City of San Jose, CA City Council, 30 Mar 2023

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From YouTube: MAR 30, 2023 | Joint Study Session of City Council & and Federated/Police-Fire Retirement Boards

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City of San José, California
Joint Study Session of City Council & and Federated/Police-Fire Retirement Boards , March 30, 2023

Pre-meeting citizen input on Agenda via eComment at https://sanjose.granicusideas.com/meetings.
This public meeting will be held at San José City Hall and also accessible via Zoom Webinar. For information on public participation via Zoom, please refer to the linked meeting agenda below.

Agenda: https://sanjose.legistar.com/View.ashx?M=A&ID=1079691&GUID=47CC1885-9D05-4500-B70B-78D46454951D

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Look we're very spaced out hi.

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Everybody good.

C

Afternoon, welcome all right, we're gonna call it again call to order this joint study session of the city council, Federated, City, Employees, Retirement Board in the police and fire department, Retirement Board the afternoon of March 30th Tony. Would you please call the roll Jimenez.

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President Cohen Ortiz present Davis here go in yeah Candelas here, bully.

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Batra Pleasant to me, ehan here.

C

Thank you. Thank you all right. Well, thank you all for being here. We really appreciate everybody. Taking the time for the study session. I know it's going to be very informative. You all are doing one of the most important jobs which is making sure that we are meeting our obligations to our retirees and and taking care of those who have served the city and its residents. So really looking forward to the discussion and and learning together.

C

I know we are kicking off with item one on our agenda, which is an introduction to San Jose pension and opeb funding and I apologize I'm not going around turning it over too, but who's giving the presentation. The first presentation.

G

um Good afternoon, good.

C

Afternoon, we're happy taking you here.

G

um First presentation is by uh Bill Hallmark, who is our actuary from Chiron actoria firm? He intended to be here this afternoon, but he's playing got delayed, so he's now reporting or presenting remotely a bill. Are you there with us? Can you hear me.

G

Not only can we hear you, we can actually see you.

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H

Going to share my screen here, hopefully you can uh now see my presentation yeah.

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We got it Bill good job.

H

All right well, uh thank you for the flexibility to present via Zoom I I was really looking forward to actually getting to see everyone in person, but uh I guess so. We've now learned to present through zoom and communicate through Zoom. So that's what I'll have to do today.

H

With the agenda materials, you got a PDF copy of this presentation. I just wanted to point out that, on the first page of that PDF copy There's, an actual link that goes to a Chiron website where you can see the interactive version that I'm going to be presenting, uh so you can either follow along or if you're, really into pension funding. You can look it up later and play around with some of the numbers in here.

H

uh I would also uh encourage you to uh stop me and ask any questions if there's something on a particular slide that you don't understand, I I know that uh most of you do not spend a lot of time working with pensions and so I hope. The presentation is clear, but let me know if there's anything not clear. Of course we can take questions at the end as well.

G

Guys for stopping you and I apologize to the mayor and the council, but um this is also an open public meeting for the board and they need to take raw call as well. I forgot to mention.

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G

So, if, if, if you don't mind, if we can do that for a second thank you, Miss America I apologize, uh Drew and Spencer, if you can start with police on fire, first take the roll call and then Federate it. Thank you great Franco. Here.

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Dave here David.

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Wilson here and.

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uh Yeah Juan you're here here, uh dick.

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You're, here here and.

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I'm Drew Lanza, Andrew Gardner is on duty today and our trustees Ash Farm Menon um and Howard Lee, our energy Calpers conference. Thank you, uh Roberto thank.

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You uh Spencer, if you could do the same for Federated. Thank you.

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Certainly uh Vice chair Jennings must be Chandra here. Christy Kelleher.

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Trustee Linder here.

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Thank you both uh and and thank you to the council and the mayor and uh and the city clerk and, if I continue over to uh Bill. Thank you. Bill.

H

Thank you um so as I get into the presentation, uh I hope that there are a couple themes that kind of come through uh San Jose's pension and notepad plans have about two-thirds of the assets that they should have at this point.

H

That shortfall is largely a legacy problem uh attributable to funding uh the benefits for members who mostly no longer work for the city.

H

The boards, the retirement boards have put together uh some strong policies to restore funding through both contributions and investment returns, but that will likely take some time and so we'll we'll show you some of that, and the biggest variable in those plans is what future investment returns turn out to be.

H

So, to start off uh all four plans: two pension and two retiring medical plans. Combined. You have about 7.7 billion dollars in assets; they should have 11.7 billion, so there are about four billion dollars short in aggregate uh now, there's a significant variation between the plans. Here you can see uh the pension plans are clearly the largest uh the oped or retiree medical plans are relatively small.

H

In comparison, the Federated pension has a two billion dollar unfunded liability, the police and fire pension, 1.2 billion uh police and fire is 78 funded in the Federated pensions, 57 funded.

H

Now, if we compare those to other California plans uh as of 2022 each one of these dots represents another California plan, uh and you can see that the Federated plan is the lowest funded plan in California and police and fire uh is in the the lower half, but up in the the more of the mainstream, uh with its 78 funded.

H

Now they weren't always that way. So if we go back in time uh to 2007 the Federated plan at that time was 90 funded in the police and fire plan was 113 funded. Now all the plans were better funded than they are today. uh There's a Fresno plan that was a 170 percent funded at the time.

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If we roll forward, you can see the the changes and in the 2008-9 crisis, all of the plans funded status fell and then they've been slowly working their way back up, but at the same time we've been reducing our discount rates, our expected return on assets, which makes them more poorly funded and strengthening other assumptions.

H

uh So the combination of those uh things changing the investment assumption uh and trying to recover the investment returns leads us to where we are today.

H

Now I I said we have a strong plan to restore funded status. These are the projected City contributions for each of the plans uh going forward to get us back to uh full funding and at the bottom here is the Federated Pension Plan. It's got the uh the longest path, it's it's like 57 funded. Now we have a two billion dollar shortfall to close, and so the the current contributions are just above 200 million we're looking at those increasing gradually uh over time.

H

Until we get uh very well funded uh in the late 2030s and then 2040, uh we look for a significant drop in contributions, police and fire. It happens more quickly. uh It's better funded. Now it's on a very rapid Pace to pay off uh an unfunded liability, and then the opeb plans are small pieces on top. If you just look at the the pension you can see, we hit the hit the peak in at the end of this decade and then start a decline. That decline is being led by a steep drop.

H

That's projected in contributions for the police and fire plan. Federated pension plan uh we're expecting contributions to continue at a fairly strong level uh until 2040.

H

Now, if you're managing that's a quick overview of where we are and what we're expecting I'm gonna go a couple layers deep and then come back uh and in managing the pension plans. There are really three types of policies that uh control the plan. The benefit policy is what the city and the unions negotiate what the benefits are going to be. uh There are certain uh requirements for voter approval for changes, but that's between the the city and the unions and the retirement boards are not really directly involved in that process.

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Retirement boards have a control the Investments and that really affects in the short term, the expected costs. In the long term. It affects the actual costs which are really dependent on those investment returns and it look.

H

It affects the potential range of costs for the plan and then there's the contribution policy, which uh is really my role with the boards to determine what the timing and amount of contributions will be given are investment returns, and so we develop uh that contribution policy in pattern and that's what uh drives the contributions we request from the city, foreign.

H

The basic structure of a pension system has not changed. uh This graphic is from the Harvard Business Review in 1965, and we still use it today because yeah it still works. uh The key thing to understand is that our fundamental equation is over time over the life of the pension plan. All the contributions, plus all the investment earnings, have to add up to the benefits paid and the expenses paid.

