ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM BOARD OF RETIREMENT 2223 E. WELLINGTON AVENUE, SUITE 100 SANTA ANA, CALIFORNIA

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1 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM BOARD OF RETIREMENT 2223 E. WELLINGTON AVENUE, SUITE 100 SANTA ANA, CALIFORNIA REGULAR MEETING November 18, :00 a.m. AGENDA The Orange County Board of Retirement welcomes you to this meeting. This agenda contains a brief general description of each item to be considered. The Board of Retirement encourages your participation. The public, plan members, beneficiaries, and/or representatives may speak to any subject matter contained in the agenda at the time the item is addressed. Except as otherwise provided by law, no action shall be taken on any item not appearing in the following agenda. When addressing the Board, please state your name for the record prior to providing your comments. Speakers will be limited to three (3) minutes. Pledge of Allegiance CONSENT AGENDA All matters on the Consent Agenda are to be approved by one action unless a Board Member or a member of the public requests separate action on a specific item. C-1 MATERIAL DISTRIBUTED Application Notices - November 18, 2013 Death Notices - November 18, 2013 Recommendation: Receive and file. C-2 BOARD MEETINGS AND COMMITTEE MEETINGS Approval of Meeting and Minutes Regular Board Meeting Minutes - October 21, 2013 Approval of Meeting Budget Workshop - October 25, 2013 Recommendation: Authorize all meetings and approve all minutes.

2 Orange County Employees Retirement System November 18, 2013 Regular Board Meeting Agenda Page 2 C-3 V3 PENSION ADMINISTRATION SYSTEM SOLUTION (PASS) MONTHLY UPDATE Recommendation: Receive and file. C-4 LEGISLATIVE UPDATE NOVEMBER 2013 Recommendation: Receive and file. C-5 UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 Recommendation: Receive and file C-6 THIRD QUARTER 2013 BUDGET TO ACTUAL REPORT Recommendation: Receive and file C-7 TRUSTEE EDUCATION POLICY EDUCATION HOURS Recommendation: Receive and file C-8 COMMENTS FROM THE CITY OF WESTMINSTER Recommendation: Receive and file. C-9 THE EVOLUTION OF OCERS UAAL Recommendation: Receive and file C-10 FIDUCIARY COUNSEL RFP AND IFB FOR GENERAL COUNSEL SEARCH FIRM Recommendation: Receive and file C-11 OUTCOME OF BOARD MEMBER ELECTIONS Recommendation: Receive and file C-12 REPORT ON CONFERENCE ATTENDANCE Recommendation: Receive and file

3 Orange County Employees Retirement System November 18, 2013 Regular Board Meeting Agenda Page 3 C-13 BOARD COMMUNICATIONS Recommendation: Receive and file. * * * * * * END OF CONSENT AGENDA * * * * * * * INDIVIDUAL ITEMS AGENDA I-1 INDIVIDUAL ACTION ON ANY ITEM TRAILED FROM THE CONSENT AGENDA I-2 PORTFOLIO ACTIVITY REPORT This report will be presented at the Nov. 20, 2013 meeting of the Investment Committee. I-3 THE RALPH M. BROWN ACT Presentation by Harvey Leiderman Recommendation: Take appropriate action. I-4 FIDUCIARY FRAMEWORK FOR ADOPTING ACTUARIAL ASSUMPTIONS AND METHODOLOGIES Presentation by Harvey Leiderman Recommendation: Take appropriate action. I-5 ACTUARIAL FUNDING POLICY (AMORTIZATION) Presentation by Paul Angelo, The Segal Company Recommendation: Take appropriate action. I-6 ASSUMED EARNINGS RATE Presentation by Paul Angelo, The Segal Company Recommendation: Take appropriate action. I-7 ACCELERATED UAAL PAYMENTS DISCUSSION Presentation by Paul Angelo, The Segal Company Recommendation: Take appropriate action.

4 Orange County Employees Retirement System November 18, 2013 Regular Board Meeting Agenda Page 4 I-8 15 YEAR RATE PROJECTION Presentation by Paul Angelo, The Segal Company Recommendation: Receive and file. I-9 OCERS ADMINISTRATIVE AND INVESTMENT BUDGET FOR FISCAL YEAR 2014 Presentation by Brenda Shott and Tracy Bowman Recommendation: 1. Adopt the Administrative and Investment Budget for Fiscal Year 2014 in the amounts presented in the budget package for the categories of Personnel Costs, Services and Supplies and Capital Expenditures. 2. Approve the addition of four new positions for a total of 72 authorized positions. 3. Approve the OCERS Direct Staff Salary Ranges. 4. Approve the position title changes. I-10 CONDITIONS OF EMPLOYMENT OF OCERS CEO PERFORMANCE EVALUATION Presentation by Cynthia Hockless Recommendation: Take appropriate action. * * * * * * END OF INDIVIDUAL ITEMS * * * * * * * CLOSED SESSION E-1 PUBLIC EMPLOYEE PERFORMANCE EVALUATION PURSUANT TO GOVERNMENT CODE SECTION Position to be evaluated: Chief Executive Officer Recommendation: Take appropriate action. * * * * * * * END OF CLOSED SESSION AGENDA * * * * * *

5 Orange County Employees Retirement System November 18, 2013 Regular Board Meeting Agenda Page 5 DISABILITY APPLICATIONS/MEMBER APPEALS AGENDA 1:00 P.M. NOTE: WHEN CONSIDERING DISABILITY RETIREMENT APPLICATIONS, THE BOARD MAY FIND IT NECESSARY TO DISCUSS MATTERS RELATING TO THE EVALUATION OF THE WORK PERFORMANCE OF AN EMPLOYEE WHO HAS APPLIED FOR DISABILITY RETIREMENT, OR DISCUSS COMPLAINTS OR CHARGES MADE AGAINST SUCH EMPLOYEE. IF THIS OCCURS, THE BOARD MAY ADJOURN TO A CLOSED SESSION TO DISCUSS SUCH MATTERS PURSUANT TO GOVERNMENT CODE SECTION 54957, UNLESS THE EMPLOYEE REQUESTS THAT THE DISCUSSION BE IN PUBLIC. D-1: **************** Bruce E. Bailey Fire Apparatus Engineer, Orange County Fire Authority Date of employee filed application for service connected disability retirement: 07/02/2012 Date of entry to OCERS: 05/16/1980 Total years of OCERS service: Date of service retirement: 03/28/2012 Last day of compensation: 04/06/2012 Attorney Designation: Lawrence R. Whiting STAFF RECOMMENDATION IS TO GRANT SERVICE CONNECTED DISABILITY RETIREMENT WITH AN EFFECTIVE DATE OF JULY 2, (SAFETY MEMBER) (D-1) D-2: Robert Manche Deputy Sheriff II, Orange County Sheriff s Department Date of employee filed application for service and non-service connected disability retirement: 11/29/2012 Date of entry to OCERS: 07/15/1996 Total years of OCERS service: Last day of compensation: Still receiving compensation Attorney Designation: Mark Singer STAFF RECOMMENDATION IS TO GRANT SERVICE CONNECTED DISABILITY RETIREMENT WITH AN EFFECTIVE DATE OF THE DAY AFTER THE LAST DAY OF COMPENSATION. (SAFETY MEMBER) (D-2) D-3: Timothy R. Richards Firefighter/Paramedic, Orange County Fire Authority Date of employee filed application for service connected disability retirement: 01/25/2013 Date of entry to OCERS: 07/20/1995 Years of reciprocal service: Total years of OCERS service: Last day of compensation: 03/21/2013 Date of service retirement: 03/22/2013 Attorney Designation: Pro Per

6 Orange County Employees Retirement System November 18, 2013 Regular Board Meeting Agenda Page 6 STAFF RECOMMENDATION IS TO GRANT SERVICE CONNECTED DISABILITY RETIREMENT WITH AN EFFECTIVE DATE OF MARCH 22, 2013.(SAFETY MEMBER) (D-3) D-4: Bret Russell Fire Captain, Orange County Fire Authority Date of employee filed application for service and non-service connected disability retirement: 07/23/2012 Date of entry to OCERS: 11/07/1980 Total years of OCERS service: Last day of compensation: 02/18/2013 Date of Service Retirement: 02/19/2013 Attorney Designation: Mark Singer STAFF RECOMMENDATION IS TO GRANT SERVICE CONNECTED DISABILITY RETIREMENT WITH AN EFFECTIVE DATE OF FEBRUARY 19, (SAFETY MEMBER) (D-4) D-5: Heather Aguirre Radio Dispatcher, Orange County Sheriff s Department Date of employee filed application for service and non-service connected disability retirement: 03/12/2012 Date of entry to OCERS: 06/01/2001 Total years of OCERS service: Last day of compensation: 05/05/2011 Attorney Designation: Pro Per STAFF RECOMMENDATION IS TO DENY SERVICE AND NON-SERVICE CONNECTED DISABILITY RETIREMENT DUE TO INSUFFICIENT EVIDENCE OF PERMANENT INCAPACITY. (GENERAL MEMBER) (D-5) D-6: Kenna Andrade Sergeant, Orange County Sheriff s Department Date of employee filed application for service connected disability retirement: 12/20/2012 Date of entry to OCERS: 02/01/1988 Total years of OCERS service: Last day of compensation: 10/10/2011 Date of Service Retirement: 10/11/2011 Attorney Designation: Pro Per STAFF RECOMMENDATION IS TO DENY SERVICE CONNECTED DISABILITY RETIREMENT DUE TO INSUFFICIENT EVIDENCE OF PERMANENT INCAPACITY AND JOB CAUSATION.(SAFETY MEMBER) (D-6) D-7: Dwayne R. Best Fire Captain, Orange County Fire Authority Date of employee filed application for service connected disability retirement: 03/13/2012 Date of entry to OCERS: 05/16/1980 Total years of OCERS service:

7 Orange County Employees Retirement System November 18, 2013 Regular Board Meeting Agenda Page 7 Last day of compensation: 03/22/2012 Date of Service Retirement: 03/23/2012 Attorney Designation: pro per STAFF RECOMMENDATION IS TO DENY SERVICE CONNECTED DISABILITY RETIREMENT DUE TO INSUFFICIENT EVIDENCE OF PERMANENT INCAPACITY. (SAFETY MEMBER) (D-7) D-8: MELISSA T. RAMIREZ Eligibility Supervisor, Orange County Social Services Agency Date of employee filed application for service and non-service connected disability retirement: 10/04/2012 Date of entry to OCERS: 10/28/1988 Total years of OCERS service: Last day of compensation: 03/22/2012 Attorney Designation: pro per STAFF RECOMMENDATION IS TO DENY SERVICE AND NON-SERVICE CONNECTED DISABILITY RETIREMENT DUE TO INSUFFICIENT EVIDENCE OF PERMANENT INCAPACITY AND JOB CAUSATION. (GENERAL MEMBER) (D-8) * * * * * * * * END OF DISABILITY APPLICATIONS/MEMBER APPEALS AGENDA * * * * * * * PUBLIC COMMENTS: At this time members of the public may address the Board of Retirement regarding any items within the subject matter jurisdiction of the Board, provided that no action may be taken on non-agendized items unless authorized by law. BOARD MEMBER COMMENTS CHIEF EXECUTIVE OFFICER/STAFF COMMENTS COUNSEL COMMENTS ADJOURNMENT: (IN MEMORY OF THE ACTIVE MEMBERS, RETIRED MEMBERS, AND SURVIVING SPOUSES WHO PASSED AWAY THIS PAST MONTH) NOTICE OF NEXT MEETING INVESTMENT COMMITTEE MEETING November 20, :00 A.M. ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM 2223 E. WELLINGTON AVENUE, SUITE 100 SANTA ANA, CA 92701

8 Orange County Employees Retirement System November 18, 2013 Regular Board Meeting Agenda Page 8 INVESTMENT MANAGER MONITORING COMMITTEE MEETING December 3, :00 A.M. ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM 2223 E. WELLINGTON AVENUE, SUITE 100 SANTA ANA, CA GOVERNANCE COMMITTEE MEETING December 5, :00 A.M. ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM 2223 E. WELLINGTON AVENUE, SUITE 100 SANTA ANA, CA All supporting documentation is available for public review in the retirement office during regular business hours, 8:00 a.m. 5:00 p.m., Monday through Thursday and 8:00 a.m. 4:30 p.m. on Friday. It is OCERS' intention to comply with the Americans with Disabilities Act ("ADA") in all respects. If, as an attendee or participant at this meeting, you will need any special assistance beyond that normally provided, OCERS will attempt to accommodate your needs in a reasonable manner. Please contact Marisa Quintero or Alison Griffith as soon as possible prior to the meeting to tell us about your needs and to determine if accommodation is feasible. We would appreciate at least 48 hours notice, if possible. Please also advise us if you plan to attend meetings on a regular basis.

9 Orange County Employees Retirement System Retirement Board Meeting November 18, 2013 Application Notices Member Name Agency/Employer Retirement Date Adams, Tammy Public Guardian/Administrator 7/19/2013 Ash, Tony Health Care Agency 8/9/2013 Barsaga, Victoriana Sheriff's Dept 7/2/2013 Benson, Gary Probation 8/13/2013 Blondet, Kanako OCTA 7/27/2013 Boon, Cynthia Fire Authority (OCFA) 7/24/2013 Bourne, Nigel Sheriff's Dept 8/23/2013 Boyle, Michael OCTA 7/10/2013 Breceda, Luis OC Community Resources 8/9/2013 Brown, Phyllis Probation 7/12/2013 Clark, Kathleen Superior Courts 7/12/2013 Eisler, Edward Vector Control District 8/8/2013 Fall, Gregory Social Services Agency 7/12/2013 Frazier, Ron District Attorney 7/12/2013 Glenn, Ulysses Treasurer-Tax Collector 7/12/2013 Harrington, David Social Services Agency 7/19/2013 Hempel, Daniel OCTA 7/1/2013 Hensler, Mark Social Services Agency 6/28/2013 Holt, Ralph Sanitation District 6/28/2013 Keown, Brenda Social Services Agency 7/12/2013 Kite, William Public Defender 8/23/2013 Kitto, Linda Sheriff's Dept 8/9/2013 Leblow, Loan Social Services Agency 7/12/2013 Mansilla, Iris Probation 6/26/2013 McLuckey, Ramona Sheriff's Dept 6/28/2013 Mead, Vince Public Defender 7/23/2013 Montijo, Michael OCTA 7/24/2013 Nguyen, Jessica Health Care Agency 7/26/2013 Novak, Kraig OC Public Works 6/28/2013 Ocon, Samuel Fire Authority (OCFA) 7/12/2013 Olschewske, Guy Sheriff's Dept 7/16/2013 Pehrsen, Roberta Superior Courts 7/12/2013 Pham, Dung OC Public Works 7/6/2013 Powers, Gregory Health Care Agency 6/28/2013 Ramos, Victor Sheriff's Dept 8/9/2013 Rodriguez, Felix Sheriff's Dept 8/23/2013 Rodriguez, Karen County Counsel 8/9/2013 Shoucair, Sam Social Services Agency 7/12/2013 Walker, Susan Health Care Agency 7/12/2013 Warnke, Sue Sheriff's Dept 7/1/2013 Williams, Teresa Sheriff's Dept 8/23/2013 Zorrilla, Arturo Social Services Agency 7/15/2013 Zverina, Amaly Sanitation District 7/16/2013

10 Orange County Employees Retirement Retirement Board Meeting November 18, 2013 Death Notices Retired Members Agency/Employer Date of Death Abbott, Martha Superior Court 10/15/2013 Dunn, Patricia Public Guardian/Administrator 10/7/2013 Krueger, Beverly Social Services Agency 9/4/2013 Lawson, Hatley Probation 11/2/2013 Lonza, Gregory Fire Authority (OCFA) 10/16/2013 Maycock, Patricia OC Public Works 9/22/2013 Yramategui, Florence OC Community Resources 9/16/2013 Surviving Spouses Date of Death Guzman, Marcus 10/1/2013 Pendrey, Ruby 10/24/2013 Stanton, Stephen 10/5/2013

11 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM BOARD OF RETIREMENT 2223 E. WELLINGTON AVENUE, SUITE 100 SANTA ANA, CALIFORNIA REGULAR MEETING October 21, :00 a.m. MINUTES The Vice Chair called the meeting to order at 9:01 a.m. and read the opening statement into the record. Attendance was as follows: Present: Absent: Frank E. Eley, Vice Chair; Roger Hilton; Ray Geagan; Chris Prevatt; Shari L. Freidenrich; Wayne S. Lindholm; Chuck Packard; David Ball. Thomas E. Flanigan, Chair; Robert A. Griffith; Also present: Steve Delaney, Chief Executive Officer; Julie Wyne, Assistant CEO, External and Legal Operations; Brenda Shott, Assistant CEO, Finance and Internal Operations; David James, Director of Internal Audit; Girard Miller, Chief Investment Officer; Robert Kinsler, Communications Manager; Cynthia Hockless, Human Resources Manager; David Lantzer, Staff Attorney; Megan Cortez; Disability Coordinator, Suzanne Jenike; Member Services Director; Anthony Beltran, Visual Technician; Javier Lara, Visual Technician; and Alison Griffith, Recording Secretary Harvey Leiderman, Esq., Reed Smith, LLP Mr. Hilton led the Pledge of Allegiance. CONSENT AGENDA All matters on the Consent Agenda are to be approved by one action unless a Board Member or a member of the public requests separate action on a specific item. Mr. Hilton pulled items C-6, C-8 and C-9 Mr. Eley pulled items C-3c and C-3d. Mr. Delaney pulled item C-11. A motion was made by Mr. Lindholm, seconded by Mr. Prevatt to approve the remainder of the Consent Agenda. The motion carried unanimously.

12 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 2 C-1 MATERIAL DISTRIBUTED Application Notices - October 21, 2013 Death Notices - October 21, 2013 Recommendation: Receive and file. C-2 BOARD MEETINGS AND COMMITTEE MEETINGS Approval of Meetings and Minutes Governance Committee Minutes - August 07, 2013 Regular Board Meeting Minutes - August 19, 2013 Regular Board Meeting Minutes - September 19, 2013 Approval of Meeting Strategic Planning Workshop - September 19, 2013 Recommendation: Authorize all meetings and approve all minutes. C-3 GOVERNANCE COMMITTEE OUTCOME (Meeting on 08/07/2013) Presentation by Julie Wyne Recommendation: Approve the Governance Committee recommendations as shown below: A. STAFF CODE OF ETHICS AND STANDARDS FOR PROFESSIONAL CONDUCT Recommendation: 1. Recommend to the full Board to approve the OCERS Staff Code of Ethics and Standards for Professional Conduct. 2. Recommend to the full Board that OCERS endorse the principles of the CFA Code of Conduct for Members of a Pension Plan Governing Body. B. COMMUNICATIONS POLICY DISCUSSION Recommendation: To recommend an amendment to the Communications Policy with the following changes: Add to page 2 Policy Guidelines, Communication among Board Members, paragraph 8 the following language: Board members should refrain from antagonistic and/or disrespectful responses during public comments. E. NEXT GOVERNANCE COMMITTEE MEETING DATE December 5, 2013 at 10:00 a.m.

13 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 3 C-4 STRATEGIC PLANNING WORKSHOP OUTCOMES Recommendation: Receive and file. C-5 QUARTERLY TRAINING AND TRAVEL REPORT Recommendation: Receive and file. C-7 REPORT ON CONFERENCE ATTENDANCE Recommendation: Receive and file. C-10 SECURITIES LITIGATION POLICY REPORT Recommendation: Receive and file. C-12 OPTION 4 RETIREMENT ELECTION Cynthia Boon Recommendation: Grant election of retirement benefit payment, Option 4, based on The Segal Company s actuarial report. C-13 OPTION 4 RETIREMENT ELECTION David Harrington Recommendation: Grant election of retirement benefit payment, Option 4, based on The Segal Company s actuarial report. C-14 OPTION 4 RETIREMENT ELECTION Daniel Hempel Recommendation: Grant election of retirement benefit payment, Option 4, based on The Segal Company s actuarial report. C-15 OPTIONAL DEATH ALLOWANCE Antonio Gianformaggio (Deceased) Recommendation: Find the member is permanently incapacitated from the duties of an Offset Press Operator. Grant survivor benefits pursuant to Government Code Section (Optional Death Allowance) to the member s spouse, Lydia Sisneros. C-17 BOARD COMMUNICATIONS Recommendation: Receive and file. * * * * * * END OF CONSENT AGENDA * * * * * * *

14 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 4 INDIVIDUAL ITEMS AGENDA I-1 INDIVIDUAL ACTION ON ANY ITEM TRAILED FROM THE CONSENT AGENDA C-3 GOVERNANCE COMMITTEE OUTCOME (Meeting on 08/07/2013) Presentation by Julie Wyne Recommendation: below: Approve the Governance Committee recommendations as shown C. BOARD TRAVEL EXPENSE PAYMENT METHOD ANALYSIS Recommendation: To recommend to the full Board the issuance of American Express credit cards to Board members who request them, and direct staff to create a credit card usage and issuance policy. D. BOARD MEETING VIDEO STREAMING VIDEO RETENTION Recommendation: 1. Recommend to the full Board that the Public Records Retention Policy be revised to reflect permanent retention of the Board and Investment Committee meeting video recordings. 2. Direct staff to focus on Granicus Company and bring forward recommendations to the Board related to live streaming and publishing of meeting videos. 3. Post a Board meeting on YouTube to see how that process works. Mr. Eley requested to discuss item C-3c in conjunction with item I-9 and item C-3d in conjunction with item I-10. C-6 RETIRED BOARD MEMBER ELECTION UPDATE Recommendation: Receive and file. Mr. Hilton requested staff to expand upon item C-6. Ms. Sadoski stated that while using Crystal Reports to provide addresses to the Registrar of Voters, a query of retired members was run and a random sampling was run against Pension Gold. Later it was determined that Crystal Reports did not pull all current addresses, more than 2400 were incorrect. Ms. Sadoski stated that in an effort to correct the addresses, a supplemental list was created and a new report was provided to the Registrar of Voters. She stated that a second mailing of ballots was performed along with a letter of explanation. Mr. Prevatt asked if there was a process that the Registrar has to identify duplicate ballots.

15 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 5 Ms. Hockless stated that the Registrar checks all received ballots against the master list and only one vote will be counted. Ms. Wyne stated that question arose whether OCERS would reimburse organizations for campaign materials that were sent to incorrect addresses. She stated that OCERS is legally barred from reimbursing any campaign materials from trust funds. A motion was made by Mr. Prevatt, seconded by Mr. Packard to receive and file item C-6. The motion carried unanimously. C-8 COMMENTS FROM ORANGE COUNTY SANITATION DISTRICT ON AMORTIZATION PERIODS Recommendation: Receive and file. Mr. Hilton asked if staff would catalog the incoming letters from Plan Sponsors and the Stakeholder community regarding the amortization schedule which will be addressed at the November Board Meeting. Mr. Packard stated that it would be appropriate to have a separate historical perspective; what has happened to the UAAL and assumed earnings rates versus what actual rates have been. He stated that he would like to rely on the history, and would like it in a cover report so Board members all have the same information. Mr. Delaney stated that he would work with staff to compile the requested information. A motion was made by Mr. Packard, seconded by Mr. Prevatt to receive and file item C-6. The motion carried unanimously. C-9 PROPOSED BOARD SCHEDULE FOR 2014 Recommendation: Receive and file. A discussion was held regarding whether or not Board Members were in favor of holding Board meetings in August and December of Mr. Prevatt stated that he was in favor of holding meetings in both months due to disability applicants and the amount of waiting time should no meeting be held. Mr. Delaney stated that the 2014 schedule is proposing the December Board meeting be combined with the Investment Committee meeting and stated that the same could be done with the August 27 th Investment Committee meeting. A motion was made by Mr. Lindholm, seconded by Mr. Hilton to receive and file item C-9 with the proposed changes to August and December. The motion carried unanimously. C-11 LEGISLATIVE UPDATE OCTOBER Recommendation: Receive and file.

