optimice risk and return. this turned out good. we have lost a lot less because we have less exposure to public exthan even nine months ago. the turning to item number 4 that is a narrative how we have allocated capital here since october. the bottom line is that our private equity portfolio the board approved in october of 2016 in terms of assets allocation is done. real assets is essentially done. absolute return is essentially fully implemented. the one big item is private credit we are at 2% in terms of committed capital it is closer to 5 or 4.5.

we do have a couple larger investments in the next number of months in private credit. as we indicated five months ago. we expect it will take five years to build this out. everything else is pretty much complaint and fully implemented. item five you see our absolute return performance. we are really pleased with this. the return 6% since infor incep. it had a good relative performance losing 1% last month. closings. there are quite a few. arch. the few approved this real estate investment in may for $50 million. we did close on all $50 million. this is a private equity buyout strategy. we requested $100 million and we

got a total of $40 million between two strategies. caramel, a local real estate manager. we asked for $25 million. we were allocated $25 million. the european property investors special opportunities this was also known as k1. we asked for $100 million in terms of euros. we did complete $100 million. gateway another real estate investment the board approved $50 million in september. we got all $50 million. hellman and friedman, a flagship private equity firm, a large firm that continues to execute exceptionally well. we asked for $50 million and were allocated 5 $50 million. jibe the pragill investment we

-- brazil investment we asked the board to approve in july. it is the equivalent of $30 million u.s. dollars. we were allocate you had that amount. new energy capital infrastructure. i believe legal requires us to read these out. that is why we are doing that. we asked for $50 million in september to new energy cap. we were awarded $50 million. nordic, a buyout strategy emphasizing the upper part of the european continent, we asked for $75 million euros. we weren't surprised. we were cut back to $50 million. it is a capacity constrained strategy. top manager. pelican co-investors we asked for $15 million co-investment

that was closed in october. san francisco asia which is a local -- known as asia alternatives could investment together or separate account with asia we asked for $150 million. we did get $150 million. san francisco s e.i.r. the k-1 we asked for $30 million. we were awarded 30. the large cap buyout software specialist manager we have had great success with we asked for $50 million in august. we closed with you $50 million. vista, also another large cap software buyout specialist we have had great returns with. we asked for $50 million and we did get $50 million. crescent which is a healthcare

venture specialist in san diego has an office here locally. we did ask for $50 million. we weren't surprised we were cut back to 35. early stage venture is hard to get a complete allocation to. we have a couple personnel things to update the board on. one is -- go ahead. >> thank you, jay. i have it here. >> closed at 10.57 this morning. the wng aircraft opportunities we have this in the real assets. it is an equity oriented investment, not credit investment. $50 million. that the did close yesterday. we got notice of that today. thank you, jay, for that. personnel. ashley, who is a young rising

star, princeton grad. incredibly bright, great under write you go, stayed a year and-a-half. she got an offer that was too good to be true. >> do you know how? >> yes, and i can't say publicly. i could tell you privately. it is smug she absolutely had to do. >> roughly five times what we could pay her. >> is there an issue now with keeping young people due to our pay scales? are we losing them. >> no issue. >> you don't have an issue? >> in this case for this position, as to what we can pay we are in the process of

creating a more clear career path with the effort. in this case, it was impossible for her to pass up the opportunity that was given. certainly i assured her the door is open should that not workout. she is welcome to come back. >> i would be thrilled. take an 80% pay cut to come back. >> one of thing to address in personnel. we don't want to lose good people. you spend a lot of time training them. >> we certainly do not. i am delighted to welcome han back and we met little hannah before han returned. she is delightful. tanya is managing interim director. she has been with us 10 years

and has a couple distinguished awards she has very much earned in the private equity space. we do have three in addition to the private markets we have three searches for analysts at help in different areas. we have what i think is a terrific investment meeting on december 19th. what our risk exposure us are, how we compare to an optimized asset allocation and different things like that. and mahas been works on this presentation for two months. she has made rapid progress. i am thrilled how that is coming together. that is december 19th. that is close to christmas. i hope that the board can be present for that because i do

