starting point of the exercise. now when it goes to risk mitigation, our view is that the whole part of the exercise should be to avoid big losses. not to try to smooth the volatility of returns due to normal gyrations of the market. why is that important? if you look since 1976, there have been 21 periods when s&p 500 has lost more than 10%. out of those 21 episodes, 16 happened during nonrecessionary periods and guess what the recovery time was? only 89 days. the markets took only three months to recover to their previous peak. on the other hand, the other five times when these losses happened during a recessionary period, they happened to be much larger than 10%. and the recovery time was sometimes many years.

and these are the events that you're really trying to protect the plan against because these are the events which can lead to some optimizization of the plan levels for selling contributions. there is no one strategy as my colleague mike will momentarily talk about that can persevere and manage through these protected pers of losses that one can see during recession. the answer in our view is asset allocation. just like there is really no debate about a diversified portfolio is better than pa concentrated level. diversify your diversify, that's the name of the game. some of these strategies worked very well in a sharp sell-off in the market. u.s. treasuries would be one

example. there were others that worked well in a protracted sell-off because it is very difficult, if not impossible to forecast what will be the onset of the sell-off and what would be the nature of the sell-off. in our view, the best approach is to put together a portfolio of these strategies. but ultimately, in our minds, this is an asset allocation problem and something that can be solved by considering a full strategy. let me pass it on to mike who will walk through one of the different levels that are available to investors like yourselves and when do these sfwhork what are the optimal conditions when they perform and what are times when they don't work? >> thank you. i was going to review briefly page three. you've seen an earlier version of this, i think. probably from us previously. and then i know there was -- since there's been a good amount of talk about scheduling, i might address the

previous issues that came up on scheduling but then i think we'd like to throw it open and answer whatever questions you have. let me just run over this sort of -- we have the new addition, by the way, the thing we have not probably discussed with you before. there are the two at the bottom of this chart on page three. so, potentially if we have time we can discuss those two. just briefly, long duration treasuries. historically a positive expected return. investment that has been good hedge of equity risk. but it's certainly not always a hedge of equity risk. this months was another case where it wasn't, right? this wasn't really a big sell-off. but definitely equities and bonds went down at the same time. not perfect, but if you balance it against the sketching, which is the second line of the table. so, it involves buying out of money options essentially to

protect your portfolio. by almost definition if you own an out of the money put, which is protection against your equity assets f. that falls, it is going to form. that is its contractual obligation. but you pay a price essentially, right? and that is the negative expected return on buying and holding options as you discussed. these two at the top are used in portfolios for similar types of purposes, to protect against these sharper equity moves down where typically, historically, treasures have been quite responsive as we saw in 87, '09 and several times before, but it is not a guarantee. we've seen investors put in the

sort of bucket of strategis that can hedge against sharp drawdowns. trend falling, managed volatility equity strategies are all strategis that require a little bit of time to work, which will tend to work better in an extended drawdown and which historically has been positive return and quite nice positive expected returns. so, you include those in the portfolio because they have the potential for equity-like returns but will be uncore lated with equities or potentially negatively core lated with equities. but these strategis are also not perfect. the trend fall we were just talk about. so, the answers to the questions that got asked, how long does it take a trend follower to recognize a trend? it varies. i would say at a minimum, most of them are two weeks before they really start to establish significant positions. that is how our trend follower works. slower ones could be a month or longer.

so this most recent sell-off was a little too quick and none of the trend followers came in and found it on the wrong way around, unfortunately. the sell-off at the beginning of 2016 was extended enough that most of the trend followers caught it and did quite well, actually. that is the most recent example when they were up 10% when the equity market was down 10%. but it was a slower sell-off. i think the diversifying the diversifiers theme comes out because some work well in some circumstance and some work well in others. and in particular for the sketching which i'll touch on in a second. but that sort of thing you can easily have the option where the market sold off and if you didn't do anything with it, the option went up in value and proceeded to come back to zero. simply buying and holding those kinds of things can be problematic. >> if i could add about the treasury, too.

in addition to the sharpness of the sell-off, it is the reason. so, in '08-'09, there was a fear of deflation and the past week or two, there was a fear of inflation. so treasury behaves differently in those two types of sell-offs. >> that is exactly right. the research we suggests is that treasuris are more effective as risk mitigants are [inaudible]. and i thought we would take some questions. maybe the best thing to do if we could would be skip to page -- let's look at page nine for a minute and then page 10 beliefly.