16 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 6 Ms. Wyne addressed the Board and gave an initial review of the recently introduced Pension Reform Act ballot measure. She stated that the proposed changes would affect future rates of accruals and healthcare benefits. Ms. Wyne stated that if the systems were 80 percent funded or above, collective bargaining would determine future accruals, but if the system is in crisis, i.e. substantially underfunded, additional actions can be taken and imposed. She also stated that if a system is less than 80% funded, rate stabilization would be imposed. She stated that in order to pass this measure, there needs to be over 807,000 signatures and it has to qualify 131 days prior to a general election. A motion was made by Mr. Prevatt, seconded by Mr. Packard to receive and file item C-11. The motion carried unanimously. I-2 PORTFOLIO ACTIVITY REPORT Presentation by Girard Miller Recommendation: Receive and file. Mr. Miller presented the August 2013 Portfolio Activity Report to the Board. He summarized the August activity in the following areas: diversified credit, private equity, real estate, real return, absolute return, and manager cash. Mr. Prevatt asked what would happen if the majority of credit rating agencies downgraded the USA, would our ability to invest be affected? Mr. Miller stated that it depends on whether Congress allowed the USA to default for a few days which would have no effect on OCERS but if the rating agencies assigned the letter d, markets could potentially go into a tail spin. He stated that the Investment team was proactive on crafting a plan for this possibility. He stated that OCERS was prepared to move money if needed. A motion was made by Mr. Packard, seconded by Mr. Hilton to receive and file item I-2. The motion carried unanimously. The Board recessed at 10:21 a.m. The Board reconvened at 10:35 a.m. I-3 MUNICIPAL INSOLVENCY: FAT TAIL EVENTS AND HOW TO MANAGE THE RISKS Presentation by Harvey Leiderman Recommendation: Take appropriate action Mr. Leiderman addressed the Board and presented a PowerPoint presentation regarding Municipal Insolvency. Some of the highlights of the presentation included fat tail events from the last 20 years that impacted OCERS. He stated that the purpose of the Board of Retirement was to

17 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 7 protect OCERS ability to pay the promised benefits when due using care, skill, prudence and diligence under the prevailing circumstances. Mr. Leiderman stated that some of the current prevailing circumstances today were unfunded liabilities pushing contribution rates higher than ever, retirees exceeding the number of active employees and with longer life spans, people are spending more time in retirement than they did working. He stated that a negative cash flow potentially leads to riskier and more complex investments. Mr. Leiderman also addressed the impact of plan sponsors filing for bankruptcy protection. He stated that when looking at bankruptcies, you need to break apart what the obligation is to OCERS. He stated that the normal cost is a post-petition obligation and that the money should not be interrupted. He stated that UAAL represents a past due cost that was accrued because of things that happen before the petition date and can t be held up in bankruptcies. Mr. Harvey Leiderman, OCERS Fiduciary Counsel, presented a PowerPoint presentation that focused on the possibility of municipal bankruptcies, and what that might mean in OCERS context. He encouraged the Board to take a close look at plan sponsor s finances and specifically their revenue streams as part of an overall risk assessment from OCERS point of view. With that work accomplished, it would then be possible for the Board to build in risk mitigation strategies to their overall governance approach. The Board was very interested, and asked staff to begin developing the scope of such a program, assuming that it would take from 4-6 months of field work before returning to the Board for the risk mitigation work. The time for this particular topic concluded before Mr. Leiderman could discuss what California law provides in regard to municipal bankruptcies, and he will return at a later time to continue that discussion. Mr. Ball stated that cost and amortization are not related. He stated that amortization is a cash flow method to pay off an obligation over a period of time. He stated that the longer you stretch out payment, the harder it is to predict what will happen and there are more errors and in his opinion there would be better results with shorter amortization. Mr. Lindholm left the Board meeting at 11:36 a.m. Mr. Leiderman stated that when he is at a future Board meeting, he will go into more detail about the fundamental obligation owed to OCERS versus plan sponsors to other lenders. A motion was made by Mr. Packard, seconded by Mr. Hilton to receive and file item I-3. The motion carried unanimously. Mr. Delaney stated that due to travel schedules, item I-5 will precede I-4 and he introduced Jan Hartford of CEM to the Board. I-5 CEM BENCHMARKING REPORT FOR FY 2012 Presentation by Jan Hartford Recommendation: Receive and file.

18 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 8 Ms. Hartford presented the results of CEM s Pension Administration Benchmarking FY 2012 study and directed the Board to the PowerPoint presentation in their Board material. She stated that OCERS was compared to 9 other larger Public Retirement Systems. The following areas were some of the comparisons made in CEM s study: Pension administration cost, total cost per active member and annuitant, overall cost per FTE, and total service score. Because OCERS has an economies of scale disadvantage with those larger systems Mr. Delaney informed the Board that we would no longer use the CEM Benchmarking approach, instead through 2014, Mr. Delaney will work with CALAPRS and SACRS to find other benchmarking options. A motion was made by Mr. Packard, seconded by Mr. Hilton to receive and file item I-5. The motion carried unanimously. The Board recessed for lunch at 12:50 p.m. The Board reconvened at 1:17 p.m. and began the disability applications agenda. DISABILITY APPLICATIONS/MEMBER APPEALS AGENDA 1:00 P.M. NOTE: WHEN CONSIDERING DISABILITY RETIREMENT APPLICATIONS, THE BOARD MAY FIND IT NECESSARY TO DISCUSS MATTERS RELATING TO THE EVALUATION OF THE WORK PERFORMANCE OF AN EMPLOYEE WHO HAS APPLIED FOR DISABILITY RETIREMENT, OR DISCUSS COMPLAINTS OR CHARGES MADE AGAINST SUCH EMPLOYEE. IF THIS OCCURS, THE BOARD MAY ADJOURN TO A CLOSED SESSION TO DISCUSS SUCH MATTERS PURSUANT TO GOVERNMENT CODE SECTION 54957, UNLESS THE EMPLOYEE REQUESTS THAT THE DISCUSSION BE IN PUBLIC. **************** D-1: Mary. K. Blaul Firefighter/Paramedic, Orange County Fire Authority Date of employee filed application for service connected disability retirement: 9/6/2012 Date of entry to OCERS: 9/13/1985 Total years of OCERS service: Last day of compensation: 10/18/2012 Date of Service Retirement: 10/19/2012 Attorney Designation: Pro Per STAFF RECOMMENDATION IS TO GRANT SERVICE CONNECTED DISABILITY RETIREMENT WITH AN EFFECTIVE DATE OF OCTOBER 19, (SAFETY MEMBER) (D-1) Megan Cortez, Disability Coordinator, presented item D-1 to the Board along with the staff recommendation. A motion was made by Mr. Geagan, seconded by Mr. Packard to grant service connected disability retirement with an effective date of October 19, The motion carried 7-0 with voting as follows:

19 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 9 AYES NAYS ABSTAIN ABSENT Mr. Eley Mr. Flanigan Mr. Prevatt Mr. Griffith Mr. Hilton Mr. Lindholm Ms. Freidenrich Mr. Packard Mr. Ball Mr. Geagan D-2: Brenda Bosco Sheriff s Special Officer, Orange County Sheriff s Department Date of employee filed application for service connected disability retirement: 01/03/2012 Date of entry to OCERS: 06/29/1990 Total years of OCERS service: Last day of compensation: still receiving compensation Attorney Designation: Mark Singer STAFF RECOMMENDATION IS TO GRANT SERVICE CONNECTED DISABILITY RETIREMENT FOR CONDITION #1 WITH AN EFFECTIVE DATE OF THE DAY AFTER THE LAST DAY OF COMPENSATION. AND TO DENY SERVICE AND NON-SERVICE CONNECTED DISABILITY RETIREMENT FOR CONDITION #2 DUE TO INSUFFICIENT EVIDENCE OF PERMANENT INCAPACITY. (GENERAL MEMBER) (D-2) Megan Cortez, Disability Coordinator, presented item D-2 to the Board along with the staff recommendation: A motion was made by Mr. Prevatt, seconded by Mr. Hilton to grant service connected disability retirement for condition #1 with an effective date of the day after the last day of compensation. And to deny service and non-service connected disability retirement for condition #2 due to insufficient evidence of permanent incapacity. Mr. Singer urged the board to follow staff recommendation. The motion carried 7-0 with voting as follows: AYES NAYS ABSTAIN ABSENT Mr. Eley Mr. Flanigan Mr. Prevatt Mr. Griffith Mr. Hilton Mr. Lindholm Ms. Freidenrich Mr. Packard Mr. Ball Mr. Geagan D-3: Tammy A. Demetry Senior Recordable Documents Examiner, Orange County Clerk Recorder Date of employee filed application for service and non-service connected disability retirement: 09/29/2011

20 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 10 Date of entry to OCERS: 08/20/1990 Total years of OCERS service: Last day of compensation: 08/11/2011 Attorney Designation: Krishna Gulaya STAFF RECOMMENDATION IS TO GRANT SERVICE CONNECTED DISABILITY RETIREMENT WITH AN EFFECTIVE DATE OF AUGUST 12, 2011.(GENERAL MEMBER) (D-3) Megan Cortez, Disability Coordinator, presented item D-3 to the Board along with the staff recommendation: A motion was made by Mr. Hilton, seconded by Mr. Packard to grant service connected disability retirement with an effective date August 12, The motion carried 7-0 with voting as follows: AYES NAYS ABSTAIN ABSENT Mr. Eley Mr. Flanigan Mr. Prevatt Mr. Griffith Mr. Hilton Mr. Lindholm Ms. Freidenrich Mr. Packard Mr. Ball Mr. Geagan D-4: Robert C. Feldtz Fire Apparatus Engineer, Orange County Fire Authority Date of employee filed application for service connected disability retirement: 07/23/2012 Date of entry to OCERS: 11/13/1981 Total years of OCERS service: Last day of compensation: 09/06/2012 Date of Service Retirement: 09/07/2012 Attorney Designation: Pro Per STAFF RECOMMENDATION IS TO GRANT SERVICE CONNECTED DISABILITY RETIREMENT WITH AN EFFECTIVE DATE OF SEPTEMBER 7, 2012.(SAFETY MEMBER) (D-4) Megan Cortez, Disability Coordinator, presented item D-4 to the Board along with the staff recommendation: A motion was made by Mr. Geagan, seconded by Mr. Hilton to grant service connected disability retirement with an effective date of September 7, The motion carried 7-0 with voting as follows: AYES NAYS ABSTAIN ABSENT Mr. Eley Mr. Flanigan Mr. Prevatt Mr. Griffith Mr. Hilton Mr. Lindholm Ms. Freidenrich Mr. Packard Mr. Ball Mr. Geagan

21 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 11 D-5: Dennis Klonowski Maintenance Worker II, City of San Juan Capistrano Date of employee filed application for service connected disability retirement: 07/13/2012 Date of entry to OCERS: 12/08/1986 Total years of OCERS service: Last day of compensation: 08/26/2011 Date of Service Retirement: 07/13/2012 Attorney Designation: Pro Per STAFF RECOMMENDATION IS TO GRANT SERVICE CONNECTED DISABILITY RETIREMENT WITH AN EFFECTIVE DATE OF JULY 13, 2012.(GENERAL MEMBER) (D-5) Megan Cortez, Disability Coordinator, presented item D-5 to the Board along with the staff recommendation: A motion was made by Mr. Prevatt, seconded by Mr. Geagan to grant service connected disability retirement with an effective date of July 13, The motion carried 7-0 with voting as follows: AYES NAYS ABSTAIN ABSENT Mr. Eley Mr. Flanigan Mr. Prevatt Mr. Griffith Mr. Hilton Mr. Lindholm Ms. Freidenrich Mr. Packard Mr. Ball Mr. Geagan D-6: Michael Mish Fire Captain, Orange County Fire Authority Date employee filed application for service connected disability retirement: 4/5/2012 Date of entry to OCERS: 4/24/1981 Total years of OCERS service: Last day of compensation: 3/16/2012 Attorney Designation: Pro Per STAFF RECOMMENDATION IS TO DENY SERVICE CONNECTED DISABILITY RETIREMENT DUE TO INSUFFICIENT EVIDENCE OF PERMANENT INCAPACITY. (SAFETY MEMBER) (D-6) Item D-6 was pulled from the agenda. D-7: Patricia J. Monroe Comprehensive Care LVN, Orange County Health Care Agency Date of employee filed application for service and non-service connected disability retirement: 03/21/2012 Date of entry to OCERS: 01/18/1993 Total years of OCERS service: Last day of compensation: 10/21/2010 Attorney designation: Jane Oatman

22 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 12 STAFF RECOMMENDATION IS TO DENY SERVICE AND NON-SERVICE CONNECTED DISABILITY RETIREMENT FOR CONDITIONS # 1 AND #2 DUE TO INSUFFICIENT EVIDENCE OF PERMANENT INCAPACITY. (GENERAL MEMBER) (D-7) Megan Cortez, Disability Coordinator, presented item D-7 to the Board along with the staff recommendation: A motion was made by Mr. Packard, seconded by Mr. Hilton to adopt the staff recommendation and deny the applicant s application for a service and non-service connected disability retirement for conditions #1 and #2 due to insufficient evidence of permanent incapacity. Mr. Mark Singer urged the Board to grant service connected disability. He stated that as of 2006, the applicant was no longer capable of performing her duties in her job description. He stated that the employee and employer both tried to accommodate restrictions but it is no longer feasible for the applicant to continue. Ms. Cortez stated that the doctors felt that the current accommodations were being met and the applicant was capable of working. A substitute motion was made by Mr. Prevatt to grant the disability retirement. The motion failed for a lack of a second. The original motion carried 6-1 with voting as follows: AYES NAYS ABSTAIN ABSENT Mr. Eley Mr. Prevatt Mr. Flanigan Mr. Geagan Mr. Griffith Mr. Hilton Mr. Lindholm Ms. Freidenrich Mr. Packard Mr. Ball D-8: Patricia Wieczorek (PULLED) Senior Office Supervisor, Social Services Agency Date of employee filed application for service connected disability retirement: 03/05/2012 Date of entry to OCERS: 03/07/1989 Total years of OCERS service: Last day of compensation: 03/08/2012 Attorney Designation: Pro Per STAFF RECOMMENDATION IS TO DENY SERVICE CONNECTED DISABILITY RETIREMENT FOR CONDITIONS #1 AND #2 DUE TO INSUFFICIENT EVIDENCE OF PERMANENT INCAPACITY. (GENERAL MEMBER) (D-8) Item D-8 was pulled from the agenda. D-9: Anthony Calderon Sheriff s Special Officer II, Orange County Sheriff s Department Application for service and non-service connected disability retirement

23 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 13 Date of employer application: 02/04/2010 Date of employee application: 03/17/2010 Date of entry to OCERS: 11/06/1987 Total years of OCERS service: Last day of compensation: 02/11/2010 Date of service retirement: 02/17/2010 Attorney Designation: Steven Pingel STAFF RECOMMENDATION IS TO ADOPT THE FINDINGS AND RECOMMENDATIONS OF THE HEARING OFFICER AND GRANT APPLICANT S APPLICATION FOR SERVICE CONNECTED DISABILITY RETIREMENT. (GENERAL MEMBER) (D-9) Megan Cortez, Disability Coordinator, presented item D-9 to the Board along with the staff recommendation: A motion was made by Mr. Prevatt, seconded by Mr. Hilton to adopt the findings and recommendations of the hearing officer and grant applicant s application for service connected disability retirement. The motion carried 6-1 with voting as follows: AYES NAYS ABSTAIN ABSENT Mr. Eley Mr. Geagan Mr. Flanigan Mr. Prevatt Mr. Griffith Mr. Hilton Mr. Lindholm Ms. Freidenrich Mr. Packard Mr. Ball D-10: Jorge Pineda Deputy Juvenile Correctional Officer II, Orange County Probation Department Application for service and non-service connected disability retirement Date of employee application: 09/05/2008 Date of entry to OCERS: 02/11/2000 Total years of OCERS service: Last day of compensation: 08/31/2006 Attorney Designation: Mark Singer STAFF RECOMMENDATION IS TO ADOPT THE FINDINGS AND RECOMMENDATIONS OF THE HEARING OFFICER AND GRANT APPLICANT S REQUEST FOR AN EARLIER EFFECTIVE DATE. (SAFETY MEMBER) (D-10) Megan Cortez, Disability Coordinator, presented item D-10 to the Board along with the staff recommendation: A motion was made by Mr. Prevatt, seconded by Mr. Hilton to adopt the findings and recommendations of the hearing officer and grant applicant s request for an earlier effective date. The motion carried 7-0 with voting as follows:

24 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 14 AYES NAYS ABSTAIN ABSENT Mr. Eley Mr. Flanigan Mr. Prevatt Mr. Griffith Mr. Hilton Mr. Lindholm Ms. Freidenrich Mr. Packard Mr. Ball Mr. Geagan D-11: Donald Blankenship Chief, Orange County District Attorney Application for service connected disability retirement Date of employee application: 01/22/2010 Date of entry to OCERS: 01/15/1999 Total years of service: Last day of compensation: 09/17/2009 Date of Service Retirement: 09/18/2009 Date of Non-Service Connected Disability: 01/22/2010 Attorney designation: Steven Pingel STAFF RECOMMENDATION IS TO ADOPT THE FINDINGS AND RECOMMENDATIONS OF THE HEARING OFFICER AND DENY APPLICANT S APPLICATION FOR SERVICE CONNECTED DISABILITY RETIREMENT. (SAFETY MEMBER) (D-11) Megan Cortez, Disability Coordinator, presented item D-11 to the Board along with the staff recommendation: A motion was made by Mr. Prevatt, seconded by Mr. Packard to adopt the findings and recommendations of the hearing officer and deny applicant s application for service connected disability retirement. A substitute motion was made by Mr. Hilton, seconded by Mr. Geagan to adopt alternate number two which was presented by staff, and allow the Board to consider this case at a future meeting. Attorney Steven Pingel addressed the Board stating that the applicant was not disabled when he came to work for the county therefore he urged the Board to grant the application. Mr. Lantzer stated that while the applicant met the criteria to be hired as an investigator, the employer determines duties of a uniformed officer. The substitute motion carried 7-0 with voting as follows: AYES NAYS ABSTAIN ABSENT Mr. Eley Mr. Flanigan Mr. Prevatt Mr. Griffith Mr. Hilton Mr. Lindholm Ms. Freidenrich Mr. Packard Mr. Ball Mr. Geagan

25 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 15 Mr. Lindholm returned to the meeting at 1:50 p.m. D-12: Margaret Nelson Deputy Probation Officer II, Orange County Probation Department Application for service and non-service connected disability retirement Date of employer application: 09/28/2004 Date of employee application: 11/23/2004 Date of entry to OCERS: 06/20/1986 Total years of OCERS service: Last day of compensation: 08/10/2004 Date of Service Retirement: 04/01/2005 Attorney Designation: Pro Per STAFF RECOMMENDATION IS TO ADOPT THE FINDINGS AND RECOMMENDATIONS OF THE HEARING OFFICER AND DENY APPLICANT S APPLICATION FOR SERVICE AND NON-SERVICE CONNECTED DISABILITY RETIREMENT. (SAFETY MEMBER) (D-12) Megan Cortez, Disability Coordinator, presented item D-12 to the Board along with the staff recommendation: A motion was made by Mr. Packard, seconded by Mr. Geagan to adopt the findings and recommendations of the hearing officer and deny the applicant s application for a service and non-service connected disability retirement. Ms. Nelson read a prepared statement to the Board and requested to be granted a service connected disability based on the heart presumption. Mr. Lantzer explained to the Board that a heart presumption removes the causation from the disability factor. He stated that if there is a presumption, the applicant does not have to prove that their county employment caused the incapacity. He stated that the applicants physician stated there was no restrictions that were based on the heart or a presumption. The motion carried 5-3 with voting as follows: AYES NAYS ABSTAIN ABSENT Mr. Eley Mr. Hilton Mr. Flanigan Mr. Prevatt Mr. Packard Mr. Griffith Mr. Ball Ms. Freidenrich Mr. Geagan Mr. Lindholm D-13: Robert Polk Electrician, Orange County Sanitation District Date of employee filed application for non-service connected disability retirement: 02/16/2010 Date of entry to OCERS: 05/07/1990 Total years of OCERS service: Last day of compensation: 09/15/2005 Attorney Designation: Kristina D. Kittell

26 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 16 STAFF RECOMMENDATION IS TO ADOPT THE FINDINGS AND RECOMMENDATIONS OF THE HEARING OFFICER AND DENY APPLICANT S APPLICATION FOR NON-SERVICE CONNECTED DISABILITY RETIREMENT. (GENERAL MEMBER) (D-13) Megan Cortez, Disability Coordinator, presented item D-13 to the Board along with the staff recommendation. A motion was made by Mr. Packard, seconded by Mr. Lindholm to adopt the findings and recommendations of the hearing officer and deny the applicant s application for non-service connected disability retirement. Kristina Kittell, attorney for the applicant, presented to the Board. She stated that the applicant was demoted due to mental impairments, which included difficulties getting along with coworkers and trouble multitasking, which led ultimately to termination citing that he was argumentative, not disabled. Mr. Lantzer stated that Mr. Polk was an Electrician 1 after he suffered injuries. He stated that the applicant was terminated due to workplace violence which was upheld in court. The motion carried 8-0 with voting as follows: AYES NAYS ABSTAIN ABSENT Mr. Eley Mr. Flanigan Mr. Prevatt Mr. Griffith Mr. Ball Mr. Geagan Mr. Lindholm Mr. Hilton Mr. Packard Ms. Freidenrich * * * * * * * * END OF DISABILITY AGENDA * * * * * * * * * * * * * * * INDIVIDUAL ITEMS AGENDA (CONTINUED) * * * * * * * I-4 COMPENSATION PHILOSOPHY Presentation by Cynthia Hockless Recommendation: Take appropriate action. Ms. Hockless presented the Compensation Philosophy to the Board. She stated the history behind the development and informed the Board that The Hay Group was contracted to conduct the study and in turn provided a report of an objective and comprehensive comparison of salary, performance award and benefits between OCERS and other public and private sector employees.

27 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 17 Ms. Hockless stated that the Ad Hoc committee met to discuss how to address previous questions from the Board. She stated that the language was simplified and made more direct. Mr. Hilton stated that he was in favor or the Compensation Philosophy however was not comfortable with the wording of bullet point one under Compensation Philosophy. He stated that OCERS should only be compared to other public organizations. The Board determined that the bullet point should now read Provide pay levels that are externally competitive among peers within our industry and with published market data for similar sized governmental organizations. Additionally the Board determined that under Compensation Strategy, bullet point two should now read Salary increases within a range shall not be automatic. The Chief of each division will provide performance feedback and salary adjustment recommendations for the CEO s consideration. The CEO will make the final determination of salary awards based on the annual performance pool and individual award limits approved by the Board of Retirement in connection with the budget. A motion was made by Mr. Hilton, seconded by Mr. Packard to adopt the Compensation Philosophy which the above mentioned changes. The motion carried unanimously. I BUSINESS PLAN Presentation by Brenda Shott Recommendation: Approve OCERS 2014 Business Plan (funding subject to final budget approval in November). Ms. Shott summarized the 2014 Business Plan and Budget Process for the Board and referred to the PowerPoint presentation included in their materials. Highlights of her presentation included going over 61 individual department goals, stating that the V3 implementation project is the priority for Mr. Delaney addressed the Board regarding the risk assessment stating that it will take time and staff work. He stated that this is a valuable and timely issue and suggestions made by Mr. Leiderman during his presentation of Item I-3 could require an outside consultant to assist. Mr. Ball requested that Mr. Delany research what other systems are doing. Ms. Freidenrich stated that this is a great opportunity for OCERS to be proactive. She stated that there are districts which are withdrawing, and that we need to look at how things are coming together and maybe look to Internal Audit to review. She indicated that if the risk-assessment project required special funding Mr. Delaney could return to the Board in 2014 for that adjustment. A motion was made by Mr. Hilton, seconded by Mr. Packard to approve the 2014 Business Plan (funding subject to final budget approval in November). The motion carried unanimously.

