situation. they had a 30-year rolling ammortization period they were using on their unfunded which gets them persistently below that. so they recognize it and they're not doing that anymore, so they're climbing out, but that's part of what got them into the situation they were in. >> president stansbury: so our calpers members, workforce, what do we see for them in terms of anxiety levels? >> the only calpers members that are city employees at this point in time are deputy sheriffs and institutional police officers hired before 2012, or 2010 -- 2012. because the city and the pension reform basically brought all new hires from the -- in the

sheriff's department as well as in the institutional police officers and to miscellaneous safety plan that we administer. i -- we don't deal with those folks because when it comes time to retire they have to go to calpers. i will say that calpers has discovered that we're not -- the city is not adding any new deputy sheriffs into that plan so the city is dealing with the concept of now that is a closed pool plan. and the calpers is requiring a much higher contribution rate related to those folks because the active payroll, sort as bill was indicating, there's no growth in the active payroll, other than the pay increases. and there's no new employees who have a 20-year career ahead of them to be making contributions to help fund the benefits.

and so the city is going through the process of trying to expedite the payments to calpers. so i think that the anxiety is on the side of the city because it's now an escalating contribution rate on behalf of those folks who still find themselves covered by calpers. but they believe that long-term, everyone will actually be covered by spurs and they felt that they were more comfortable with that. they truly believe, and there's reason to believe, that we manage the plan as well as invest the money better and it's cheaper for the city. and so we have a limited group of folks. and i still think that there's probably thousands in that group that are calpers members and i haven't seen that number either. >> president stansbury: do you think -- do you thank w think te going to then move to a situation that we did with the

airport and -- not there? >> well, actually, i always remind karen because she was at the city's stearn office when we -- attorney's office when we drafted these plans that don't have any members in it because they can negotiate, for example, -- the sheriffs could negotiate a transfer into the sfers plan for i think only prospective service. but that has to be done through m.o.u. and through negotiations and the city has never really approached them. so the city thought of everything and basically said that we will provide a mechanism to allow through negotiation for the sheriffs that find themselves at calpers to move into the sfers. but i don't recall the details but i think that it's for prospective service only, because, certainly, sfers can

accept the liability and guarantee that there will be a transfer from calpers, which we did with the airport police. we ensured it covered the liability for those folks, airport police, who were transferring back and forth. but that could still come depending on the situation. >> president stansbury: i kind of wanted to get it out on the table so it's in everyone's mind and in the discussion, because i think, you know, calfers and the anxiety levels there go up, you know, we do have a workforce that is concerned about what's going to go on and, you know, so i think that it's important, just at least to be aware of it at this point in time. >> um-hmm. >> another question? >> before i ask my question, the circumstances with the airport police transfers are totally different than the situation now?

>> right. >> that's a big issue. i would be willing to bet any money that the city saves with the newer sheriff examples in the lower benefit structure, any money they save there will only help to contribute to the increases they'll wind up paying to calfers. i wanted to ask a question about page 14 where you talked about the supplemental coal a colas af the biggest components. there's the other piece of the supplemental cola that is not resolved yet. do you have a ballpark figure on what that might be? >> i know what you're talking about. >> i don't want any sticker shock. we have no way yet to know how the court case would go but i'd like to anticipating some. >> we had worked up some estimates like two years ago, but i don't remember the number. >> it might be at the bond disclosures but i don't have that at the tip of my -- >> i can look that up and get

it. >> and the smaller population, the lower dollar base, and it's still -- >> you're correct. >> whether they moved the needle, -- >> i think when the lawsuit was filed against the retirement board that the number that the comptroller used was $100 million. but that was before we had to pay at least 2, if not 3 additional supplemental colas. and then the retroactive cost of paying those and sort of accumulating those and compounding those. so, i mean, i believe that the city believed at the time that they filed the lawsuit that it was at least in the realm of $100 million in additional liability that they'd be assume figure they paid that group. >> and that's true. our estimates were done before the last couple supplemental colas. >> right. and didn't include compounding interest. >> right, right.

