those are. we're currently assuming 7.5% and like in the other analysis we're going to look a little bit at the history and a little bit of trends to really try to figure out what our expectations are going to be.
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and this total shows the actual returns for the fund over different periods of time and we put in the last column on the table is the expected return at the beginning of that period. and so the expected return in 1989 was 8% and then for that 10-year period we got an actual return of 11.9%. so that's how you can read the chart. sometimes we did better than the expected return and sometimes we didn't. and in the last five years we had average returns of 9.4%, which is a lot better than the expected return. >> can i ask a question, for the fiscal year ending 2019, what is going to be our liability number? >> for -- so we do -- we'll do a
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valuation as of june 30, 2018. or the fiscal year-end 2020. last year's valuation was for fiscal year-end 2019 for contributions. so you're looking for the contributions? >> yes, what was our last valuation for the value liabilities? i'm just looking for approximate market. >> we were a little over $25 billion in liability. and assets were, what, $22 billion? >> so are we on a liability basis in a market-value basis? are we close to 100%? >> no. >> no, we're at about 85% -- yeah, 86%. >> what is our current market value, over $25 billion, right? >> now we have $25 billion and last year we had 22 and the
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liabilities were 25. so that ratio came out to 86. >> so that's what i mean, for this fiscal year do you expect the liabilities to go up? >> yes, the liabilities will go up. we won't know how much until we do the valuation, but your assets went up by more than we expected. >> what were we projected -- i'm sorry, maybe i didn't ask a good question. what were we projecting our liability number to be for the fiscal year ending 2019? >> i don't have that right in front of me. >> that's fine. >> but it would be something on the order of about a 7% increase i think. >> okay, that's fine. >> the contributions are done on the actuarial numbers and not the market numbers. >> no, i understand that. >> but -- >> it is an important number though. >> in a position where we have more market value assets being invested than the actuarial
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value is assumed, so there is some leeway. we went under that for about a year or two but now we're back where our market value is higher than our actuarial value. so they assume 7.5% growth on the actuarial value, we're investing more than actuarial value so there's some leeway there. >> i think that they're still very close. >> very close. >> the trend nationally has been to reduce discount rates and as i mentioned, i just came back from this conference and they announced in 2017 there were more plans that reduced their discount rate than they'd ever had in any single year before that. it's something close to 30% of the plan. they reduced their discount rate. the median is still right around
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7.5% but there are fewer and fewer that are in the 7.5% to 8% range and there are more and more below 7% in their assumptions. in california we're seeing -- california has been ahead of that national trend in reducing expected returns. we're -- the lowest return in california now, even in 2017, was 6.75%. i think that there's one plan that went to 6.5% for 2018. maybe others will. there were two plans at 7.5%, including this one. the other one has already adopted a lower rate for 2018. so if we remain at 7.5%, we will
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-- (indiscernible). >> leading in california? >> we'll still be around the median nationally, so it depends on the universe you compare to, right? >> if i asked you to put up a comparison using a spread, the spread number, rather than those numbers, can you do that? >> i can -- not in the moment. we have it in our database. >> because when you start to say averages, some came down but other numbers came down too. >> yeah, the spread requires some additional interpretation, right? because the spread over your wage inflation really affects your active liability and it doesn't affect your retiree liability. and your retiree liability is expected by your spread over the cola which then gets complicated
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because you need to look at what those plans have as colas and what their assumption is for those colas. but we can show you what they say that their price inflation assumption is and what the spread is over that. >> we're getting there, just saying. sorry. so we start in terms of forward looking we start by going to your investments and ask them for their assumptions based on your target allocation. they produce five to seven-year assumptions and 30-year assumptions. so the important thing is down at the bottom that they're assuming over the next five to seven years that your portfolio would return 6.9% and over 30 years it would return 8%.
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and so we're going to look at some comparisons on that. it's in a minute here. so a lot of the investment consultants you will see will provide short and long horizon assumptions and they use six years that you may see up to like 10 years on that. and those start with the current market conditions and they each have their own methodology but they build out from current market conditions and what they can read in the market in terms of forward rates and other things to develop their assumptions. and then the long-term assumptions, i have seen them at 20 years and at 30 years. and they usually start with their shorter projections and then they -- the two basic classes of methods that i have seen are kind of averaging in historical returns for different asset classes with that to develop a long-term.
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or what i could nepc does is they have an opinion about what the terminal state of the market would be, and the eclibrium state or maybe they call it a normal state, i can't remember exactly how they determine it, but they then start with their six-year assumptions and gradually move to that e qrve ulibrium state. and to understand the different mechanisms with the short versus long and how you might get a spread of over 100 basis points in that assumption. i wanted to show the benefit lines in your valuation going out the next 65, 70 years.
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but in the valuation we're essentially taking the present value of those and the present value about half of the present value is covered in the first 13 years of payments. and so when we try to figure out how to weight short-term assumptions versus long-term assumptions i think that the past practice has been just to focus on the long term, but what's becoming more common is a discussion that, well, we should really weight the short term, at least recognizing that a big portion of our liability is being paid out in a shorter time period. and that will vary from plan to plan, a plan with a lot of retirees, compared to actives, that will even be shorter. >> will that have an effect on us because our distribution is
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different than other plans on average? >> well, yes. so your 50th percentile is less, and other plans it would be 8% or 10%. so you're longer than probably the average plan in looking out and at how far out you should look at your assumption. >> i can't conceptualize in my mind why that is, why do we have a different profile? >> because you have more active compared to retirees than they do. >> more contributions. >> so the greater proportion of your benefit payments are further out in the future. so just to give you a look at other sets of capital market
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assumptions we went out and we looked at well-known consultants who posted their assumptions on the internet so you could get them and had capital market assumptions that matched reasonably closely to your asset classes. but one of the issues is always getting the right assumption to match with the asset class. they weren't always perfect. the most difficult class for us to match up was private debt and when there was nothing close we used the nepc assumption. but -- so the ones that we're showing here are black rocks, j. perform morgan, northern trust and averas. and they define them over different time periods and i put those there but i wanted to show you here you can see the green diamonds are the other
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consultants and the blue squares are nepcs. and so nepcs' 30-year assumption is the highest and the five to seven year fits very closely with some of the other assumptions. and just to give you a sense of what is -- what might be driving that, we looked at the assumptions by asset class and set them up here. so on the far left it reordered the class assets left to right, based on the weight in your portfolio. and so there's equity and return and you can see where the individual saw saw. are assumpt. >> do you get a feel for how well -- i think that it was money managers and not
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consultants. >> well, there's a mix. >> what is the record for forecasting? >> well, that's very difficult to assess for any of them. >> (indiscernible). >> well, all of the firms are ones that we have seen have a fairly good reputation. we didn't just pick anybody who had anything out there. they have an established protocol. most of them put out a lengthy white paper and how they developed their assumptions so you know that they have a robust process to it. and so it's not just trying to grab any set of assumptions that is out there. but it's also not comprehensive list of consultants. the intent is to give you a sense of the landscape out there for the different assumptions. there's obviously a lot of unknowns here