H

So there's really only two sources of revenue to pay for the benefits that have been promised and earned, and so whatever we don't get from investment earnings. We have to make up for in contributions, and so, if we get great investment returns, it will ultimately reduce the contributions. If we get poorer investment returns compared to what we expected, we will have to increase contributions, there's really just those two sources and and that's the the dynamic and balance and and issues that we struggle with.

H

So we had been showing just the contributions, but uh really the expected investment returns are quite significant, so the um prior chart. We just showed what the contributions we expect from the city. We also get contributions from the members uh to build the plan, but the expected investment returns are more significant than those contributions and and if we don't get what we expect, those get pushed back into the contributions over some period of time. We don't take an immediate loss and have to pay it all at once, but it builds into the contributions.

H

The other thing I would note here is: if you you just look at the investment Returns, the police and fire plan on the left and the Federated plan on the right. You can see that the police and fire plan is currently much more dependent on those expected investment returns, it's got more assets, and so we expect more investment returns. But that means its contributions are going to be more sensitive to differences between what we expect the investment return to be and what it actually is.

H

Now, when we set contributions um or members in the city, the first piece is something we refer to as the normal cost, and that is the cost of the current year of service for active members. Some benefits attributable to that current year of service, and so there's a couple things to note here about that cost. We normally express it as a percentage of pay and the the tier one costs. This is placing fire here and Federated over here. The tier one costs uh are larger than the new tier 2 costs like by a fair amount.

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uh The tier one benefits were more generous with uh earlier retirement, higher multipliers, higher colas, uh and so those benefits cost more and the um the split between the city and the member also changed between tier one and tier two in tier one. The members paid 3 11 of the cost, and the city pays eight elevenths in the past. In tier two, the costs are split, 50, 50.

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So uh what we are seeing is over time that normal cost is going down, as we have more tier one members retire and the city hires more tier two members to replace them, so those costs are gradually going down over time.

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If we look at them as a dollar amount, you can see for Federated, the tier two costs are actually uh in combination they're higher than tier one. The city's tier one contribution is still higher um police and fire is less far along in the transition between tier one and tier two, and so those costs uh are still similar uh to just the the percents that you saw on the prior slide, but over time, you're going to see the costs shift from Tier 1 to tier two, and that will be a lower percentage of pay.

H

But the last piece we put on is a payment to pay for the unfunded liability, and that is Far and Away, the largest cost and uh well on tier two. The members would pay 50 percent of that cost in tier one. The city pays all of it tier two's young, and there really isn't a UL associated with tier two, it's all associated with tier one, and so, if we were a hundred percent funded instead of two-thirds there'd be over 300 million dollars in contributions.

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That would go away uh because we wouldn't need it because we'd be fully funded. So we are uh putting 300 million to over 300 million uh this year, just towards paying off that unfunded liability.

H

Just one more comparison to other California Retirement Systems, here I we put in the total normal cost rates, for uh you can see the police and fire and the Federated. Most of the other uh systems have some combination of General members and safety members, and so we created the yellow dot to be the the city of San Jose as a whole to blend up uh to provide a more apt comparison, and so you can see the the total normal cost.

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Blended is uh above average, uh but it is coming down as you shift from tier one to tier two.

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The employee contribution rates uh you're about average, with an average rate of about 10 percent.

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But the employer contribution rate uh you're among the highest in the state uh and that reflects Federated being the lowest funded in the state and really a strong policy towards paying down that unfunded liability uh in getting it paid off.

H

These things also reflect uh that we use a lower discount rate, a lower expected return on assets which increases our expected costs.

H

So if you look at those California systems, uh the most common rate is 6.75, um but there are a lot of systems at seven percent uh were at six and five eighths for both the Federated and police and fire, and uh we used to be the the lowest discount rate in the state. But uh several of the systems have uh now caught up and actually a few are are lower, but we're still um below most systems.

H

One more thing on paying down the ual this chart. The line shows the measure of the unfunded liability projected over time and the bars are the payments, and this is looking at police and fire, and so you can see uh in 24, 24 and 2025 we're going to be paying about 140 million uh towards the ual we're paying 145 in the current fiscal year.

H

But if you go out about five years, the ual is projected to have dropped to 870 million from 1.2 billion, fairly significant pay down of the ual and five years after that, it's really dropped dramatically down to about 356 million.

H

So we are um paying this down fairly rapidly, Federated, uh it's a similar story, but uh we are starting a little bit more slowly so by in the next five years we would be reducing it from about 2 billion to 1.8 billion, and then, after that, it starts uh dropping much more quickly uh down to 1.3 billion by 2033 and that's assuming all of our assumptions are met.

H

Everything goes according to plan uh and all of that- and we know that that is not the case, so I want to just give you some sense of how sensitive these projections are to investment returns. So this is that same chart. I started with um early in the presentation, with our total contributions peaking at 523 million in 2029 before they they start to go down. That assumes we get a six and five-eighths percent return each and every year.

H

So we created um two scenarios for you to to consider uh one. The optimistic scenario that assumes we get a 10 percent return uh for each of the next five years and I'd suggest you watch the um watch the 2034 number, so this is 461 with the expected return at a 10 return that drops to 313 million. So that's a 130 million dollar difference there If. Instead, we had the pessimistic version where we get a two percent return for each of the next five years.

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uh That would increase that number to 657.

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So that again it's over a 300 340 million dollar difference between the optimistic and pessimistic returns.

H

And you can look at that at 2029, which uh is really based on uh evaluation, five years from now from 632 to 432., so a 200 million dollar difference in the city's contribution. uh Just on that range of investment returns, and we know they could investment returns can be much better than that. We had in 2021 um much better Returns on the order of 27 28 percent and then in 2022 we had worse returns that were um down below zero.

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So these aren't the extremes but uh kind of the the middle range of our expectations for what uh you can expect.

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Will come up here with uh those themes again uh the plans, uh including the OPEC plans together, are about 66 percent funded, but we are expecting that number to improve each year. We know contributions are high. There are about 472 million for fiscal year. End 2024..

H

um Those High contributions are to pay off at unfunded liability, that's uh mostly or the benefits for tier one members who have mostly retired.

H

We expect gradual increases in the contributions if all Actuarial assumptions are met, but there's really a wide range of possibilities, depending on what actual investment returns are.

H

So with that I'll open it up to any questions. People may have.

C

Great, thank you so much that was really informative, especially appreciate seeing those scenarios at the end I think that's really helpful context. So we're gonna open it up to council, discussion. Colleagues and thank you all for being here, um I think because we don't have our fancy hand raising system I'll. Just ask you to put your tent card like this. If you'd like to jump in it's probably the easiest way to do it. I saw councilman.

C

Torres was waving me down earlier, so I, don't not to put you on the spot, but do you want to kick us off with with some questions.

K

I I have a bunch written down, but we can I. I can yield some time to my colleagues if I keep asking them, but uh so in the in the presentation, the funded ratio for the Retirement Systems I liked how you player played around with the the years.

K

Obviously you went all the way to I'm talking like, if he's here out there on Zoom yeah yeah, if, uh if, um if I think, if you can go back to it, so we you're you're, obviously going back to 2007, because that was right before pension, the pension fight that the city had right.

H

Well, 2007 was a peak for many pension systems, not not just San Jose.

K

H

It it's before the financial crisis, okay,.

K

Thank you uh and I know I just made you jump to it um and I'm. Sorry. What I meant to say is is if you can go back to the one where you had them.