>> i'm sorry, can i ask one last question about 14. so we're looking at the line item, and we're talking investment? >> yes. >> and losses? >> investment gain and losses on the actuarial gain of assets. so it's on the smooth value. so it can take five years for it all to flow through. >> okay, thank you. that makes more sense. >> i'm sorry, i should have clarified that. >> no, i know better. thank you. >> okay. so we'll start with price inflation because it's kind of the foundation for the other assumptions. you can think of wage inflation as being price inflation plus a real wage growth component and you can think of the expected return as a price inflation plus a real return compound.

our current assumptions, 3%, it does not have a direct impact on our valuation. the only place that we use it directly is to set our cola assumption, not supplemental cola, but the basic cola. and the basic cola is capped at 2%. which is below 3%. so it doesn't really have a direct impact, it has an impact more as it impacts the other assumptions. and you will see this theme as we go through all of the saw.ions and we tend to look at historical data and -- assumptions and we tend to look at historical data but we look at any current market data that we have and any forward looking forecasts, we can look at. and a variety of sources where possible. for inflation we'll look at

break-even inflation and i'll go through that. there's a survey of the economic forecasters and we look at investment consultants and the federal reserve policy has an impact. looking at historical, there was a period that many of you are aware of in the 1970s and 1980s with very high inflation but pretty much since that time inflation has been much lower levels and persistently lower levels. and this has 180 large public plans across the country and the bars represent the distribution between the fifth percentile

assumption in that database. and the indictments represent what our assumptions have been historically. and you can see that there's been an obvious movement downward in those price inflation assumptions. and right now, actually, as of 2016, 3% was the median assumption nationally. i think that drops to 2.75% with the latest data. if we look at california systems, they've followed a similar pattern but are slightly lower. we have four plans that are at 2.5% out of about 36 plans that we looked at in the state of california. and there's only one plan at 3.25% but there are a lot of plans at 3%.

>> 3.225%? >> yeah. so 23 of the 39 systems in our survey were at 3%. i think that a lot of them are considering moving or have moved to 2.75%. so if we look at market expectations, one measure is the break-even inflation rate, which is simply the difference between a conventional treasury bond yield and a treasury inflation protected security yield. the idea being that if you bought one and you sold the other that you're left with essentially a bet on inflation. and so this is the break-even amount of inflation over -- the amount of inflation over the time period that would make that

break-even. and it's interesting to me actually that the difference between five years and 20 years is virtually nothing in terms of the break-even amount. it's bounced around a little bit but then very low levels in the last two years. we look at a complete range of 1.75% for five-year inflation last year to 2.13% for 20-year inflation this year. so that number has been very l low. here we've got the chart that shows the distribution of our different sources. so the federal reserve published the pro-forecasters inflation for the next 10 years. there's at least one who is up at 3.50% but over three-quart ergs of them are below 2 --

quarter of them are below 2.50%. >> none of this matters if it's above 2%, correct? >> correct. if we adopt an assumption of 2% we might have a discussion. but as long as we're above 2%, it's not going to have a direct impact. but generally you can see across these different groups most of the assumptions are below 3%, 2.5% to 2.25%, and the difference being in the public plan database somebody out there is assuming 4.5%. i'm not sure how they do that, but someone is doing that. >> we -- just for timing purposes, can we move forward to wage inflation? >> yep. >> we're still far away from any

sort of -- >> let me just hit the last bullet on this slide is that we suggest that you consider reducing this assumption to 2.75% from 3%. so wage inflation, i was going to go through very quickly. there's some data here but let me get to the punch line of the data. which is -- that price inflation data was all national price inflation. if you look at bay area, that bay area inflation has been about 50 basis points higher than the national inflation. now if you look at national data on local government wages, they've been growing by about 50 basis points above national inflation. but here it's only been 25 basis points above bay area inflation.