think it is a really informative and helpful presentation really valuableness information. with that i will turn it over to the board for questions or comments. >> in the private markets you are down two people? >> we are down, well, we have new hires for est in addition. we are without md of private markets. we are without an analysts for real assets and without an analyst four private and liquid credit. unemployment in the bay area is less than three%. we know the cost of livings here. it is intense. >> that is why i ask how you can

attract neutral lent. >> the competition for talent has never been higher, in my experience. >> maybe the piece of the december 19th meeting depending how much time anna needs to walk us through risk management which we talk about bud never do much about. we may have 45 minutes on the concept of decision making. what she is doing has more priority than this other part. part two a request. mr. coker when you and your team deliver recommendations through the rfi process it is important to see the other candidates at least performance number us so we are not simply looking at this your best recommendation.

take it or leave it, it has got to stop. >> i think it is 6 and 7 of the other document, not just performance, all number us we can see where we are going. >> as long as we can share with the board which in mossiness stonnses we can. >> so we don't mess up relationships. >> i did want to mention also just one quick thing. we have highered the first intern. we are thrilled. is shawn here? shawn kim has joined us as intern. he is valuable in the sense that he has a ton of work to do and we are not going to pay him very much money. >> nice to have you with us where do you come from? [ inaudible ]

>> also a biotech researcher. any additional comments? >> this is discussion item only. thank you, mr. coker. we have deferred 13. let's go on to discussion item. deferred comp investment performance third quarter. diane. >> discussion item. committee report. >> i will combine them. we will put them together. >> october 24, 2018. >> just pushing us ahead as i see the clock moving. i don't want to lose our quorum.

>> thank you, commissioners. i believe we have the deferred compensation committee chair report and commissioner bridges has provided that for item 12. deferred compensation chair report. >> committee report. >> deferred comp committee report as of today. we held our deferred comp meeting september 19th. approved minutes. approved the rfb for the sdpc third-party administrative to october 24th. deferred compensation committee meeting to defer, discuss and vote.

at that meeting they recommended the finalists for the deferred compensation administrator. that is the summary of the meeting as of today. >> thank you, commission. do i have public comment on that item? no public comment. no motion. it is just discussion only. >> discussion only. >> 13. we have deferred. 14. >> 14 discussion item. sfdcp investment performance as of the third quarter 2018. >> thank you, darlene. diane will present this item. >> thank you, commissioners. this is biannual report we give twice a year. this was for the october meeting. we updated the performance

number us as of september. given the time and i heard commissioner driscoll mentioning the need to keep a q4 rum. i wanted to ask the chair about a brief version of the presentation. >> i would like to turn it over to greg who does the performance updates. >> good afternoon. i will workout you have the summary presentation and hit the highlights in very brief fashion. page 3 to recognize the backdrop with which we are evaluating the investment fund managers. a couple quick comments. as you can seize we have arranged the asset class county large on the left and small cap. the distribution. the 10 to 90th percentile is highlighting what a big range it was in terms of outcomes. when we get to the weeds and

evaluate the underlying managers, it is the divide between growth and value. growth outperforms value. the bottom line within the u.s. equity market large caps up 7%. 3.5% for small caps. in the international equity growth versus value divide continued but yet much smaller return with the index is the developed markets up 1.35% ranked in the 13th percentile. the bond market was flatted given the rise in interest rates. one piece of information that is not included but in the peer group. high yield had amening full return. high yield were up 2.5 purse when the ago was flat. >> what is the global income

that 9 96%? what does that tell us. >> city world bond government index ranked poorly relative to international or global fixed income managers. you will see the negative return that was currency and other factors. >> i turn your attention in the interest of time to the actual plan allocations on page 11. i am doing the highlight vehicles. the planned assets 3.5 bud as of the end of september. you will see that was an increase over last quarter. assets increased $101 million over that period. you will see you can look at the leash you were how participant was allocated assets 20% in

target date funds one of the key features we look at. growth within the u.s. equity large cap growth equity portfolio is one you have the largest stand alone funds up 16% and that as we talked about growth versus value participant had a nice run in a large way. the largest single fund is the stable value at 27%. returns can be found on page 12. these are starting with target dated funds managed by russell you will note it left to right shorter to longer periods of time. you will see each fund is relative to the custom benchmark. russell is the manager as i mentioned. i have done an on site to meet

