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HomeMy WebLinkAbout11 CalPERS Investments Agenda Item # I I ..... ..... ... . ......... Public Utility District WORKSHOP To: Board of Directors From: Nancy Waters Date: December 17, 2008 Subject: Discussion of CaIPERS 1. WHY THIS MATTER IS BEFORE THE BOARD This workshop is to provide information about CaIPERS investments during the current financial market downturn and how employer rates may be affected. This update was requested by the Board. 2. HISTORY The District joined California Public Employee's Retirement System (CaIPERS ) in 2004 to provide safe and secure retirement benefits for District employees. 3. NEW INFORMATION CaIPERS recently released a circular letter to public agency members stating the following: The CaIPERS pension system remains sound amid the current global market downturn. CaIPERS adheres to a prudent, long term investment strategy and maintains a diversified portfolio that is well-positioned for the long term. While the market value of assets has experienced a decline in recent weeks, the pension system is structured and well diversified to withstand these fluctuations. Employees' retirement benefits are safe, secure and protected by law. The CaIPERS rate stabilization policies spread market gains and losses over 15 years, thus reducing the volatility of employer rates. Employer contribution rates are affected by the investment return of a given fiscal year in the third fiscal year that follows. The impact of this fiscal year, 2008/2009, will first impact the employer contribution rates in the 2011/2012 fiscal year. As a result of the rate stabilization method adopted by the CaIPERS Board, this impact will be greatly mitigated. However, employer rates will increase if the 2008/2009 fiscal years ends with an investment return of negative 20 percent or more. The circular letter from CaIPERS is attached and explains in further detail how employer rates will be affected in the future. Staff will continue to monitor and report back to the Board should there be any changes to the current situation. 4. FISCAL IMPACT The fiscal impact of the 2008/2009 financial market downturn on employer contribution rates will not be felt until the fiscal year of 2011/2012. At that time, the affect on employer rates will vary depending on the magnitude and security of the economic downturn. 5. RECOMMENDATION Receive this report and provide feedback to staff. Mary Cha Michael D. Holley Administrative Services Manager General Manager P.O. Box 942709 Date: November 18, 2008 Sacramento, CA 94229-2709 Reference No.: 888 CalPERS (or 888-225-7377) Telecommunications Device for the Deaf Circular Letter No.. 200-056-08 CaIPERS No Voice(916)795-3240 Distribution: I, IA,A www.calpers.ca.gov Special: Circular Letter TO: ALL PUBLIC AGENCIES SUBJECT: INVESTMENT RETURN IMPACT ON EMPLOYER RATES ATTENTION: FINANCE DIRECTORS, HUMAN RESOURCE DIRECTORS, PUBLIC AGENCY DECISION MAKERS CaIPERS is sending this circular as a result of our commitment to periodically provide information regarding the current financial market volatility impact to the CaIPERS trust fund, to our employers and to our members. CaIPERS continues to manage a well diversified portfolio and maintain a prudent, long term investment strategy in order to ensure the financial security for those we serve. RECENT EMPLOYER OUTREACH CaIPERS issued Circular Letter 310-050-08 on October 6, 2008 in order to inform public agencies of the CaIPERS investment policy and strategy during the market decline. That Circular Letter also addressed the impact of financial market volatility on employer contribution rates and on the security of retiree benefits. On October 21, 200.8, CaIPERS staff presented an agenda item to the Board of Administration that assessed the impact to the System's funding status and employer contribution rates under various 2008/2009 fiscal year investment return scenarios. In addition, CaIPERS Board Members and Executive staff addressed these same issues extensively during the 2008 CaIPERS Educational Forum that was held in southern California from October 27 through October 29. This Circular Letter updates the information shared in October and includes the impact of a revision to the fiscal year 2007/2008 investment return and more recent asset return information during fiscal year 2008/2009. FINAL 2007/2008 INVESTMENT RESULTS In July 2008, CaIPERS released preliminary net of fees investment returns for the 2007/2008 fiscal year of about negative 2.5 percent. Consistent with previous years, this announced return was labeled preliminary because the market value figures for the real estate and Alternate Investment Management (AIM) programs were as of March 31, 2008 and December 31, 