so there's some compression there between those two -- two pieces. but we're suggesting, particularly if we just drop the price inflation down to 2.75% and we keep our job inflation at 3.5%, to increase that spread to 75 basis points, recognizing that we've had higher inflation here in the bay area and some impact on -- that's offset somewhat by not as much real wage growth locally. now that may -- that may -- that dynamic may change a little bit over time but we think that spread is justified here. so that's all i had on wage inflation. any questions on that before we get into the main... okay.

so before we get into the expected return i wanted to return to our graphic for a moment. to point out that there's either contributions or investment earnings. so when we're setting the expected investment return what we're really doing is setting our expectations and budget for how we split things, split the costs, between the contribution and the investment returns. and if we're wrong in any direction we'll have to adjust contributions in the future either up or down. and that's the impact of our

analysis and the expected return is the most powerful single assumption here and going to emphasize that the contributions over time will depend on your actual investment returns, and not what we decide here. what we decide here will affect the timing and how level those are. we're currently assuming 7.5% and like in the other analysis we're going to look a little bit at the history and a little bit of trends to really try to figure out what our expectations are going to be. and this total shows the actual returns for the fund over different periods of time and we put in the last column on the table is the expected return at the beginning of that period. and so the expected return in 1989 was 8% and then for that

10-year period we got an actual return of 11.9%. so that's how you can read the chart. sometimes we did better than the expected return and sometimes we didn't. and in the last five years we had average returns of 9.4%, which is a lot better than the expected return. >> can i ask a question, for the fiscal year ending 2019, what is going to be our liability number? >> for -- so we do -- we'll do a valuation as of june 30, 2018. or the fiscal year-end 2020. last year's valuation was for fiscal year-end 2019 for contributions. so you're looking for the contributions? >> yes, what was our last valuation for the value liabilities? i'm just looking for approximate

market. >> we were a little over $25 billion in liability. and assets were, what, $22 billion? >> so are we on a liability basis in a market-value basis? are we close to 100%? >> no. >> no, we're at about 85% -- yeah, 86%. >> what is our current market value, over $25 billion, right? >> now we have $25 billion and last year we had 22 and the liabilities were 25. so that ratio came out to 86. >> so that's what i mean, for this fiscal year do you expect the liabilities to go up? >> yes, the liabilities will go up. we won't know how much until we do the valuation, but your assets went up by more than we expected. >> what were we projected -- i'm sorry, maybe i didn't ask a good

question. what were we projecting our liability number to be for the fiscal year ending 2019? >> i don't have that right in front of me. >> that's fine. >> but it would be something on the order of about a 7% increase i think. >> okay, that's fine. >> the contributions are done on the actuarial numbers and not the market numbers. >> no, i understand that. >> but -- >> it is an important number though. >> in a position where we have more market value assets being invested than the actuarial value is assumed, so there is some leeway. we went under that for about a year or two but now we're back where our market value is higher than our actuarial value. so they assume 7.5% growth on the actuarial value, we're investing more than actuarial value so there's some leeway

there. >> i think that they're still very close. >> very close. >> the trend nationally has been to reduce discount rates and as i mentioned, i just came back from this conference and they announced in 2017 there were more plans that reduced their discount rate than they'd ever had in any single year before that. it's something close to 30% of the plan. they reduced their discount rate. the median is still right around 7.5% but there are fewer and fewer that are in the 7.5% to 8% range and there are more and more below 7% in their assumptions. in california we're seeing --

california has been ahead of that national trend in reducing expected returns. we're -- the lowest return in california now, even in 2017, was 6.75%. i think that there's one plan that went to 6.5% for 2018. maybe others will. there were two plans at 7.5%, including this one. the other one has already adopted a lower rate for 2018. so if we remain at 7.5%, we will -- (indiscernible). >> leading in california? >> we'll still be around the median nationally, so it depends on the universe you compare to, right? >> if i asked you to put up a comparison using a spread, the spread number, rather than those numbers, can you do that?