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K

In one, the contribution rates for uh California Retirement Systems, uh which is I, think slide 12.. Can you also do to 2007 for all three of those? Can you play around with, or do you have to do it separately.

H

I I I don't have that information built in here. uh We can certainly follow up with that, um but you're right, the well. The city's contribution rates would be much lower uh compared to both in in an absolute sense and compared to other systems.

K

Okay, so I I squiggled a question here and I and I hope I can read my own writing. uh My question is for the for slide before.

K

Would this would this Gap look.

K

Different, would this Gap look different if we, if we didn't, have pension the pension reform that we did in 2009 or 10 whatever year? It was uh significantly different uh if we didn't have the pension reform fight of 2009.

H

Yeah, so the the pension reform, uh reduced the costs, uh and so where we would have come out in terms of funded status, is a little bit unclear because we would have required more contributions in the interim uh and your liabilities would have been higher, uh but I think the the pension reform definitely uh reduced this. The costs to the city uh in that andrean period.

K

H

Did not do anything for paying off the Legacy liability other than create more space for um higher contributions to go towards that Legacy liability right.

K

And so we obviously- and we obviously see that in slide, 10 right we're yes right with the components of the contribution, how it it equals and levels off for our city right in the in that slide.

H

um Better in slide nine, where you're looking at a percent of pay.

K

Yeah and that's where that's why actually I was going for next? Thank you. uh Do we know how many active tier one city employees we still have because I'm actually, two one and I haven't retired, so just letting you know.

H

Right, no, we definitely.

H

I, don't have the number right in front of me it's in our valuation reports, but you can see I we're still collecting 9.4 million dollars a year from tier one members in Federated uh and 15.9 million a year from tier one members in police and fire yeah.

K

I, don't know so so my question and I can probably get them offline is how many active tier ones for police and fire. We have how many are retired same thing for tier two and then obviously same thing for the Federated pension, so I can I could always get that from uh from you right.

H

Yes, uh in fact, uh is there if there's a chat function, I can put them. I can look them up after I'm off the presentation and put the answer in there. Oh.

K

Yeah yeah I'm we're we're not on Zoom, but we'll get it somehow. Okay,.

G

Bill, if you can forward that to me and I'll make sure that is made available to the to the city council I by the way uh you are so lucky that I will I'll be back before you next week right to talk about the Actuarial report, uh results for 2022, so you're gonna, uh you're gonna, hear some of these uh to a less extent, but I can actually touch base on on those some of those questions and some of that data with my presentation, great.

K

And and I just have two more comments after this I promise. Colleagues uh and I don't know who these questions should be directed. I think maybe they'll be directed to Roberto, because the individual on Zoom is our consultant right for the pension plans right.

H

K

Okay, uh um how would if you know if our economy were just to tank again like it did in 2007.? How would layoffs uh affect uh how would Mass layoffs affect uh our pension plans, because I saw we went up until 2043? How would Mass layoffs affect affect our pension plans? Massive layoffs, I should say.

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What are you laughing you want to take that one I mean what what is that I I think the council member is asking actually the actual impact um been if we have layout for the city, which decreases the amount of contributions by the employees. Obviously, but do you want to take that sure.

H

Yeah, so the complex web of in first, we would collect fewer contributions uh from members. We would uh also have some lower liabilities because we are assuming that these people will continue to work and larger benefits.

H

But, having said that, about 70 of the liability uh or 67 I think for Federated is for people who have already retired, and so the reduction in liability would not be that significant. uh Presuming that the massive layoffs are because the city does not have Revenue. uh That would be a very significant concern for us because, as you saw, a big part of our contribution that we're trying to collect is to pay that unfunded liability and so anything that severely impacts.

H

The city's revenues and budget also has an impact on us and concerns us about our ability to collect those contributions.

K

Great thank you, uh and um so, as we talk about filling vacancies here in our city of San, Jose and I, know and I know that that's been a big. uh That's been lots of. You know concerns from from my from my colleagues about vacancies when we're trying to fill in these vacancies and their former full-time folks in our city. If they were tier one and they get rehired or I, think we even have that retirement uh uh program where this I don't know what to call it.

K

A semi-retired folks could come in and work for a little bit right. If there's a lot of work that our city has, uh do they come back into the the same tier that they left. So if a tier one or just, for example, uh somebody quit long time ago and was tier one and what's was to come back uh as a city employee again, would they be hired under tier one or they'd be hired under tier two.

G

um So the internet speaking, what will happen is if you were a tier one, member and left the city for another jurisdiction, and you come back to the city. You are considered uh a a Legacy Legacy member, which means that you go back when you join the city. You go back to tier one uh if, in turn you refer to the retired members, uh I believe and obviously the city is here. So if I mistake please correct me, um they do have a program that they have a retiree rehire.

G

That means these are members that have already retired and are receiving a pension from the system, in which case they just will be working to help uh they get paid, but they are limited in terms of the number of hours they can work a year and they don't they don't really have. They do not become part of the plan. So there's no any extra liability for that either. Okay,.

K

H

You'd, like I, do have the member accounts. Now. Oh.

K

Sure yeah I overlooked those numbers.

H

So in the police and fire plan there are 966 tier one members who are active.

H

uh There's 780 tier two members who are active.

H

There are 348 uh members, I, don't have the split between tier one and tier two, but they're people who are no longer working for the city and are entitled to a benefit in the future, but not receiving one. Today uh and then the largest group is 2 518 members who are currently receiving benefits.

K

As retirees as.

H

K

Cool uh and then uh my last question I.

H

Promise you want the same numbers for Federated. Oh.

K

Yeah sorry I forgot I forgot. We have two pension plans. Yes, what is the Federated one.

H

uh So active Federated uh tier one is 1292.

H

Tier two is two thousand five hundred uh the no longer working, but not receiving benefits is one thousand eight hundred and ninety, and then the group members receiving benefits is four thousand five hundred and fifty Seven.

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K

Great, thank you so much for those and then my last question I promised before I yield. My time is I'm a visual person. So correct me: if I'm wrong in the in slide 14, that's so that's it! What I'm seeing here is by 2043. We would have paid off uh the unfunded liability.

H

Yes, if all of our assumptions are met all right, so this is the schedule, assuming that everything goes exactly as expected, including earning six and five-eighths percent each and every year. Okay,.

K

Great. Thank you.

L

Council, member yeah I just wanted to clarify something that Roberto said and just to give you a little more detail on the rehired retirees we can use them up to 960 hours per year. I think you were going there with that question and if they were to exceed that, then they would jeopardize their retirement benefits. Okay, great.

K

C

Great thanks great questions not seen any tent cards up. Anybody else have questions no I'll just ask: are we seeing other jurisdictions do anything Innovative that we should be looking at as a city in terms of paying down other increase in it? We've talked about pension obligation, bonds, which I have my own concerns about, but would be a decision of the council but ways of accelerating payment into the funds or reducing obligations on the other. The other side buying people out of their health care benefits I mean.

C

Are there any solutions, we're seeing out there that we should be considering or have we have? We tried everything, and this is just kind of the flight path. We're on at this point.

H

uh I think largely, it is the flight path you're on um because of the Legacy uh issues. I think the the new ish thing uh for new plan designs uh is to include more risk sharing features.

H

uh You have some risk sharing in terms of the contributions in tier two, um but a lot of the other designs are adjusting benefits um in terms of the risk sharing to control. The volatility of the costs can.

C

B

Say the issue, is you.

H

Can't do that with the Legacy liability, and so that's why I say you're largely on the um um you're on this path. Right.

C

Can you say a little more about the resharing that you just referenced that you're seeing other cities do forward forward? Looking of course,.