so page nine n particular the one i want to focus on is these are sort of five-year periods where you buy options. these are back tests. but what they are is purchases of one year out of the money options. what i want to make a point on this in particular, this is already addressed previously, only really works in sharper sell-offs. if you look at this, the tech bubble was a sharp enough selloff and the financial crisis was a sharp enough sell-off that if you'd owned hedges going into those crises, they would have helped you. but if you look at more mild sell-offs such as the sort of russian default in the end of the 1990s, in those scenarios, the sell-off wasn't as strong and it would have ended up being a drag on the portfolio. you have a five-year period where you had a decent sell-off but didn't do much for you. so, those on their own are probably good at hedging deep

sell-offs but more moderate things. they're certainly not suited for. and unless they're implemented directly, are probably going to be a drag on the portfolio. if you flip to page 10, this was the question around what are the historical costs of hedging a portfolio. this is a historical cost chart of hedging a portfolio 81% to the s&p 500 and so% to the nikkei. so, a u.s.-centric portfolio which isstomy what you have, having done some quick work on it. you can see how the cost of these hedges vary pretty dramatically over time. and during times like the financial crisis, if i take the green line in the middle, which is hedging a portfolio. that's the floor you are looking to put on the portfolio. you are looking to essentially stop the losses over a one-year

period at that level. if you purchased those hedges in the middle of the financial crisis, they might have cost 8% of your portfolio value. i guess that it really only affects -- you have to have them ongoing into the crisis. because if you try to buy them in the crisis, they're definitely too expensive and you can see how expensive they got. >> so if you need these and buying them at the time you need them, they're very expensive. the time to buy them is before you need them. and then they expire worthless and you lose money if the time -- if that time passes and the decline didn't occur. and then you are forced with a

decision do we buy them again? so it can be a conundrum. it is definitely a challenge from the point of view of -- do i write another check, do i not. if we could flip to page 10? page 11, sorry. this will give you a sense in our estimation of the long-term negative cost of options. this is a simple -- this chart has two thing on it. the green line is -- sorry, the yellow shrine is the s&p 500 and the green line is the s&p 500 where every year we passively go out and buy a hedge and the hedge is a spend of 1%. at the beginning of every year

and i might have discussed this previously. but your hedging strategy is 99% of the portfolio and equity is 1% and one-year hedge and then reroll it every time. your 7.3% return didn't go to 6.3%. but of the 1% you invested in hedges, it had a negative 30% return. right? on average, buy and hold hedging. this ratio would probably be -- you know, people would be in broad agreement about it. , it has a negative return. if you happen to buy the put before the sell-off, it is hugely beneficial, right? in the way you happen to go short equities.

over the long-term, there's been a substantial drag on portfolio returns and when you buy closer to the money options like 5% or 10% of the money options, you find the drag to be even greater. because they're more expensive. can you explain again what is the scenario here? what are you hedging at? >> sure. the way this works every year we're going to spend 1% on hedges. 1 pktz of the account value. i have a portfolio that is essentially all s&p except for hedges t. strike price of that hedge is going to move around because the cost of the options are moving around. the reason we focus on 1% is

because in our experience, most of the investors that hedge, they tend to have a budget around 1%, 1.5%. that is what they typically spend. they will allocate something for a hedge, but not too much. the point is to illustrate the 1% spend over this is 60-year period at 30% of the premium you spent. >> and didn't any p.c. model this as to what the impact would be on our returns if we did a systemic hedge at 5% of how the money puts and wouldn't it reduce our returns with simply 1.5%? >> yeah. the assumption we used is hedging 100% protection for the global equity portfolio in. this case, there would be 0 downside.

>> that makes perfect sense because those options are a lot more expensive. in some sense, they ought to look like cash, right? >> you eliminated all the downsides sneer this scenario here? >> no. no. our scenario is amounting the level of protection for 1%. it will be at least some of the money. and the reason we did think way is because -- >> i misunderstand. it's 1% of assets spent for full coverage, whatever you can buy for full coverage. >> it covers the entire -- >> no. no. whatever you can buy for 1% at