>> i can -- not in the moment. we have it in our database. >> because when you start to say averages, some came down but other numbers came down too. >> yeah, the spread requires some additional interpretation, right? because the spread over your wage inflation really affects your active liability and it doesn't affect your retiree liability. and your retiree liability is expected by your spread over the cola which then gets complicated because you need to look at what those plans have as colas and what their assumption is for those colas. but we can show you what they say that their price inflation assumption is and what the spread is over that.

>> we're getting there, just saying. sorry. so we start in terms of forward looking we start by going to your investments and ask them for their assumptions based on your target allocation. they produce five to seven-year assumptions and 30-year assumptions. so the important thing is down at the bottom that they're assuming over the next five to seven years that your portfolio would return 6.9% and over 30 years it would return 8%. and so we're going to look at some comparisons on that. it's in a minute here. so a lot of the investment consultants you will see will provide short and long horizon assumptions and they use six years that you may see up to like 10 years on that.

and those start with the current market conditions and they each have their own methodology but they build out from current market conditions and what they can read in the market in terms of forward rates and other things to develop their assumptions. and then the long-term assumptions, i have seen them at 20 years and at 30 years. and they usually start with their shorter projections and then they -- the two basic classes of methods that i have seen are kind of averaging in historical returns for different asset classes with that to develop a long-term. or what i could nepc does is they have an opinion about what the terminal state of the market would be, and the eclibrium state or maybe they call it a normal state, i can't remember exactly how they determine it, but they then start with their six-year assumptions and

gradually move to that e qrve ulibrium state. and to understand the different mechanisms with the short versus long and how you might get a spread of over 100 basis points in that assumption. i wanted to show the benefit lines in your valuation going out the next 65, 70 years. but in the valuation we're essentially taking the present value of those and the present value about half of the present value is covered in the first 13 years of payments. and so when we try to figure out

how to weight short-term assumptions versus long-term assumptions i think that the past practice has been just to focus on the long term, but what's becoming more common is a discussion that, well, we should really weight the short term, at least recognizing that a big portion of our liability is being paid out in a shorter time period. and that will vary from plan to plan, a plan with a lot of retirees, compared to actives, that will even be shorter. >> will that have an effect on us because our distribution is different than other plans on average? >> well, yes. so your 50th percentile is less, and other plans it would be 8% or 10%. so you're longer than probably the average plan in looking out

and at how far out you should look at your assumption. >> i can't conceptualize in my mind why that is, why do we have a different profile? >> because you have more active compared to retirees than they do. >> more contributions. >> so the greater proportion of your benefit payments are further out in the future. so just to give you a look at other sets of capital market assumptions we went out and we looked at well-known consultants who posted their assumptions on the internet so you could get them and had capital market assumptions that matched reasonably closely to your asset classes. but one of the issues is always getting the right assumption to

match with the asset class. they weren't always perfect. the most difficult class for us to match up was private debt and when there was nothing close we used the nepc assumption. but -- so the ones that we're showing here are black rocks, j. perform morgan, northern trust and averas. and they define them over different time periods and i put those there but i wanted to show you here you can see the green diamonds are the other consultants and the blue squares are nepcs. and so nepcs' 30-year assumption is the highest and the five to seven year fits very closely with some of the other assumptions. and just to give you a sense of

what is -- what might be driving that, we looked at the assumptions by asset class and set them up here. so on the far left it reordered the class assets left to right, based on the weight in your portfolio. and so there's equity and return and you can see where the individual saw saw. are assumpt. >> do you get a feel for how well -- i think that it was money managers and not consultants. >> well, there's a mix. >> what is the record for forecasting? >> well, that's very difficult to assess for any of them. >> (indiscernible). >> well, all of the firms are ones that we have seen have a fairly good reputation. we didn't just pick anybody who