28 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 18 I-7 V3 QUARTERLY UPDATE OCTOBER 2013 Presentation by Jenny Sadoski Recommendation: Receive and file. Ms. Sadoski reported that Build 1 testing had been completed except for Service Credit Purchases (SCP). She stated that the final Build 1 acceptance signoff process would follow, though 2 months later than originally scheduled. She stated that with the optimization of the Build on-site installation process and the elimination of redundant and unnecessary environments and tasks, the project was able to recoup the time lost due to the Build 1 delay. As a result, the pre-uat testing for Build 2 will start on November 13, 2013 as per the original plan, putting the project back on schedule. She stated that final reviews are in progress for re-approvals of Build 2 design specification documents that were updated during the Vitech development and configuration process. And that Build 2 is in the final stages of Functional System Testing by Vitech and is scheduled to be delivered to OCERS by October 29, 2013, three weeks later than originally planned. She also stated that the definitions for acceptance criteria for Builds and what constitutes a billable change order were clarified and agreed to between OCERS and Vitech. Mr. Ball left the meeting at 3:45 p.m. Mr. Eley requested that future reports show the dates that V3 work is expected to be done by and then accompanied by the actual date of completion. A motion was made by Mr. Packard, seconded by Mr. Hilton to receive and file item I-7. The motion carried unanimously. I STRATEGIC PLAN Presentation by Steve Delaney Recommendation: Adopt the Strategic Plan. Mr. Delaney reminded the Board that the Strategic Plan had been reviewed in detail at the September strategic Planning Workshop and would return every quarter for Board review and adjustment if needed. A motion was made by Mr. Packard, seconded by Mr. Geagan to Adopt the Strategic Plan. The motion carried unanimously. I-9 ISSUANCE OF CORPORATE CREDIT CARDS TO BOARD MEMBERS Presentation by Brenda Shott Recommendation: Take appropriate action. Ms. Shott stated that the Governance Committee had directed staff to look at prepaid credit cards for Board Member travel. She stated that after analysis was done, it was found that there is more administrative work and more cost involved than the issuance of a corporate credit card. The committee recommended that the Board Members be given individual corporate issued credit

29 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 19 cards. She stated that in order to expedite this request, staff was already in process of developing policy on the issuance of credit cards. Board members Eley, Lindholm and Freidenrich each stated their position on issuing corporate credit cards and why they disagreed with the Governance Committee recommendation. Mr. Eley suggested that the CEO and Board Chair be given the authority to approve cash advance requests without the entire Board s approval. A motion was made by Mr. Lindholm, seconded by Mr. Packard in lieu of the Governance Committee recommendations to not issue credit cards to the Board Members but instead to grant authority of cash advances to the CEO and Board Chair and update the policy to reflect the change. The motion carried 6-1 with Mr. Hilton opposed. I-10 BOARD MEETING VIDEO STREAMING UPDATE Presentation by Jenny Sadoski Recommendation: Take appropriate action. Ms. Sadoski stated that the Governance Committee had made three recommendations to the topic of video streaming and retention. The following were the recommendations were suggested: 1. Recommend to the full Board that the Public Records Retention Policy be revised to reflect permanent retention of the Board and Investment Committee meeting video recordings. 2. Direct staff to focus on Granicus Company and bring forward recommendations to the Board related to live streaming and publishing of meeting videos. 3. Post a Board meeting on YouTube to see how that process works. Ms. Sadoski stated she conducted a survey of CALAPRS IT members and out of the 12 replies, only one system streams videos of Board meetings on the web. She stated that the County and City of San Diego record and post videos on their websites. She also stated that the OCERS website offers DVD recordings of our meetings. Mr. Eley stated that he pulled item C-3d as he feels that the video retention policy needs to be rewritten, but at this time, IT s priority is V3 and this item is using valuable staff and resources. A motion was made by Mr. Packard, seconded by Mr. Prevatt to adopt recommendation #1 of the Governance Committee. The motion carried unanimously. A motion was made by Mr. Prevatt, seconded by Mr. Packard to table Governance Committee recommendations 2 and 3 indefinitely. The motion carried unanimously. I-11 OCERS BOARD MEETING - DECEMBER Presentation by Steve Delaney Recommendation: Take appropriate action.

30 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 20 The Board briefly discussed their individual preference to combining the Regular and Investment Committee meetings in December Mr. Eley took a poll of the Board Members and the majority preferred to combine the two meetings together on December 16, No motion was needed. I SACRS LEGISLATIVE PROPOSAL Direction to Voting Delegate Presentation by Julie Wyne Recommendation: Consider the PEPRA Cleanup legislative proposal and provide direction to the OCERS voting delegate to support for SACRS sponsorship. Ms. Wyne requested direction for the voting delegate to support the PEPRA Cleanup legislation at the SACRS Business meeting in November. A motion was made by Ms. Freidenrich, seconded by Mr. Geagan to approve for SACRS sponsorship. The motion carried unanimously. * * * * * * END OF INDIVIDUAL ITEMS * * * * * * * PUBLIC COMMENTS: At this time members of the public may address the Board of Retirement regarding any items within the subject matter jurisdiction of the Board, provided that no action may be taken on nonagendized items unless authorized by law. None BOARD MEMBER COMMENTS Mr. Prevatt read a prepared statement and asked that it be made part of the official minutes. (Please see attached Exhibits 1, 2 and 3) Ms. Freidenrich stated that in her earlier statement regarding her request to rescind her vote on the amortization issue, she had explained that she spoke to the Board Chair the day after the July Board meeting. Mr. Hilton stated that he believed there may be Brown Act violations and requested to read the s submitted by Mr. Prevatt to determine if other actions should be taken. CHIEF EXECUTIVE OFFICER/STAFF COMMENTS To ensure all contracts are reviewed per policy in the future Mr. Delaney informed the Board that the contract with ReedSmith should have been put out to bid in Ms. Wyne explained that the contract was open ended, but policy recommended rebid after 6 years. Mr. Delaney stated that he will appoint an overseer of contracts who would maintain a master list with information related to consultant contracts so the Board would be aware of expiration dates. He also stated that he will begin an annual State of the System presentation beginning in January 2014, which would include that master list.

31 Orange County Employees Retirement System October 21, 2013 Regular Board Meeting Minutes Page 21 Finally, Ms. Wyne recommended the Board not pursue rebidding the ReedSmith contract until after our new legal counsel was in place and the Board concurred. COUNSEL COMMENTS None ADJOURMENT: (IN MEMORY OF THE ACTIVE MEMBERS, RETIRED MEMBERS, AND SURVIVING SPOUSES WHO PASSED AWAY THIS PAST MONTH) Active Members: Richard Cromwell, Jeffrey Wagner, Franco Di Caprio, and Lisa Boies. Retired Members Jack Adelman, Harriet Antopol, Clara Bounds, Clarence Brady, Susan Brockett, Mary-Evelyn Bryden, James Burton, Harry Cohen, Laura Dennison, Glenys Dickerson, Tam Doan, Gardner Dowrey, Nora Edgar, Virginia Freeman, Hanne Gauger, Nathaniel Glover, John Gonzalez, Thelma Gorder, Margaret Headrick, Avis Jahn, William Keys, Ruth Larson, Connie Lee, Maxwell Luxemburger, William Mc Court, Timothy Miller, Doris Muhonen, Jo Anna Naughton, Phuc Nguyen, Monte Nichols, Eldon Paddock, John Padilla, Jean Palmer, Thomas Person, Betty Reuteler, Richard Robison, Edward Rodusky, Burt Sanders, Frances Silva, Lecil Slaback, Helen Thomas, Floria Torres, Jeannette Townsend, Gladys Trontz, Barry Vaughn, Deborah Whelan, and Dorothy Wood. Surviving Spouses Charlyne Cambell, Patricia Gierke, Geneva Gross, Olive Krause, Donald Martin, Marie Smedley, and Andrew Umstead. ADJOURNMENT: There being no further business to bring before the Board, the meeting adjourned at 5:15 p.m. Submitted by: Approved by: Steve Delaney Secretary to the Board Frank Eley Vice Chair

32 EXHIBIT 1

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34 EXHIBIT 2

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38 EXHIBIT 3

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44 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM MEMORANDUM DATE: NOVEMBER 6, 2013 TO: Members, Board of Retirement FROM: Brenda Shott, Assistant CEO Finance and Internal Operations & Jenny Sadoski, Director of Information Technology SUBJECT: V3 Pension Administration System Solution (PASS) Monthly Update Recommendation: Receive and file. Background: At the January 22, 2013 Board of Retirement meeting, the Board approved the revised PASS project plan. As part of the revised project plan, staff committed to the Board that a detailed project status report would be provided and discussed on a quarterly basis. In addition the Board would also receive a project update each month in their Regular Board Meeting materials. The attached PowerPoint presentation contains the V3 project update for the month of October Submitted by: Jenny Sadoski Director of Information Technology C-3 V3 Pension Administration System Solution (PASS) Monthly Update Page 1 of 1 November 2013 Regular Board meeting

45 V3 Pension Administration System Solution October 2013 Monthly Board Update 2012 OCERS

46 Agenda Project Overall Status Update 3 V3 PASS Project Status Gantt Chart 4 PASS V3 Project Milestones 5 Project Status Update Through October Build 1 Status 7 Build 2 Status 8 Build 3 Status - 9 Build Testing Statistics 10 Pending Activities Not Started or Completed 11 Planned for Next Month 12 Project Risks and Mitigation 13 Budget to Actual 14 V3 PASS October 2013 Update 2012 OCERS 2

47 Project Overall Status Update Build 1 Acceptance Document Signed off on 10/31/2013. Data Mapping for Data Conversion complete and milestone payment amount $42, released as scheduled. Vitech completed Functional System Testing of Build 2. Vitech completed deployment of Build 2 to OCERS on-site environment, including smoke and sanity testing Build 2 release notes and deliverables received and are being reviewed by OCERS for acceptance OCERS completed preparation for Build 2 Pre UAT testing. OCERS completed and delivered Cycle 11 conversion run for Build 3 Functional System Testing and Pre-UAT for Build 3 as scheduled. Design specifications being re-reviewed and approved for Build 3 development. Reconfigured OCERS Data Scrubber utility to retain the same Build 2 scrubbed SSN and Member names during all pre-uat scrubbing cycles to facilitate testing efforts between Builds, particularly with regards to testing Employer Payroll (transmittals). New scrubbed data routine included in the latest data conversion cycle delivered to Vitech on 11/1/2013. All scrubbing routines are secure and in compliance with OCERS requirements on protecting Personal Identity Information (PII) of OCERS member data. OCERS provided mortality tables from 2006-current and PEPRA Age Factor tables as required for configuration to Vitech. V3 PASS Dash Board R Legend Red Risk Project Overall Status Budget Resources Build Status Build 1 - Completed A G Amber Green Delay All ok Back on Time Build 2 Build 3 Build 4 V3 PASS October 2013 Update 2012 OCERS 3

48 V3 PASS Project Status Gantt Chart Planned Task Duration Efforts spent to date V3 PASS October 2013 Update 2012 OCERS 4

49 V3 PASS Project Milestones Milestone 1 Milestone 2 Milestone 3 Milestone 4 Milestone 5 Milestone 6 Build 1 Delivery New Member Enrollment Member Information Changes Service Credit Purchase Reciprocity Interest Posting Planned Date 06/07/2013 Actual Date 06/19/2013 Build 2 Delivery Termination Benefit Estimate Retirement Processing Disability Member Account Adjustment Comp Limits/401(a)(17) Employer Payroll Planned Date 10/01/2013 Actual Date 10/31/2013 Build 3 Delivery Death processing DRO processing Payroll COLA Recalculation 1099R Comp. Limits/tax Compliance CRM - Notes and attachments Health Care/Insurance Planned Date 02/13/2014 Build 4 Delivery Member Portal Member statements Partner Portal Actuarial Extract Member Correspondence Member counseling Seminars Imaging General Ledger Finance & Reporting Security Work flow specs Audit/Logging Build User Acceptance Testing Planned Date 09/25/2014 Build for Parallel Testing Planned Date 12/29/2014 V3 GO LIVE March 3rd 2015 Planned Date 04/06/2014 Build 1 Acceptance Planned Date 08/16/13 Actual Date 10/30/2013 UAT Tested & Accepted Build 2 Acceptance Planned Date 01/23/2014 V3 PASS October 2013 Update Build 3 Acceptance Planned Date 05/05/2014 Build 4 Acceptance Planned Date 12/10/2014 Final Conversion Run for Parallel Planned Date 12/31/2014 Planned Date 08/15/ OCERS 5

50 Project Status August September October Finalized decision to discontinue Controlled Data Set (CDS) and use full converted and scrubbed dataset for all Vitech Functional System Testing. Created structured SharePoint environment for reconciliation reporting. New workflow process in SharePoint to assign Design specs for review and approval. Initiated several Workflow tasks for Build 2, 3 and 4 Design Specs. Upgraded Track IT status reporting application with several new features to enhance functionality and efficiency for V3 Project. Change Control Process is under review. Hot Fixes: Two hotfixes requested for Build 1 to support Service Credit Purchase (SCP) testing. Hot Fix #1 - Addresses, importing age at entry rates into V3 using the V3 import process. Hot Fix #2 - to correct several identified issues, such as label changes, double click issue, contributions due in data sheet, and the inability to test with members of the County of Orange. Reviewed initial data maps for imaging. This was the last mapping deliverable from Vitech fulfilling the payment Milestone as scheduled. Created new Permission schema for TrackIT reporting system and enhanced the application with new features for reporting efficiency. Build Acceptance and Sign off procedures documentation under development. Actual acceptance cannot be completed until SCP testing has been completed and Build 1 results reviewed by the Steering Committee. Organized items from scorecards, prioritized conversion items and began code refinement. Initiated training for Data Cleansing team on scorecards and scrubbed lists. Over 62k accounts updated by Data Cleansing team since May V3 Transmittal file sample developed and reviewed. QA Team completed testing OCERS developed Build 1 letters and assigned defects to appropriate OCERS personnel. Updated Data Scrubber to keep current build 2 scrubbed member Names and SSNs. Initiated building of Reporting Database schema in a test V3 environment. To be used for Reconciliation & Data Validation Reports. Build 2 Acceptance Document and associated deliverables given to OCERS. Review of Vitech Functional System Testing evidence has started. Nikita Patel from Vitech New York office was on-site for 3 days to work with OCERS IT staff on documentation, configuration, and environment maintenance procedures. Restarted Plan Sponsor transmittal user guide and support documentation Complete 2014 V3 project budget planning. V3 PASS October 2013 Update 2012 OCERS 6

51 Build 1 Status Build 1 Acceptance Documentation Signed Off and Vitech Invoice submitted for Payment V3 Go Live Overall 25% Completed Build 1 Status Current Status: Completed V3 PASS October 2013 Update 2012 OCERS 7

52 Build 2 Status Vitech Data Conversion/Data Cleanup Test Preparation Testing Build 2 Delivered 10/30/2013, 2 weeks delay due to Functional System testing for: Contributions Employer Payroll Termination Disability Benefit Estimate Retirement Processing Member Account Adjustment Comp Limits/401(a)(17) Cycle 10 Data Conversion file received from OCERS. Identified members in CDS for testing. Functional system testing completed. Build 2 Acceptance Documentation delivered Prioritize and update coding and cleansing activities for: Termination Disability Benefit Estimate Retirement Processing Employer Payroll Member Account Adjustment Comp Limits / 401(a)(17) Build 2 data refreshed with 6/27/13 data from PensionGold Delivered converted scrubbed data to Vitech on 8/13/13, and again on 8/25/13 with updated configuration data Level 4 Test Case Outlines (TCO) completed for: Employer/Other Interested Party Demographics Retirement Processing Disability Employer Payroll Benefit Estimates Member Account Adjustment Other items completed Test Case Identification Data mining Build 2 Pre-User Acceptance Training Draft Other items In Progress Vitech Regression Test Plans and Build 2 Test Plan Document under review Test Transmittal files being created and reviewed Pre UAT Prep completed Build 2 Training dates scheduled for the week of : 11/5/13-11/7/13 11/12/13-11/14/13 Build 2 Testing scheduled to start on 11/13/13. Build 2 Status Current Status: Build 2 Deployed and Training in Progress Legend R Red Risk A Amber Delay G Green On time V3 PASS October 2013 Update 2012 OCERS 8

53 Build 3 Status Vitech Data Conversion/Data Cleanup Test Preparation Testing Build 3 Business Processes under development: Active Death Processing Retired Death Processing DRO & Court Orders Retiree Payroll Healthcare & Insurance Compensation Limits COLA Granting 1099R Processing Employer Portal Retiree Payroll: 3 rd Party, Overpayments, Payment Maintenance Build 3 design specifications being finalized for development. Build 3 data refreshed with 9/29/13 data from PensionGold Delivered converted scrubbed data to Vitech on 11/01/13 Focus will be on Score Card issues from Build 3 Data Conversion Cycle Level 3 Test Case Outlines (TCO) in progress for: Active Death Processing Retired Death Processing DRO & Court Orders Retiree Payroll Healthcare & Insurance Compensation Limits COLA Granting 1099R Processing Employer Portal Retire Payroll: 3 rd Party, Overpayments, Payment Maintenance N/A Build 3 Status Current Status: Build 3 under development Legend R Red Risk A Amber Delay G Green On time V3 PASS October 2013 Update 2012 OCERS 9

54 Testing Statistics Reporting Period Developed Selected for Execution Planned Deferred Un-Planned Deferred * Total Executed Passed Failed Percentage Complete Test Case Pass Ratio Build 1 June 07 - Aug % 86% 14% Build 2 Oct 01 - Jan TBD 212 TBD N/A N/A N/A N/A N/A N/A N/A Build 3 Feb 03 - May 05 Build 4 June 02 - Aug 15 TEST CASE SUMMARY TEST CASE EXECUTION SUMMARY TEST EXECUTION PERCENTAGES Test Case Fail Ratio * The Total column is the sum of [Selected for Execution] minus [Deferred] Project Testing Summary Build 2 testing preparation is in progress, which includes finalizing the selection of test cases to be executed by OCERS Vitech test execution documentation has been delivered to OCERS and is undergoing review Build 2 training for OCERS Test Team to be held 11/05/13 through 11/18/ Build 1 defects will be re-tested as part of Build 2. OCERS expects the remainder of defects identified in Build 1 will be delivered for re-testing in Build 3 Defect Summary Note: The summary below is a running total OPEN CLOSED Critical: 0 2 High: Medium: Low: 66 9 * Total: * Includes defects found while performing Ad-Hoc testing and known defects reported by Vitech at delivery Critical High Medium Low System Unavailable Business Critical Non-Business Critical Residual Fault V3 PASS October 2013 Update 2012 OCERS 10

55 Pending Activities Activities Planned for this period, but not started or completed Started but not completed Verify requirements of Transmittal Adjustment File. Verify requirements of Active Member and Payee Actuarial Files. Need to re-review requirements and V3 specs developed to date to determine if changes are required based on OCERS actuarial activities completed for The requirements will need to include the changes being made to PG for Continue work on regular and adjustment transmittal file samples and supporting documentation for plan sponsors Enhance current transmittal file requirements in PensionGold to support data requirements for V3. Synchronize valid data types/values on the transmittal file, tighten up validation's during transmittal processing to ensure correctness of data coming into PensionGold and facilitate reporting back to our plans sponsors of errors and corrections needed by them Complete signoff of Project Charter, Communication Plan, Risk Plan, Change Management Plan, Unplanned Work Management Plan and Score Card review process. OCERS re-review/approval of Build 2 design specifications. Coordinate with Wells Fargo to setup testing of extract and import files. Continue to work on Plan Sponsor and Internal OCERS V3 Project communications templates Finalize basic approach for Reconciliation Complete Build 3 Test Case Outlines Complete Build 3 Design Specification approvals Not started Initiate development of map to identify PensionGold data not defined by V3 data conversion maps. Provide V3 configuration information by plan sponsors for plan sponsors to review. V3 PASS October 2013 Update 2012 OCERS 11

56 Project Management Planned for November 2013 Continue Build 2 and Build 3 Design Specification approvals in SharePoint with Vitech and OCERS staff. Review with Project Leads the project tasks for the next four months (November 2013 through February 2014). Focus on Holidays and other OCERS year end activities such as year end closing, 1099 s and actuarial extract. Data Conversion/Reconciliation Continue creation of Reconciliation Center and programming of reconciliation and data validation reports. Start evaluation of scorecards to be delivered for Cycle 11. Infrastructure/Interfaces Continue Documenting V3 environments and support procedures. Take ownership of OSBATCH on-site environment, including Build 2 restore and automate weekly and ad-hoc refresh schedule. Continue work on materials for Plan Sponsors regarding V3 Transmittals, plan sponsor configuration information. Continue work on V3 Contribution Rates import template instructions to allow OCERS staff to create pre-2006 contribution rates spreadsheets. Purchase remaining V3 project hardware (printers and scanners) for use in testing in Builds 3 and Build 4. Testing Review Build 2 Deliverables review with Vitech and OCERS QA Team and Project Management. Receive training from Vitech for Build 2 pre-uat. Begin Pre-UAT for Build 2 Complete Build 3 Test Case Outlines. OCERS Developed Items Continue development of OCERS documents for Build 3 and 4, and begin development of OCERS queries, reports and spec design workflows. Continue Focus on development of Data Aggregation environment for Pension Gold and V3 data. Vitech Conduct analysis on design gaps as identified through testing, demos and design specification reviews. Address defects as identified through Build 2 Pre-UAT. Continue development of Build 3 functionality and address approval of remaining Build 3 design specifications. Complete level 4 TCOs for Build 3. V3 PASS October 2013 Update 2012 OCERS 12

57 Project Risks and Mitigation Build 2 Delivery and Acceptance: Each Build being delivered to OCERS must be fully certified by Vitech as having satisfied OCERS requirements by performing unit and functional system testing on all new functionality being provided in the Build and regression testing of all functionality previously delivered to date*. To prevent a similar situation as that created by SCP in Build 1, Build 2 acceptance will not occur if potential issues identified are not immediately and satisfactorily addressed. Mitigation Begin review and verification of Vitech Functional System Testing documentation for Build 2, along with release notes scheduled to be delivered at the end of October 2013 to OCERS. Address all potential issues or areas of concern immediately with Vitech. Begin Build 2 training on 11/5/2013 and address all potential issues or areas of concern immediately with Vitech. Hold off on Build 2 Acceptance until all issues raised have been address satisfactorily. *per agreement between Vitech and OCERS as to when previous defects will be corrected, and in what Build. Resource Issues and Planning Timing and resources constraints continue to affect the project for both OCERS and Vitech. Upcoming holidays in November and December along with other OCERS year end activities will add additional constraints to the projects scheduled activities. Mitigation Review OCERS and Vitech schedules over the next four months to identify potential problem areas and make adjustments as necessary. Backfill for OCERS Subject Matter Experts in critical areas, to allow them more time on the V3 project, while ensuring daily operational tasks are completed, without disruption of service to our Members or Plan Sponsors. Manage timing and tasks for all project team members to ensure their time is used effectively, are on track and completed as scheduled. This allows us to identify resource constraints and make adjustments as required. Evaluate contractor tasks to ensure expected productivity of their time and expertise on the project. Monitor and adjust project activities and staff hours when in conflict with OCERS operations (payroll, etc.). Reduce overall reliance on contractors. Data Cleansing Continue to analyze and categorize reported data issues, assigning priority to those having a direct impact to data conversion and calculations within V3. Mitigation Add additional temps and OCERS staff to help facilitate the correction of data and auditing of data that has been cleaned. The cost of the temporary help is budgeted under OCERS temporary staffing budget. Shift routine and recurring cleansing tasks from Data Cleansing resources to the Member Services operations team. Work with plan sponsors to correct data issues derived from transmittal processing of employer payroll files. V3 PASS October 2013 Update 2012 OCERS 13

58 Budget to Actual Actual vs. Plan cost Cumulative Project to Jul 2012 Bal 2012 Q1 / 2013 Q2 / 2013 Jul-13 Aug-13 Sep-13 Oct-13 Budget Cost $ 9,896 $ 11,786 $ 13,073 $ 14,545 $ 14,917 $ 15,415 $ 15,816 $ 16,319 Actual Cost $ 9,926 $ 11,877 $ 13,115 $ 14,558 $ 14,909 $ 15,284 $ 15,647 $ 15,885 $ (Under)/Over Amt $ (8) (131) (169) (434) % -Under/Over 0.1% 0.4% 0.2% 0.1% 0.0% -0.6% -0.7% -1.8% Budget Hours 27,899 38,953 47,263 56,666 59,760 62,856 65,739 68,821 Actual hours 27,899 35,121 41,053 49,728 52,554 55,966 58,503 61,445 Hours (Under)/Over Amt 0 (3,832) (6,210) (6,938) (7,205) (6,890) (7,235) (7,375) Hours % -Under/Over 0.0% -16.2% -26.3% -29.3% -30.5% -29.1% -30.6% -31.2% *Cost reflects Actual Invoiced cost to date and estimated cost for incurred, but unbilled time V3 PASS October 2013 Update 2012 OCERS 14

59 ? V3 PASS October 2013 Update 2012 OCERS 15

60 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM DATE: November 7, 2013 MEMORANDUM TO: FROM: Members of the Board of Retirement Julie Wyne, Assistant CEO, External & Legal Operations SUBJECT: Legislative Update November 2013 Recommendation: Receive and file. Discussion: The Governor had until October 13 th to sign or veto bills, so any bills on the accompanying legislative chart that are still in a Committee or the Assembly or Senate are dead. The Governor vetoed AB 1235 (Gordon), the bill that required board members of a local agency that provides a stipend to receive financial management training, because he believes local governments can impose appropriate financial management training without the aid of the State General Fund. (Governor s Veto Message, AB 1235, 10/7/13) The Governor also vetoed AB 822 (Hall), the bill that would require local ordinances or measures that qualify for the ballot that propose to alter, replace, or eliminate the retirement benefit plan of employees of a local government entity, whether by initiative or legislative action, to comply with Government Code Section 7507 (which requires an actuarial analysis of the cost impact to be made public at a public meeting at least two weeks prior to the proposed action) and include the actuary s analysis or synopsis of the analysis with instructions for obtaining a full report to be printed on the voter section of the sample ballot. His veto message indicated that the requirement to provide an actuarial analysis and hold a public hearing imposes another mandate on local governments, and believes that a local governing body can provide an in depth fiscal analysis of a measure without the state telling them to do so. (Governor s Veto Message, AB 822, 10/12/13) Ballot Initiatives: On October 15th a ballot initiative known as The Pension Reform Act of 2014 was filed with the Secretary of State, seeking to amend the California Constitution. The initiative seeks to add Section 12 to Article VII of the California Constitution that does the following: Defines vested rights (relating to pension benefits or retiree healthcare benefits) as those rights earned and vested incrementally, as the employee actually performs work, in proportion to the work performed Does not modify any rights earned up to the effective date of the new section C-4 Legislative Update November 2013 Page 1 of 3 November 2013 Regular Board Meeting