that point of the contract. so, you may end up covering 50%. you can end up covering 20. >> at what percent loss? >> it varies. he was saying it is at least 20%. >> i think maybe i'm not expressing myself clearly. i just want to make sure i get this. you're saying you are going to set aside 1% of equity assets -- >> and just to be clear, right? you're certainly not hedging all your risk. the hedges you buy will be of a face amount equal to the rest of the portfolio. 99%. but the protection itself will be deep out of the money. with a 20% deductable and 30% deductible and potentially even more, maybe as much as 40%. >> that will change -- >> correct. >> we're all saying the same

thing in different ways. thank you for helping me get there. >> when you threat amount of premium amounts spent over time, it is tough to get a sense of the cost. if you know you're only spending 1% a year, then you can see what that 1% spend gave back to your portfolio and gave back negative 30 basis points. >> what the bottom line is, if you're implementing a hedging programme, it is something that needs to be a long-term decision for all the reasons that we mentioned. because there could be a period of five, six years where these hedges don't pay off and don't come to fruition. and that is good because having some hedging in the portfolio, maybe it allows you to keep some risk on. i also want to be balanced about the benefits of having some hedging in the portfolio. there are some clients we work with globally. they have decided to have

downside protection if built into part of the risk mitt investigation portfolios because one of their goals is not tonight provide downside protection but for the risk mitigation to provide positive returns and the markets are going to a sharp sell-off. if that is one of the considerations, then maybe it should be larger. but if you take a step back, the sell-offs here are on the cost of the hedge versus the reliabilities of the hedge. so assets like treasury, strategies, they don't have quote-unquote a cost associated with them because they have a positive expected return. but what you're not getting is reliabilities of protection. there isn't a contractual linkage between the performance of those assets and a sell-off in the equity markets. they will pay off if the

correlation pattern holds. if the stock market continues to be negative and equities sell-off, having some treasury in the the portfolio will help. but it is not a guarantee. those are the trade-offs. what is the cost of the protection or the expected return on your hedge? what is the reliabilities of that hedge? and then finally what is the execution? because for all of these things, hedging, manage futures, depending on which one you pick, your performance and your experience could be very different. for example, there are managers who have designed trend following strategies primarily for the purpose of diversification. so, if the only trend in the market is equity markets going up. so they will limit the exposure

to trends that move the equity markets. you can design a trend-following strategy which cannot take very long positions in equitis so that ensures that in a scenario like what we just saw a week ar so ago, it doesn't get hurt. because it is not allowed to have that much equity to begin with. the trade-off is in a period like 2014 through 2017, when we had a one name moving the equity market, we're not going to be making as much returns as a normal trend follower. so, really what it boils down to, is at the plan level, what are the objectives. what is this risk mitt investigation designed to do. what type of slippage or basis against the equity markets you are willing to accept. and what type of execution risk that [inaudible] because of the managers you are picking.

those are the three dimensions and that's why for most of the client, globally, this is a multipronged approach. they know the best way to deal with the many things that i mentioned to you is having multiple strategies and multiple mercks who are implementing those strategies. >> so, the key is putting those together. >> precisely. that is the asset allocation decision. you at a policy level say, look, it is very important for me, for the risk mitigation portfolio to get a high return because the markets are down and i would like to take that task and deploy it back to the markets where arguably markets are distressed and relatively cheap, then you should consider some form of risk. if that is not one of the goals maybe it should not be part of the opportunities.

>> then it becomes manager selection and strategy within the asset classes. there is diversification in geography and sector and style and all those diversifiers that help as well. >> so the board knows and we talked about this before is this is something that i asked to be put on the agenda because we need to have bigger, more global discussions about risk than we probably have in the past. one of the things i said before is you can't just diversify away all your risk. i understand that diversification is an important component. but if you make bad choices about what you're diversifying in, then you end up with our experience in '08-'09. we need to be smarter about our asset allocation process which you all have been work on.

the data clearly says it doesn't make stones do a blanket hedge across the board. but if you start modeling out 5% hedge or 10% hedge or 15% hedge and there is all different kinds of strategies, does that push you sort of up and to the left on the risk-risk ---risk-return profile? if >> there any point it can take you off and shift the curve? >> putting together these diversifying strategies, ideasly you are coming up with something that is giving you potentially not much of a dimunition in return. we worked on a strategy for a large investor that combined an alternative risk premium strategy to generate returns with a certain amount of -- which was like a trend follower, designed to do well