had anything out there. they have an established protocol. most of them put out a lengthy white paper and how they developed their assumptions so you know that they have a robust process to it. and so it's not just trying to grab any set of assumptions that is out there. but it's also not comprehensive list of consultants. the intent is to give you a sense of the landscape out there for the different assumptions. there's obviously a lot of unknowns here and we are not qualified to say that any one assumption is better than the other. >> but they stand apart from nepc which i thought that we were simply using them but it didn't justify -- i wouldn't say right or wrong -- but there's a significant difference there? >> yeah, in some cases so we

thought that the board should be aware of those differences, particularly with the 30-year assumption. >> perfect. >> in fairness though -- a lot of the others, their time horizon is shorter and the one that is up here above 7.5% on this is mikita's 20-year assumption. yeah, that one right there. just looking within nepc's assumption there's a distribution of potential returns that is not unusual and it's fairly significant, right, to understand how those could vary based on the mathematical model. so there's a lot of information

here and how do you put it together and it's very difficult. i think that we do believe that given this information that a range between 6.5% to 7.5%, would be considered reasonable and so while the current presumption of 7.5% is still reasonable we do think that the board should consider reducing the assumption going forward. and so this just sums up our recommendations and at the bottom we gave sort of three proxies on expected returns and if you wanted to consider a change. >> a few questions. on page 38, the other consultant

managers projection, did you use our asset mix, our proposed asset mix with their returns for the different classes? okay. and back to page 29 i wanted and you the bottom bullet, and risk and preference. what do you mean by risk? >> that it's different than expected. >> that's all of the different types of outcomes. >> so this assumption would be expected returns. so the actual returns are different than what you expect expected. really what we're getting at there is how aggressive or conservative does the board want to be going back to the notion that we're essentially starting a budget exercise where we're anticipating how much we're going to get with investment returns versus how much is going to have to come from contributions. if we overestimate the investment returns now it will have the contribution lower now

but we'll have to pay more later to make up for it and vice versa. and there's obviously a range that is reasonable. there's a range of investment consultant expectations. there's a lot of uncertainty in the markets going forward. and so there is no one -- we can't just plug everything into a formula and say this is the number that you should use. we need to assess kind of how aggressive or conservative do you want to be. >> explain the contribution rates go up for an actuarial loss, when is somebody going to scream ouch? >> and you don't -- you know, one of the things that can get plans in trouble is if those accumulate, right? >> that's my two big questions. >> right. and, yeah, now is a good time to

go back to this is a discussion item only. we're not asking for a decision today but we wanted to get the information in front of you so that you could have time to think about it and to ask questions and to raise any issues. yeah. >> i say that if someone wanted to lower the rate of return, they wouldn't be necessarily be limited to the three options that you provided? >> no. >> right? there's a sort of litany of scenarios where people could have a sort of end result and work to get there. so if someone wanted to say reduce by five basis points a year over the next five years to get to 7.25%, i mean, is that reasonable? >> so what we're saying here is that we believe that for this year that anything between 6.5% and 7.5% we consider reasonable.

and so doing something like that, the standard would require that each step be reasonable in the year that it is used. and so if we went 7.5% to 7.45%, we're saying, yes, that's reasonable this year. and next year we'd have to look and make sure that 7.4% would still be reasonable. but that's a reasonable approach. i would say that there's been a lot of discussion in the actuarial community that rather than do that, that we -- if the reason for doing that is because you want to freeze the impact on contributions, just adopt the lower assumption and then have us directly phase in the impact on contributions. and we can do that -- we did that -- >> we did that with the 2015 demographic assumptions,

assumption changes that we made. we actually are stepping into those in a five-year period i believe. >> in terms of the bottom line number -- >> in terms of the contribution that you can get about the same result. >> the downside or upside to one versus the other? >> the idea is that you're telling them what you really think that the target is. if you think that the target is 7.25%, you're giving that target and we're showing that target of the liability target and then we're just addressing the phase in of the contributions as a stabilization impact. so that's why it's preferred is the basic measures are on the rate that you want to get to. >> now over what period of time are we currently phasing them in? >> we did five years on the -- on the demographic assumptions.