with the interim cio. they had the current cio that left in october. pete gun you go returned. he was the cio there from 2008 to 2013. i wanted to talk to him to see if h he is make you go changes. he was interim. he was surprised they made him business cards. he lives in australia. he made the commute from australia. it is not weekly. given his title, he doesn't manage day-to-day money it is organizational level. >> he oversees? >> he participates. >> yes, i want the point he does this from 2008 to 2013.

he ask accustomed to it. performance continues to remain strong in absolute returns and the longer time periods out performing the benchmarks. the under lying are the pieces of the puzzle. on page 13 to reorient yourselves to read the page. it is a heat map. in green it shows each fund for a particular period. for instance the sftpc stable value for last quarter up 507 basis. it was -- 50 bases. it was in the top half of the peer group. you can see the bench america that is the rise in short term interest rateds. cash has a healthy return with a

flat yield. yellow means third quarter performance and red is fourth quarter performance. the red is active. that is because the growth market is so strong. the active funds tend to reinvest back to cheaper stocks and not get so overweight to growth. that has held back the relative performance. look -- performance. look at the absolute return us four the last three years. it is a return of 19.1 purse per year. to round out the international and el estate on you -- real estate on page 14. strong result us. on page 15, these are the funds that aren't available four direct investment within the plan bututtized in the target

date. they use these specific funds in general they have all performed quite well with some performance for the short duration. this is most conservative russell uses for liquidity and it just missed the mark by a few basis points is why it is in the red. no concerns. i will pause to see if there are questions in my abbreviated report. >> page 11 did you bullet point from the outflow from the stable value fund. any clues where it went? >> the premise is that these are closer to retirees. >> if it is rolled out that is one thing. i am concerned how many dollars would be rolled back to the

stock market. is there any way to find that out? let's find out and report to the deferred comp committee. part two. on page 12. performance numbers with the target date each one has 10 or 11 mutual funds. any way to do an information ratio number? >> yes relative to respective benefits. >> four the next deferred comp meeting looking at how well it will work for the members so we are not just letting them focus only on the return. risk adjusted number. >> yes, they are in the bigger report. >> thank you. >> any other questions?

>> you any public comment? no public comment. one public comment. >> investing is about risk and reward. the higher the risk the higher the reward. mr. coke is pleased getting 6% from the hedge funds. if i got 6% i would be displeased. if you invest in hedge funds the minimums 15% on any high risk investment. you are going to find at the end of 10 years you are going to get less than 5% annual return on the hedge fund investments. you should think about divesting today. >> any additional public comment? we don't have any additional public comment. next item. >> deferred compensation manager

report. >> can we go back to 13? >> 13 is continued. i said that prior that it was continued. to the december 12th meeting. >> i don't like to public -- i would like to publicly thank cal lenfor the item. there was a lot of work in the entire process. i want to publicly thank callen and staff for work on that. thank you very much. >> the work is not done. >> the bulk of it is here.

you. >> we still have a discussion item. >> item 15. thank you, commissioner. before you are the manager reports for september and october. at this time i would like to open it to any questions you may have with regards to the assets oral location of the assets or transactions you see before you. if not i have another quick update from a marketing standpoint? >> any comments? >> thank you. last year as you may remember, staff worked with our record keeper to launch the big picture seminar. that was very successful. due to the success of it, we launched it again this year. we heard a lot of feedback from last year and encore important

rated it this year. this year it is your whole story. the point is to consider retirement planning through your 20s to midlife to getting ready to retire. we did this year expanded the presentation and included more information on the investments as well as what you want to do as you prepare to retire. commissioner driscoll attended a seminar as well as commissioner bridges and they were able to witness a high turnout. i would love to share information. i am a data geek. i like to share comparisons. because the presentation happened two weeks ago, we are still reconciles the information. i am happy to report it is very good at the next meeting. >> thank you. public comment? that report no public comment.