in sell-offs inspect a certain amount of long options to protect against the things that the trend follower essentially could not. and i think those kind of things can make sense. but you really want to -- tune it to what your portfolio is and what your risks are. right? and i think that it is clear that if you try to hedge away all the risk, you kind of hedged away most of the return, too. right? and somewhere in the middle there has to be a balance. but by having multiple different ways of diversification, each of which potentially address difference risks, you're hopefully a little bit more certain that your risk portfolio will do well when things sell-off. but it is exactly to the point that she's made. it is all a question of what does it do to returns and what does it do to your long-term objectives, right? and it is a a very tough balancing act. >> commissioner, i think that we have done a lot that

addresses your interest in performing our performance and down markets, especially relative to 2008. for example, we've gone from about 57% in long only equity to about 45. i think we're on our way to 31. 31 is getting to a really low number. i don't think that would be another public plan in the country that is as low as 31. we've also reduced our core bonds exposure from 20 to -- and we're reducing it down to 0. because of the bleak outlook for returns. we replaced that with a series of long-short global macro relative value strategis in absolute return by going from 0 to 15% and we're about half way there right now. we're around 7 or something.

we've implemented a real assets programme to increase inflation protection. within bonds, we've also set aside a 6% allocation for treasuries along the lines for some of the reasons that you've seen here. our downside protection is much better than it wass in 2008. in 2008, our bond portfolio looked a lot like an equity portfolio. it had a ton of credit risk. when credit blew up, it did poorly. >> can i just -- can i -- for time's sake can i stop there and open it up to the board for questions? this is kind of a natural place. >> just one more minute? ok. in the long-term, diversification almost always works. it works spectacularly in the bursting of the internet bubble. back then, real estate made money. reits made money.

value stocks made money. hedge funds earned double-digit returns in the bursting of the internet bubble. in most periods, diversification does work. in a severe, systemic-wide sell-off like we had in 2008, diversification does not work as well. but also what happens post that, the government comes rushing in and says i'll guarantee that. i'll back that. i'm good for that. they can't let risk at-prices fall to zero. what happens after that is you have a robust recovery. >> can i -- can we talk about that some other day. i don't want to keep everyone here all night. >> the bottom line is we believe the best approach, we've had dozens of meetings on this over years, is we believe the best approach to risk

mitigation is through thoughtful asset allocation. >> ok. >> i agree it is the best. but is it the only one? >> no. of course not. >> bingo. thank you t.s >> it's not. >> we talk about the presentation that's in front of us today. and for pimco, is this an ok place to sort of pause or do you want to make another point? >> sure. sure. happy to take questions. >> great. can i open it up to the board for questions? there has to be at least a couple. [laughter] >> did you receive the 18 questions that i submitted to mr. martin on this topic? >> 18 questions? >> no. >> excuse me. excuse me. ok. let me just go to page 30. since this is an educational

issue, you priced out 5% strike price -- >> what page is this? >> page 30. it is a very high average price, 5%. that's one, too. it shows that if we strike at 10% where i think the premium was running more at the 2% level, it starts to change these numbers dramatically. if the different strike levelss will have different cost points. what are we trying to achieve? and then i shall go to almost the last page in pimco's presentation. i can't item if they're for or against doing this.

on page 24, these are gross return numbers, not yet. i'm not sure how to adjust their performance numbers for net. but that shows you the added value. the number i do not have to give you, and i've asked a couple of people to include mr. hallmark from chyron, we're using 7.5% at assumed great return. we know there will be bad years. the question is at this two deviation level, are we understanding that we're going to use 2.5% this year. that's ok. we don't ensure for that. that is your tolerance. let's put in that strike price at that level. that is what i'm trying to understand. because at the point when you do want to buy insurance, there is a time when you don't need it. you go to the markets a long time. it's more expensive. we discount that all back into it. when to do it, when not to do it. what is the effect on the total

portfolio for adding value because that is when we turn around and say, ok, contributions have to go up because of that. >> so, just one point on page 24. we had all five strategies here. that is managed volatility you can see. there is a highlight on the top. this is actually a chart of a different strategy which i can't explain, but essentially a strategy that dynamically increases and decreases equity exposure based on market volatility. historically, that has been a good strategy. typically when equity markets are volatile, they're going down, you want to own less of them. when equity markets are less volatile, you want to own more of them. like last year. historically a strategy like that has outperformed straight long equities. certainly not a guarantee.