61 Requires that specific language has to be present in a labor agreement, contract or voter initiative entered into or enacted prior to the new section s effective date to create a vested contractual right to future pension or retiree healthcare benefits Allows for amendment of a labor agreement, legislative action, or initiative, referendum or ballot measure changing future accrual of pension or retiree healthcare benefits in compliance with collective bargaining laws Current labor agreements remain in place until their expiration, as long as it was not renewed or extended more than 6 months before its expiration date during the 12-month s prior to the new section s effective date Allows for a change in the amount employees are required to pay towards their pension and retiree healthcare benefits through a labor agreement, an action by a legislative body, an initiative, referendum or other ballot measure If the pension fund or retiree healthcare plan is substantially underfunded (not defined in the initiative), is at risk of not having sufficient funds to pay retirees or future retirees, or declares a fiscal emergency due to an impaired ability to provide essential government services or protect vital interests of the community, the employer has the following options: o o o o o Reduce the future rate of accrual for pension and retiree healthcare benefits Reduce the future cost of living adjustments for pension and retiree healthcare benefits Increase the retirement age for future payment of pension or retiree healthcare benefits Require employees to pay a larger share of pension or retiree healthcare benefit costs Other reductions or modification agreed upon thru collective bargaining The above changes will apply to benefit accruals after the date the employer takes the action and can be amended if future circumstances change The above changes must be collectively bargained if they are within the mandatory scope of collective bargaining, but if no agreement reached in 180 days, the employer can impose changes and must make factual findings that the actions are reasonable and necessary to serve an important purpose consistent with the U.S. and California Constitutions A pension or retiree healthcare stabilization plan is required for any pension or retiree healthcare plan that has assets equaling less than 80 percent of the plan s liabilities as determined by the plan s actuary using generally accepted accounting principles C-4 Legislative Update November 2013 Page 2 of 3 November 2013 Regular Board Meeting

62 The rate stabilization plan shall describe the actions to be taken to achieve 100 percent funding within 15 years while preserving basic government services, including: o o o o o o The benefits to be modified, if any The additional costs to be incurred by employees, if any The additional costs incurred by the employer, if any The specific funding sources to pay for additional costs The investment rates of return needed to achieve 100 percent funding, including historical rates earned by the plan The impact of any existing pension obligation bonds and actions needed to pay off the bonds The rate stabilization plan must be published for public review within 180 days of receipt of the actuarial valuation on funding status and a public hearing held within 270 days of receipt The pension plan or retiree healthcare plan must use the same discount rate and amortization schedules as applied to the unmodified pension or retiree healthcare plan when establishing contribution rates under the rate stabilization plan Once approved for circulation the initiative needs to gather 807,615 signatures and then it will be placed on the next general election ballot occurring at least 131 days after the signatures have been verified. SACRS Legislative Committee: The SACRS Legislative Committee did not meet in October. They will meet during the SACRS Conference on November 13 th. Prepared by: Assistant CEO, External & Legal Operations C-4 Legislative Update November 2013 Page 3 of 3 November 2013 Regular Board Meeting

63 OCERS 2013 Legislative Update November 7, 2013 Page 1 of 20 Bill No. Summary OCERS Impact SACRS Position Status 37 Act Legislation Sponsored by SACRS See SB 215 Beall below 37 Act Electronic Signatures Allows a 37 Act retirement board to adopt regulations for members to perform transactions with a retirement system by telephone with the same force and effect as a manual or digital signature. If we develop the capability to authenticate callers we would be able to transact business over the phone without the necessity of forms. Sponsor Language contained in SB 215 AB 382 Mullin California Public Records Act (CPRA) and Brown Act Amendments Amends the Brown Act, Section , to add the section of the CPRA that addresses alternative investments. Would provide clarity that agenda materials related to confidential alternative investments do not have to be provided to the public. Sponsor Chaptered AB 1380 Committee on Public Employees, Retirement and Social Security (Bonta (Chair), Jones-Sawyer, Mullin, Rendon, and 37 Act PEPRA Cleanup Covers all clean up between CERL and PEPRA relating to retirement eligibility, purchase of service, definition of final compensation, return to work provisions, reciprocity, deferred retirement and Social Security integration. Clarifies when CERL provisions apply and when PEPRA provisions apply. Sponsor Chaptered

64 OCERS 2013 Legislative Update November 7, 2013 Page 2 of 20 Bill No. Summary OCERS Impact SACRS Position Status Wieckowski) 37 Act, PERS, STRS AB 160 Alejo PEPRA Exceptions Exempts from PEPRA certain multiemployer plans authorized by Taft Hartley and regulated by ERISA, and retirement plans for public employees whose collective bargaining rights are protected by Section 5333(b) of Title 49 of the United States Code and agreements entered into under that provision, if the U.S. Department of Labor has determined that collective bargaining rights have been impaired; Potential impact on OCTA if their employees collectively bargain under the specified federal provision and the Department of Labor has determined their collective bargaining rights have been impaired. If so those OCTA employees would not be subject to PEPRA. Superseded by the passage of SB 13 which contained identical provisions Excludes a multi-employer plan under ERISA that is collectively bargained from a PEPRA prohibition against offering a new supplemental defined benefit plan to new employees hired on or after ; Urgency clause added. AB 205 Pan 37 Act Infrastructure Investing Authorizes 37 Act retirement board to prioritize in-state infrastructure projects over a comparable out-of-state one. If OCERS chose to invest in an in-state infrastructure project, it would provide some insulation from criticism if Chaptered

65 OCERS 2013 Legislative Update November 7, 2013 Page 3 of 20 Bill No. Summary OCERS Impact SACRS Position Status a comparable out-of-state opportunity existed but was not chosen by the board. AB 761 Dickinson PERS/STRS Gun Manufacturer Investments Prohibits PERS and STRS from investing in a company with business operations that are described as the manufacture of firearms or ammunition to individuals and entities other than the United States military and requires the systems to sell or transfer such investments already in their portfolio. No impact on OCERS. Applies to PERS/STRS only. In Assembly Appropriations Committee AB 785 Weber PERS Retiree Organizations Direct Mailing Provides that PERS shall provide address information to a third party mailing service for a recognized retiree organization s direct mailing, at the expense of the retiree organization; No impact on OCERS. Applies to PERS only, and OCERS already has legislation that does this. In Assembly Public Employees, Retirement & Social Security Committee Provides that only the mailing service shall have access to the address information. AB 822 Local Government Retirement Benefits Would impact the ability Vetoed

66 OCERS 2013 Legislative Update November 7, 2013 Page 4 of 20 Bill No. Summary OCERS Impact SACRS Position Status Hall Requires local ordinances or measures that qualify for the ballot that propose to alter, replace, or eliminate the retirement benefit plan of employees of a local government entity, whether by initiative or legislative action, to comply with Government Code Section 7507 (which requires an actuarial analysis of the cost impact to be made public at a public meeting at least two weeks prior to the proposed action) and include the actuary s analysis or synopsis of the analysis with instructions for obtaining a full report to be printed on the voter section of the sample ballot. to alter, replace or eliminate retirement benefits of OCERS members. AB 1163 Levine PERS Board Composition Alters the composition of the PERS board by removing the member of the State Personnel Board and would replace that position with the Director of Finance and add 2 persons, appointed by the Governor, who are independent, as defined, and have financial expertise; No impact on OCERS. Applies to PERS only. In Assembly Public Employees, Retirement & Social Security Committee Requires voter ratification if passed. AB 1379 Committee on STRS Retired Members, Disability Effective Date, Annuities No impact on OCERS. Applies to STRS only. Chaptered

67 OCERS 2013 Legislative Update November 7, 2013 Page 5 of 20 Bill No. Summary OCERS Impact SACRS Position Status Public Employees, Retirement and Social Security (Bonta (Chair), Jones-Sawyer, Mullin, Rendon, and Wieckowski) Provides that activities of an employee performing an assignment of 24 months or less are not included in the definition of retired member activities. Requires that a retired member be informed of employment restrictions and specifically of certain potential forfeitures of service credit; Makes various changes regarding the effective date of an application for disability benefits when an application has been canceled or denied and the effective date of a termination of a disability retirement allowance. Also requires a member who cancels his or her retirement application to return the gross amount of all payments for the canceled retirement benefit to the system s headquarters office and provides that the member is liable for any adverse tax consequences that may result from these actions; Specifies the method of paying the annuity if certain institutions or entities are the beneficiary of the annuity. AB 1381 Committee on Public Employees, Retirement STRS PEPRA Conformance Defines a member subject to PEPRA and would except from that definition a member who is also a member in certain other retirement systems, prior No impact on OCERS. Applies to STRS only. Chaptered

68 OCERS 2013 Legislative Update November 7, 2013 Page 6 of 20 Bill No. Summary OCERS Impact SACRS Position Status and Social Security (Bonta (Chair), Jones-Sawyer, Mullin, Rendon, and Wieckowski to January 1, 2013, as specified; Revises the definition of creditable compensation and salary, and specifies exclusions, for purposes of the Defined Benefit Program and the Cash Balance Benefit Program; Revises provisions prescribing the amounts that members are required to contribute to the retirement fund for the Defined Benefit Program, and that participants in the Cash Balance Benefit Program contribute, to reflect the requirements of PEPRA; Provides, consistent with provisions of PEPRA, that the normal retirement age is 62 years of age for a new member of, or a participant in, the Defined Benefit Program and Cash Balance Program, with respect to provisions related to survivors benefits, retirement for service following reinstatement, and performance of post-retirement service; Adds new limitations on compensation that may be paid to a member of the Defined Benefit Program or a participant in the Cash Balance Benefit Program performing post-retirement activities, as defined; Prohibits application of the

69 OCERS 2013 Legislative Update November 7, 2013 Page 7 of 20 Bill No. Summary OCERS Impact SACRS Position Status Replacement Benefits Program to employees subject to PEPRA; Defines a participant in the Cash Balance Benefit Program who is subject to PEPRA to account for concurrent membership in that program and other public retirement systems; Prescribes new requirements applicable to participants in the Cash Balance Benefit Program who perform retired participant activities, including requirements imposed on governing bodies seeking to employ these participants; Revises provisions that permit the use of a one-year period for the calculation of final compensation for members who are not subject to PEPRA, subject to negotiation by a teacher employer and an exclusive classroom teacher representative, to require that a written agreement addressing this subject be entered into prior to January 1, 2014; Prohibits an employer from paying member contributions for defined benefits for employees who are not subject to PEPRA on or after January 1, 2014, as specified; Provides that compensation for

70 OCERS 2013 Legislative Update November 7, 2013 Page 8 of 20 Bill No. Summary OCERS Impact SACRS Position Status postretirement activities that are not supported by state, local, or federal funds is not subject to postretirement earnings limitations; Applies postretirement compensation limitations to employer payments for deferred compensation plans, the purchase of annuities, and payments to various tax qualified retirement plans. SB 13 Negrete- McLeod PEPRA Clean-up Indicates it is declaratory of existing law set forth in PEPRA, and that it should be applied concurrently with the initial operation of that Act; Clarifies PEPRA provisions and does not change how OCERS initially interpreted them. Chaptered Adds to the definition of new member the exemption of concurrent membership within 6 months of beginning employment with a new employer; Adds the ability of a retirement system to adopt resolutions or regulations to modify its plans in accordance with PEPRA; Clarifies that an employer is not precluded from offering a defined contribution plan on or after January 1, 2013, if the employer did not offer one

71 OCERS 2013 Legislative Update November 7, 2013 Page 9 of 20 Bill No. Summary OCERS Impact SACRS Position Status prior to that date; Clarifies the calculation of normal cost to include either a single rate of contributions or age based rates; Adds the ability of a state employer to exclude from pensionable compensation those items agreed to in an MOU as excludable and determine whether that exclusion applies to unrepresented employees in similar job classifications; Clarifies the pensionable compensation limit CPI adjustment to be calculated each September and compared to the September of the prior year; Clarifies that the retirement system may limit the contributions to pensionable compensation; Clarifies that the calculation of the normal cost rate shall be established based on the actuarial assumptions used to determine the liabilities and costs as part of the annual actuarial valuation, including retirement formula, eligibility and vesting criteria, ancillary benefit provisions and automatic cost of living adjustments; Clarifies that a new member may be

72 OCERS 2013 Legislative Update November 7, 2013 Page 10 of 20 Bill No. Summary OCERS Impact SACRS Position Status required to pay more than 50% of normal cost if the greater contribution rate has been agreed to through the collective bargaining process; Removes the safety member industrial disability benefit from the PEPRA section (thereby ensuring it is not applied to system members other than PERS); Clarifies the PERS industrial disability section to reference an annuity from a member s accumulated additional contributions; Clarifies that the exemption from the 180 day waiting period for a retiree to return to work for an agency covered under the same retirement system without reinstatement for a public safety officer or firefighter only applies if the retiree is hired for functions regularly performed by a safety officer or firefighter; Clarifies that the forfeiture provisions for a felony conviction arising out of performing public agency job duties for judicial officers are in addition to other forfeiture provisions for judges; Removes Social Security integration from the PEPRA plans (does not impact OCERS);

73 OCERS 2013 Legislative Update November 7, 2013 Page 11 of 20 Bill No. Summary OCERS Impact SACRS Position Status Excludes federally bargained plans from PEPRA until Secretary of Labor or Federal District Court determine coverage or January 1, 2015, whichever is sooner; Excludes certain Taft Hartley plans if governed by ERISA. SB 24 Walters PEPRA Clean-up Eliminates the requirement that the Legislature approve a defined benefit plan adopted on or after that provides a lower benefit age factor at normal retirement age and lower normal cost for employees hired on or after ; Could impact OCERS plan sponsors that want to adopt a lower benefit tier than PEPRA for new employees who are new members hired on or after In Senate Public Employment & Retirement Committee Add a fiscal necessity option for adopting a benefit formula that is lower than the PEPRA formulas. SB 215 Beall Retirement and Health Care (PERS only) Provides that the employing agency be reimbursed by PERS retirement fund for the direct and reasonable costs incurred by employing a replacement for an elected member of the board to replace the board member during Most of this bill applies to PERS only, except for the telephone transactions language that SACRS is sponsoring to allow retirement systems to adopt regulations allowing members to transact business by Chaptered

74 OCERS 2013 Legislative Update November 7, 2013 Page 12 of 20 Bill No. Summary OCERS Impact SACRS Position Status attendance at board meetings; Repeals the provision requiring the board to sell exchange-traded call options only through an exchange, and only with respect to stock owned by the system; Authorizes the board to make available, in a manner it determines appropriate, copies of the monthly benefit payment information electronically and by mail and requires the board, if it does not elect to mail copies of this payment information, as specified, to all or some of the people receiving monthly benefit payments, to notify people of their right to request that a copy of the benefit payment information be mailed and to mail it if requested; Provides that a contracting agency and its employees and annuitants may obtain a health benefit plan, as defined, subject to board approval and authorizes the board to refuse to contract with, or to agree to an amendment proposed by, any contracting agency for benefit provisions that are not specifically authorized by PEMHCA and that the board determines would adversely affect the administration of this system; telephone with same force and effect as a signature.

75 OCERS 2013 Legislative Update November 7, 2013 Page 13 of 20 Bill No. Summary OCERS Impact SACRS Position Status Permits the board to require the contracting agency to enter into a contract with the board constituting an election by the contracting agency to include the agency and its employees in PEMHCA-authorized health benefit plans. Requires that the approval of the contract be by the affirmative vote of a majority of the members of the relevant governing body; Includes LACERA s telephone transaction language that allows a 37 Act retirement board to adopt regulations for members to perform transactions with a retirement system by telephone with the same force and effect as a manual or digital signature; Allows members to change their retirement option election after a qualified life event and elect the same beneficiary as they had elected under the prior option. SB 220 Beall PERS PEPRA Compliance PEPRA conformity language added to PERL, and requires PERS to administer each of the retirement systems the PERS Board governs in compliance with PEPRA, and if conflict between PEPRA and provisions governing PERS or the Judges No impact on OCERS. Applies to PERS and JRS only. Chaptered

76 OCERS 2013 Legislative Update November 7, 2013 Page 14 of 20 Bill No. Summary OCERS Impact SACRS Position Status Retirement System that PEPRA provisions control; Prescribes requirements for the calculation of the retirement allowance of members with service in different retirement systems, at least one of which is subject to PEPRA, with different minimum retirement ages, when the member retires before 52 years of age, as specified. SB 774 Walters PERS Post-employment Benefits For employees first hired on or after , prohibits a state employer, as defined, from providing postemployment health care benefits on behalf of its employees unless it fully funds those benefits, as determined by an actuary; No impact on OCERS. Applies to state employee retirement systems only. In Senate Public Employment & Retirement Committee For employees first hired on or after , prohibits a public employer from entering into a memorandum of understanding or other collective bargaining agreement that provides for defined postemployment health care benefits for which a state employee may opt in unless each employee pays at least 50% of the actuarially required contributions to fund those health care benefits;

77 OCERS 2013 Legislative Update November 7, 2013 Page 15 of 20 Bill No. Summary OCERS Impact SACRS Position Status For state employees who become members of the system on and after January 1, 2015, the employer share of contribution for these benefits is 50% after 15 years of credited state service and would increase that percentage by 5% for each year of credited state service up to 100% after 25 years of credited state service. SB 775 Walters PERS Post-employment Benefits Requires the Controller to include a section in its 2015 report on the financial condition of all state and local public retirement systems that uses the data collected for that report to evaluate the actuarial feasibility and associated costs of a statewide buyout of current state employees' defined postemployment health care benefits. No impact on OCERS. Applies to state employee retirement systems only. In Senate Public Employment & Retirement Committee Public Agency Legislation AB 194 Campos Brown Act Prohibiting Public Criticism Bars chairperson of a local agency governing body from excluding public criticism protected under the Act, makes violations a misdemeanor, and subjects the action taken at the Would apply to OCERS board and prohibit the Chair from failing to allow public criticism during public meetings. In Assembly Public Employees, Retirement & Social Security Committee

78 OCERS 2013 Legislative Update November 7, 2013 Page 16 of 20 Bill No. Summary OCERS Impact SACRS Position Status meeting to becoming void per judicial action. AB 246 Bradford Brown Act Closed Sessions Authorizes closed sessions with the Governor to address matters posing a threat to the security of public buildings, a threat to the security of essential public services, or a threat to the public s right of access to public services or public facilities. Would allow OCERS to hold a closed session with the Governor to address the specified security threats. Chaptered AB 537 Bonta Meyers-Milias-Brown Act Impasse Procedures Adds specific requirements for drafting a tentative agreement reached by the parties to be presented to the governing body for determination; Would impact OCERS as an employer indirectly, as the County represents OCERS in employee relations matters for represented employees. Chaptered Allows the filing of a charge for failure to meet and confer in good faith if the governing body rejects the tentative agreement; Requires the parties to jointly prepare a written memorandum of understanding upon adoption of the tentative agreement by the governing body; Provides process for handling a claim

79 OCERS 2013 Legislative Update November 7, 2013 Page 17 of 20 Bill No. Summary OCERS Impact SACRS Position Status of unfair practice in relation to an arbitration request. AB 616 Bocanegra Meyers-Milias-Brown Act Factfinding Panel Requires an employee organization to submit a request to settle differences to a fact finding panel to be in writing; Would impact OCERS as an employer indirectly, as the County represents OCERS in employee relations matters for represented employees In Senate Appropriations Committee Establishes process for a determination that an actual impasse exists through the Public Employment Relations Board; Defines impasse; Once impasse has been determined each party is allowed one appointment to the factfinding panel. AB 1090 Fong FPPC Violations Civil and Administrative Actions Provides authority for the FPPC to bring civil and administrative actions against public officers, employees and elected officials who have a financial interest in contracts or other financial transactions upon written authorization from the district attorney of the county in which the alleged violation occurred; Would impact OCERS employees, officers or board members as well as OCERS if financial contracts or transactions were entered into in violation of FPPC rules. Chaptered

80 OCERS 2013 Legislative Update November 7, 2013 Page 18 of 20 Bill No. Summary OCERS Impact SACRS Position Status Authorizes a person covered under Government Code 1090 to request an opinion or advice from the Commission with respect to his or her duties under that section. AB 1181 Gray Meyers Milias Brown Time Off to Testify Requires public employers to give labor representatives time off to testify to the PERB in matters relating to a charge filed by the employee organization against the agency, or when they are testifying/representing the employee organization in other employment relations matters; Would require OCERS to give public employee labor representatives time off for this purpose. Chaptered Requires the employee organization being represented to provide reasonable notification to the employer requesting a leave of absence without loss of compensation pursuant to these provisions. AB 1235 Gordon Brown Act Financial Management Training for Board Members and Elected Local Agency Officials Requires that if a local agency provides any type of compensation, salary, or stipend to, or reimburses the expenses of, a member of the The 37 Act already has continuing education requirements for trustees that encompass financial management training. We would just have to ensure that trustees attend those training Vetoed

81 OCERS 2013 Legislative Update November 7, 2013 Page 19 of 20 Bill No. Summary OCERS Impact SACRS Position Status legislative body, all local agency officials in service as of January 1, 2014, except a member whose term of office ends before January 1, 2015, receive training in financial management, as specified; sessions. Requires the Treasurer s office and the Controller s office, in consultation with other state agencies, associations, and outside experts, to work together to develop standardized criteria that sufficiently meet specified requirements; Requires curricula developed by any entity to meet criteria put forth by the Treasurer s office and the Controller s office. AB 1333 Hernández Contract Requirements City, County or District Provides that if a contract or memorandum of understanding with a total annual value of $250,000 or more between a private party and a city, county, city and county, or district contains an automatic renewal clause, the legislative body of the city, county, city and county, or district, on or before the annual date by which the contract may be rescinded, must adopt a resolution that either exercises or Would require OCERS to determine whether it wants to renew contracts valued at $250,000 or more containing an automatic renewal clause and adopt a resolution. In Senate Governance & Finance Committee

82 OCERS 2013 Legislative Update November 7, 2013 Page 20 of 20 Bill No. Summary OCERS Impact SACRS Position Status declines to exercise the option to rescind the contract, as specified. SB 292 Corbett Employment Discrimination Sexual Harassment Expands definition of sexual harassment to specify that an act is sexual harassment regardless of the intent of the harasser. Would impact OCERS as an employer. Chaptered SB 407 Hill Local Government Officers and Employees Expands the definition of local agency executive to include deputy or assistant chief executive officer or any person whose position is held by employment contract and precludes automatic renewal of a contract with automatic compensation increases in excess of a cost-of-living adjustment or a maximum cash settlement in excess of certain limits. Would apply to OCERS as an employer if we employed executives through a contract. Chaptered

83 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM MEMORANDUM DATE: November 5, 2013 TO: FROM: Members, Board of Retirement Tracy Bowman, Director of Finance SUBJECT: Unaudited Financial Statements for the Nine Months Ended September 30, 2013 Recommendation: Receive and File. Background: The attached Financial Statements reflect the unaudited activity for the nine months ended September 30, These statements are unaudited and are not the official statements of OCERS but rather are a review of the progress to date for the third quarter. The official financial statements of OCERS are included in the annual Comprehensive Annual Financial Report (CAFR). Summary: Fiduciary Net Position As of September 30, 2013, the net position restricted for pension and other postemployment benefits is $10.5 billion in trust for pension and health care benefits, an increase of $950.8 million from September 30, This was a result of increases in total assets of $783.1 million and a decrease in total liabilities of $167.7 million as described below: The majority of the $783.1 million increase in total assets can be attributed to total net appreciation in fair value of investments which continue to recover from the lows realized in 2008 and The overall change within the individual investment categories is due to the amendment of OCERS investment policy approved by the Board of Retirement at its June 2012 Board Meeting. This policy was amended to diversify the strategic asset allocation, including decreasing holdings in international equity securities and domestic fixed income and increasing alternative investment holdings in the areas of diversified credit and Global Tactical Asset Allocation (GTAA). In addition, as of September 30, 2013, eighteen new investment managers were added to alternative investments and two new investment managers were added to foreign bonds. Capital assets significantly increased by $6.7 million due to continued progress in implementing the new Pension Administration System Solution (PASS) Project, V3. The increase in total assets was slightly offset by a decrease in total accounts receivable related to the timing of proceeds due for sales in securities and a decline in C-5 Unaudited Financial Statements for the Nine Months Ended September 30, 2013 Page 1 of 2 November 2013 Regular Board meeting