H

Yeah so they're uh they're uh restricting it based on funded status, but but I should point out that risk sharing goes both directions, I mean. So if the plan does well, they pay much higher colas, uh and if the plan does poorly, they pay a little or no Cola.

C

Right, okay and then on the health care costs specifically I, don't know what the rules are, but our retirees legally allowed to enroll in Medicare and if they did, would there be a world in which we could pay them or part of the savings of doing that as an ins to incent them to do that as a way of reducing our long-term obligations, they're kind of a win-win potentially for the city and the employee, if they were to enroll well.

H

The the retirees who are eligible for Medicare I believe they are required to they're.

C

Required: okay got it all right, just thinking of a creative angle here for reducing our problem, yeah.

H

But your your big liability is still the the tier one pension.

C

Line I understood, yeah, okay, all right colleagues, I've been stalling as long as I can there's nothing else. uh Roberto was there anything else on item one that you wanted to cover, or should we move on.

G

um No no, there was there was nothing else. I cannot be before you uh City Council next week to um present just that 2022 results so certainly I'm happy to answer any questions there as well about the actual evaluation. uh I. Think the last comment that I'd like to make about this and I don't know really we have any any um slides on it.

G

uh One of my goal was to to sort of uh connect the Actuarial uh information with uh the presentation by our chief investment officer and some of the trustees in terms of the asset allocation and I have to do with uh the ratio of acting members to retirees and the sensitivity that that brings to the plans.

G

I want to make the connection because I I will we made that statement every year when I come before you for the evaluation and so those Prabhu when he comes to present investment results, uh which has impacted the the board's thinking in terms of the asset allocation and and the risk profile that they actually Implement When selecting data allocation, uh meaning that, because of the high ratio of both of the plants compared to the peers across the state, it makes for a highest sensitivity to Market fluctuations, which means that uh when we have great returns is awesome for the plans.

G

But when we have bad returns, it's actually more painful for the plans and because of that, the boards have made a conscious decision over time to limit the risk profile of both plans through the selection and the implementation of the asset allocation. But I'll leave the concept to our CIO, who is obviously very well educated in that area and can speak more more eloquently about it than I can so. Thank you.

C

Great, thank you. So that's a perfect transition to item two and probably we'll pass it over to you all.

M

Right, thank you. uh Thank you. Mr mayor council members trustees good afternoon, uh so our presentation will again be some 30 35 minutes long and then we'll open it up for questions. The last time we we made a presentation to the Joint City Council board meeting. uh We address some specific topics, because at the time the council, the composition of the council, is different.

M

You were somewhat familiar with our investment program and there were some specific concerns and we addressed that now, since the majority of the council is new, uh this is going to be sort of an investment 101, and so it's certainly not Our intention to talk down to anyone. But we are going to explain some fundamental concepts.

C

We all appreciate the remedial course.

M

But I know some of you are very sophisticated, so bring on the questions, um but we'll start with uh chairman Lanza who's been here uh longer than any other trustees like a dozen years, I think and so he'll he'll give sort of a historical overview of the plans and what got us here and I will then talk about our current asset allocation and why we manage our portfolios.

M

The way we do and that will be followed by trustee Chandra who's, the chair of the Federated investment committee on our results and then we'll open it up for questions with that over to trustee, Lanza and I'm, hoping that somebody can can drive the slides for us is.

G

It possible turning to us someone from thank you there you go. Thank you.

I

Right so I'm going to talk a little bit about why PNF is unique. That's fine!.

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And next slide we're.

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So um disclaimers, first of all, I'm going to take you on a journey with me, because I've been on support for 12 years of the 16 trustees, there's only one other trustee that was in this room with me on March 2011, when the city I think wisely decided they need some help from independent members. That's my friend dick Santos, who also joined the board in March of 2011.

I

I am not a financial expert I'm, not a pension expert I'm, not a government expert I do what was that famous movie. I do have a unique talent right, I'm, a recognized expert in building and sustaining High function team and, at the time wisely, I. Think the the council, the mayor and the system said we're going to be building a new team where we haven't had one before: let's bring in a guy like lonza, so they were looking for me. I went looking for them and the rest is I. Think a happy coincidence.

I

Now, in the next five or ten minutes, I'm going to pull a rabbit out of a hat. That's the.

B

Second sentence.

I

Here, I, don't think my fellow trustees are going to agree. That's what I just did.

B

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Even think our consults are going to be that's what I just did I'm.

N

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You're going to agree, that's what I just did but I think it's what I'm going to do next slide.

I

So the Journey of building High function teams is, is a Learning Journey. You learn other people, you learn the challenges and so on. No disrespect to you. I decided to tell this as sort of a cartoon story in stick figures. So you guys are the pregenders, the city council, mayor you're, the grandparents. The boards are.

B

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And the systems piff and Federated police and fire and Federated are the children. Our Consultants are the teachers in principal and there's this odd quirky character. This tutor called Alpha next slide.

I

Next slide, uh hang on uh so when we showed up, it was very very clear that there was a horrible debacle in 2007-8-9. Now we all know we lived through it. There was a horrible debacle, it was the real estate crisis, but that crisis and Bill sort of showed it just hit San Jose harder than it hits similar pension system. We had no idea why we're brand new. Well, we do what you do and you're building a high function team. You shoot everybody.

I

So Bill joins us one or two months after I join over the next three to four years. We replace our legal counsel, we replace our CEO, we replace our financial advisors and then we replaced our CIO after we'd replaced all them. We had no idea if that was the right thing to do, but the general rule of thumb is when a group in an army loses a battle. You take everybody out the soldiers, the general the Genesis sergeants next slide.

I

B

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Of this is just filler in case you want to read Standalone uh next slide, okay, so police. It turns out in this 12-year Journey thank God. Thank you. Bill God thank God for bill bill says at the very first meeting. Hey you guys, know you're different right, police fire. You get this and you've seen the slides and, of course, being new. We're like okay. Well he's he came highly recommended, so we're listening pit.

I

What Bill tells us in the vernacular of this cartoon is that piff is abnormally sensitive to his grandparents in their specific Bill tells us that the city of San Jose is abnormally sensitive to the performance of the police and fire pension fund. You've seen some of that already. That's why we had bill go first next slide.

I

So this is Bill's slide. Now, look I'm, I'm a trained engineer and that black dot on the right and left is police and fire. As a trading engineer, when you see a slide and he talks about a population you're an outlier, you need to think great we're all going to get rich or holy crap. We're all gonna die right. It turns out it's neither one of those. It just says we are very abnormal and therefore our challenge is to work with you to compensate for that. Next slide, it turns out. Federated is very normal.

I

It's a little underfunded, okay, but it's pretty normal thank God pension system. Good, probably next slide.

I

It would take. It has taken me 12 years to understand this now. I'm, not stupid.

I

So I can't explain this to you in an instant, but it's possible to compensate for the fact that you're oversensitive To Us by reducing the risk in our Investment Portfolio, unfortunately, risk and return are related, and so, when we lower that risk, we lower that return and it looks like that's um that's the rate of return, the discount rate, the actual Red Burn for the peers on the left, the police fire on the right, and when you sort of defox your eyes, you say they're virtually the same right and as you heard, they almost are.

I

The median California plan now is at about seven percent and we're at six and five eighths. So it's pretty dang close. But let me tell you that three eighths of a percent I think is 20 million dollars a year. You guys, maybe more so it's pretty it's pretty significant.