let's move on to number 16. >> discussion item. ch e.i.r. on and staff response to the act you wearial audit of july 1, 2017, actuarial valuation. >.>> janette. >> good afternoon. it is still afternoon. this item is wrap-up of the audit which occurs every five years. the board hired martel to conduct the audit. it was presented at the september board anybody. the staff memo in the packet

explains the minor issues. bill harmark and ann harper are here to touch on the two larger issues to come out of the audit. >> all right. bar tell matched our july 1, 2017 valuation results very closely. they did identify a number of technical items we are working with janet on. there were two issues we wanted to discuss with you the first. the treatments of the supplemental colas and development of the normal cost rate. on the supplemental colas. future supplemental colas are granted when the return is greater than the assumed return on the actuarial value of

assets. when we set contribution rates, the liability tar guilty we set and the contribution rate we development does not anticipate future supplemental colas. when we do projections we build in the supplemental colas and adjust going forward. when we do the evaluation on the financial statements that includes projections of future supplemental colas. this issues come up both in prior actuarial audit and the current one. in the current one they stated fairly strongly they should be included in did you liabilities and recommended contribution rates. prior audit agreed with the approach we were taking that given the requirement that you

it be fully functioned, at that time it applied to everyone before the supplemental colas were granted. they thought it was reasonable the approach we were taking. therthere has been a little chae that members who worked between 1997 and 2012 get a supplemental cola regardless of the funded status you have the plan. our rationale for not including the supplemental coal law is i would changes which the plan is 100% funded. that was not the intend or our understanding of the intent of putting that 100% funding threshold. we interpreted 100% without supplemental colas. that still applies for some members in the plan but not for

everyone. bar tell specifically pointed to the standard of practice. we note that that standard of practice allows you to exclude specific benefits depending on the purpose of the measurement and because we are only excluding it for certain purposes and are clear in our report that it is excluded for those purposes, we don't believe it violates the standard. then in terms of just adequate

funding, we are amortizing the cost of those supplemental colas currently over five years, over a very short period. that builds in those costs very quickly. we are talks about alternatives to that particular method. we believe that is reasonable both from a funding standpoint and is consistent with the operations of the standards of practice. we did in our next presentation we will talk about alternatives for funding supplemental colas. we ask you to give those consideration. we did include the method suggested in the audit, but regardless of what is eye elected, we do think it would be appropriate for us to include additional disclosures in the funding report including the

measure of liability with the future supplemental colas in it. we are calculating for financial disclosure purposes. it is not really a significant addition but it would be added to the funding report, and we also suggest that we will add more in depth explanation why they are not included in the funding valuation as part of the funding valuation report so it is clear that they are not included and why they are not included. >> the next item that bar tell addressed in the audit we are going to address today is the calculation of the normal cost rate there. are three-pieces to the contribution rate. normal cost rate, unfunded

accrued liability amortization payment included to pay as well and the administrative expense rate. we are focusing on the first piece, normal cost rate. the normal cost is the cost of benefits earned in the current year by active members. currently our method only covers the normal cost for members who are employed or active on the actual you valuation date. as a result we see small actuarial losses every year for new hires coming into the plan. last year it was about .5% of the accrued liability. it is a $20 million loss over $26 billion in the total liabilities. the current method is very common in the private sector that we are using, but it is not

considered best practice four public sector pension plans. i want to note that this current method was approved by the board five years ago with the previous audit as well. there is a lot going on in the slide. the current method and best practice method are the same except for the payroll used to calculate the normal cost of percentage of pay. the current method uses a higher payroll for a lower cost rate applied to all pension as first payroll. the difference in the current method and best practice is 0.8%. there is an alternative approach since all new hires go to the prop c. we can apply there to the prop c

group and it would automatically convert to best practice when ththe actor was the proxy group. >> those are the two items in question? >> questions, commissioners? >> if you covered this while was out of the room, my apologies. in terms of best practices how we do payroll. do you recommend we make that change? it is termination? >> from the normal cost rate? >> yes. >> yes, we would prefer to be using best practices, but the current method we are okay supporting. we will be ok supporting the alternative approach also. >> the small number attached to