84 investment income receivable due to a decrease in returns earned on investments compared to the prior year. The decline of $167.7 million in total liabilities as of September 30, 2013 compared to September 30, 2012 is primarily due to the timing of unsettled security purchases and a reduction in the security lending program due to decreased activity in separate account equity managers as OCERS moves more towards less costly index funds. The decrease in total liabilities was offset by an increase in unearned contributions compared to the prior year due to higher prepaid employer contributions being received as a result of higher contribution rates that went into effect July 1, 2013 and an increase in investment management fees payable recorded in other liabilities due to a change in the method of accounting to properly accrue fees on a quarterly basis whereas previously this accrual had only been accounted for at year-end. Foreign currency forward contracts are heavily dependent on investment manager strategy and the international market which continuously fluctuates and directly impacts the fair market values due to changes in the foreign currency exchange rates. Statement of Changes in Fiduciary Net Position Total additions to fiduciary net position decreased by 5% from the previous year, primarily due to a decline in net investment income which decreased by 14% compared to the prior year. This can be attributed to a decline in investment returns of approximately 6.7% as of September 30, 2013 compared to 9.5% in the prior year. This decrease can also be attributed to a change in the method of accounting for investment management fees to properly accrue fees on a quarterly basis rather than only on an annual basis, which led to a $5.4 million increase in expenses reported for the current year. Total contributions increased by 10% as a result of a significantly larger employer contribution made to the County Health Care Fund of $55.9 million in the current year compared to $16.8 million in the prior year. Total deductions from fiduciary net position increased by 8% from the previous year, primarily due to the continued and anticipated growth in member pension benefit payments, both in the total number of OCERS retired members receiving a pension benefit and an increase in the average benefit received. Other Supporting Schedules In addition to the basic financial statements for the nine months ended September 30, 2013, the following supporting schedules are provided for additional information pertaining to OCERS: Total Fund Reserves, Pension Trust Fund Contributions, Schedule of Investment Expenses, Schedule of Administrative Expenses and Administrative Expense Compared to Projected Actuarial Accrued Liability (21 basis points test). Prepared by: Tracy Bowman Director of Finance C-5 Unaudited Financial Statements for the Nine Months Ended September 30, 2013 Page 2 of 2 November 2013 Regular Board meeting

85 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM Unaudited Financial Statements For the Nine Months Ended September 30, 2013

86 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM Unaudited Financial Statements For the Nine Months Ended September 30, 2013 Table of Contents Statement of Fiduciary Net Position (Unaudited). 1 Statement of Changes in Fiduciary Net Position (Unaudited)... 2 Total Fund Reserves.. 3 Pension Trust Fund Contributions.. 4 Schedule of Investment Expenses. 5 Schedule of Administrative Expenses. 6 Administrative Expense Compared to Projected Actuarial Accrued Liability... 7

87 Statement of Fiduciary Net Position (Unaudited) As of September 30, 2013 (with summarized comparative amounts for September 30, 2012) (Dollars in Thousands) Pension Trust Fund Health Care Fund- County Health Care Fund- OCFA OPEB 115 Agency Fund Total Fund Comparative Totals 2012 ASSETS Cash and Short-Term Investments Cash and Cash Equivalents $ 329,043 $ 4,586 $ 592 $ 93 $ 334,314 $ 431,714 Securities Lending Collateral 275,023 3, , ,379 Total Cash and Short-Term Investments 604,066 8,419 1, , ,093 Receivables Investment Income 14, ,570 23,697 Securities Sales 264,929 3, , ,496 Contributions 9, ,456 14,414 Other Receivables 1, ,657 1,595 Total Receivables 290,360 3, , ,202 Investments at Fair Value Domestic Equity Securities 1,779,503 24,804 3,203 12,094 1,819,604 1,687,904 International Equity Securities 1,827,793 25,477 3,290 5,452 1,862,012 1,989,608 Global Equity Securities 509,817 7, , ,821 Domestic Bonds 2,100,198 29,274 3,780 9,875 2,143,127 2,807,319 Foreign Bonds 561,195 7,822 1, , ,801 Real Estate 985,578 13,737 1,774-1,001, ,862 Alternative Investments 2,570,339 35,827 4,626-2,610,792 1,302,974 Total Investments at Fair Value 10,334, ,047 18,601 27,421 10,524,492 9,556,289 Capital Assets, Net 16, ,221 9,493 Total Assets 11,245, ,382 20,194 27,514 11,449,160 10,666,077 LIABILITIES Obligations Under Securities Lending Program 275,023 3, , ,379 Securities Purchased 312,854 4, , ,596 Unearned Contributions 272, , ,151 Foreign Currency Forward Contracts (Net) 4, ,471 6,139 Retiree Payroll Payable 48,418 2, ,984 47,028 Other 8, ,451 1,830 Due to Employers ,514 27,514 24,559 Total Liabilities 921,431 10,726 1,292 27, ,963 1,128,682 Net Position Restricted for Pension and Other Postemployment Benefits $ 10,323,639 $ 145,656 $ 18,902 $ - $ 10,488,197 $ 9,537,395 1

88 Statement of Changes in Fiduciary Net Position (Unaudited) For the Nine Months Ended September 30, 2013 (with summarized comparative amounts for September 30, 2012) (Dollars in Thousands) Pension Trust Fund Health Care Fund- County Health Care Fund- OCFA Total Fund Comparative Totals 2012 ADDITIONS Contributions Employer $ 302,056 $ 55,905 $ 2,688 $ 360,649 $ 319,698 Employee 148, , ,104 Total Contributions 450,421 55,905 2, , ,802 Investment Income Net Appreciation in Fair Value of Investments 593,727 6, , ,160 Interest on: Domestic and Foreign Bonds 49, ,655 53,600 Cash with County Treasurer Domestic Dividends 2, ,342 10,284 International Dividends 28, ,985 35,998 Real Estate Income 32, ,266 33,685 Alternative Investments 7, ,084 11,170 Less: Investment Management Fees (21,066) (293) (39) (21,398) (15,999) Foreign Income Tax Expense/Other (5,868) (82) (11) (5,961) (7,441) Securities Lending Revenue 1, ,609 2,331 Less: Securities Lending Fees (432) (6) (1) (439) (652) Net Securities Lending Revenue 1, ,170 1,679 Commission Recapture-Net/Other 1, , Net Investment Income 691,054 7,771 1, , ,793 Total Additions 1,141,475 63,676 3,826 1,208,977 1,279,595 DEDUCTIONS Participant Benefits 429,428 21,170 2, , ,041 Death Benefits Member Withdrawals and Refunds 7, ,386 7,414 Administrative Expenses 10, ,674 10,246 Total Deductions 448,100 21,185 2, , ,201 Net Increase 693,375 42,491 1, , ,394 Net Position Restricted For Pension and Other Postemployment Benefits, Beginning of Year 9,630, ,165 17,560 9,750,989 8,693,001 Ending Net Position $ 10,323,639 $ 145,656 $ 18,902 $ 10,488,197 $ 9,537,395 2

89 Total Fund Reserves For the Nine Months Ended September 30, 2013 (Dollars in Thousands) Pension Reserve $ 6,644,062 Employee Contribution Reserve 2,197,488 Employer Contribution Reserve 1,043,125 Annuity Reserve 842,464 Health Care Plan Reserve 164,556 County Investment Account (POB Proceeds) Reserve 107,618 Unclaimed Fund Reserve 123 Contra Account (511,239) Total Fund Reserves $ 10,488,197 3

90 Pension Trust Fund Contributions For the Nine Months Ended September 30, 2013 (Dollars in Thousands) Employee Employer County of Orange $ 115,465 $ 229,423 Orange County Fire Authority 9,096 41,595 Superior Court 11,785 19,043 Transportation Authority 5,596 14,375 Sanitation District 4,595 12,101 San Juan Capistrano 522 1,362 OCERS 538 1,019 Transportation Corridor Agencies Children & Family Commission Public Law Library Cemetery District UCI OCIHSS LAFCO Department of Education 1 13 Contributions Before Prepaid Discount $ 148,365 $ 320,668 Prepaid Employer Contribution Discount - (18,612) Total Pension Trust Fund Contributions $ 148,365 $ 302,056 4

91 Schedule of Investment Expenses For the Nine Months Ended September 30, 2013 (Dollars in Thousands) Investment Management Fees Alternative Investments $ 5,752 International Equity 5,634 Real Return 3,198 Domestic Bonds 3,142 Real Estate 2,324 Foreign Bonds 673 Global Equity Securities 675 Total Investment Management Fees 21,398 Foreign Income Tax Expense/Other 5,961 Security Lending Activity Security Lending Fees 290 Rebate Fees 149 Total Security Lending Activity 439 Total Investment Expenses $ 27,798 5

92 Schedule of Administrative Expenses For the Nine Months Ended September 30, 2013 (Dollars in Thousands) Pension Trust Fund Administrative Expenses Expenses Subject to the Statutory Limit Personnel Services Employee Salaries and Benefits $ 5,386 Board Members' Allowance 9 Total Personnel Services 5,395 Office Operating Expenses Professional Services 1,216 Operating Expenses 870 Rent/Leased Real Property 489 Depreciation/Amortization 91 Total Office Operating Expenses 2,666 Total Expenses Subject to the Statutory Limit 8,061 Expenses Not Subject to the Statutory Limit Investment Department Expenses 1,174 Legal Costs 565 Consulting/Research Fees 631 Actuarial Fees 219 Total Expenses Not Subject to the Statutory Limit 2,589 Total Pension Trust Fund Administrative Expenses 10,650 Health Care Funds Administrative Expenses 24 Total Administrative Expenses $ 10,674 6

93 Administrative Expense Compared to Projected Actuarial Accrued Liability For the Nine Months Ended September 30, 2013 (Dollars in Thousands) 2013 Administrative Expense Compared to Projected Actuarial Accrued Liability Projected Actuarial Accrued Liability as of 12/31/13 $16,083,792 Maximum Allowed For Administrative Expense (AAL * 0.21%) 33,776 Actual Administrative Expense 1 8,061 Excess of Allowed Over Actual Expense $25,715 Actual Administrative Expense as a Percentage of Projected Actuarial Accrued Liability 0.05% 1 Administrative Expense Reconciliation Administrative expense per Statement of Changes in Fiduciary Net Position $10,650 Less administrative expense not considered per CERL section ,589 Administrative Expense allowable under CERL section $8,061 7

94 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM MEMORANDUM DATE: November 6, 2013 TO: Members, Board of Retirement FROM: Tracy Bowman, Director of Finance SUBJECT: Third Quarter 2013 Budget to Actual Report Recommendation: Receive and File. Background: The Board of Retirement approved OCERS Administrative and Investment Budget for Fiscal Year 2013 (FY13) on November 19, The approved administrative budget for FY13 was $22,118,178 and the approved investment budget for FY13 was $39,625,785. At the January 22, 2013 Regular Board Meeting, the Board approved the reclassification of a Secretary III position from the executive division to a Staff Specialist in the investment division. This reclassification resulted in a budget transfer of $80,384 from the administrative budget to the investment budget. The amended administrative budget for FY13 is $22,037,794 and the amended investment budget for FY13 is $39,706,169. OCERS budgeting authority is regulated by California Government Code Sections and , including a provision that OCERS budget for administrative expenses (which excludes investment related costs and expenditures for computer software, hardware and related technology consulting services) is limited to twenty-one hundredths of one percent of the accrued actuarial liability of the retirement system (commonly referred to as the 21 basis point test). The approved FY13 administrative budget represents 8.57 basis points of the projected actuarial accrued liability. The budget also meets the Agency s current policy limitation of 18 basis points of the projected actuarial value of total assets and represents basis points of assets for FY13. Although the Agency is no longer bound by this test by the Government Code, the Board of Retirement directed staff to continue to prepare the calculation for this test when compiling its budget. The Chief Executive Officer, or the Assistant CEO, has the authority to transfer funds within the three broad categories of the budget: 1) Salaries and Benefits, 2) Services and Supplies, and 3) Capital Projects. Funds may not be moved from one category to another without approval from the Board of Retirement. C-6 Third Quarter 2013 Budget to Actual Report Page 1 of 5 November 2013 Regular Board Meeting

95 Discussion: Administrative Summary For the nine months ended September 30, 2013, year-to-date actual administrative expenses are $11,500,220 or 52.2% of the $22,037,794 amended administrative budget and below the 75% target set for the end of the third quarter (nine months ended September 30, 2013/twelve months for the year ending December 31, 2013). A summary of all administrative expenses (excluding investments) and explanations of significant variances are provided below: Summary of all Administrative Expenses (excluding Investments) For the Nine Months Ended September 30, 2013 Prorated % Budget vs. Actuals Annual Balance of Budget Prorated Actuals to Date Budget Remaining Used Budget* (Over)/Under Personnel Costs $5,706,382 $8,340,227 $2,633, % $6,255, ,788 Services and Supplies Meetings 15,930 72,775 56, % 54,581 38,651 Training 125, , , % 401, ,337 Professional Services 792,447 1,471, , % 1,103, ,478 Legal Services 111, , , % 292, ,257 Equipment/Bldg Maintenance 397, , , % 468,150 70,313 Equipment/Software Purchase 135, , , % 253, ,297 Equipment/Bldg Lease 489, , , % 530,925 41,767 Telephone 44,975 90,000 45, % 67,500 22,525 Postage 41, , , % 128,250 86,793 Printing 48, ,100 85, % 100,575 51,686 Membership/Periodicals 20, , , % 95,276 74,666 Office Supplies 40,363 50,000 9, % 37,500 (2,863) Services and Supplies 2,263,125 4,712,042 2,448, % 3,534,032 1,270,907 Administrative Expense-Sub Total 7,969,507 13,052,269 5,082, % 9,789,202 1,819,695 Capital Expenditures** 3,530,713 8,985,525 5,454, % 6,739,144 3,208,431 Administrative Expense Total $11,500,220 $22,037,794 $10,537, % $16,528,346 $5,028,126 *Prorated budget represents 75% (9 months/12 months) of annual budget. **Capital expenditures represent purchases of assets to be amortized in future periods. Personnel Costs - Administrative Personnel Costs incurred as of the third quarter are $5.7 million or 68.4% of the amended annual budget for this category. The original administrative personnel cost budget of $8,420,611 was amended to reflect a personnel cost budget reduction of $80,384 due to a budget transfer related to the reclassification of a Secretary III position from the executive division to a Staff Specialist in the investment division as previously discussed in the background section of this report. These expenses are less than the 75% target for budget used as of the third quarter due to two open positions budgeted for in the IT department in FY13, including an IT Applications Developer not filled until the end of the third quarter and an IT Supervisor position that remained unfilled as of the end of the third quarter. C-6 Third Quarter 2013 Budget to Actual Report Page 2 of 5 November 2013 Regular Board Meeting

96 Services and Supplies - Administrative Total expenditures for services and supplies are $2,263,125 or 48% of the annual budget for this category. The variance of $1,270,907 between the pro-rated budget and year-to-date actuals in this category is primarily due to the following: Meetings are at 21.9% of the annual budget and are lower than the pro-rated budget by $38,651. This is primarily due to amounts budgeted for meetings that have not yet been expensed, including a previously planned visit to Vitech s offices in New York that has since been cancelled. The Training budget has utilized 23.4% of the annual budget and is lower than the prorated budget by $276,337. This is primarily due to training costs that have been budgeted for but not yet expensed, including the Southern California SACRS conference, various training sessions planned for IT personnel to be taken later this year, postponement of training sessions budgeted for member services and finance staff due to the focus on V3 testing, and costs coming in less than budget for all-staff training. Professional Services utilized 53.8% of the annual budget. Expenses are lower than the pro-rated budget by $311,478 primarily due to timing of expenses for various IT-related software consulting, as well as costs used on an as-needed-basis, such as Pension Gold customizations and CEO contingency. Legal Services are at 28.5% of the annual budget and are lower than the pro-rated budget by $181,257. This is primarily due to budgeted legal services being utilized on an asneeded basis. Equipment/Building Maintenance costs are at 63.7% of the annual budget and are lower than the pro-rated budget by $70,313. This is attributed to timing of budgeted costs that have not yet been incurred, primarily relating to software licensing fees which have varying renewal timelines throughout the year Equipment/Software Purchase utilized 40% of the annual budget and is lower than the pro-rated budget by $118,297. This is primarily due to the timing of the purchases of printers and various software and equipment that have been budgeted for but not yet purchased. Telephone expense is at 50% of the annual budget and lower than the pro-rated budget by $22,525. This is due to budgeted costs coming in less than expected and a decrease in the use of OCERS-issued Blackberry cell phones. Postage is at 24.2% of the annual budget and lower than the pro-rated budget by $86,793. This can be attributed to the timing of bulk mailings to Plan members and use of postage on an as-needed basis. Printing expense is at 36.5% of the annual budget and lower than the pro-rated budget by $51,686. This is primarily due to printing costs being less than anticipated for the CAFR, C-6 Third Quarter 2013 Budget to Actual Report Page 3 of 5 November 2013 Regular Board Meeting

97 as well as the timing of printing expenses budgeted for company brochures and printing on an as-needed basis. Memberships/Periodical expense is at 16.2% of the annual budget and lower than the prorated budget by $74,666. This is mainly due to timing of membership and periodical expenses that will occur in the last quarter, including membership fees for IT consultant Gartner. Office Supplies utilized 80.7% of the annual budget and is slightly higher than the prorated budget by $2,863. This is primarily due to additional supplies needed relating to the third floor build-out. Capital Expenditures - Administrative Capital Expenditures as of the third quarter are approximately $3.5 million or 39.3% of the annual budget for this category. The majority of these expenses is related to the V3 project. The variance of $3.2 million is due to timing of V3 expenses which are scheduled to increase by year-end as the project advances and payments based on milestones are reached. Investment Summary For the nine months ended September 30, 2013, year-to-date actual investment expenses are approximately $24.1 million or 60.8% of the $39,706,169 amended investment budget and below the 75% target as of the end of the third quarter. The approved investment budget of $39,625,785 was revised to reflect an increase of $80,384 in the investment personnel cost budget due to the reclassification of a Secretary III position from the executive division to a Staff Specialist in the investment division as previously discussed. A summary of all investment expenses and explanations of significant variances are provided below: Summary of all Investment Expenses For the Nine Months Ended September 30, 2013 Prorated % Budget vs. Actuals Annual Balance of Budget Prorated Actuals to Date Budget Remaining Used Budget* (Over)/Under Personnel Costs $821,057 $1,189,179 $368, % $891,884 $70,827 Services and Supplies Due Diligence 19,521 65,675 46, % 49,256 29,735 Meetings 12,950 15,000 2, % 11,250 (1,700) Training 9,909 37,225 27, % 27,919 18,010 Equipment/Software Purchase 17,775 25,000 7, % 18, Membership/Periodicals 18,545 26,510 7, % 19,883 1,338 Services and Supplies 78, ,410 90, % 127,058 48,358 Investment Expense-Sub Total 899,757 1,358, , % 1,018, ,185 Professional Services** 23,236,885 38,347,580 15,110, % 28,760,685 5,523,800 Investment Expense Total $24,136,642 $39,706,169 $15,569, % $29,779,627 $5,642,985 *Prorated budget represents 75% (9 months/12 months) of annual budget. **Professional services excludes unbudgeted professional service actual expenses of foreign income tax / other and security lending fees totaling approximately $5.9 million and $290,000, respectively. C-6 Third Quarter 2013 Budget to Actual Report Page 4 of 5 November 2013 Regular Board Meeting

98 Personnel Costs - Investments Personnel costs are $821,057 or 69% of the amended annual budget for this category. The original investment personnel cost budget of $1,108,795 was revised to reflect an increase of $80,384 due to the budget transfer related to the reclassification of a Secretary III position from the executive division to a Staff Specialist in the investment division as previously noted. These expenses are slightly under the 75% target for budget used as of the third quarter due to actual benefit selections made by staff compared to those estimated in the budget. Services and Supplies - Investments Services and Supplies expenditures as of the third quarter are $78,700 or 46.5% of the annual budget for this category. These expenses in total are below the 75% target for budget used as of the third quarter; however, meetings exceeded the 75% target due to expenses incurred for monthly investment committee meetings that were not budgeted for in FY13. Due diligence was below the 75% target due to less travel occurring than planned. Training expenses were below the 75% target due to amounts being budgeted but not yet expensed, including the Southern California SACRS and Pension West conferences that will occur in the fourth quarter. Professional Services - Investments Professional services are approximately $23.2 million or 60.6% of the annual budget for this category. These expenses were below the 75% target for budget used as of the third quarter. The majority of this variance is primarily due to the timing of direct investment management and actuarial fees that have been budgeted but not yet expensed, and budgeted legal services being utilized on an as-needed basis. Conclusion: Through the end of the third quarter, both the Administrative Budget and Investment Budget were below the 75% goal for the nine months ended September 30, 2013 at 52.2% and 60.8%, respectively of their annual budgets. In addition, actual Administrative expenses are within the 21 basis point test and 18 basis point test as originally budgeted. Prepared by: Tracy Bowman Director of Finance C-6 Third Quarter 2013 Budget to Actual Report Page 5 of 5 November 2013 Regular Board Meeting

99 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM MEMORANDUM DATE: November 8, 2013 TO: FROM: SUBJECT: Members of the Board of Retirement Steve Delaney, Chief Executive Officer Trustee Education Policy Educational Hours Recommendation: Receive and file. Discussion: At the November 2012 Regular Board meeting the Trustee Education Policy was updated to reflect the passage of AB 1519 (Wieckowski), to create educational standards for Retirement Board Trustees and require a minimum of 24 hours of education every two years a trustee serves on the Board. The legislation became effective January 1, Section , added by AB 1519, requires that the educational hours be tracked and posted annually on OCERS website. To that end, staff has compiled a list of educational sessions conducted at the various Board meetings throughout this year and will determine the length of each session and the Board members in attendance to properly track these hours. In addition to staff tracking of internal educational sessions, we are compiling a list of conferences attended by Board members during 2013, and paid for by OCERS, and will contact each of you to determine which educational sessions you attended. Staff also encourages Board members to provide the details of conferences they attended in 2013, that OCERS did not pay for, so we can determine whether they qualify for education hours under the new law. By way of reminder, the educational subjects are: a. Pension funding; b. Institutional investments and investment program management; c. Investment performance measurement; d. Actuarial science; e. Benefits structure and administration; f. Disability retirements; g. Due process in benefit determinations; C-7 Trustee Education Policy Education Hours Page 1 of November Board Meeting

100 h. Pension law; h. Organizational structure, methods, and practices; j. Budgeting; k. Governance and fiduciary duty; and l. Ethics. Staff will return to the Board with a tracking form at the December Board meeting. Prepared by: Steve Delaney Chief Executive Officer C-7 Trustee Education Policy Education Hours Page 2 of November Board Meeting

101 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM TRUSTEE EDUCATION POLICY PURPOSE 1. It is the policy of the Board of Retirement to ensure that individual Trustees have sufficient knowledge of the issues and challenges facing OCERS so as to craft policies to guide the administration of the plan and effectively monitor their implementation based on ongoing exposure to up-to-date benefit, financial, investment and policy information and together with staff are properly trained to perform their respective duties. 2. Effective January 1, 2013, Trustees are required to complete a minimum of 24 hours of Trustee education within the first two (2) years of assuming office and for every subsequent 2-year period in which the Trustee serves on the Board. 3. To that end, each Trustee is encouraged to regularly participate in those educational opportunities that will enable competent discharge of the obligations of that position and meet the statutory requirements for continuing education. POLICY OBJECTIVES 4. The objective of this policy is to ensure that all Trustees have adequate opportunity to acquire the knowledge they need to carry out their fiduciary duties. POLICY GUIDELINES 5. Trustees agree to develop and maintain knowledge of relevant issues pertaining to the administration of OCERS throughout their terms. 6. Trustees agree to pursue appropriate education across a range of pension-related areas, rather than limiting their education to specific areas. General pension-related areas to be pursued include: a. Pension funding; b. Institutional investments and investment program management; c. Investment performance measurement; d. Actuarial science; e. Benefits structure and administration; OCERS Trustee Education Policy Page 1 Adopted February 19, 2002 Last revised November 19, 2012