i don't think that i'd want to go any further than that. >> and on any change in the assumed rate of return you probably would recommend a five-year period as well? of phasing in? >> so we amortize the impact over 20 years. but what we did is that we -- instead of paying the full amount of that 20-year a.m.orization in the first year we only paid one-fifth of it and then the second year two-fifths and three-fifths and four-fifths and then got up to the full amount. now the full amount was larger because we accumulate with interest for those first few years. >> any questions from the board? >> in the amount of dollars it doesn't really matter and it has to do with the rate of return for our asset mix?

>> right. so here's the allocation that is on slide 33. and that's the basis, the analysis, that's the basis for the nepc assumptions and that's what we have plugged into the other capital market assumptio assumptions. >> and we did an allocation mix and now it comes back to how the effect on contributions expect for the rate of return? i remember the discussion when we were at 7.58% and the plan had been to go to 7.5% and we froze at 7.58% that year and i do remember that discussion very well. and there was no real facts given to why 7.58% but that's the way that the vote went. but there's other things that we're doing, it will come up -- we have an item a couple moments from now about whether or not we're able to improve our public equity performance or not. whether or not -- which is more

justified and you say 6.5% to 7.5% and i can make the case for 7.5%, and i'm not trying to keep the rates up or down to help anybody, it's what we think that our investment team can do? >> yes. i guess that i'd say that these are -- these are essentially assumptions and, you know, our standards put a pretty high bar for including any above expenses into the calculation. >> let's do that. i appreciate it. thank you. >> i want to open up for public comment. any members of the public that would like to address the commission on this item? >> i am john stenson, a member of a pension fund. when it comes to inflation there's only three asset classes that you need to outperform inflation and that's stock bonds

and real estate. stock bonds and real estate, in the past 100 years have had returns of 7.5% to 11%. just as simple and best. and they rebalance every year and in the last 100 years of 8.4%. and the investment consultants will have you investing all over the world and high-risk investments like -- especially like phones and emerging markets. it's not necessary to do it. you don't even have to go outside of the united states. in the next few years you'll have a big recession, maybe as big as the last recession. and the safest place in the world to have investments is in the united states. and if you don't believe me, ask warren buffet. >> president stansbury: any other members of the public that would like to address the commission? seeing none we close public comment. anything else before the next item? thank you both.

sorry, you got pushed to this month. >> it's quite all right. >> president stansbury: thank you for the time. next item. >> clerk: july analysis of the protection strategies which was continued from the july 10, 2018, retirement board meeting. >> we'll walk through the nepc analysis and then i'll have some comments on staff analysis. >> mr. president, commissioners, this analysis is an update and extension to the protection material reviewed several months ago. we analyzed historically what put the protection at a 20% level would have meant for this plan and we looked prospectively

at what the costs of protecting against a 20% or more decline or a 10% or more decline in the equity portfolio would have resulted in. the top line conclusion is that protection is expensive. and protecting against extreme events is cheaper than protecting against every downside event but it's still quite expensive. if we had elected to try to protect the equity portion of this portfolio, in june of this year for the next year and protect against a 10% or worse decline, it would have cost approximately 3.4% of the total portfolio. so you would have had to experienced a decline of 13.5% or worse in order to have any economic benefit from that protection. >> 3.4%, where would i look in the presentation for that? >> that is on page... -- one

more page -- page 5 right there. so for the $10.2 billion portfolio of global public equities, the cost of the contract, line item d is $334 million for 12 months of protection. so if the plan -- if the equity fell 10% you'd lose the 10% that the equity fell plus the $343 million in costs to put the protection in place. and you'd have to lose significantly more in order to have any benefit from this. and as we discussed before there's a lot of other ways to try to protect yourself from an equity draw down. that's the whole point of the many conversations that we've had about diversification. many of those other strategies, like the absolute return