2007, respectively. Circular Letter#200-056-08 - November 18, 2008 The one to two quarter lag is a normal consequence of the time private market partners take to complete their financial reporting to CalPERS. This lag is consistent with industry reporting standards. CalPERS has now obtained final figures for these investments. The official 2007/2008 investment return net of expenses is negative 5.1 percent. More information about the official investment return is available on the CalPERS web site at www.calpers.ca.gov. IMPACT ON 2010/2011 PUBLIC AGENCY EMPLOYER RATES Local public agency contribution rates are affected by the investment return of a given fiscal year in the third fiscal year that follows. For example, CalPERS recently set the employer contribution rates for fiscal year 2009/2010 based on the investment return of the fiscal year ending June 30, 2007. The negative 5.1 percent return for fiscal year 2007/2008 will first be reflected in the public agency employer contribution rates applicable for the 2010/2011 fiscal year. CalPERS achieved double digit gains in each of the four years leading up to the 2007/2008 fiscal year. Through CalPERS 15 year smoothing of investment returns, these previous positive returns will cushion the impact the 2007/2008 investment losses will have on employer contribution rates in 2010/2011. In fact as of June 30, 2007, the asset smoothing method set aside about 14 percent of the CalPERS fund as a "rainy day" fund. The negative 5.1 percent return for fiscal year 2007/2008, about 12.9 percent less than the 7.75 percent expected rate of return, uses up most of the 14 percent of the rainy day fund. The good news is that employer contribution rates in 2010/2011 are not expected to increase as a result of the 2007/2008 negative 5.1 percent return. In fact, with the rate smoothing policies at CalPERS, the estimated impact of the negative 5.1 percent investment return is a decrease up to 0.1 percent of payroll in expected 2010/2011 employer rates. This assumes that all other actuarial assumptions are realized in aggregate. It is important to note that in recent years, the demographic experience of most plans translated to increases in employer rates. By now, you should have received your actuarial valuation report as of June 30, 2007, which set employer contribution rates for fiscal year 2009/2010. That actuarial valuation also contained an estimated employer contribution rate for fiscal year 2010/2011. However, due to timing and availability of data, that report projected the 2010/2011 employer rate using the preliminary estimated negative 2.5 percent rate of return rather than the actual negative 5.1 percent investment for fiscal 2007/2008. The projected employer contribution rate for 2010/2011 shown in the annual valuation report should be about 0.1 percent of payroll higher than the figure contained in this most recent report. Circular Letter#200-056-08 -3- November 18, 2008 IMPACT ON 2011/2012 PUBLIC AGENCY EMPLOYER RATES The investment return for fiscal year 2008/2009 will first impact public agency employer contribution rates in the 2011/2012 fiscal year. As a result of the rate stabilization method adopted by the Board, the impact on employer rates will be greatly mitigated. However, the smoothing method adopted by CaIPERS imposes a corridor of 80 percent to 120 percent of the market value of assets when determining the smoothed actuarial value of assets. Stated another way, the 15 year smoothing method stops when the actuarial value of assets hits 120 percent of the market value of assets or 80 percent of the market value assets. The corridor limit will be hit if the 2008/2009 investment return reaches about negative 13 percent. Investment return lower than negative 13 percent will produce a significantly greater impact on employer rates. Note that the impact on employer rates will vary from plan to plan based on the assets of your plan compared to the payroll of active members of your plan. The higher the ratio of assets to payroll, the greater the change in employer rate. The table below shows the estimated impact of various 2008-2009 investment returns on the employer rate for fiscal 2011/2012. ESTIMATED Change in Employer Contribution Rates in Fiscal 2011/2012 Hypothetical Investment Return for 2008-2009 -20% .15% -10% 0% 7.75% 10% 20% Return Return Return Return Return Return Return Range of Increase Increase Increase Increase Decrease Decrease Decrease Estimated of about of about of about of about of less than of about of about Changes in 2%to 5% 1%to 2% 0.2%to 0.1%to 0.1% of 0.1%to 0.2%to Rates in Fiscal of Payroll of Payroll 0.5%of 0.2% of Payroll 0.2% of 0.5%of Year 2011/2012 Payroll Payroll Payroll Payroll If CalPERS does experience a negative return in 2008-2009 as