102 f. Disability retirements; g. Due process in benefit determinations; h. Pension law; i. Organizational structure, methods, and practices; j. Budgeting; k. Governance and fiduciary duty; and l. Ethics. 7. Educational tools for trustees include, but are not limited to: a. External conferences, seminars, workshops, roundtables, courses or similar sessions (henceforth referred to collectively as conferences ); b. Industry association meetings or events; c. In-house educational seminars or briefings; d. Periodicals, journals, textbooks and similar materials; and e. Electronic media including CD ROM-based education, Internet-based education and video-based education. 8. On an ongoing basis, the Chief Executive Officer and the Chief Investment Officer will identify appropriate educational opportunities, based on the needs of individual Trustees or the Board as a whole, and include details of such in Board meeting information packages for Trustee consideration. Trustees are encouraged to suggest educational opportunities that may provide value to the Board of Retirement. 9. Standards for determining the appropriateness of a potential educational opportunity shall include: a. The extent to which the opportunity is expected to provide Trustees with the knowledge they need to carry out their roles and responsibilities; b. The extent to which the opportunity meets the requirements of this policy; and c. The cost-effectiveness of the program in light of travel, lodging and related expenses. 10. Beginning January 1, 2013, Trustees will acquire a minimum of 24 hours of Trustee education within the first two (2) years of assuming office and for every subsequent 2-year period for which the Trustee serves on the Board. OCERS Trustee Education Policy Page 2 Adopted February 19, 2002 Last revised November 19, 2012

103 11. Trustees will attempt to meet the following minimum goals: a. To secure, over time, a useful level of understanding in each of the topic areas listed in paragraph 6 above; b. To attend at least one conference annually. In accordance with a. above, Trustees are encouraged to attend conferences, on occasion, that address pension topics other than investments; and c. Participate in any in-house educational seminars or briefings that are organized by the Chief Executive Officer and Chief Investment Officer including: i. The educational component of the annual Strategic Planning Session; ii. The Education Forum; iii. Individual sessions at regular Board meetings; and iv. Workshops available to Board and staff members. 12. The Board shall maintain a record of Trustee compliance with this policy, and the Chief Executive Officer or his designee will ensure that the policy and annual compliance report are placed on the OCERS website. ATTENDANCE AT CONFERENCES & INDUSTRY ASSOCIATION MEETINGS 13. Approval for attendance and reimbursement of travel expenses in connection with educational conferences and industry association meetings will be in accordance with the Travel Policy. 14. In furtherance of this policy, the Chief Executive Officer shall have discretionary authority to approve staff travel as necessary to carry out the administrative responsibilities of the OCERS, such as attendance at legislative meetings or hearings, conducting on-site visits as part of due diligence evaluation of existing and proposed service providers, participating in continuing education programs, and other duties as directed. 15. The Board will periodically review the programs, training or educational sessions that qualify for Trustee education. ORIENTATION PROGRAM 16. Working with the Chief Investment Officer and OCERS professional advisors, the Chief Executive Officer will hold an orientation program, covering the general topic areas outlined OCERS Trustee Education Policy Page 3 Adopted February 19, 2002 Last revised November 19, 2012

104 in paragraph 6 above, and designed to introduce new Trustees to all pertinent operations of the System and highlight the knowledge bases required of a Trustee. The aim of the orientation program will be to ensure that new Trustees are in a position to contribute fully to Board of Retirement and committee deliberations, and effectively carry out their fiduciary duties as soon as possible after joining the Board. 17. Prior to a Trustee s first official meeting with the Board of Retirement, he or she will endeavor to attend a Board meeting or a standing committee meeting in the role of an observer. 18. Within 30 days of a trustee s election or appointment to the Board, the Chair will designate an incumbent member of the Board to provide the new Trustee an orientation to current Board governance practices. 19. As part of the orientation process, new Trustees will, within 30 days of their election or appointment to the Board of Retirement: a. Be briefed by the Chief Executive Officer on the history and background of OCERS; b. Be oriented by the Chair on current issues before the Board; c. Be introduced to members of senior management; d. Be provided a tour of OCERS offices by the Chief Executive Officer; e. Be briefed by the Board s fiduciary counsel on their fiduciary duties, conflict of interest guidelines, the County Employees Retirement Law of 1937, Proposition 162, The Brown Act, and other pertinent legislation; and f. Be provided with: i. A Trustee Reference Manual (the contents of which are listed in the Appendix); ii. A listing of upcoming recommended educational opportunities; and iii. Other relevant information and documentation deemed appropriate by the Chief Executive Officer. 20. During the course of their first 12 months on the Board of Retirement, new Trustees will endeavor to attend a seminar on the principles of pension management or a comparable program. 21. The Chief Executive Officer will review, and if necessary, update all orientation material. It is the responsibility of Trustees to maintain their Trustee Reference Manuals, by ensuring OCERS Trustee Education Policy Page 4 Adopted February 19, 2002 Last revised November 19, 2012

105 that they contain the most up to date materials. A master copy of the Trustee Reference Manual will be available for use by Trustees at the OCERS office. 22. Trustees will inform the Chief Executive Officer, for information purposes, of all pensionrelated conferences attended, whether attending on behalf of OCERS or not. POLICY REVIEW 23. The Board of Retirement will review this policy at least every three years to ensure that it remains relevant and appropriate. POLICY HISTORY 24. This policy was adopted by the Board of Retirement on February 19, The policy was revised on May 16, 2005, March 24, 2008, June 18, 2012 and November 19, November 19, 2012 Steve Delaney, Secretary to the Board Date OCERS Trustee Education Policy Page 5 Adopted February 19, 2002 Last revised November 19, 2012

106 APPENDIX TRUSTEE REFERENCE MANUAL A Trustee Reference Manual will include the following materials: a. Relevant sections of the County Employees Retirement Law of 1937; b. The Brown Act and Proposition 162; c. Most recent plan description and member handbook; d. Copies of Board policies; e. Most recent Annual Report; f. Most recent actuarial valuation and financial statements; g. Most recent actuarial experience study; h. Most recent asset/liability study; i. Most recent investment performance report; j. Most recent Business Plan and budget; k. Organizational chart; l. Names and phone numbers of the trustees and the Chief Executive Officer; m. Listing of current committee assignments; n. Listing of current service providers; and o. Glossary of key pension administration terms and definitions. OCERS Trustee Education Policy Page 6 Adopted February 19, 2002 Last revised November 19, 2012

107

108 Serving the Active and Retired Members of: October 31, 2013 CITY OF SAN JUAN CAPISTRANO COUNTY OF ORANGE ORANGE COUNTY CEMETERY DISTRICT ORANGE COUNTY CHILDREN & FAMILIES COMMISSION ORANGE COUNTY DEPARTMENT OF EDUCATION (CLOSED TO NEW MEMBERS) ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM Tri Ta, Mayor City of Westminster 8200 Westminster Blvd. Westminster, CA SUBJECT: OCERS ACTUARIAL FUNDING POLICY Dear Mayor Ta, Thank you for your letter of October 23, 2013, directed to the Orange County Employees Retirement System (OCERS) Board of Retirement. ORANGE COUNTY FIRE AUTHORITY ORANGE COUNTY IN-HOME SUPPORTIVE SERVICES PUBLIC AUTHORITY ORANGE COUNTY LOCAL AGENCY FORMATION COMMISSION ORANGE COUNTY PUBLIC LAW LIBRARY ORANGE COUNTY SANITATION DISTRICT ORANGE COUNTY TRANSPORTATION AUTHORITY SUPERIOR COURT OF CALIFORNIA, COUNTY OF ORANGE TRANSPORTATION CORRIDOR AGENCIES The issue of OCERS actuarial funding policy and the corresponding question of amortization periods has understandably drawn much interest and attention. I will be including your letter as part of the Board s consent agenda for their next administrative meeting of Monday, November 18, You should be aware that the OCERS Board Chair has agreed to agendize this topic once again, at the request of Board Member Freidenrich, for further consideration at the Board s regular monthly administrative meeting to be held on Monday, November 18th You are certainly invited to attend in person if you so wish, and I will be sure the Board is reminded at that time of your city council s stated preference. Thank you again, and please feel free to contact me directly should you have any further questions, comments or concerns on this matter. Thank you, UCI MEDICAL CENTER AND CAMPUS (CLOSED TO NEW MEMBERS) Steve Delaney, CEO (714) desk (714) fax (714) cell ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM 2223 E. Wellington Avenue, Suite 100, Santa Ana, CA Telephone (714) Fax (714)

109 The Evolution of OCERS Unfunded Actuarial Accrued Liability Steve Delaney, CEO December 31, 2012 Valuation

110 The Evolution of OCERS Unfunded Actuarial Accrued Liability The Orange County Employees Retirement System (OCERS) is a public pension plan providing a defined benefit lifetime pension to many of Orange County s diverse community of public servants - from firefighters and police officers to bus drivers and court clerks. OCERS conducts an annual valuation of the OCERS Trust Fund to determine its current economic status. In the most recent valuation, for the period ending December 31, 2012, the system s professional actuary (The Segal Group) calculated the Unfunded Actuarial Accrued Liability (UAAL) of the fund stands at approximately $5.676 billion. Just over a decade ago, as of December 31, 2000, there was no UAAL at all, the system being more than 100% funded. The drivers and components that contributed to the evolution of OCERS current UAAL are the subjects of this paper. WHAT IS AN UNFUNDED ACTUARIAL ACCRUED LIABILITY (UAAL)? The Government Accounting Standards Board (GASB) officially defines UAAL as the difference between the actuarial accrued liability and the actuarial value of assets accumulated to finance a public pension. In simpler terms, if you compare the cost of OCERS pension promises with the actuarial value of OCERS assets, the promises currently exceed the assets. That shortfall is OCERS Unfunded Actuarial Accrued Liability. A fully funded pension system with no UAAL (as was the case for OCERS in 2000), generally means that all of the actuary s assumptions about the cost of the fund and growth of liabilities have been met, and the present value of the system s accumulated assets are sufficient to pay out the pension promises to plan members. But how does a public pension plan accrue the necessary funds for paying out benefits, and how can that process lead to a gap between the amount of assets held, and the present value of those future benefits? A pension system s approach to building its assets in order to pay future benefits is not unlike the approach taken by many families in saving for their children s college education. If you expect your child s education is going to cost $100,000 eighteen years from now, you have three basic options: (1) You could deposit a single lump sum amount representing the present value of that future cost into a savings account, similar to an endowment or trust, calculated to grow with sufficient earnings to total $100,000 when the child is ready for his or her first day of college. (2) You could save over time, depositing an equal amount year after year into an account and again assume that sufficient interest earnings will accrue to fully fund the cost when the big day arrives. (3) You could wait until the child turns 18 and pull from your available resources at that time to pay the entire $100,000 in a single payment. Public pension plans face similar choices in determining the best method for accruing sufficient resources to fund a member s benefit at retirement. Like most American families, the majority of public pension plan systems choose to pay a level percent of salary each year, in order to gradually grow the amount needed to fund future retirements. Determining how much to contribute each year is a primary challenge for any public pension system. For that reason public pension plans will use the expertise of a professional actuary to assist in planning the funding of those retirement benefits over the long term, allowing investment earnings on the contributions to fund the majority of the pension costs. In Orange County those investment earnings provide the largest portion of retirement benefits being paid, greatly reducing the cost to Orange County s employees and taxpayers in providing public services to our community. The job of a pension plan actuary includes estimating (or assuming) how much money should be contributed each year so the plan will have enough funds to pay the benefits promised by the plan throughout the lifetime of the member. The year-to-year stream of contributions should be as smooth and consistent as possible to avoid wreaking havoc on the Revised 11/07/

111 budget of the employer. HOW DID OCERS CURRENT UAAL DEVELOP? The long-term cost of retiree benefits are based on a host of variables, the future values of which are unknown. There are many different events that can both cause a UAAL to develop or even disappear. While actuaries try to pin down these variables through the use of best or at least reasonable assumptions and professional methodologies, the unexpected should be expected to occur. There are six assumptions in particular that have the greatest impact on the actuary s estimates of plan funding: 1. The assumed rate of return on investments 2. The rate of increase in salaries 3. Member mortality 4. The age at which members choose to retire 5. How many members become disabled 6. How many members terminate their service earlier than anticipated Finally, there are two other events that can have great impact on plan funding, events the actuaries can t anticipate: (1) plan changes, that is, when a benefit formula is changed in some unanticipated manner by the plan sponsor, and (2) differing actual experience, that is, when actual experience indicates that previous assumptions must be modified to reflect a more current reality. A key example here is life expectancy, which with the continued advances in medicine challenges actuaries in being able to accurately project average life expectancies in the coming decades. Either will generally have an unfunded impact on the cost of the system, though savings can occur as well, as in fact has happened in the period of 2009 through 2012 with a slowing in projected salary increases due to the challenging economic times. First, a summary history of OCERS UAAL as well as the plan s funded status: (In 000 s) Actuarial Valuation Date December 31 Valuation Value of Plan Assets Total Unfunded Actuarial Accrued Liability (UAAL) Funded Ratio 1985 $613,863 $462, % 1986 $713,506 $507, % 1987 $821,884 $522, % 1988 $985,030 $468, % 1989 $1,136,210 $515, % 1990 $1,297,575 $543, % 1991 $1,576,131 $196, % 1992 $1,807,319 $332, % 1993 $2,024,447 $280, % 1994 $2,177,673 $372, % 1995 $2,434,406 $199, % 1996 $2,675,632 $176, % 1997 $3,128,132 $204, % 1998 $3,504,708 $177, % 1999 $3,931,744 $85, % 2000 $4,497,362 ($162,337) % 2001 $4,586,844 $257, % 2002 $4,695,675 $978, % 2003 $4,790,099 $1,309, % Revised 11/07/

112 2004 $5,245,821 $2,158, % 2005 $5,786,617 $2,303, % 2006 $6,466,085 $2,298, % 2007 $7,288,900 $2,549, % 2008 $7,748,380 $3,112, % 2009 $8,154,687 $3,703, % 2010 $8,672,592 $3,753, % 2011 $9,064,355 $4,458, % 2012 $9,469,208 $5,675, % As shown in the table above, the annual calculation of OCERS UAAL can swing dramatically from year to year, such as when the UAAL shrank from $543 million to $196 million, a reduction of nearly 40% in a single year due primarily to the remarkable earnings of that year (1991: 20.25%); or when the UAAL grew from $978 million to $1.3 billion, an increase of approximately 30% reflecting both assumption and benefit changes the year before, as well as the delayed recognition of some heavy investment losses incurred in the three prior years. The trajectory of the increase in the UAAL has accelerated in the past few years due to the unprecedented 2008 market losses and a reduction in the expected investment return assumption used in the 2012 valuation. While this document tracks the evolution of the OCERS UAAL as it has developed especially since the year 2000, keep in mind that the actuary can only show from one year to the next what the initial impact an event may have on future liability projections measured using the assumptions adopted by the OCERS Board as of that measurement date. It cannot show what the impact of that same single event may be in later years should the initial assumption prove different from actual experience. An example of this was the increase in benefits that occurred in 2004, when a number of key benefit formulas were changed by the plan sponsor, leading to a change in the projection regarding future liabilities to be paid out, and creating an increase in the UAAL of $365 million. Will the ultimate cost of that benefit adjustment be $365 million? Not likely, it was an estimate developed using the best assumptions available at the time to prepare that projection. But can we track that specific change in plan design to see what the ultimate cost might truly be? Not really. The OCERS plan is large and complex, with nearly 40,000 members making individual life choices that will impact the ultimate cost, either positively or negatively, over a very long period of time. Once the initial event is priced into the cost of the plan, then it is the plan as a whole that gets valued in future years, composed of the many smaller decisions made year after year, and determining the course of the UAAL. YEAR BY YEAR REVIEW: It is current history that has raised the most questions from both employers, members and the public in wanting to better understand how the current UAAL has evolved over the past decade. In the following pages the data used in calculating the UAAL from calendar year 2000 when OCERS last had a surplus, through 2012, is presented in table format, with commentary on the events of each year that had primary impact on determining if the UAAL rose or fell for that given year. [See the annual reviews for the OCERS UAAL as it develops from the year 2000 through 2012, beginning with Page 7.] A VISUAL REVIEW OF THE UAAL HISTORY Two different approaches to viewing the UAAL in context of the OCERS Fund as a whole are displayed in the following tables. In the first table a trend line is displayed, reflecting the growth of the UAAL in total dollars. Identifying trends, and determining how best to address the cautionary tale being shared is an important task of any decision maker when it comes to pension design. Revised 11/07/

113 In the following table, the UAAL is now reflected as a percentage of the total pension liability, both funded and unfunded, to put it into perspective. This is an important point to keep in mind as the OCERS plan continues to mature over time. Note for example that while the total UAAL increased in 2010 by approximately $50 million dollars, the funded ratio of the plan actually improved, as the total assets available to pay the plan s liabilities increased at an even faster rate. Revised 11/07/

114 CONCLUSION: As this review has shown, both past experience and assumptions (that try to predict the future using that past experience) often change, and have a major impact on the system s future costs. Actuaries use long economic cycles to make their assumptions. They do not often adjust their assumptions in response to year-to-year fluctuations in actual experience. Rather, actuarial assumptions are typically changed only following careful assessment of ongoing and durable trends in experience. Because public pension plans such as OCERS take a very long view of the time horizon, recognizing that our average member retires with 22 years of service, OCERS is designed specifically to allow time to exercise its smoothing effect on the costs associated with the variability of life and its vagaries. No matter how one looks at the UAAL, it s important to keep these points in mind - The UAAL is only an estimate based on many different inputs and assumptions that are all subject to refinement. The UAAL is not an absolute number such as the fixed amount of your home mortgage, but is rather a fluid estimate that will both rise and fall as it is revised annually based upon actual experience. Under a well-structured plan with conservative assumptions, the deviations will be both positive (as was the case most recently in 2010) and negative (such as in 2008) in the short run, but tend to smooth to the actuaries assumed rates over time. The causes of transitory shortfalls and surpluses will be captured in improved assumptions and appropriate contribution rates over time, ensuring a secure financial foundation for the promises made to Orange County s public servants. Revised 11/07/

115 2000 Development of UAAL/(Surplus) for Year Ended December 31, UAAL at beginning of year $ 85,534, Total normal cost at middle of year 3. Amortization Payment (6,752,601) 4. Interest 11,403, Expected UAAL $ 90,185, Actuarial (gain)/loss and other changes a. Gain on investment $(286,267,436) b. Loss on salary increases 24,584,670 c. Loss on new retirees 29,186,796 d. Gain on mortality (28,835,682) e. Other experience (gain)/loss 8,809,049 f. Benefit improvements g. Change in actuarial assumptions h. Total changes (252,522,603) 7. (Surplus) at the end of the year $ (162,336,848) IMPACTING EVENTS Calendar year 2000 is a key year, and emblematic of how public pension systems are designed to smooth out the highs and lows of plan costs over time, OCERS moves from a UAAL of $85 million at the start of the year to a surplus of $162 million as the year comes to a close. There were no significant changes in Plan provisions in calendar year Though total fund returns for 2000 were only 3.28% that exceeded the policy benchmark and ranked OCERS in the top quartile of the Callan Public Plan Sponsor Database. Altogether the recognition of past and current smoothed earnings lowered the UAAL by over $286 million. The actuarial value of assets passed the actuarial value of liabilities in 2000, and the Plan was 103.7% funded at the end of the calendar year. UAAL as of 12/31/ Assets 3.00 Liabilities 2.00 UAAL In billions Revised 11/07/

116 2001 Development of UAAL/(Surplus) for Year Ended December 31, (Surplus) at beginning of year $(162,336,848) 2. Total normal cost at middle of year 3. Amortization Payment (11,193,795) 4. Interest 7,117, Expected UAAL $(158,260,086) 6. Actuarial (gain)/loss and other changes a. Loss on investment $221,191,812 b. Loss on salary increases 40,447,786 c. Loss on new retirees 48,490,180 d. Other experience (gain)/loss 19,791,339 e. Change in actuarial assumptions (34,094,126) f. Impact of for Law 119,488,767 Enforcement (Safety) g. Total changes 415,315, UAAL at the end of the year $ 257,055,672 IMPACTING EVENTS While not significant, changes to the assumed withdrawal rates, the assumed termination rates, the assumed service-connected disability rates and the assumed retirement rates taken together actually lowered future liabilities by approximately $34 million. The change in the retirement benefit for Law Enforcement (safety) members to a 3% per year of service benefit payable at age 50 increased future liability by approximately $119 million. The OCERS portfolio experienced a loss of -3.24% in calendar year 2001, with an earnings assumption of 8%. That loss, though smoothed led to an increase of the UAAL by $221 million. UAAL as of 12/31/ Assets 4.00 Liabilities 2.00 UAAL In billions Revised 11/07/

117 2002 Development of UAAL for Year Ended December 31, UAAL at beginning of year $ 257,055, Total normal cost at middle of year 3. Amortization Payment 12,123, Interest 27,502, Expected UAAL $ 296,681, Actuarial (gain)/loss and other changes a. Loss on investment $ 220,329,452 b. Loss on salary increases 91,886,000 c. Loss on new retirees 82,392,000 d. Other experience (gain)/loss 48,763,0690 e. Change in actuarial assumptions 148,339,453 f. Impact of for Firefighters; 89,688,449 Probation become Safety under the formula retro; fwd. g. Total changes 681,398, UAAL at the end of the year $ 978,079,531 IMPACTING EVENTS OCERS experienced negative returns in 2002 as did much of the market. A loss of -5.46%, when the assumption was for earnings of 8% led to an effective hit of % on the funding position of the plan. Even with smoothing in place, more than $220 million in losses were applied to the UAAL. With the market having been down for a couple of years in a row, the OCERS Board revisited its earnings assumption and lowered the portfolio s assumed rate of return from 8% annual to 7.5%. That change in earnings assumption indicated there would be lower investment earnings to offset plan costs. Taken together with a lowering of the assumption for future salary increases (when salaries don t grow as fast as anticipated, fewer contributions than anticipated will be flowing to the system) from 5.5% to 4.5% annually, led to a $148 million increase in the UAAL. On the benefit side, the retirement benefit formula for firefighters was improved to 3% of final average salary at age 50. Additionally Probation Officers became Safety Members at going forward and providing them with a conversion of past service to based on a formula, and the provision to voluntarily convert any remaining years of service not covered by the conversion formula. Those benefit changes added $89 million to the UAAL. UAAL as of 12/31/ Assets 4.00 Liabilities UAAL 0.00 In billions Revised 11/07/

118 2003 Development of UAAL for Year Ended December 31, UAAL at beginning of year $ 978,079, Total normal cost at middle of year 4. Amortization Payment (58,355,527) 5. Interest (7.5%) 78,359, Expected UAAL $ 998,083, Actuarial (gain)/loss and other changes a. Loss on investment $ 287,828,001 b. Gain on salary increases (103,234,000) c. Loss on new retirees 119,420,000 d. Other experience (gain)/loss 4,898,374 e. Change in actuarial assumptions f. Impact of new formula for City of San 2,337,899 Juan Capistrano, and City of Rancho Santa Margarita g. Total changes 311,250, UAAL at the end of the year $1,309,333,645 IMPACTING EVENTS Despite a great year for the market, with the OCERS portfolio returning 19.84% in 2003, that wasn t enough to offset the smoothed losses of prior years continuing to be recognized in the valuation, with the UAAL growing by over $287 million on that basis alone. Even with the lower salary growth assumption adopted in the previous year, member salaries did not grow as fast as anticipated, so while fewer contributions came in, that was offset by lower growth in pension liabilities, leading to a reduction in the UAAL of $103 million. The cities of San Juan Capistrano and Rancho Santa Margarita adopted improved benefit formulas for their general service members, for San Juan Capistrano, and for Rancho Santa Margarita. UAAL as of 12/31/ Assets Liabilities UAAL 0.00 In billions Revised 11/07/

119 2004 Development of UAAL for Year Ended December 31, UAAL at beginning of year $1,309,334, Changes in methods and procedures 106,630, Total normal cost at middle of year 188,163, Actual employer/member contributions (279,940,000) 5. Interest 102,756, Expected UAAL $1,426,943, Actuarial (gain)/loss and other changes a. Gain on investment $(50,536,000) b. Other experience (gain)/loss 19,372,000 c. Benefit improvements 365,409,000 d. Change in actuarial assumptions 579,681,000 e. Change to 3.5% inflation assumption 33,129,000 and Entry Age Normal funding method f. Change in investment return (215,487,000) g. Total changes 731,208, UAAL at the end of the year $2,158,151,000 IMPACTING EVENTS Two major events occurred in 2004, a change in actuarial services from Towers Perrin to The Segal Group led to a review and change in actuarial methods, procedures, and assumptions. There were also several retirement benefit formula improvements Moving from one actuary to another is an uncommon event The change in valuation methods and procedures between Towers Perrin and The Segal Group led to an increase in the UAAL of $107 million is the only year you will find the Changes in Methods and Procedures line entry capturing the impact of that change in this document. In addition to reflecting a change in methods and procedures, the 2004 valuation also includes a number of basic actuarial assumption changes regarding future salary increases, rates of withdrawal at termination, and rates of retirement. Those changes added an additional $580 million to the UAAL. An improvement in benefits as Probation members adopted the formula, Orange County Transportation Authority adopted and The County of Orange general members adopted increased the UAAL by $365 million. A gain for the fund was the recognition that the current portfolio composition would earn an assumed rate of return of 7.75%, an increase over the previous 7.5%. That assumption that greater earnings would assist in offsetting costs lowered the UAAL by $215 million. UAAL as of 12/31/ Assets Liabilities UAAL 0.00 In billions Revised 11/07/