I

This is now the end of the year 2011 and the conclusion we reach is that it wasn't that the trustees had a bad plan in 2008. In fact, they had pretty much the same plan as every other pension plan in California. The problem was that was the wrong plan. Given that we're an outlier next slide, please.

I

So I'm going to pull a rabbit out of a hat, but I have to tell you that the impetus for us having the same red return, the same discount rate as our peers is not some wonderful intellectual exercise to be damned honest. As a trustee and the rest of we get tired of answering the question: why do you suck? Why is everybody else? At seven and a half percent and you're seven and a quarter I swear to God every pension conference. You walk in. They laugh I'm, not making this up.

I

They would laugh and say you suck and we're like. No, we are unique all right, so I, some of you know, Vincent's area at the end of 2011, sonzaria and I go and have beer and Son Jerry, says I think we can simultaneously have a lower risk, lower return core plan, but an overall plan that Returns the same as our peers. That, ladies and gentlemen, is pulling a rabbit out of a hat. Let me show you how we're going to do it and we.

N

B

I

In fact done it uh next slide.

I

I am not a finance guy, Vince says and I'm not explain this to you. He says if beta is an immovable rock, you add Alpha for those of you that know Finance. You know what I just said: I didn't know what that would be talking about.

I

That's why we had the meeting over here we went looking to build a team that could generate this mysterious, Alpha thing, and so we reached out and recruited and hired uh Prabhu Palani now I'm not actually pulling the rabbit out of the Hat Prabhu and his team are pulling rabbit up the hat, but since they worked for me, I'm gonna take credit for it. Okay next slide all right.

I

So in life you guys get this right. Everything is kind of graded on the curve and graded in absolute right, I, I I, don't have to outrun the bear. I just have to outrun you right on a curve, or it's just me I damn will better outrun the bear. So in the beginning we started incrementally lowering our discount rate an eighth of a percent per year, just to say we should probably have a lower discount rate than our peers, because we are an outlier, we're more sensor to risk.

I

Well, that's grading on a curve, and that may sound stupid to you, except there have been a lot of studies on crowds, have more wisdom than the best experts in the world.

I

It's called the wisdom of crowds right, and so we assumed that the rest of the bench systems had the right number for them and therefore the right number for us would be slightly lower in 2018 Eileen over there from varus one of our Consultants playing the role of principal, said: I think we can help you actually figure out what the absolute number you should aim for is in the next slide.

I

So we we had an off-site at the Hayes mansion and the answer came back. I think we can calibrate this so in any given downturn of 2008 of 22 2022 2023, the city of San Jose, will feel the same pain as its peers and how we do that. Will have a lower discount rate lower the risk, so, as the market goes down, we will feel less pain and you can see it. It's happened this time. Peru could tell you.

I

We have lost Less in this downturn than just about any other pension plan state, which means we gain less when new years are up next slide. uh Next slide.

I

So it's probably driven you guys a little crazy that we have a lower discount rate and therefore you have to pay us more money.

I

It certainly bugs us that we go to conferences and people say we suck, but the reality is every previous mayor mayor, Reed, mayor, Ricardo and Council has said: yeah dang, but you're doing the right thing, because that man we never want to I mean the city almost went bankrupt after 2008, right and and so uh next slide.

I

So I'm going to read what Professor Alpha says: your report card will continue to show lower grades in core subjects. That's the bulk of our investments, that's a lower port, a lower risk portfolio, lower assets, but higher grades in electives, and therefore your GPA will match your peers. I've used this analogy over the years, because GPA kinda makes sense what it is and so in in the parlance of beta and Alpha, we will choose a lower beta for the core portfolio. We will build Alpha on top of that next slide.

I

I

This slide is so controversial, I'm sure I'll get beat up in the parking lot after this I believe I believe Drew Lanza, chairman of police fire, believes I'm sure anybody else believes in this room that we could right now have a discount rate and a return equivalent to our peers and still have a lower risk portfolio.

I

In other words, in a downturn, the city would say feel the same amount of pain as the city of San Diego, but we would get to a hundred percent funded more quickly and your contributions would be in the tens of millions less per year.

I

Bill I know Bill Bill is when thank God Bill's, not here, because he'd be the one beating me up in the parking lot, and the reason is that little tiny, yellow bar on top the mysterious Alpha it is possible when you pull a rabbit out of a hat, to have Tail Wag the Dog. That little piece of alpha may be enough to make us the same as our as our.

N

I

Next slide right so 2021 at least I decided it works. I know purple, you weigh in you can say it doesn't all right now next slide.

I

uh So some of you know we pulled a little stunt off in your 2020, which added hundreds of unexpected millions of dollars to the portfolio we triggered Alpha. It was very planned and been planned for years and covid, while covid may have killed people I hope. Nobody in this room lost anybody. Well, it was painful to people, it was wonderful for our pension system and we have it. Alpha is proven. We did it, it's clearly Alpha.

I

So here's the problem and you're going to hear more about this Mr Marin city council over the course of the year. Alpha is by definition, what's generated by.

H

I

Very smart people doing very smart things and that little slice is not about stocks and bonds. It's about really esoteric asset classes like Venture, Capital, I'm, a venture capitalist overseas debt, stress death, asset classes, where the money is made by the talent of the people dealing with money, I'm, a venture, capitalist, good VCS, make money bad VCS, don't year after year after year. It's not luck.

I

It's almost all skill, the problem uh next slide, and now now we come to last last year, and the problem is of course, that we've now built Prabhu has built a staff that generates Alpha. He has pulled a rabbit out of a hat now you may not believe that's what he did the rabbit. Is there it's it's a number on the on on our report that we generated hundreds of millions of dollars by doing something smart and unusual next slide.

I

So this says 2022, it's really today! So hopefully you, the grandparents say we're so happy that you did that you generate all that money and lowered our contributions and we say well. We had help. We had Prabhu and his staff and later on this year, we're going to ask you for help keeping that staff now next slide, here's what I mean we get beaten over the part I'm going to say something. It's just me. It's just true in the lower left of that chart is the claim it's a claim.

I

It's a prediction of the future I believe look. Sam's is a great City. We've had great City councils, great Mayors, I hope we still have one with you folks. If you folks work with us I believe we can generate the same return same discount rate as our peers, but have a core portfolio, which means the pain you feel in a downturn will be the same in San Jose. Despite all the odd statistics that bill pointed out. Well, that's not too crazy to clean, but the last slide this presentation where he turned back good.

I

Your next slide is a really crazy claim. I think if we all work together, I know I know I'm going to beat them in the parking lot. I think. If we all work together, we can have the best pension plan in the state of California and I. Think there's some chance, some small chance in decade we could have the best pension plan in the entire country, because any pension plan that generates a higher return for a given risk is a rabbit out of a hat. What do you think overdue?.

M

I

Right. Thank you.

M

Drew never a great idea to sandwich yourself between two great storytellers, you hear from trustee Chandra next, but I will try my best um so I'm going to talk about our portfolio our asset allocation. Currently, if we can go to the next attachment there, oh.

E

Nation hold on this should be a PowerPoint.

B

M

M

Okay, thank you yeah. If we can go to slide one uh so I'm going to start with uh a chart that looks like the periodic table of elements. I don't know. If you can see this, if you can read this and- and this is very basic right, why do we manage a well Diversified portfolio and I've? Had these questions before? Why isn't your portfolio entirely in stocks and you in the S P 500 or why are we taking any risk? Why isn't your portfolio entirely in bonds?

M

And the answer is this chart so, as you can see, there's no asset class. If you look at the top row, that's the best performing asset class every year and then it's and it just goes down from there and you can see. No, you know not more than two years as any asset class done has been the best performing asset class, so in 2022 Commodities was the best performing asset class right. It returned 16.