but historically it's worked. this would be an overlay strategy. >> based on rules you wrote for that clients. >> yes. we have a number of these triggers. >> they're customizable. right? >> yes. but it is not an options portfolio. it is a programme that essentially if you want to think about it, it dials up and down your equity exposure based on how volatile the market is. it's not going to work well when things are choppy. but it will work well when we get long-term. >> that is something we can determine, how much choppiness we can handle. i'll stop and leave the other 14 questions to another time. >> comments, questions, discussion? >> ok. so, we need -- we're trying to make changes so we don't have a

2008-2009 again. for all the obvious reasons. the clients that has what they're calling a managed volatility model s. this actual performance based upon real decisions or is this performance based upon perfect information looking back? >> so, this is a back test of the model that we're running for certain clientses today. but it is only going to run for the last four ors five years. there are track records of live performance, but they really only go back four or five years. people have been doing this longer. just we haven't. >> would you say that this is an accurate reflection of what returns would have been if he got in around '99, 2000. or is there maybe not interpreting data the right way. does that make sense? >> i think it is an accurate reflection. sure.

but it is a strategy that we put it together in the fashion that we think makes the most sense. [please stand by] [please stand by] board?

>> are we on time? >> the meeting's going to adjourn pretty quick. everyone has plans tonight. >> for the action items, as least. >> to the see attorney? >> just i'd like to take public comment on this before we close it out. >> of course. appreciate that. >> was this helpful, commissioner? sk >> i think it was really helpful, and i think we need to bring back some of this and maybe break it down to another level. just last question for pimco, when you see an insurance company, and they don't have

the benefits of actuarial smoothing, what percentage of their portfolio is doing something like this? >> i would say in the -- so they're doing it in the variable annuity portfolios. they have to essentially write a put option on. the insurance company's writing some sort of an agreement that says like in certain events, if a client dies, so they have to make good on it contingent on certain things happening, and they have to go out and buy essentially protection, otherwise, the capitalism on this are too great. [ inaudible ] the part of the portfolio where they have this, we they have a

lot of it are specifically in their unite variable portfolio. >> well the variable annuity portfolio investments, what percentage would you say is managed volatility strategies. >> so a larger and larger chunk. so the conventional assets would be 80 to 90%, so a whole lot that are not managed using a managed volatility approach, but this is something that's taken off in 2010, and this market continues to grow. >> and essentially, essentially, this product got designed because proeost crisi the insurance companies found it was too expensive to buy options, only buys options to hedge their risks, so they were looking at ways to reduce their equity risk in these portfolios, so not too

dissimilar to what we're talking about today. >> so it's one of many strategies that they're investing in. >> and this is a way of passing on the cost of hedging to the end consumer. you can think of it this way, by having a managed volatility index, there's two benefits for them. one is it reduced their own end balance sheet volatility, or keeping it within a narrow band, so it improves their balance sheet valuolatility, a then, they're passing on the end cost of insurance to the annuity buyer. but in the institutional space, we haven't seen this done in math, okay? so the ones who have done it, they would be earning more, to be sure. >> i have one last question. is there any public -- are there any clients that you have or any firm that -- dalman,

public plans, etcetera, that are being really smart about how they're trying to manage volatility? you think they're doing anything really sort of game changing or... >> so the -- the game changing things would be actually things that are quite simple, as in having very robust rebalancing rules and sticking to those rules, changing the governance structure so that the evaluation horizon for some of these strategies is truly a business cycle, so you can have the wherewithal to stay with them. there are some what are packaging the insurance hedging or the insurance buying program. if they do that, they know that having to write checks every quarter or every six months, becomes very painful once you have done that for several years. they're packaging that, along with strategies that generate a positive return, so the idea is

to make the insurance payment offset by a positive yielding strategy. so those are -- those are some of the innovations, if you will. one final thing i would add is there is a way to be very capital efficient when putting together these programs. so for example, managed futures and alternative premium risk use strategies, they all require a lot of cash to put on at the portfolio level, so these strategies could be employed on top of equity, they could also be put on top of the existing longeration bond exporter that you have. so these are things that could be considered. can these strategies be allocated to on top of existing liqu liquid exporters you have in

the portfolio. >> so we're talking and/or law there. >> yeah. >> and we're discussing -- >> and the -- there are some public plans that we think are really at the forefront of risk management. utah is one of the santa barbara, i would -- excuse me, san bernardino would be another one. all of the missouri plans do a very good job. >> any last questions before we call for public comment? commissioner driscoll? >> i have to say [ inaudible ] we are not trying to define contribution plans, [ inaudible ] two. in -- two, in terms of one huge question that we have not really answered is what is the amount of volatility we can accept. what we're not going to accept, we go to insure on.