120 2005 Development of UAAL for Year Ended December 31, UAAL at beginning of year $2,158,151, Total normal cost at middle of year 297,420, Actual employer/member contributions (345,111,000) 4. Interest 165,409, Expected UAAL $2,275,869, Actuarial (gain)/loss and other changes a. Gain on investment $(39,536,000) b. Loss on salary increases 16,544,000 c. Change in methodology used to (15,335,000) calculate benefits for deferred vested members d. Other experience (gain)/loss 65,468,000 e. Benefit improvements f. Change in actuarial assumptions g. Total changes 27,141, UAAL at the end of the year $2,303,010,000 IMPACTING EVENTS 2005 is an example of how over the long term a defined benefit plan experiencing a period of rising costs can correct itself and move to a more stable norm. Though the UAAL rose just over $27 million in 2005, which was smaller as a percentage than the positive rise in the overall size of the portfolio, causing the funded status of the plan to improve from 70.85% at the start of the year, to 71.53% by the end of the year. A positive return on the OCERS portfolio of 8.83%, exceeding the assumed earnings rate of 7.75%, allowed for application of a portion (after smoothing) of those investment gains to offset some larger losses where the economic and demographic experience through 2005 was negatively different from the actuarial assumptions. A change in actuarial methodology used in calculating benefits for deferred vested members with reciprocal service led to a reduction in the UAAL of $15 million. UAAL as of 12/31/ Assets Liabilities UAAL In billions Revised 11/07/

121 2006 Development of UAAL for Year Ended December 31, UAAL at beginning of year $2,303,010, Total normal cost at middle of year 300,072, Actual employer/member contributions (425,950,000) 4. Interest 173,606, Expected UAAL $2,350,738, Actuarial (gain)/loss and other changes a. Gain on investment $(112,612,000) b. Loss on salary increases 21,679,000 c. Other experience (gain)/loss 39,155,000 d. Benefit improvements e. Change in actuarial assumptions f. Total changes (51,778,000) 7. UAAL at the end of the year $2,298,960,000 IMPACTING EVENTS 2006 is another example, like that of 2005, of how over the long term a defined benefit plan can correct itself and move to a more stable norm. In 2006 the UAAL dropped in relatively modest terms, by approximately $5 million. Overall however the funded status of the plan again improved, moving from 71.53% at the start of the year, to 73.77% by the end of the year. At the same time the aggregate employer contribution rate (the average of the County of Orange and all special districts combined) decreased from 24.27% of payroll to 24.01%. In turn, the aggregate employee s contribution rate similarly decreased from 10.39% of payroll to 10.36%. Much of the positive movement in 2006 can be attributed to the 13.55% positive portfolio returns, exceeding the assumed earnings rate of 7.75%, allowing for application of a portion (after smoothing) of those investment gains towards the existing UAAL. There were no benefit plan changes or any actuarial assumption changes in The City of Rancho Santa Margarita did withdraw from OCERS in 2006 in order to move to CalPERS. There were no retirees with service earned with the City of Rancho Santa Margarita, so no long term pension liabilities were left behind with the OCERS plan upon the City s departure. UAAL as of 12/31/ Assets 6.00 Liabilities UAAL In billions Revised 11/07/

122 2007 Development of UAAL for Year Ended December 31, UAAL at beginning of year $2,298,960, Total normal cost at middle of year 324,706, Actual employer/member contributions (486,212,000) 4. Interest 171,911, Expected UAAL $2,309,365, Actuarial (gain)/loss and other changes a. Gain on investment $(176,681,000) b. Loss on salary increases 136,417,000 c. Other experience (gain)/loss 43,538,000 d. Benefit improvements e. Change in actuarial assumptions 237,147,000 f. Total changes 240,421, UAAL at the end of the year $2,549,786,000 IMPACTING EVENTS 2007 saw a positive return on the OCERS portfolio of 10.75%, exceeding the assumed earnings rate of 7.75%, allowing for application of a portion (after smoothing) of those investment gains to offset some large changes in the actuarial assumptions. Coming out of a triennial Actuarial Experience Study, analyzing the period of January 1, 2005 through December 31, 2007, a number of actuarial assumptions were changed in the areas of mortality, termination of membership, rates of retirement, salary growth, and annual payoffs, leading to an increase in the UAAL of approximately $237 million. A benefit change for the Cemetery District, moving to a 2% of final average salary at age 55 for future service only, was too negligible to have an impact on plan funding. UAAL as of 12/31/ Assets 7.29 Liabilities UAAL 0.00 In billions Revised 11/07/

123 2008 Development of UAAL for Year Ended December 31, UAAL at beginning of year $2,549,786, Changes in methods and procedures 3. Total normal cost at middle of year 361,097, Actual employer/member contributions (532,656,000) 5. Interest 190,961, Expected UAAL $2,569,188, Actuarial (gain)/loss and other changes a. Loss on investment $257,752,000 b. Loss on salary increases 97,561,000 c. Loss on new retirements 54,911,000 d. Other experience (gain)/loss 17,159,000 e. Benefit improvements f. Change in actuarial assumptions 115,764,000 g. Total changes 543,147, UAAL at the end of the year $3,112,335,000 IMPACTING EVENTS 2008 saw massive losses in the market by public pension systems across the country, with the Dow Jones Industrial Average (DJIA) down by -33.8%, the worst single year decline since the Great Depression. OCERS did remarkably well, declining by only %. Yet, even with smoothing of gains and losses in place, that decline led to a loss of $257.7 million that had to be recognized in the calculation of the 2008 UAAL. Changes in service retirement rates for General members under improved benefit formulas required a change in actuarial assumptions, leading to an increase in the UAAL of $115.7 million. UAAL as of 12/31/ Assets 7.75 Liabilities UAAL 0.00 In billions Revised 11/07/

124 2009 Development of UAAL for Year Ended December 31, UAAL at beginning of year $3,112,335, Inclusion of Additional Premium Pay Items 228,051,000 3 ADJUSTED UAAL for beginning of year $3,340,386, Changes in methods and procedures 5. Total normal cost at middle of year 396,025, Actual employer/member contributions (545,215,000) 7. Interest 253,099, Expected UAAL $3,444,295, Actuarial (gain)/loss and other changes a. Loss on investment 322,523,000 b. Gain on lower than expected salary (77,858,000) increases c. Other experience (gain)/loss 14,931,000 d. Benefit improvements e. Change in actuarial assumptions f. Total changes 259,596, UAAL at the end of the year $3,703,891,000 IMPACTING EVENTS A major challenge for the 2009 valuation was the discovery, and inclusion of a pre-existing liability. The impact of premium pay [uniform allowance, bilingual requirements, etc.] on final compensation earnable had been underreported to the actuary since With proper reporting, the recognition of a liability that had been present, but unvalued, added an additional $228 million to the adjusted beginning UAAL figure for the year. Despite increasing assets (on a market value) by over $1 billion in calendar year 2009, an 18.54% return, OCERS actually takes a loss on investments in 2009, in the amount of $322,523,000. Because OCERS smoothes both gains and losses, only $120,722,000 of the gains in 2009 were recognized, while $444,350,000 of deferred losses had to be recognized in turn flowing out of the prior year Because there were some remaining gains to be recognized from prior years still being smoothed in as well, the actual calculation for the Loss on Investment in 2009 looked like this: 2005 $ 3,887, ,826, ,222, (444,350,000) ,722,000 TOTAL $(207,693,000) The difference between the loss of $207.7 million from smoothing and the actual loss of $322.5 million recognized in the valuation was due to investment income that was not generated as the value of assets used in the valuation at the start of the year was actually more than the market value by about $1.5 billion. UAAL as of 12/31/ Assets Liabilities UAAL 0.00 In billions Revised 11/07/

125 2010 Development of UAAL for Year Ended December 31, UAAL at beginning of year $3,703,891, Changes in methods and procedures 3. Total normal cost at middle of year 389,458, Actual employer/member contributions (565,242,000) 5. Interest 280,240, Expected UAAL $3,808,347, Actuarial (gain)/loss and other changes a. Loss on investment $224,044,000 b. Gain on lower than expected salary (215,936,000) increases c. Loss on new retirements d. Other experience (gain)/loss (63,174,000) e. Benefit improvements f. Change in actuarial assumptions g. Total changes (55,066,000) 8. UAAL at the end of the year $3,753,281,000 IMPACTING EVENTS With continued economic stress, many of OCERS plan sponsors delayed filling vacancies, did not provide any cost-of-living adjustments to current salaries, and some even experienced wage reductions, combining to provide a large gain of more than $215 million in savings as future liabilities did not rise as quickly as the actuary assumed would be the case under normal market conditions. Overall the system UAAL did increase by approximately $50 million, primarily due to lower than expected investment returns. While the system actually earned 11.74%, more than the assumed rate, due to smoothing, the ongoing recognition of losses coming out of 2008 continued to hold down any possible gain on investments. Still, this was an interesting year as even with a smoothed loss of $224 million, the funded ratio of the plan, that is total assets compared to total liabilities actually improved, moving from 68.77% the year prior to 69.79% at the end of UAAL as of 12/31/ Assets Liabilities UAAL 0.00 In billions Revised 11/07/

126 2011 Development of UAAL for Year Ended December 31, UAAL at beginning of year $3,753,281, Changes in methods and procedures 3. Total normal cost at middle of year 385,008, Actual employer/member contributions (598,271,000) 5. Interest 282,615, Expected UAAL $3,822,633, Actuarial (gain)/loss and other changes a. Loss on investment $388,935,000 b. Gain on lower than expected salary (174,558,000) increases c. Full-Time equivalent salary reporting 73,448,000 adjustment for part time employees d. Retiree continuance form code change 42,619,000 e. Reclassify some active members as (6,295,000) deferred f. Loss on new retirements g. Other experience (gain)/loss (52,001,000) h. Benefit improvements i. Change in actuarial assumptions 363,842,000 j. Total changes 635,990, UAAL at the end of the year $4,458,623,000 IMPACTING EVENTS Every three years OCERS performs an experience study to determine how closely the actuary s assumptions are hewing to actual experience. The 2011 valuation was impacted by a number of assumption changes that flowed from the December 31, 2010 experience study, increasing the UAAL by $363,842,000. Those changes included (1) higher liability from recognition that General service retirees and all General and Safety beneficiaries were living longer than assumed, and (2) slightly higher individual salary increases, (3) offset to some degree by expectation of later service retirements, (4) fewer disability retirements, (5) more terminations and (6) slightly lower annual payoffs. A very important change in an economic assumption also occurred, with the introduction of a 0.25% across the Board salary increase assumption. Though in the short term many OCERS plan sponsors have continued with layoffs, delayed hires, and reductions in overall salary payroll, the long term projection by the actuary is that salaries will increase. With the addition of this assumption, there is now a consideration that over long periods of time wage inflation will be higher than price inflation by 0.25% per year. A major IT software conversion project also led OCERS to further refine the data reported to the actuary. Three of those data refinements had an impact on this year s UAAL as well: Determining that full-time equivalent salaries (calculated by adjusting actual pensionable salaries with earnable salaries during those pay periods when the member is not working full-time) UAAL as of 12/31/ Assets Liabilities UAAL 0.00 In billions Revised 11/07/

127 would more accurately reflect likely final compensation used to determine retirement benefits. clarification added $73,448,000. That Confirming those retirees who have spouses eligible for a continued benefit following the member s death added $42,619,000. Confirming that some members who had been classified as active and therefore still accruing a liability, were in fact deferred and had reduced the UAAL by $6,295,000. Revised 11/07/

128 2012 Development of UAAL for Year Ended December 31, UAAL at beginning of year $4,458,623, Changes in methods and procedures 3. Total normal cost at middle of year 410,258, Actual employer/member contributions (627,964,000) 5. Interest 337,107, Expected UAAL $4,578,024, Actuarial (gain)/loss and other changes a. Loss on investment $387,808,000 b. Gain on lower than expected salary (244,750,000) increases c. Loss on new retirements d. Other experience (gain)/loss 19,979,000 e. Benefit improvements f. Change in actuarial assumptions 934,619,000 g. Total changes 1,097,656, UAAL at the end of the year $5,675,680,000 IMPACTING EVENTS The 2012 valuation was impacted by economic assumption changes that flowed from the December 31, 2012 Review of Economic Actuarial Assumptions, increasing the UAAL by $934,619,000. Those changes included (1) decreasing the net investment return assumption from 7.75% per annum to 7.25% per annum, (2) decreasing the inflation assumption from 3.50% per annum to 3.25% per annum, and (3) increasing the current real across the board salary increase assumption from 0.25% to 0.50%. The $934,619,000 fully represents the effect of the change in earnings assumptions, as the cost impact of the other two (decrease inflation, increase salary assumptions) had a canceling effect on one another. UAAL as of 12/31/ Assets Liabilities UAAL 0.00 In billions Revised 11/07/

129 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM MEMORANDUM DATE: November 7, 2013 TO: FROM: SUBJECT: Members of the Board of Retirement Julie Wyne, Assistant CEO, External & Legal Operations Fiduciary Counsel RFP and IFB for General Counsel Search Firm Recommendation: Receive and file. Discussion: Fiduciary Counsel RFP: In accordance with OCERS Procurement and Contracting Policy an RFP for Named Service Providers, which includes our fiduciary counsel, should be conducted at least every six years. Reed Smith, and more specifically Harvey Leiderman, has been OCERS fiduciary counsel for more than six years under their current contract term, which was executed July 6, 2006, with no specific termination period or date. In discussions with the Board at the conclusion of the October 2013 Board meeting, the Board concurred with the suggestion from staff that the RFP process for fiduciary counsel be held while the search for a new General Counsel is underway, and not pursued until a new General Counsel has been on board for a period of time that allows him or her the ability to assimilate into OCERS and provide the necessary guidance on the RFP process. This memorandum is simply to memorialize that decision. General Counsel Search Firm: OCERS will be utilizing the services of an executive search firm specializing in high level attorney placements in light of the departure of OCERS General Counsel. This position is a critical position to OCERS and an expedited search process is being considered. As part of this process, executive staff believes the appropriate method for identifying and selecting the search firm is through the Invitation to Bid (IFB) process set forth in the OCERS Procurement and Contracting Policy: a) Invitation for Bid (IFB) i. This method will be used when multiple bidders are available and willing to bid, and procurement needs can be stated in detail, with precision, or where services or products are standardized, ii. Competitive bidding will be used to procure these goods and services with the lowest responsive and responsible bidder being selected. C-10 Fiduciary Counsel RFP and IFB for General Counsel Search Firm Page 1 of 2 November 2013 Regular Board Meeting

130 The goal is to target no more than four executive legal search firms with the final decision by the CEO. Once the Board approves the 2014 budget, the IFB process will begin. Prepared by: Julie Wyne Assistant CEO, External & Legal Operations C-10 Fiduciary Counsel RFP and IFB for General Counsel Search Firm Page 2 of 2 November 2013 Regular Board Meeting

131 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM DATE: November 06, 2013 TO: FROM: MEMORANDUM Members of the Board of Retirement Cynthia Hockless, Director of Administrative Services & Steve Delaney, Chief Executive Officer SUBJECT: Outcome of Board Elections: General Member and Retired Member Recommendation: Receive and File Background: The Orange County Employees Retirement System requested the Registrar of Voters conduct an election for the positions of General and Retired Member of the Board of Retirement for a threeyear term beginning on January 1, 2014 through December 31, Nomination papers were available to candidates at the Registrar of Voters office from August 7, 2013 through August 26, Analysis: Two candidates filed nomination papers by the deadline for the Retired Member election and were determined qualified candidates. The two candidates are Tom Beckett and Tony Bedolla. With nearly 4200 out of the votes cast, the Registrar of Voters declared Tom Beckett as the candidate receiving the highest total of votes on October 24, The Board of Supervisors will certify this election on November 19, 2013 at their Board meeting. For the General Member election, one candidate filed nomination papers by the deadline and was determined a qualified candidate. The Orange County Employees Retirement System s Election Procedures state: If there is only one qualified candidate for an office, no election shall be held. The Board of Supervisors shall declare that candidate to be duly elected to the Board of Retirement for the term specified. Therefore, the Registrar of Voters recommended that the Board of Supervisors approve the appointment of Frank E. Eley to the position of General Member at their December 17, 2013 Board meeting. Attached to this memo is the Election Certification for the Retiree Election and the Certificate of Appointment in Lieu of Election for the General Member seat. C-11 Outcome of Board Elections: General Member and Retired Member Page 1 of 2 November 2013 Regular Board Meeting

132 Problems with Addresses: As Mr. Delaney informed the Board during his closing comments the Board s meeting of October 21, we had encountered a problem with the program used to pull addresses for the Retired Member election. On September 26 OCERS staff was contacted by a retiree who did not receive a ballot for the upcoming election for the retired board member seat. Upon further investigation it was discovered that the list OCERS provided to the Registrar of Voters contained erroneous addresses for 2,408 retired members. Since ballots cannot be forwarded, these members never received a ballot. OCERS IT staff immediately identified the problem in our outgoing legacy system and corrected it that very day. A new disk with the corrected 2,408 addresses was sent to the Registrar of Voters and printer on Friday, September 27, The Registrar of Voters had new envelopes and ballots for all 2,408 printed on Monday, September 30, Those new envelopes and ballots were then mailed to all 2,408 retirees. Out of the 2,408 addresses, 803 were out-of-state addresses. To ensure that everyone received their ballot in sufficient time to respond by the election deadline of October 24, 2013, we worked closely with the Registrar of Voters. We sent all in-state mail by US First class and out-of-state by Priority mail. These ballots would have been received by the members by October 4, Contact with both candidates was maintained to keep them informed of the above actions. Subsequently OCERS received a request to pay for the r ing of campaign material for those affected. Julie Wyne, Assistant CEO of Legal & External Operations advised that OCERS must be cautious with any expenditure of Trust Fund dollars. Ms. Wyne advised the claimant that our election procedures contain the following statement: The Retirement Office shall use its current records, but in no way guarantees the accuracy of the information provided on the disk. With that advice, OCERS did not approve the expenditure of r ing campaign materials. A thorough after-the-fact report on the details leading to the error has been conducted and OCERS staff has taken the necessary steps in both programming and process to ensure that an error of this type does not occur again. Submitted by: Submitted by: Cynthia Hockless Director of Administrative Services Steve Delaney Chief Executive Officer C-11 Outcome of Board Elections: General Member and Retired Member Page 2 of 2 November 2013 Regular Board Meeting

133 ELECTION CERTIFICATION I, Neal Kelley, Registrar of Voters of Orange County, State of California, hereby certify that I conducted an election among the Retired Members of the Orange County Employees Retirement System for the purpose of electing a Retired Member to the Board of Retirement of the County of Orange for a term commencing January 1, 2014 and ending December 31, ) I further certify that the results of. the votes indicate that Tom Beckett was elected the Retired Member. I further certify the following to be a complete tally of the votes cast: RETIRED MEMBER ORANGE COUNTY BOARD OF RETIREMENT TOM BECKETT TONY BEDOLLA 4,182 1,653 TOTAL BALLOTS CAST: 5,837 WITNESS my hand and Official Seal this 25th day of October, Registrar 6f Voters Orange County

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135 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM MEMORANDUM DATE: November 5, 2013 TO: Members of the Board of Retirement FROM: Brenda Shott, Assistant CEO, Finance & Internal Operations and Tracy Bowman, Director of Finance SUBJECT: REPORT ON CONFERENCE ATTENDANCE Recommendation: Receive and file. Background: OCERS Travel Policy, Section 19, states: Board Members and staff who travel to conferences or seminars that are not automatically authorized in paragraphs 8 and 12 shall file with the Chief Executive Officer a report that briefly summarizes the information and knowledge gained that may be relevant to other Board members, provides an evaluation of the conference or seminar, and provides a recommendation concerning future participation. Reports by Board Members or staff will be made on the Conference/Seminar Report form shown in the appendix. The Chief Executive Officer shall cause a copy of the report to be distributed to each Board Member and to the Chief Investment Officer. On October 27 through October 30, 2013, we attended the Public Pension Financial Forum (P2F2) conference. This is not a pre-approved conference. Our report summarizing the conference is attached. Submitted by: Brenda Shott Assistant CEO, Finance and Internal Operations C-12 Report on Conference Attendance Page 1 of 1 November 2013 Regular Board Meeting

136 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM REPORT OF ATTENDANCE AT CONFERENCE OR SEMINAR Name of Members Attending: Name of Conference/Seminar: Conference/Seminar Sponsor: Brenda Shott & Tracy Bowman Public Pension Financial Forum (P2F2)-10 th Annual Conference P2F2 Dates of Attendance: 10/27-10/30 Brief Summary of Information and Knowledge Gained: Implementing GASB Statement No. 67, Financial Reporting for Pension Plans & Statement No. 68, Accounting and Financial Reporting for Pensions, was the primary theme for this year s P2F2 annual conference. The pre-conference sessions proved to be extremely valuable as the Ohio Public Employees Retirement System (OPERS) did a detailed walk-through of their mock implementation of the new pension accounting standards. The new GASB standards for pension reporting represent the most significant changes to the accounting and reporting of pension related liabilities in nearly 20 years. The session addressed both the technical and practical issues to be considered in the implementation of the new standards and attendees were provided a bound copy of OPERS implementation guide and sample schedules. The conference had several follow up sessions dealing with very specific issues and aspects of implementing the new standards, including communication of the new reporting requirements with plan sponsors and the public, potential impacts of the new standards on individual systems, resources needed for implementation, measurement and valuation dates and the roll-forward process, and accounting versus funding actuarial valuations. Michelle Coffey, project manager at the Governmental Accounting Standards Board in Norwalk, Connecticut, was one of the speakers on the GASB 67 and 68 topics. Having access to Ms. Coffey at the conference was extremely helpful as she provided up to date insight on how the GASB Implementation Guide is being developed and what we can expect to see in it (the Guide is due to be published in January 2014). She also was available for questions during networking periods throughout the conference. Paul Zorn, Director of Governmental Research at Gabriel Roeder Smith & Company led a session on the topic pension funding and accounting after GASB changes. Mr. Zorn is a highly regarded expert in the public-sector benefit arena with over 30 years of experience, including time spent as a researcher for the Government Finance Officers Association (GFOA). His insights and knowledge regarding the differences between the funding measures and the GASB s parallel accounting measures and funding policies will be very useful to OCERS as we continue through the implementation process. Although GASB 67 and 68 were the primary topic of education during the conference, there were also several other sessions one or both of us attended that included topics such as: foreign investment tax issues, investment soft dollar programs, communicating a complex message to diverse audiences, fraud controls, the retirement savings crisis and solutions for challenging times. The conference wrapped up with economic, legislative and healthcare reform updates and IRS hot topics.

137 Evaluation of the Conference or Seminar: The P2F2 conference was very well attended by both small and large pension systems, including seven SACRS systems. The conference offered an abundance of very timely and applicable information on the new GASB standards and current events and issues (pension reform, municipal bankruptcy and pension obligations, funding policies, U.S retirement savings crisis etc.). Both Tracy and I made numerous contacts with other pension accounting and finance peers which we both are very excited about. After coming from a very different industry, developing a strong network of pension industry peers was definitely needed and P2F2 was the perfect conference for this purpose. The conference was well organized and offered a variety of educational opportunities led by several well respected individuals in the industry (public pension, governmental accounting, actuarial science, tax law etc.). We both found this year s P2F2 annual conference to be the most informative conference/seminar related to GASB 67 and 68 to date. The materials provided will be a great tool as OCERS moves forward with implementing the new GASB standards as well as providing information to our plan sponsors for their implementation process Recommendation Concerning Future Attendance: The Public Pension Financial Forum (P2F2) is the only professional organization specifically organized for and by public pension FINANCE professionals. P2F2 celebrated their 10th anniversary at this year s conference with over 200 members representing nearly 100 different pension systems. The goals of P2F2 are to: Promote excellence in public pension plan financial operations; Provide educational programs of interest to membership; Promote the exchange of best practices and ideas for financial operations and reporting between public pension plans; Foster sound principles, procedures and practices in the field of public pensions related to financial operations and; Provide an appropriate national organization representing the financial operations of public systems throughout North America, including providing comment to exposure drafts and other potential accounting pronouncements promulgated by the Governmental Accounting Standards Board. P2F2 holds an annual conference offering three tracks of educational focus: 1. General Accounting 2. Investment Accounting 3. Employer Reporting In addition to the educational sessions offered, the annual P2F2 conference also provides time for informal networking, which allows attendees to exchange ideas and further discuss material presented in formal sessions as well as exchange contact information so that as new challenges are encountered throughout the year you have access to a peer support group.