M

But if you look at Commodities from 20, if I can read this properly 2012 all the way to 2015 it was the bottom performing asset class right. So it's very hard to predict and if you look at U.S equities last year it was down 18, but in other years it's been the best performing asset class, which is why you want to manage a well-diversified portfolio which takes us to the next slide.

M

The next slide shows you our current asset allocation and Drew briefly mentioned this uh touched on this. So we we follow what is called a functional asset allocation and we have three categories of assets: growth, assets, low beta and other assets.

M

And what's the point of doing this right, so we have a discount rate of 6 and 5 8., and so your growth assets are the asset classes that are going to do better than six and five eighths. And so you want the majority of your portfolio to be in those asset classes, and they are public, Equity, private markets, Drew reference, private markets, Emerging Markets, debt, high-yield bonds and so on. But you also want to keep your risk low right.

M

You can't put all your money in growth assets, so you want some diversifying strategies and that's what low beta and other assets do. So what they do is they provide some liquidity to the portfolio. They also provide some diversification benefit to the portfolio. So you know in 2018, uh chairman Lanza referenced this in his presentation. The various risk consultant did a study and they said you don't want your absolute level of risk to be greater than 12 percent.

M

So you don't want to fluctuate more than 12 and that's that's 12 as a standard deviation number, which means two-thirds of the time it will be around that 12 number, because if it does that it impacts your sponsor a lot. So so we try to take risk not more than that 12 percent. At the same time, we try to maximize returns so in the process of doing that, we've come up with this asset allocation Target, and we came up with this with the help of our consultant Makita.

M

So you can see that Federated takes a little bit more risk than police and fire and chairman Lanza explain why that is so. So you can see growth, assets are higher in Federated than police and fire and low beta assets, which are diversifying assets, are greater in police and fire than Federated. So.

N

M

Our current asset allocation, Target and I'm going to show you on the next slide how this has changed in the last five years.

M

So five years ago, so it's I'm on my sixth year at CIO now, but at the end of 2017 we were taking a lot less risk than we are taking now and part of the reason was the financial crisis of 2008-2009 and also us not understanding what a right level of risk should be, which is where a risk consultant came in and said you know you can actually take a little bit more risk.

M

So you know a risk level was about running at about 10 and they said maybe you can actually take 12, and so we waited for our time. So you can see the the comparison here now. Unfortunately, we did not have a functional grouping of asset classes back then, but I can tell you in 2017 our growth assets were about 40 percent, and today our growth assets are much higher all right, 75 and the difference is really Bonds in in 2017 or Bond portfolio for Federated was 33 as high as 33 and we've significantly reduced.

M

That and part of this is a better understanding of our risk profile and and risk can return, return, a style, so the greater the amount of risk that you take, the greater the amount of returns that you can generate, and so we move to this functional asset allocation to better understand our portfolio. We increased allocations to equities and growth and we also reduced allocation to high fee asset classes right, there's, some sensitivity around fees and rightfully so, um in fact, if you go to our next slide,.

M

So one of our former police and fire trustees used to say the only free lunch and Investments is lower fees, and so we made a conscious effort to decrease fees and we did that through a combination of things. We increased our allocation to passive assets, so roughly 50 percent of our assets today are index assets and, as you all may know, when you're, when you invest in an index fund, your fees are a lot lower and the other reason for lower fees is our asset allocation changed.

M

So we decrease our allocation to Absolute return strategies or hedge funds, which typically have you know very high fees, and instead we substituted that with lower fee Alternatives like cash and cash like Investments. The third thing is just negotiation: uh I have a very good investment team that negotiates hard and also you know our investment consultant. Makita helps through volume discounts. So if we make the same Investments as some of our peers, uh that Makita can combine it and give us lower fees.

M

So, as you can see over time, you look at the combined plans on the right side. Are fees in in 2017 to 81 basis points and it's come down to about 53 basis points, so it's quite a steep reduction in fees.

M

Those are my prepared remarks and that'll be a good segue to trustee Chandra, so you've seen what we've done and why we do it and he will talk about some of the results and I know. This was went very fast and it was very brief but I'm happy to take questions after the presentation.

N

B

N

Have sequenced me after Drew, because I'm going to continue with the secondary schooling metaphor, I'm I'm, the teacher or the parent I, get to give everyone. The report card.

M

N

Has been generated by the CIO and his team and I'm happy to report that uh we were probably a c student and we were definitely a solid, a student now. So, let's, um let's start with the uh of the three charts up there, the one to the left, which talks about the total dollar value.

M

Added, can you move to the next chart, we're not there yet, okay.

N

I, don't have my glass on oh there we go perfect yeah, so the chart to the left. This is the value added uh to to uh both plans. So over the past three years, this is trailing three year through uh January, sorry, July, 2022, the fiscal year that ended in July, 2020, uh June, 2022., um federates added 672 million dollars and police and fire at 975 million dollars.

N

Sorry, uh so one CIO staff that is 1.5 billion dollars generate rated over that those three years, keeping in mind that this is the result of the changes that Prabhu has talked about, that we've implemented um moving over and by the way, I believe we were in the bottom percentile. When I joined as a trustee and became chairman of the investment committee for Federated, we achieved in 2021 top decile performance and for fiscal year 2022 we remain in the top quartile. It's it's truly a remarkable turnaround.

N

Another thing worth noting is um a bold decision that the CIO and the staff made at the height of the covid pandemic crisis in March of 2020. A lot of analysis done in concert with our Consultants calling emergency meetings with both boards preparing us and informing us for an opportunity to readjust our strategic asset allocation to be heavier in growth and take advantage of the downturn in the market that we had experienced at that time. Don't know how many plans would have had the Tamara to do that.

N

But again our CIO made a bold decision support by both boards and we were able to add 164 million dollars to the Federated plan and 131 million dollars to the police and fire. It's a combined edition of 300 million dollars to our AUM.

N

So, moving over to the chart on the right, Drew has explained Alpha I think sufficiently that I'm not going to try to outdo him, but it's essentially a perform. It's an indication of outperformance against benchmarks. This is the secret sauce. Drew was referring to and as it pertains to our staff, it's their ability to select managers who are able to outperform their peers, and this is precisely what they've done.

N

They've generated, 104 million dollars worth of alpha for the Federated to plan and 151 million dollars for police and fire, and this is not a fees so after having paid fees through these high-priced Venture capitalists and hedge fund and private Equity folks that Drew mentioned this was the net result for our plan over the last three years.

N

um I also want to point out, since we've talked a little bit about risk, it's not present on this slide. We have managed to perform on a risk-adjusted basis, taking less risk than our peers. So there are two standards that are used in the industry. One is the sharp ratio and the other is the certino.

N

The higher you are. It means that you are performing better on a risk-adjusted basis than your peers on a sharp basis, we're in the top quartile, so we're producing top quartile returns by taking top quartile less risk. If that makes sense, and on a certaino basis, we are in the top decile of risk-adjusted returns. So Prudence is King, but Alpha is really nice when you can get that in concert, which is what we've done over the past three years and Drew gave you guys a history lesson uh that that predates me in my five years.

N

I think some of the seven seminal work that's been done is to sort of institutionalize this program Ram, so it can outlive the trustees, the committee members on on the ICS and the CIO and his staff, though I hope they stay for a long time and a part of that work began. Continuing with the schooling metaphor, I used to borrow notes from Susie klepper in seventh and eighth grade, because she was much better at school than I was so we looked at our peers around the globe and the the Canadians run really good pension plans.