that subject for me is we make a certain assumption about people not actually members but will be members. they have a right to get the benefit. that is what i am trying to understand how significant that is versus this change. in my mind they are connected. one thing that kept the contribution rate down payroll has grown significantly. it may not continue to grow at this pace. >> if payroll grows significantly, this becomes a nonissue. >> right, right. if we have declines in population, it also is not an issue because our estimate of what we are doing turns out to be closer to the right number. what we are assumes is that everyone who leaves is replaced

and that the active population in the plan remains constant. if that happens, this method would give you something on the order of $20 million loss each year, which is really a pretty small number, but it is not an unbiased number. it is always a lot. best practice method would eliminate that and some years you might have more new hires and some years few errand it would balance out. overall it ends up being a pretty small number. >> did you discuss the economic return number? >> you haven't got there yet. okay. >> any other comments? no comments. we may lose a commissioner. we will keep this moving. public comment on this item?

>> good afternoon, again, commissioners. retired employees of the city and county. my concern in reading these materials really had to do if there is going to be any impact on how there ask a determination or whether or not the supplemental cola thresholds has been reached especially for the 97 to 2012 employees since a lot of my members are part of that group. we also have a significant number you have i guess it is about 5500 left of the pre-97 group as well. this looks like this is just sort of an actuarial calculation. if some of the comments included mere are taken into consideration that could have some adverse impact on perhaps

what is determined at court and definitely what is determined within our membership in terms of whether or not the actuarial audit will sustain what we think will be a qualification for the supplemental cola. we have a lot of concern how this is actually being done and what it will mean for those actively employed with regard to that 100% thresholds that has to be met the market rate but also for those of us behind the prop c lawsuit and how that impacts the supplemental cola going forward. thank you. >> any additional comments? i see no comments. we will close public comment. you that was a discussion item. >> action item. 2018 economic updates to funding. >> reminder the this is an

annual review of the economic assumptions. this was presented at the july board meeting. that item was a discussion only at the time. today is a follow up to that meeting where the board will select the economic assumptions for the july 2018 valuation that determines the funding for the 2020 fiscal year and ann and bill are here to talk about this. >> before we revisit the economic assumptions, we are going to review and look at the supplemental cola funding policy based on what happened with the audit and also with the not intuitive way the contribution rates are projected to increase this year even though you returned 11% on the assets that is a ballpark at this point but

it triggered a supplemental cola. there will be a slight increase in the contribution rate. >> can we highlight the main items? >> go ahead. >> this is an updated baseline projection. the 2017 projections, the red line we updated this with the preliminary asset value us, and the 2008 cola. there is a very slight bump in the contribution rate in the first couple years then it will be lower because you are recognizing those asset gains. the current cola is when a supplemental cola is granted it is am moretised over five years. we do not have the specific assumptions. the investment gains or losses

are smooth over five years then amortized over 20 years. i will go through an example to show what that means as quickly as i can. in 2017, you had a 13.5% return on investments. $1.1 billion. a fifth of that is recognized for five year. $226 million. if you look at the investment gain in the table there, you can see that very first 17.6 is allmortization payment of the first recognized credit, 20% credit for the $226 million of the $1.3 billion. it is phased over five years. you can see the payments are ramping up but declining. you are seeing a bigger increase with that five year phase-in. you can get to 2023 and 2024 and

increasing with wage inflation. the supplemental cola triggered by the investment gain is over five years. the dynamic is slight increases in the contribution rate the first couple years then decrease after the next two or three years with most of the gains after the fifth year. best practices for fundings policies related to retire rebenefit as. you shouldn't go past amortization of 10 years. they are not to exceed the lifetime of members receiving take benefits. it is now 17.5 years. we are suggesting you might want to look at another option for your five year amortization of the cola in lengthening that

period from five to 10 years to match more what we are doing on the asset side. lengthening it to 10 years. phases it in over five years so the five year phase-in is matching the asset side. you can see the net result on the bottom of the scrap. you have much more evenly distributed gains. decrease initially. increases over five years then smaller decreases than the smallesmallerthe smallsmaller p. another one is the actual audit to explicitly value the supplemental cola in the funding valuation. increase in liability close to $2 billion am moretised over 20 years. the current funding policy for