strategies that we have been adding to this portfolio for the last number of years have positive expected returns going forward. they're not insurance. you expect to make money in them. this is something where over long periods of time you'd expect to lose money. you're buying insurance and it's pretty expensive. we believe that it's extremely difficult to protect exactly when this protection will pay off. and it's much more important to focus on getting that required rate of return to 7.5% or whatever it is. this is an expensive type of protection. >> can you just walk us through the table here on 5.5? >> sure. so we're looking at $10.2 billion of global public equity in the portfolio. and we priced how much it would cost to protect against a 10% --

or 90% draw down protection. so 10% -- the first 10% of losses you wouldn't be protected from but everything beyond that 10% you would be protected from. so if the markets fell by 15% or 20% or 30%, then the cost of this contract -- you'd have a benefit, you'd have a gain at the end. but you're not projected in the first 10% move. and the cost of this protection in june of this year for the next 12 months was about 3.4% of the portfolio that you're trying to protect against. so you really are only protecting yourself against extreme downside returns and it's a pretty significant cost going forward. >> why is the cost the same for each scenario? >> well, we priced what it would cost to protect ourselves against this return in june 2018 for the next 12 months.

and that cost is a known -- is a known price. so that price is -- you pay for it in june and that price you have already paid so it doesn't change no matter what scenario happens in the next 12 months. what does change is that you bought the insurance, now you're waiting to see whether the insurance pays off or not. >> so options that are further out in the money cost the same as -- >> well, this is only one option that we're showing you on this page. if we go back two pages you can see the cost of only protecting yourself against a 20% or more decline. instead of being $340 million it's $191.5 million. >> okay, i'm misreading the table. >> we have one showing zero percent out of the money. >> so we ask them to look over a 10-year historical timeframe and what would have been the impact of protecting ourselves from

this 20% decline. it's the page that you're looking at right here. and they found that -- your return, your -- your plan return over the past 10 years would have been about 1% worse. the cost here -- and we believe that looking prospectively and looking forward if we were to do a 20% protection like this every single year that we think that your expected return would be along similar lines. it would be about three-quarters a percent. >> and that 1% is annualized so compounded over 10 years -- (indiscernible). >> so you're saying about 1% of planned assets per this? >> we can return to that in the presentation. >> sorry if i'm getting ahead of you here. >> no, no, that's fine.

it's page 4 of the presentation. i don't know who is turning the pages here. oh, are you? >> (indiscernible). >> i think that it's all in one document. right here. >> so this actually looked at historical performance of this plan from september 2007 to september 2017. and the portfolio here earned

5.51%. but if you had used the option strategy it would only earned 4.75%. so that's a 1% per year cost looking back over the last 10 years. this is not cheap and the impact is significant over a long period of time. if you have a crystal ball and you'd know exactly when to buy this protection you can obviously make money. but historically speaking most years this kind of a protection is worthless. so you're buying insurance and in most years you don't get a benefit from it. >> so then what you're really hoping for is knowing when the market is going to crash and can you buy it at the right time, say, 12 months before there's a significant correction. i mean, reasonable markets like this, what do you think? >> well, we've been talking

about these strategies the last couple of years. and it's been reasonable to think that they might happen. they haven't happened yet. so it really is -- i don't know whether it's going to be -- whether we're going to see a 25% or 30%, 35% market decline next year or the year after. i think that it's reasonable to think that it will happen eventually but i also think that it's reasonable to believe that over long periods of time that you're going to come out behind because you're buying this insurance that's expensive. >> i'll be addressing that. >> okay. >> you want to jump right into that. >> so, commissioners, let's go to page 1 of staff memo. this is the -- >> i'm sorry, one last question before you get to that. we were talking about the parametric presentation and