N

So we hired a consultant cortex who helped us sort of figure out what best practices might look like for us as a Federated plan and police and fire. We did it jointly. A lot of good work came out of that and what I'd like to point out is manager selection is, is sexy and these numbers are great, but there's a lot of governance and a lot of infrastructure that's been put in place behind this, namely changes to governance. Changes to our investment policy changes to the way we approach strategic asset allocation.

N

Importantly delegating authority to the CIO and his staff, so they can make decisions and be adaptable and flexible in doing so, and ultimately, Savvy manager selection. The result of all of this- and of course there are other factors like we've in fact: increased the discount rate, which Inc increases the unfunded liability status and, while decreasing the discount rate, we've actually been able to improve the funded status over the past three years by more than 10 points. So um you know I get to say this as a parent, I guess pretty spectacular performance by our staff.

N

Thank you for all the hard work and that's the conclusion of my comments. I'm happy to take any questions as well.

M

N

M

That concludes our formal presentation on the investment section happy to take questions.

C

Great thank you uh appreciate.

N

The presentations.

C

And I I forget who said it, but certainly a very remarkable Improvement and I just want to thank our CIO Prabhu and his team for the great work that they've done. It's really really impressive. Of course, I have to ask the magician if he thinks there are more rabbits in the Hat, and you know just to kick things off and then I'll turn it over to my colleagues. I'm curious of this elusive Alpha.

C

Clearly the Strategic reallocation of assets that that mix moving away from being so heavy on bonds made a big difference. As you look forward and I will ask you to give away the secret sauce. uh Do you continue to see opportunities for Alpha that are within our acceptable risk profile?.

M

Yeah I mean that's a great question and also I want to make a distinction between beta and Alpha.

C

B

M

The the shift in strategic asset allocation, where we went from bonds to to equities over time uh was.

B

M

Right that doesn't necessarily mean that we are better than our peers and picking managers, but that just goes to show how well informed the boards are and how they've taken input from our consultants and said yes, I think we should take more risk and that put us at an advantage compared to some of our peers. Now. The fact is we did in hindsight. You know, luck is better than skill in March 2020. We we moved very quickly. We took data from our consultants and we made that move right. That added a tremendous amount of alpha.

M

So what's going to help us going forward in terms of producing that kind of return, is market dislocations right and we've seen in the last 20 years that market Cycles are ever shorter. Now it's hard to predict what's going to happen in the future, but as long as we have those types of dislocations, it gives us more opportunity to move quickly and faster, and that goes back to our governance right.

M

The fact that we have delegated authority the fact that we have well-informed boards and that we can quickly have board meetings and we can move very quickly, so I don't know if the future is you know is going to look like the past, but if we have those types of Market, dislocations I think we can take advantage of them. Let.

I

Me add an interesting side. Note you'll enjoy this Mr mayor council, so we're firing this program Bob it's right to measure G, it's like 2017. and we're still focusing on beta and that's the third year. We notice we have negative Alpha. Well beta is just stocks and bonds. How can you could we possibly be that unlucky, so we dug into it- and this goes to what anurik said about blogging tackling turns out. We were just slow. We had going back to our policy preachers.

I

That said, when the market moved, uh we take vote of the investment Community. We take it back. The boards and the staff was off on vacation six weeks later, we'd move. We fixed that in three months we haven't had negative Alpha since so it's part of it is, is you asked for the wraps part of the rap is just mundane. That's on York says it's consistently just being alert and being aware, I, think you'd say that's fair right.

M

Yeah I mean it goes back to good governance, yeah I think our governance is set up in such a way that there are no guarantees, of course, that we should be able to perform well if, if there are serious dislocations in the market, yeah.

C

I suppose that makes a lot of sense. I appreciate the the note there I assume, while speed decision is really important. It's also critical that that doesn't increase risk either. So there's there's I assume some some balancing. Yes,.

M

Absolutely so we're very, very conscious of that 12 risk Target that various has given us and so no matter what we do. So what we did in March 2020 was take it from 10 to 12. yeah right. So that was the perfect opportunity to go up to 12. and.

B

N

Had some very interesting discussions.

M

At the investment committee at the police and fire investment committee recently on whether we should be decreasing our risk a little bit given given the volatility in the environment, so we're very, very conscious everything is driven. We start with the risk before we look at return.

N

I think that's the most most important change in the five year and with varys's help is that we think in terms of risk. We we've come up with our own risk budget, which has been rigorous analysis and formed by varus's work and any decision we make to go off script because we do strategic asset allocation annually. Drew has spoken for himself, so I'll speak for myself, I'm, not a big fan of changing it.

N

Annually strategic means 10 years, 20 years, 30 years, if you're, just a wet, read in the wind every year, you're kind of working against the principle of strategic asset allocation. But when these dislocations happen, that's an opportunity, that's what every fund manager I'm in the Venture Capital industry. The way Drew is that's what you you salivate and wait for those moments. But as long as you have a discipline, you've got a risk budget within which you're operating. Hopefully you won't do crazy things and and I don't think we have.

C

Great well, thank you appreciate that. Let me open it up to my colleagues: I've not seen any tent cards up but council member. Do you want to okay.

K

B

C

I think everybody's.

D

Mic is on automatically.

D

B

My girl, okay, I.

D

Just want to be a little clearer on the changes you made to generate this Alpha, that's a style of change right and it's not that one time those changes are done and that's going to sustain this Alpha. Now you change your risk factor from 10 to 12.. So you think, as the market moves, you may be trying to change the risk lower or higher. Similarly, your allocation may move from stocks, or maybe bonds or something others so to sustain this Alpha, which you have gotten.

D

You have work to do constantly: it's not a one-time change, you're done and now we're set to make what 104 million or whatever that's.

M

Exactly right, I mean the clock restarts. You know sets for us at the beginning of every year. Okay, and so it's we, it's a clean slate and we start again. Okay,.

I

All right, if you listen carefully in my presentation, I said there were two mistakes that our previous trustees made: Neo 70809 real estate debacle, one was, they didn't recognize. We were unique and Bill charts the other one was they didn't recognize that something systemic had happened with inflation? Well, we all know this right for those of us with gray hair right, we remember the My First Mortgage in 1987 was 17 per annum.

J

Yeah and we fixed it right right.

I

So let me tell you so I'm a smart guy and he's a smart guy and I've known Rock he's a smart guy guess well so you're looking at inflation and by the way, some of the smartest people on pennant didn't see this. If you understand statistics, inflation hit the one Sigma point in 2000, is it the two Sigma point in 2004 and by 2007? Inflation had been low for a Time unprecedented since the founding of this country, and they didn't react to that. I'm.

I

Just talking about bank went down for the same reason, look inflate, inflation's nasty right and the previous board thought well, the the future is just like the past anyway. Your question basically says: how do you see the future? You don't you just ride it and surf it quickly.

D

Okay, in the second part of your change is really that you change your process, how quickly you can react to it, which is which is really the fundamental, because, if you didn't have that you.

N

D

Have the ability to really generate this Alpha Because by the time you assemble your board and all that opportunity is gone? Okay, all right. Okay,.

N

D

You very much and.

N

D

To be sitting among the smart, smarter.

N

Smarter people, so it might help us help us.

D

At least we're able to claim in the evening that.

N

We were with smart people. Okay can I make a I just want clarification on the structural changes. uh You know the work that we did to change governance, the policy it does give us the flexibility to react to a dislocation, but I personally, wouldn't want to highlight that as the the main thing.