i think that's when we go to the next level of shares and managed futures, and once we decide what we can do, then to achieve it cost effectively. to define benefit obligations that we have, that caused us to look at where we're spending money, what rate of returns can we really expect before we have to move things, so i'll just stop with that comment and thank them for 3u9iputting thi packet of information together. >> thank you, mr. -- pimco for coming. we'll call for public comment. any members of the public that would like to comment, please step forward. two minutes, mr. furland. mr. furland, i give two

minutes to everyone. [ inaudible ]

>> -- where that was on page 34 would tell me how you don't get -- >> 30 seconds. >> [ inaudible ] you're ten years into a bull market in march. [ inaudible ] >> you put it on at the end of a bull market when you can, okay, and you take it off when there's a huge supply in the bear market.

it's not taut. [ inaudible ] >> thank you, mr. furland. are there any other members of the public that would like to address the commission on this topic? seeing none, we will close public comment. thank you to napc, pimco, and staff. we'll get back together offline and push this forward to another presentation. do we want to go to kiron for timing? where would you like to go next? [ inaudible ] >> well, what -- okay. that's fine. why don't we go to the consent calendar -- no, let's push parametric to the end. let's do these other items first. >> okay. item 8, the consent calendar? [ inaudible ] >> okay. let's go to the consent calendar.

i will call for general comment. wi are there any members of the public that would like to comment on the consent calendar? seeing none, we will close general public comment. is there a motion for the consent calendar from the commission? >> motion. >> there is a motion. >> second. >> good. so moved. can we take the consent calendar without objection? great. item passes. where did you want to go next? no, i want to go to the actuarial study before we go to parametric. you want to go to item 27? there's not a rush. if we don't get it done today, then we'll find a way to get it done. >> item 27, approve request for industrial disability pension adjustment from 50 to 86%, mark williams. >> commissioners, in accordance

with your policy, you are able to increase an industrial disability when the worker's compensation has awarded an applicant in sets of 50%. in this case, the worker's office compensation appeal board came back and awarded mr. williams a 38% disability and we're asking you to vote to increase that from 50 to 58%. >> okay. >> make a motion to increase it from 50 to 58. >> okay. there's a motion. is there a second? >> second. >> why don't we go to public comment. is there anyone wishing to make public comment on this topic? seeing none, we'll close public comment. can we take this vote? great. item passes.

can we please go to the next item, please. [ inaudible ] >> why don't we go to the minutes, then, please. so why don't we go to item number 5, approval of the minutes. item number 5, approval of the minutes for the january 10, 2018 retirement board meeting. >> so moved s. >> there's a motion. is there a second? >> second. >> there's a second. any public comment? would any member of the public like to address this board regarding those minutes? seeing none, we'll close public comment. can we take -- [ inaudible ]. >> okay. it's not necessary to abstain because you're not present, correct? >> correct. >> can we take this item without objection? >> yes. >> great. item number 5 passes. can you call item number 6. >> minutes of the january 9, 2018 special meeting of the

retirement board meeting. >> there's a motion and a second. can we call for any public comment. seeing none, we'll close public comment. can we take item 6 without objection? great. item passes. item 7. >> approval of the minutes january 19, 2018 of the retirement board special meeting. [ inaudible ] >> there is a motion with an amendment to note that it was the 11:30 a.m. meeting. there is a second. i will call for a general -- or excuse me. we'll call for public comment. seeing that there's no members of the public, we will close public comment on item number 7. can we take this without objection? great. item number 7 passes. we already did the consent calendar. are you guys still working? [ inaudible ] >> commissioner, if you'd like, i can do 16 real quick.

