CalPERS Background 1,439 School Districts 1 State of California 1,581 Public Agencies 3,021 Total Employers in Retirement Program 650,000 Receiving Monthly Pension Benefit 1.85 Million Members Source: June 30, 2016 Comprehensive Annual Financial Report * Retirees and beneficiaries and survivors

Our Members

Pensions are a Shared Responsibility Employer Employees CalPERS Pension

Shared Responsibility

annualized return Since 1988 Today: $335 billion in assets 11.20% 8.83% 4.39% 6.60% 8.40% 2016/17 Portfolio Return 5-yr Annualized Return 10-yr Annualized Return 20-yr annualized return annualized return Since 1988

CalPERS Historical Allocation Discount Rate,10yr Rolling Return, and 10yr US Treasury Yield

Factors Driving Funding Risk Plan Demographics Market Conditions Asset and liability ratios Plans are maturing Public employees are living longer Increased cash outflows Current portfolio and market environment includes significant risk of volatility Market valuations and return expectations SCOTT Let’s start with some of the factors that are driving Funding Risks. And as you know these risk factors are not specific to just CalPERS. These risks apply to most pension plans and may also be a risk factor in your plan. Maturity levels are at their highest levels and they are expected to continue to increase. More than 10,000 baby boomers will turn 65 each day, and this pattern will continue through 2030… which totals almost 4 million people a year. Not only are the baby boomers starting to retire in large numbers, retirees are also expected to live longer in retirement, and also receive benefits for a longer period of time. ERIC Another risk factor is what we have seen in the financial markets over the past 10 years. It’s safe to say they have brought volatility and uncertainty to the economy.   The need to look at the funding of pension funds is needed more than ever before, as economists and financial experts believe that over the next five to 10 years the economy will head into a cycle of lower returns. Even recently, while the Dow being up is certainly a good thing, it is not necessarily an indicator of the types of investments that we have at CalPERS. We are invested in stocks, which are represented by the Dow, but we also have investments in bonds, real estate, private equity, and a number of other markets. Having a diverse portfolio like we do keeps the fund safe in times where the stock market isn’t doing as well as it is currently.

Why A Discount Rate Change in December 2016? Market conditions have changed Seeing more uncertainty in the forecast Next 10 years are consequential To close the cash flow funding gap Risks in system continue to grow

Change in Market Conditions 7.5% 7.1% Assumed rate of return

Contribution & Benefit Payments

Approved Discount Rate Phase-In for Public Agencies Required contributions from FY 2018-19 to FY 2020-21 FY 2018-19 ─ 7.375% FY 2019-20 ─ 7.25% FY 2020-21 ─ 7.0%

Timing of Change to Annual Valuations Valuation Date Contribution Rate Change State 6/30/16 17/18 Schools & Public Agencies 18/19 Affiliate Plans

Contribution Increases From Discount Rate Change   Normal Cost UAL Payments Valuation Date FY Impact Misc. Plans Safety Plans 6/30/2016 2018-19 0.25% - 0.75% 0.5% - 1.25% 2% - 3% 6/30/2017 2019-20 0.5% - 1.5% 1.0% - 2.5% 4% - 6% 6/30/2018 2020-21 1.0% - 3.0% 2.0% - 5.0% 10% - 15% 6/30/2019 2021-22 15% - 20% 6/30/2020 2022-23 20% - 25% 6/30/2021 2023-24 25% - 30% 6/30/2022 2024-25 30% - 40%

Asset Liability Management (ALM) Framework Plan Demographics Benefit Structure Market Conditions Actuarial Reports Actuarial Policies: Smoothing/ Amortization Asset Liability Management (ALM) Pension Beliefs Funding & Risk Mitigation Policy Treasury Management Actuarial Assumptions Investment Allocation External Factors Driving Risk External Factors Reducing Risk PEPRA As illustrated in this image, our pension beliefs are at the foundation of our ALM process. They are our guiding principles and standards in our journey to identify and develop risk mitigation strategies. The pension beliefs reflect CalPERS view on the importance of retirement security, defined benefit plans, fiduciary duty, and the need to ensure long-term pension sustainability. The boxes above pension beliefs represent the many ways we examine our assets and liabilities, as well as our economic and actuarial assumption. And to the left and right you’ll notice the external and internal factors that are driving pension risk. Later I’ll talk more about the factors driving risk as this is where we really need to focus our attention and ensure that together we are doing what we can to mitigate those risks.

Stay Informed Through the ALM Process Nov. 2017 Experience Study & Educational Workshop: Candidate Portfolios Dec. 2017 First opportunity for Board to Adopt ALM Changes Feb. 2018 Second Opportunity for Board to Adopt ALM Changes Jan. 2017 Educational Workshop: Public Access Apr. 2017 Educational Workshop: Private Assets Jul. 2018 Implementation of Board Decisions Jun. 2017 Approval of Capital Market & Economic Assumptions Jul. 2017 Fiscal Year Investment Returns Announced & Educational Workshop: Leverage Oct. 2017 CalPERS Educational Forum

Considerations Pension prefunding options for employers CalPERS’ focus: reducing cost & complexity Vested rights cases for county pension systems PEPRA employees will reduce unfunded liability curve Already nearly 30% of all members Stakeholder engagement with Board and executive team

QUESTIONS Thank you for your time today. We hope this information is helpful to your decision making. Now we can open it up for questions….

Definitions Asset Liability Management (ALM) — An integrated look at our assets and liabilities to determine the right mix of investments for our portfolio, specifically designed to achieve a sound and sustainable fund. Done on a rolling 4-year cycle. Discount Rate — Also known as the “assumed rate of return”. It is what we assume our $304 billion in investments will return in a typical fiscal year, July 1 to June 30. Normal Cost — The annual cost of service accrual for the upcoming fiscal year for active employees. The normal cost should be viewed as the long term contribution rate. Risk Mitigation Policy — A mechanism that triggers adjustments to strategic asset allocations and reduces discount rate by a set amount when returns exceed a certain threshold.  Unfunded Liability / Unfunded Actuarial Accrued Liability (UAL) — When a plan or pool’s Market Value of Assets is less than its Accrued Liability, the difference is the plan or pool’s Unfunded Liability. If the Unfunded Liability is positive, the plan or pool will have to pay contributions exceeding the Normal Cost.