N

um It's probably the thing that you see embedded in the numbers, but it's a day-to-day week to week, quarter to quarter way for us in our governance oversight to manage the CIO and the staff, but also to give them the freedom and the flexibility.

N

um And you know we moved to Battleship two or three degrees. That's all we did.

D

Okay, thank you very much. Okay,.

C

Thanks councilmember councilmember Taurus I.

K

I, just uh I wanted to go back to inflation.

B

And and yeah and.

K

Anybody could answer this question. I'm I'm, assuming uh you all know about it, does, uh does inflation actually help or hurt us in terms of investment.

M

K

M

Can answer that you? You want some amount of inflation in general right, if, if inflation is too high, it eats into your purchasing power right and in if inflation is too low.

M

If you have a deflationary environment, then that's going to hurt risk assets, so you basically have to adjust your portfolio according to the inflation scenario that you have, but what the FED tries to Target and I'm talking policy here is a two person: inflation Target right, so so it all depends on how you construct your portfolio and how we construct our portfolios in anticipation of, what's going to happen with inflation, so, regardless of the environment, you can have a portfolio that can ride through it.

M

What's what what's difficult is change in inflation rather than the inflation level itself.

I

Teresa Roberto, aren't they pensions have a three percent capped Cola. Is that right.

G

Most of them do especially in California, yes,.

I

Yeah and ours: that's too right.

G

So no so the tier one has a three percent and.

J

G

Not really a cap, it's just it's a fixed three percent. It's fixed three percent.

N

G

And tier two I think is I'm. Looking around the.

M

I believe it's a two percent tied to the CPI.

G

Correct two percent tied to the CPA in the Oakland San Francisco and San Jose.

I

Area so there is a concrete question: dude.

O

I

Question in times of low inflation, we get hurt because the historic inflation number going back to 2000 I think was like 2.2 or 2.3 percent, and yet we were increasing pensions, three percent per year, in times of higher inflation right that that, to some extent, Northstar benefit and I'll, tell you. We have our great trustee, Sunita and I. We had this debate.

I

We're going offline, we're arguing is inflation, so there are two regimes of inflation there's the first post-war period up to 1990 was about four percent and the second period we've all lived through from 92 to about two three years ago, where it was roughly 2.6, 2.7 percent over that whole time, and it matters deeply which of those two regimes, proactivating fisticuffs, arguing which one's going to be next and no one knows- and we will make that bet because we're not in the business of betting, but we will prepare I, assume Prabhu to benefit no matter how it turns out right.

I

That's the Hope! Yes,.

K

So so um thank.

P

K

P

Depends on Valence our asset allocation, as Prabhu said.

K

Yeah awesome, okay, so again I'm a visual person and that I'm assuming that's why in 2021 and 2022, we are investing more in Commodities right than anything else, which basically means a lot of a whole slew of stuff right.

M

Yes, Commodities tips real estate: these are all Hedges against inflation as a growth, equities, right.

K

And that's why I was uh uh that's where I was I was going next, so like what does investing in real estate? Look like for us.

M

So we we invest in two types of real estate: one is core real estate, which is publicly traded, real estate, assets, commercial, residential and so on, and we also invest in the same type of assets through our private Equity program. So we have a private real assets program.

K

Okay, um we don't invest, we don't invest in like dirty Industries right tobacco oil.

M

We have no restrictions on investments.

M

Well, we are, we are in the S, P 500 and all lessons we've.

B

M

Right if you're in the S P 500 by by definition, you are exposed to Tobacco companies.

K

I didn't I didn't hear that. Could someone please repeat that.

D

Years ago years ago we had the.

D

Had the pose way back when I don't know to me, it was supposed to carry over now. Okay,.

K

So is the is the answer yes or no. If we invest in dirty Industries.

G

We do as we participate in the market, especially in the SMP um and especially in those passive returns, uh passive stocks. We are have exposure to oil and tobacco companies and everything else. Yes,.

K

Okay, um so so I think that that's going to lead me to my closing my closing comment. Look so right. We just we've seen a a Rosy picture of of us paying down our our on unfunded liability. I. Think that's very, very important, very, very important. uh However.

K

um I wholeheartedly believe uh that for us to continue to have a strong and stable pension system, that is, is that we shouldn't be taking advantage of our advantage of the inflation crisis. That's happening, but also investing in oil and tobacco. But that's uh that's. uh Those are my two cents uh and I'll I'll. Definitely definitely leave it at that, but uh you know I've said it once I've said it twice on the mic a couple times it I guess it is guess it is what it.

I

Is well I've been here for.

K

I

That what so, what does that mean? uh 120 some odd meetings and maybe half the meetings. We have a closed session being to discuss Investments and not nothing. You know nothing like that's ever come up, but we do invest in baskets of stocks and Philip Morris might be in one of those baskets. Do we invest in felt bars.

N

I

Do we invest in a basket that has Philip Morrison 30 other companies I fill out the annual? Are you investing in these companies and the annual thing I say is I'm purpose says we spread our money like peanut butter around the planet, Are You conflicted with what we're doing I have no idea. I'm, probably invested in thousands of stocks. I.

O

I

Know what I'm invested in so no we're not aware that we're investing in that, but I bet, Phil Morse is probably in one of those baskets right.

M

It is in the asset well as long as it's in the S P 500, uh like Drew, said it's spread out and you know, but the flip side of it is, you know, clean energy right and when we see opportunity and clean energy, we take advantage of that and in our private program we have made those Investments.

K

Okay, that's good, so so my last question follow-up. um So is there? Is there a city policy that prevents us from investing in in like what did I just say, dirty, dirty, Industries, I, don't know.

F

K

Thank you that that's all.

L

Okay, I do think just thinking about this I think on the city Side of our own Investments. We have some policies.

K

I just wanted to just clarify that. Thank you for that clarification.

C

Yeah we looked at that last year, I think on the city side, yeah great thank.

N

You okay thank.

C

You, council, member colleagues,.

O

Yeah Director of Finance, so on the city, Side.

C

Oh here comes the answer on the city.

O

Side on the city Side, the Investment Portfolio, we have uh an investment policy which specifically excludes some of those Industries uh from from our investment. So we have a fixed income portfolio, so we do not buy bonds or Securities from those Industries great.

K

And is there a reason why we don't have a policy for our pension? Is it because it's more run by a third party, we.

C

Don't we don't, we don't determine.

J

The Investments.

K

J

C

What the boards? Okay! We're for other questions, comments.

C

Colleagues going once once: okay, well yeah, please.

J

As the uh representative for the as a council representative to the police and fire Retirement, Board I first want to thank you for the uh uh Retirement Board 101, both the first presentation and the second one and the alpha beta and and your drawings were really fun, but uh and I want to thank Prabhu for the uh really in brilliant investment strategies that have brought us to where we are today, which is in a pretty good place.

J

Even though we have substantial unfunded liabilities that we have to consider, but that was really created over years ago and and continues to accumulate and eventually you can see It'll be over, but not in my lifetime. But I want to thank all the fiduci, the trustees who, on both sides who are fiduciaries to those accounts and their their fine management of the systems. So thank you.

C

Yeah, thank you councilmember and I'll Echo that I appreciate all the good work. That's been done, we're clearly on a much better trajectory from from a very dark moment and I know that's due to a lot of the leadership in this room and appreciate you also taking the time to be here today to educate us and answer questions and look forward to working with you all in the years ahead. So thank you and with that, unless we do Tony I apologize, we need to go to public comment. No.

F

E

F

C

Okay, we'll have one public comment period go ahead.

E

Is there anybody in person.

F

And there are no hands online.

C

B

With that, you all got off easy. We were adjourned.

B