>> no, why don't we hold off. i don't think 16 will be quick. >> okay. >> and good afternoon, commissioners. >> great. so why don't -- are we calling -- this is item number. >> 25. >> item number 25? great. i'll call for a public comment on this item before we begin. are there any members of the public that would like to address this under item number 25? seeing none, we'll close public comment. please. >> okay. i'll let you start though. >> okay. thank you. good afternoon. we're here to present the actuarial evaluation results from the july 1, 2017 valuation.

wanted to hit a couple highlights and talk through a few things. first thing is as part of your report, i'm going to flip over here to the report for just a minute. one of the things "a" (schwa) we added is at the very first page of the report, something we are calling a dashboard that hits the graphic -- that hits some of the key results of the evaluation, we're going to go through some of the results that are in that dashboard, that hopefully that's an easy reference for people out of the first page of the report. so looking at that, employer contribution rates for fifscal year 2019 will decrease slightly to 23.3%. that's about a 15 basis point decrease after the cost sharing adjustment, it would be 19.8%. there's no change to the cost

sharing adjustments for the member. the average member rate about 11.1%. the chart here shows the fiscal year 2018 rates, and the fiscal year 2019 rates, with member rates on the bottom and the employer rates on the top. the new things that we've added to show are the black lines shows where the total normal cost rate is. that's the amount -- that's the value of the benefits attributable to the next year of service, so that's what you're paying just to -- for pima crewing benefits for the next year. any contribution above that is going to pay down the unfunded, except the contributions between the black line and the blue line are just paying the interest on that or actually are paying it down. it's the contributions above the dashed blue line that are actually paying down the

unfunded. but -- and this shows that you are paying down the unfunded which, if you look nationally, a lot of systems are not even making enough payments to pay the interest on their unfunded, and so the unfunded would be growing as a dollar amount. so this shows that you have a very sound contribution policy and are working towards payment and getting to 100% funded. the next slide shows the change in the actuarial liability and the change in the assets during the year. the actuarial liability increased by about 1.3 billion to 25.7 billion. that's the net effect of the accrual of benefits offset by the amount of benefits paid throughout the year.

the chart shows the actuarial liability into three components. the blue component is the portion attributable to people that are already retired and receiving benefits. that little gold piece that we didn't label is for members who have left their employment but have not started receiving benefits, so they're entitled to a future benefit, but they're no longer working within the system. and then, the red portion represents the amount that's attributable to people that are working today in the system. and about -- you can see, at about 15 billion, about 60% of the liability is for people who are currently receiving benefits. the lines represent the assets. the green line is the market value of assets, and then, we use a smooth value to determine contributions that we call the actuarial value, and that's the light blue line. they're very close together

right now, so i'm not going to spend a lot of time talking about the differences, but the market value increased about 2.3 billion to 22.4 billion. that leaves us with an unfunded liability of about 3.3 billion on a market value basis, 3.5 billion using our smooth value. >> so this chart is something that you've seen before. we've presented it at every valuation. it just shows the reconciliation and recording rate and as bill said, there was aness decrease of 1.5% in the contribution rate, but there are offsetting events if you will that happened that did have an impact on the rate. first of all, there was a market gain on your assets of 13.5%, and that increased -- or

decreased the contribution by about 1% of pay, but since you had those market returns, it triggered your supplemental cola that were effective july 1st, 2017, and that basically gave most retirees about an additional 1.5% increase on their benefits, in addition to their basic cola, so that increased the contribution rate by about 1.5%. the second set of offsetting events were the continued phase in of your 2015 assumption changes. if you will, when we did the demographic assumption study back in 2015, it was decided to phase in the impact of the unfunded over five years, so you're in the third year of that phase in, and that increased the contribution rate by about 6.3% of pay, and that was offset by the board's decision to decrease the wage inflation assumption back to the november board meeting

from 3.75% to 3.5%, and that's also coupled with the fact that you've reduced your inflation assumption from 3.5% to 3%. those are related to each other, and that had the impact of reducing your contribution rate by.66% of pay. and you're assuming lower wage inflation, you're assuming lower projected salaries, and then if you have that, the salary based formula, you'll have lower projected benefits, and lower cost. this chart is actually a new chart that we put into the presentation and we actually put it into the valuation report. we got a lot of positive feedback from other clients that we did this with, so we decided to go ahead and give you this historical look at the annual changes in the unfunded accrued liability of your plan,

and so i'm just going to spend a little time going over the graph. first, it's showing the different sources of changes in your unfunded, and that -- their magnitude. the stacked bars above the black line are increased to your unfunded accrued liability, and the stack bars below the black line are decreases to your unfunded accrued liability; and again, your unfunded is basically the difference between your liabilities and your assets. the sources of the unfunded are liability gains and losses which are the gray bars, and that's when people don't retire according to the assumptions, their salary increases or lower or higher than the assumptions, so you have what's called liability losses. the gold bars are your liability losses on your