assumption changes over three to five years. going forward any variances in the supplemental cola am moretised gains or losses over 20 years. this graft shows the pattern what we talked about the 2017 baseline, updates to 2018 with assets and supplemental cola, prefunding that supplemental cola increase in contribution rate, highest. it does converge with the 2017 baseline in 10 years. then we haven't talked about. expanding the supplemental cola from five to 10 years and phasing it in over five years. with that i will pass it to bill to talk about the economic assumptions. >> we presented the economic

assumptions back in august. the recommendations were to consider reducing the price inflation to 2.75, keep wage assumptions at 3.5. consider reducing discount below 7.5. we put three potential choices there. .4, 7.25 and 7. the rationale was looking at capital market assumptions from any pc and other investment consultants. most of those were less than 7.5. any pc's 30 year is pryer than 7.5. one other projection is higher than 7.5. most are lower. a lot of these look at more of a 10 year outcome. the current discount rate of 7.5

is the highest in the public plans in california. >> we are the highest public plan at 7.5? >> yes, but you are around the median nationally. you have two different ways to look at that. >> two different peer groups. >> just looking at what you changing the discount rate did you to your funded status at 7.5%, you are about 87% funded with a $3.3 billion unfunded liability. as you reduce that discount rate, it increasing our funding target. the liability and the funded status goes down at 7.4. it goes council $300 million. 7.25 drops you to 85%. 7 down to 82%. that increase in liability would

be am moretised over 20 years and if you did a significant jump we would fail in the amortization. that is a quick summary we wanted to look how those play out in the projections, and we are going to run through a few of the combination was the supplemental cola policy alternative. this chart shows the employer rate before any caution. we are not going to address the cost sharing directly. we did put the two triggers that most commonly come into play on these charges. below 22.5% employee rate goes down. above it it goes up.

you can gauge where we are on the cost sharing. you this is the preliminary 2018 projection with no changes to current policies. the first option is to take a small step. reduce discount to 7.4 and extend supplemental cola to 10 years with five year phase-in. you would still have the highest discount rate in california, but it would be a step and the supplemental colas would not -- would be much less likely to cause short-term increase in contribution rates. it is one you have the things that we didn't like. if you have a good investment return, the contribution rate should go down. because you have the

supplemental cola, unless you have a really good investment return it goes up for a little bit, then down. this would take care of that problem. there is as we in the first 10 years as you phase-in that approach, you end up with a trend for increasing rates in the interim period there. you could take a moderate step and drop the discount to 7.25. we suggest phasing that in over three years, combining with the supplemental cola amortization. that would put you at median in california and below median nationally and with the same pattern on the supplemental coal what rates. you can see compared to the 2017valuation projection, we are fairly close to that projection

fewer the next several years. in the out years conindustrybution rates would be higher. >> can i stop you there? >> yes. >> i didn't believe the staff report indicated the three options we are looking at was sustain 7.5, reducing small step down to 7.4, going to 7.25. i know you recommended 7.0. those are ugly and a very ugly chart. the time is short. over the last few weeks, staff karen and janette and i have been meeting with the city, representatives of the mayor's office and controller's office to chart the impact of these decisions today on the budget and what it would look like. i have been authorized by the chief of staff and mayor's office to report to the board that they believe this might be

a good year to you take a small state down -- small step down and they believe in the budget process that they would not want to pass the cost of this step down out into the future and so that they would like the board to consider reducing it to 7.4 and keeping the amortization period at five years, not extending amortization period. that with the chart janette furnished you yesterday in an e-mail. >> i am comfortable with that. >> can we have additional comments on that? >> no. like i say, it is just part of they understand that first of all, it is easier to make a reduction in a good year. it is hard to do it when we have a bad year, and that they like

the idea of keeping the five years because that absorbings a lot of the cost upfront. at the tail end you save money to you the city long-term. >> i liked that. it is a nice moderate step. i want to see if we can get support from our board. any discussion? >> as a retire rye, how concerned am i that