we're talking about the cost over 10 years and that was how much of a drawdown? 10%? what were we saying for the options? a 10% loss, 20% loss? >> that was for assuming a 20% loss. >> so the parametric analysis as assumes that the cost is based on a 20% loss? yes? okay. thank you. >> so, commissioners, turning to the staff's memo, page 1, this highlights the percentage cost to just hedge only the public equity expert foa portfolio whis on a $10.2 billion would cost us $533 million. what that means is that -- and these are all based on one-year contracts. so say starting july 1 and ending june 30th, is that if

we had a loss of more tha 5.2%,s would earn us positive returns. and at for a 10%, would be protected -- this is numbers that are slightly different -- a loss of more than 13.3%. this would be a positive -- positive strategy. and if it was 20% out, it would be more than 21.7% for the strategy to turn a positive return. i did want to highlight a couple of things because getting the magnitude and the timing of this kind of strategy is critically important for it to be successful and even if you have a large loss, but the large loss doesn't happen inside of your contract period and it's not large enough and you still won't make money even though the market has declined a lot.

for example, in the bursting of the internet bubble we had losses of 9 -- well, you see the numbers here, particularly in fiscal years ended june 30, 2001 and 2002. and the market fell 17% and 20%. but buying 20% would have added to your loss, okay? because the market didn't fall more than 20% in either period. so you would have had a compound loss of almost 35%, plus the cost of putting another more than 3%. these are based on market valu values. market values. another event would have been, say, black monday in 1987 when the market fell 22% in one day. if you'd had bought on july 1

and sold them on june 30th is that you wouldn't have made money on that because the market recovered rapidly beginning in november and finished the year -- fiscal year, with the loss of only 4%. even though a lot of people were very scared of a depression-like scenario and even a week after black monday is the market fell another 8% on one day. and so it wasn't clear to participants that a bull market started in november 1987 until way after the fact. just like in the current bull market, nobody probably recognized that we were in a major bull market until we were years into it. recently we've had since the end ever the g.f.c. we had six

declines in the market that have approached between 10% and nearly 20%. and buying -- put options 20% out of the money would not have protected us from such a decli decline. so next -- so this just talks on page 3 a little bit about whether or not to buy it strategically which means buy and hold it for one year and then buy it again, okay? you can see the cost of this. and you saw parametrics assessment of what the impact would be over a long period of time. and then another option would be to try to puts tactically, means to buy them for a year and sell them but not buy them again the next year. or buy them on, say, july 1, and sell them some time during the course of the year. to get that right you have to

open up the markets decline by more than the cost of the puts, okay, and plus you have to get the sale of the puts correctly in terms of timing. again, we just saw an example in 1987 where if you had sold your puts at the end of october, 1987, you would have made a pretty nice profit because it declined from july to october and it was about 30%. but if had waited even three or four more months, your puts would now have not been in the green. okay? your loss would have been less than 20%. and by the end of june it would have been a loss of just 4%. so an important thing in deciding, you know, whether to buy puts is to determine how often markets decline a lot and

by how much they decline. and this estimates that a 10% decline on average is 16 to 17 months. but the way that the market declines 10% is that predictive of whether or not it will decline 20%? the answer is, no, okay? you see here that it estimates that only one-third of the time when the markets have declined 10% do they go on to fall another 10% so that its total decline is 20% or more? how about if the markets decline 20%, is that predictive of whether or not markets go on to fall another 20% such that their total decline is 40%? and the answer here, again, is no. only 22% of the time or about one time in five when markets

fall 20% is that predicted that the markets will go on to fall 40%. okay? on page 4, we look at different characteristics of different major bull markets. this list, the 10 largest bull markets which range from like negative 27% to the great depression, and you see that the characteristics vary widely. our high valuations predictive of a major bear market? only five times out of 10 were high valuations present at the start of a major bear market. so half and half, a coin flip. the one factor that has been common among major bull markets is recession. they've been present in eight out of 10 major bear markets.