illustrated above, and then returns to its anticipated 7.75 percent investment return, employer rates would likely continue to rise slowly over time. Returns in excess of 7.75 percent in subsequent years would be necessary to prevent a steady rise in employer rates. For example, if the 2008/2009 fiscal year ends with an investment return of negative 20 percent, investment returns of 7.75 percent in the next few years would result in increases in employer rates of about 0.2 percent to 0.6 percent of payroll each year. circular Letter#200-056-08 -4- November 18, 2008 IMPACT ON FUNDED STATUS CalPERS determines a plan's funded status by comparing the market value of assets to the accrued liability. The table below displays the average funded status of CalPERS public agency plans as of June 30, 2007. The table also shows the estimated funded status as of June 30, 2008 based on the negative 5.1 percent return during 2007/2008. Funded Status on a ESTIMATED Funded Market Value of Status on a Market Assets Basis as of Value of Assets Basis June 30, 2007 as of June 30, 2008 Average Public Agency Miscellaneous Plan 103% gg% Average Public Agency 99% 85% -Safety Plan The table below provides estimated average funded status for CalPERS public agency plans as of June 30, 2009 under various possible investment return scenarios. ESTIMATED Funded Status on a Market Value of Assets Basis as of June 30, 2009 Based on Hypothetical Investment Returns Hypothetical Investment Return for 2008-2009 -20% -15% -10% 0% 7.75% 10% 20% Return Return Return Return Return Return Return PA MisC 66% 70% 74% 82% 89% 91% 99% PA(Safety)_ 63% 67% 71% 79% 85% 87% 1 95% CalPERS cannot predict what the rest of the fiscal year will bring in the way of investment return; therefore, we are providing these scenarios to employers in order to build awareness of the potential impacts due to the global market downturn and to assist administrators with long term planning. CalPERS will continue to utilize our full range of resources and talents to protect our employer and member financial interests today and into the future. If you wish to discuss these issues further, please contact your CalPERS actuary at 888 CaIPERS or (888-225-7377). Ronald L. Seeling, Chief Actuary Actuarial & Employer Services Branch FACTS AT A CLAN CF: Facts At A Glance is a monthly compilation of information of interest to Board Members,staff,and the general public. Information is current as of September 30,2008,unless otherwise noted.Every effort has been made to verify the accuracy of the information,which is intended for general use only.Please direct any questions and comments to the Public Affairs Office at(916)795-3991. INVESTMENT PORTFOLIO MARKET VALUE $213.5 Billion(As of September 30,2008) ASSET CLASS BY MARKET VALUE&ALLOCATION ASSET CLASS MARKET CURRENT CURRENT PREVIOUS `PASSIVE VALUE ALLOCATIONN;) TARGET* TARGET VS.ACTIVE PASSIVE ACTIVE $4.2 1.9% 0.0% 0.0% 0.0% 100.0% $46.0 21.6% 17.0% 0.0% 100.0% $4.7 2.2% 2.0% 0.0% 100.0% $50.7 23.7% 19.0% 26.0% $26.1 12.2% 10.0% 6.0% 0.0% 100.0% $62.1 29.1% 28.0% 40.0% 64.10% 35.9% $44.5 20.8% 28.0% 20.0% 62.7% 37.3% -- $132.7 62.1% 66.0% 66.0% $21.8 10.20% 10.0% 8.0% 4.1% 95.9% $4.2 2.0% 5.0% 0.0% 1.00.00% Totall<u-nd $213.5 100.0% 100.0% 100.0% 31.7% 68.3% Target allocation Effective December 2007. GROWTH OF FUND YEAR YEAR-END 6/30 YEAR-END 12i31 1.985 $28.6 billion $32.7 billion 1990 $58.2 billion $57.5 billion 1995 $87.8 billion $96.9 billion 1996 $100.7 billion $108.0 billion 1997 $119.7 billion $128.2 billion 1998 $143.3 billion $150.6 billion 1999 $159.1 billion $171.9 billion 2000 $172.2 billion $165.2 billion 2001 $156.0 billion $151.8 billion 2002 $143.4 billion $133.8 billion 2003 $144.8 billion $161.4 billion 2004 $166.3 billion $182.8 billion 2005 $189.8 billion $200.9 billion 2006 $208.2 billion $230.3 billion 2007 $247.7 billion $253.0 billion 2008 $239.2 billion TOTAL RETURNS(NET) Fiscal year to date ended 9/30/2008 -10.81% 3 years for period ended 9/30/2008 3.30% 5 years for period ended 9/30/2008 7.84% CALIFORNIA INVESTMENTS AND COMMITMENTS Approximately$22.0 billion-or 10 percent of total fund as of September 30,2008. Fixed Income $5.2 billion Equities $8.8 billion AIM $2.0 billion Real Estate $5.9 billion R HISTORICAL RATES OF RETURNS' YEAR YEAR END 6/30 YEAR END 1.2;32 1984 -3.1 12.9 1985 35.4 28.0 1986 24.6 15.9 1987 13.8 4.3 1988 3.9 12.8 1989. 15.7 21.3 1990 9.7 -0.8 1991 6.5 23.0 1992 12.5 6.5 1993 14.5 13.4 1994 2.0 -1.0 1995 16.3 25.3 1996 15.3 12.8 1997 20.1 19.0 1998 19.5 18.5 1999 12.5 16.0 2000 10.5 -1.4 2001 -7.2 -6.2 2002 -5.9' -9.5 2003 3.9 23.3 2004 16.7 13.4 2005 12.7 11.1 2006 12.3 15.7 2007 19.1 10.2 2008 -4.9 Dated:1111712008 Beginning 6130102 performance figures are reported as gross of fees.