138 We highly recommend attending this conference on an annual basis and will present the option of adding this conference to this list of preapproved conferences in OCERS Travel Policy to the Governance Committee at their next meeting Cost of P2F2 10 th Annual Conference Scottsdale, Arizona Pre Conference $ 75 Member Registration $ 275 Hotel (4 nights) $ 635 Airfare $ 225 Meals $ 100 Other Transportation $ 45 Misc $ 20 Total cost per person $1,375 # of attendees 2 Total cost to OCERS $2,750 Signature Signature November 5, 2013 Date

139 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM MEMORANDUM DATE: November 6, 2013 TO: Members of the Board of Retirement FROM: Steve Delaney, Chief Executive Officer SUBJECT: BOARD COMMUNICATIONS Recommendation: Receive and file. Background: To ensure that the public has free and open access to those items that could have bearing on the decisions of the Trustees of the Board of Retirement, the OCERS Board has directed that all written communications to the entire Board during the interim between regular Board meetings be included in a monthly communications summary. News Links: The various news and informational articles that have been shared with the full Board are being provided to you here by web link address. By providing the links in this publicly available report we both comply with the Brown Act public meeting requirements, as well as avoid any copyright issues. The following news and informational links were received by OCERS staff for distribution to the entire Board: From Tom Flanigan Chriss Street s Latest Report: French Rioting to Dump the Euro Scrooge McDucks/Bill Gross s November Read! Sovereign_Precariousness_HANG_TIME_Seeking_Alpha_ After Currency Wars Comes The Death of Money Item C-13 Board Communications Page 1 of 5 November 2013 Regular Board Meeting

140 Pension Alert Is Issued in Chicago Budget Talk From Shari Freindenrich Fourth District Update From Girard Miller [A recap of articles previously mailed directly to Trustees by the CIO] Irvine Plans To Prepay Its Pension Bill The ECB Finally Provides Some Detail on a Stress Test That Could Have Broad Ramifications for Europe The ECB has been making it clear for months that its upcoming bank stress test will be rigorous, comprehensive and transparent. The ECB has also made clear that a backstop to deal with any capital shortfall will be in place prior to the completion of the exercise. Previous stress tests have failed to meet this standard. And this one will fail too if the EU is not prepared to tackle tough but well-known questions. One of the key questions the ECB will have to decide is what to do with periphery banks very large holdings of risky sovereign bonds. A rigorous test of the banks, inclusive of both their private sector and sovereign holdings, will expose capital holes that will need to be filled. When we run the numbers, we think the size of the capital hole is likely to be manageable, but the controversial question remains who will pay for it. In this regard, the stress tests have the potential to be the forcing mechanism for providing clarity on who will pay for the banks. Last week, we finally got some information about the ECB s newest stress test, but it is still not clear whether these questions will be answered or whether this test will succeed where others failed. Inflationist: Be careful what you ask for News Updates Central banks in most countries are in a holding pattern with their easy-money policies, as economic data remain sluggish enough to discourage a more-rapid return to normal rates. This global QE monetary approach is supporting asset-flation as it s a benign backdrop for equities, it pushes up real estate values, and rewards risk-taking. As noted in my latest House Views (attached) and underscored in our Economic Dashboards for next week s IC meeting (also attached here for quicker reference if you re interested), the run-up in equity prices puts all Item C-13 Board Communications Page 2 of 5 November 2013 Regular Board Meeting

141 pension funds in the awkward position of riding this trend into higher and higher valuations despite the risks of a short-term correction. China is one exception, where internal statistics are showing growth in manufacturing, and urban housing prices are bubbling again, causing them to raise key rates Separately, and on a definitively positive note today, the U.S. Fed is moving toward a stiffer liquidity standard for big (too big to fail) banks, which is an improvement on the cyclical risks in that sector domestically. Their counterparts in Europe are making similar moves to bolster liquidity and reserves, as well. The makes the fat tail risk a little skinnier (but doesn t make it go away). This article reflects a concern that I did develop in London (when doing due diligence work there): their national government is making it very easy perhaps too easy -- for the lower income families to enter the market with little down (a national government program lends firsttime and lower-income buyers the money for a second in a program called Help to Buy, far too reminiscent of Freddie/Fannie shenanigans here in the last US real estate cycle). So there has been 10% appreciation nationwide and tongues are wagging all about the UK about real estate, usually a sign of froth. The London business newspaper reported that brick manufacturers cannot keep up with demand because of environmental regulations and capacity limits, so supply is lagging the demand and squeezing prices higher. Then we have today s news on similar residential price appreciation in China! Of course, that economy has a legion of potential owners with few other options for investment so it s difficult to know where fair value is. But we ve learned before that trees don t grow to the moon.. https://mninews.marketnews.com/content/update-china-september-home-prices-surge-policyvacuum Item C-13 Board Communications Page 3 of 5 November 2013 Regular Board Meeting

142 While the world is A-Twitter about Twitter s IPO (which I d be shorting now if I had money to gamble) as this one feels like the internet bubble days of the late 90s: The New Normal is still the world we live in. Stocks are anticipating growth rates well above what we re actually experiencing, so there is clearly a divergence which increases risks of equity ownership. But, that can go along for some time. The chartists (people like Dow Theory) have finally recognized a bull market after we ve rebounded 150% from the bottom so what good does that do anybody? But they are right that the third leg of a bull market is usually the upsurge, what others call the blow off leg, and it s problematic for a pension fund to move too soon to bail out of that or take downside protection, which will be a topic at our December 3 risk workshop. Now, here s the news: GDP in the US was stronger than expected, in the 3d quarter, although likely to fall back a bit in 4Q because of the federal shutdown. Under the hood: autos and housing still growing. These remain signpost indicators in my House Views. If they weaken materially for several months, then we need to challenge the thesis of sustainable but anemic growth. Labor markets show better tone: jobless claims down but we still are NOT seeing job creation, which is a clear confirmation of the New Normal thesis. Until employment levels improve, inflation is muzzled. Meanwhile, overseas, German growth slowed but analysts see bottoming or turnaround in Europe But there is still a deflationary undertow in Europe which Draghi is trying to counter All in all, it s the usual mixed bag of reports, but nothing that radically changes the House Views that will accompany the Nov 20 Investment Committee materials. Item C-13 Board Communications Page 4 of 5 November 2013 Regular Board Meeting

143 Other Items: Attached are copies of electronic correspondence from OCERS staff to each Board member that were mailed during the past month: o OCERS Activities and Updates summary report for the month of October 2013 e- mailed on November 6, o Results of the election for the Retired Member position on the OCERS Board of Retirement memo ed on October 24, Submitted by: Steve Delaney Chief Executive Officer Item C-13 Board Communications Page 5 of 5 November 2013 Regular Board Meeting

144 From: Delaney, Steve Sent: Wednesday, November 06, :14 PM To: Board Members Cc: Wyne, Julie; Shott, Brenda; Miller, Girard; Jenike, Suzanne; Sadoski, Jenny; Bowman, Tracy; Hockless, Cynthia; Kinsler, Robert; Quintero, Marisa; Quintanilla, Susana; Griffith, Alison; Leiderman, Harvey L. Subject: OCERS Activities and Updates: OCTOBER 2013 To the members of the OCERS Board of Retirement, The following is my regular monthly summary of OCERS staff activity, with highlights for the month of OCTOBER 2013, as well as updates regarding other OCERS-related issues: ACTIVITIES BUILDING UPKEEP PAINTING THE WALLS In case you missed it, the entire building got an internal makeover as our walls went from faded white to a relaxing tan. Special thanks to Ms. Cynthia Hockless who organized the process floor by floor over a week s time period, with very little interruption of daily work - quite the accomplishment. MEMBER OUTREACH PRESENTATIONS We had a number of detailed outreach presentations through the month, and will continue on into November. On both October 7th and 8th Ms. Suzanne Jenike and I joined Mr. Geagan at OCPFA headquarters to share detailed background information on defined benefits as a whole, as well as details about OCERS in particular with two different groups of firefighters. In my experience firefighters in almost any public system tend to be the most knowledgeable members, and the detailed questions posed by these firefighters left no doubt that is the case here in Orange County as well. On October 28 Ms. Jenike and I held similar meetings throughout the day, starting our morning at OC Sanitation 1

145 Headquarters, followed by two meetings held one after the other that afternoon at OC Transportation Authority. Turnout was excellent, with nearly 200 members present between those three meetings. MEETING WITH COUNTY CEO On October 17 Ms. Brenda Shott, Ms. Julie Wyne and I arranged to meet with Mr. Mike Giancola, County of Orange CEO, as well as his staff in order to catch up on various OCERS-related issues. We discussed: 1. His letter of September 11 regarding proposed OCERS compensation philosophy document, and the recent directive from the OCERS Board s ad hoc Compensation Committee to simplify the document in light of the concerns Mr. Giancola had raised. 2. The agendas for the upcoming October and November Board meetings. 3. Offered our assistance in addressing a concern raised by Supervisor Moorlach at a recent Board of Supervisor meeting to have more information on the issue of amortization. 4. Ms. Wyne s departure. 5. A reminder that three of our four appointed members (Ball, Flanigan and Packard) have their terms expiring as of December 31, RETIRED MEMBER ELECTION On October 18 Ms. Wyne and I met with the co-presidents of REAOC (Retired Employees Association of Orange County) to discuss the current status of the Retired Member election. Understandably they were quite upset and concerned over the issue of out-of-date addresses having been included when the mailing list for the election was originally produced. While I assured them that every action possible had been taken to correct the error, suffice it to say they were very 2

146 unhappy. This was the issue I reported verbally to the Board during my CEO comments at the end of the October 21 meeting of the Board of Retirement. I joined Ms. Hockless on October 24 at the Registrar of Voters office to observe the counting of the ballots. A full report will be provided to the Board with your November 18 materials. The REAOC representatives who were present were very happy with the outcome as their candidate, Mr. Tom Beckett, won resoundingly. He was also present, and I was able to shake his hand and welcome him to the OCERS Board. I also made an immediate phone call to the other candidate, Mr. Tony Bedolla, to inform him of the outcome. Mr. Bedolla was a true gentleman and thanked me for my call. HALLOWEEN PARTY Lots of good work takes place here at OCERS day in and day out, but we also need those special moments to bond and enjoy one another s company. Staff held a Halloween lunch hour costume party on the 31 st, and above you will find a photo of all those staff members who dressed up, and the second shot is of our four winners, Ms. Jenny Sadoski winning the grand prize with her inimitable Mona Lisa!. UPDATES THE V3 IT CONVERSION PROJECT Ms. Sadoski provides the following report on the current status of the V3 project: Build 1 pre-uat testing is complete. The OCERS QA team finished their testing mid-october and we signed off on the Build 1 Acceptance documentation and invoice for payment. Build 1 defects have been reviewed jointly by OCERS test team and Vitech. 121 of the reported Build 1 defects will be corrected and included in Build 2 for re- 3

147 testing. The remaining Build 1 defects should be delivered with Build 3, but that has not yet been confirmed. OCERS QA team and Vitech have been extremely busy preparing for Build 2. Vitech has completed their Functional System Testing of Build 2 and they delivered and installed Build 2 on-site at OCERS the last week of October. OCERS QA team have been working with our IT Programming team to scrub existing Pension Gold transmittal files and then convert them to V3 transmittal files for testing with Build 2. A lot of effort is being placed in understanding the V3 transmittal import process and validations, as this is a key business process for OCERS. In addition to transmittal processing (aka Employer Payroll), Build 2 also includes Benefit Estimates, Terminations, Retirement Processing, Member Account adjustments, and 401(a)(17) compensation limits. Over the next two weeks Vitech will be training all the testers on the different modules included in Build 2 and we will be reviewing the Build 2 deliverables documentation for acceptance, barring any issues that come up in training. The Data Conversion team sent the scrubbed data for Build 3 preparations last week. Staff are completing their reviews and approvals on the remaining design specifications and Test Cast Outlines for Build 3 and the V3 Project budget for 2014 has been reviewed and submitted to Finance. Finally with the holidays just around the corner and year end closing, open enrollment for retiree medical, tax rate changes and the actuarial extract, Build 2 and Build 3 looming on the horizon, the V3 Project Management team and Leads will be meeting in November to review the project schedule over the next four months. Our goals is to plan ahead and ensure that we are making the best use of our time, scheduling tasks and staff accordingly to take advantage of when we will be extremely busy and when we will not.. INVESTMENT DIVISION ACTIVITIES The Investments team devoted much of October to the due diligence and research on non-us direct lenders, which culminated in approval of three 4

148 European direct lenders: Hayfin, Park Square and Capula. We also conducted further research on the Asian strategy, narrowing our field of choice to one firm to be presented at the November meeting. Staff worked with our real estate consultants at RV Kuhns to refine the policy parameters and pacing plan for real estate. Our 14 th direct hedge fund manager, Gotham, was presented and approved, which nearly completes the build-out in that sleeve. Our budget preparation process and data was presented at the board s budget workshop, including the 2014 prioritization results which showed these three subject of top interest for next year: Upside return strategies portfolio performance enhancement beyond just risk considerations Dynamic (business cycle) asset allocation Risk and risk-adjusted returns, and how to think about them going forward The Manager Monitoring Subcommittee reviewed Wellington DIH (inflation-oriented strategies) and Adams Street (private equity). The CIO continued his work on the P4 collaborative procurement project, reporting progress at the October investment committee meeting, and continuing the analysis with antitrust counsel in preparation of a legal memorandum on the P4 initiative. If you have questions regarding any of the items above, or wish clarification, please feel free to call. As a reminder, you will see this information included with the BOARD COMMUNICATIONS item you will find on the consent agenda for the November 18 meeting of the Board of Retirement. Steve Delaney CEO, Orange County Employees Retirement System (714) [desk] (714) [office cell] 5

149

150 trar From: Delaney, Steve Sent: Thursday, October 24, :12 PM To: Board Members Cc: 'Leiderman, Harvey L.'; 'Angelo, Paul'; 'Yeung, Andy'; Martin, Allan (NEPC); Stracke, Don (NEPC) Subject: Results of the election for the Retired Member position on the OCERS Board of Retirement To the members of the OCERS Board of Retirement, Staff and I were at the Registrar of Voters office today to observe the counting of the ballots in the election to replace Mr. Griffith s position (Mr. Griffith has decided to be truly retired and did not run again). For the three year term beginning January 1, 2014, Mr. Tom Beckett, former CFO of the County of Orange, has been elected to that seat, as per the Twitter notice received below. I have spoken with both candidates, and it does not appear there will be a challenge to this election due to the fairly wide spread in the vote tallies for the two candidates. There will be a final report on this episode as part of your materials for the November 18 meeting of the Board. Steve Delaney CEO, Orange County Employees Retirement System (714) [desk] (714) [FAX] (714) [cell] From: OC Registrar (Twitter) Sent: Thursday, October 24, :40 PM To: Sadoski, Jenny Subject: OC Registrar mentioned you on Twitter!

151 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM MEMORANDUM DATE: NOVEMBER 8, 2013 TO: Members of the Board of Retirement FROM: Marisa Quintero, Secretary SUBJECT: Portfolio Activity Report Recommendation: This report will be presented at the November 20, 2013 Investment Committee Meeting. Submitted by: Marisa Quintero Secretary I-2 Portfolio Activity Report Page 1 of 1 November 2013 Regular Board Meeting

152 Sunshine is the Best Antiseptic The Ralph M. Brown Act Board of Retirement Orange County Employees Retirement System May 20, 2013 Harvey L. Leiderman

153 TWO FUNDAMENTAL PUBLIC POLICIES The public is entitled to meaningful access to elected officials and decision-makers. All governing bodies and standing committees of local public agencies must conduct their business in noticed, open meetings, giving the public the right to attend, observe and comment. 2 2

154 WHAT ARE MEETINGS? 1. Face-to-face or by teleconference Any gathering of a quorum of the board, except discussions of general interest at conferences and social gatherings (if no discussion about board business) 3

155 2. Serial WHAT ARE MEETINGS? Chains of communications designed to hear, discuss, deliberate or take action on any item within the board s jurisdiction Daisy chains Hubs and spokes Actual concurrence unnecessary Except staff answering questions or providing information one-way to board members 4 4

156 WHAT ARE MEETINGS? 3. Writings Any medium can be a meeting letters, s 2001 AG opinion exchanges are not sanitized by sending to officers, posting on websites or reporting on later SB 1732 (2008) all writings circulated to board members are disclosable public records. Must be available at relevant meeting Except confidential communications with your attorney Caveat! Be aware of the Public Records Act 5 5

157 AGENDA REQUIREMENTS Regular meetings 72 hours advance notice and posting; include a brief general description of each item Special meetings 24 hours advance notice and posting; called by Chair or majority of board; no other business may be conducted Non-agendized matters may not be discussed, unless a need for immediate action arose since agenda posting. Requires 2/3 vote of board present, or unanimous vote if 2/3 not present, to take the matter up. 6 6

158 CLOSED SESSIONS Permitted Personnel hiring, firing, complaints, evaluation of performance but not compensation Legal pending or threatened litigation, or considering litigation Purchase or sale of pension fund investments Real property negotiations Labor negotiations Confidentiality required Reporting out reportable actions and rollcall votes 7 7

159 PENALTIES AND REMEDIES Criminal misdemeanor for knowing actions in violation of the Act Civil injunction/declaratory relief; voiding actions Anyone can seek D.A., member of public 30 & 90 day opportunities to cure before filing suit Attorneys fees and costs against agency (not against board member) Insurance coverage? 8 8

160 HYPOTHETICAL #1 Over drinks at a SACRS conference, at which others are present, four members of the board agree to vote for a pay increase for their hardworking CEO. One agrees to talk to another board member and get her agreement before the meeting. When approached, the fifth board member thinks she is having the conversation with only one other board member, and readily agrees. Problems? 9 9

161 HYPOTHETICAL #2 The Board is preparing to consider the assumed rate of return at its next meeting. During the comment phase of the current meeting, one member publicly announces her belief it should be dropped to 6%. After the meeting, four other board members get together privately and agree to vote in favor of a 6% assumed rate of return. At the Board meeting, the vote is 5-4 in favor of dropping to 6%. Problems? 10 10

162 HYPOTHETICAL #3 The CIO s an article to all the board members that praises the skills of an investment manager then under consideration for a private equity mandate. He asks, let me know what you think. Six of the board members carefully reply to the CIO alone and say that they agree and intend to vote for the manager at the next meeting. At the meeting, the CIO announces that he has had favorable replies from most of the board and calls for the vote, without further discussion. Problems? 11 11

163 WHO IS THIS MAN? 12 12

164 Ralph Milton Brown ( ) Ralph Milton Brown ( ) was a member of the California State Assembly representing the 30th State Assembly district from 1943 to Born in Kentucky and a resident of Modesto, California, he was Speaker of the Assembly from January 1959 until he resigned in September 1961 to accept appointment to the California Courts of Appeal, Fifth Appellate District Court. He is best known for writing the Brown Act, California's first sunshine law, providing for increased public access to government meetings, which was enacted in

165 FIDUCIARY FRAMEWORK FOR ADOPTING ACTUARIAL ASSUMPTIONS AND METHODOLOGIES Presentation to the Board of Retirement Orange County Employees Retirement System November 18, 2013 Harvey L. Leiderman 1

166 FUNDAMENTAL FIDUCIARY DUTIES Exclusive Benefit Rule to use the assets solely to pay the members promised retirement benefits Primary Loyalty Rule to act in the best interests of all members and beneficiaries both current and future Prudent Expert Rule to assure the competency of the assets and act as would a prudent person familiar with these matters 2

167 WHAT ABOUT MINIMIZING EMPLOYER CONTRIBUTIONS? Constitutional provision added in 1984 when retirement boards were permitted to invest broadly in in equity and debt markets (Prop. 21) Intended to restrain gambling in the market at the expense of employers and taxpayers Does not mean that the board has a duty to keep near-term contribution rates low Longer amortization periods at lower rates end up costing employers more to fund the same benefits, and can limit the assets needed for investment growth 3

168 THE BUCK STARTS AND STOPS HERE The board shall have the sole and exclusive power to provide for actuarial services in order to assure the competency of the assets of the system. Upon the investigation, valuation, and recommendation of the actuary, the board shall [set] the changes in the rates of interest, in the rates of contributions of members, and in county and district appropriations as are necessary. The independent assumptions of the actuary shall not be subject to meet and confer The intent of the Legislature is to assure the solvency and actuarial soundness of the retirement systems by preserving the independent nature of the actuarial evaluation process. 4

169 CONTEXT: ECONOMIC PRESSURES ON SOME PLAN SPONSORS Declines in revenue sources Operational deficits Workforce reductions Strain on making timely contributions Increasing pension contribution obligations Difficult choices in delivering services 5

170 SECONDARY CONSIDERATIONS THAT ARE NOT FIDUCIARY DUTIES Doing what other boards are doing Doing what the private sector is doing Promoting intergenerational equity Reducing county and district rate volatility Protecting taxpayers 6

171 BUT YOU CAN T IGNORE REALITY County and district fiscal distress can adversely affect funding of the benefits (see City of San Bernardino) and could have a waterfall effect Fiscal distress can impact members jobs (what good is a pension if you don t have a job to earn it with?) Fiscal distress can motivate withdrawals from the system Actuarial methodologies (like smoothing) are better designed to deal with these pressures than actuarial assumptions (like capital market projections) 7

172 ASSUMPTIONS AND METHODOLOGIES Assumptions are predictions of future events like investment returns, inflation, life expectancies, hiring levels, salary growth, length of service, etc. Methodologies are procedures for measuring pension obligations and allocating plan costs and contributions and income to meet those obligations, over time like smoothing the value of assets, amortizing liabilities, using level percent of pay or level dollar, etc. 8

173 ASSUMPTIONS ABOUT THE RATE OF RETURN AND DISCOUNT RATE Rate of return projects expected long-term earnings on invested assets of the fund the greater the expected return, the lower the current contributions need to be Discount rate calculates the present value of expected future benefit payments the lower the rate, the higher the current contributions need to be 9

174 THE ASSUMED RATE OF RETURN AND DISCOUNT RATE Are predictions about future market returns and inflation art or science? Is anybody any good at this really? Is the past really no predictor of future performance? Can t we just hide in the crowd? What s a prudent person to do? 10

175 PRUDENT DECISION-MAKING Engage in a public, well-documented process that demonstrates due diligence and independent judgment Obtain expert advice, but maintain a healthy skepticism Model realistic if, then scenarios Consider available options under professional standards (like ASOP, GASB ) Consider a broad range of data, views 11

176 PRUDENT DECISION-MAKING Establish the board s own risk tolerance Avoid negotiating with the County, districts, unions Avoid undue influences Consider impact on the system s cash flow, asset allocations Determine if there will be any material impact on members benefit security Resist reverse engineering the result! 12

177 SOME NEW CONSIDERATIONS PEPRA 50/50 cost-sharing requirement: With members contributing at least 50% of Normal Cost, focus on getting Normal Cost right will be greater Should we build in a downside margin of error? SEC ENFORCEMENT risk in getting it wrong RATING AGENCIES pressure on plan sponsors CAUTION Be careful not to understate unfunded pension liabilities 13

178 14 DISCUSSION

179 OCERS Actuarial Funding Policy Actuarial Funding Policy June 17, 2013 ANDY YEUNG, ASA, MAAA, FCA, EA Vice President and Associate Actuary The Segal Company v1

180 OCERS Actuarial Funding Policy Funding Policy Components Actuarial Cost (Funding) Method allocates costs to time periods, past vs. future Asset Smoothing Method assigns a value to assets for determining contribution requirements UAAL Amortization Policy how, and how long to fund difference between liabilities and assets Interest crediting and excess earnings policy Unique to 1937 Act county systems Generally separate from funding policy Slide 2

181 OCERS Actuarial Funding Policy Funding Policy and Annual Cost Amortization of Unfunded Actuarial Accrued Liability Actuarial Value of Assets Unfunded Actuarial Accrued Liability Present Value of Future Normal Costs Normal Cost Slide 3

182 OCERS Actuarial Funding Policy General Policy Objectives 1. Future contributions plus current assets sufficient to fund all benefits for current members Contributions = Normal Cost + full UAAL payment 2. Reasonable allocation of cost to years of service Both expected costs and variations from expected costs 3. Reasonable management and control of future employer contribution volatility Consistent with other policy objectives Slide 4

183 OCERS Actuarial Funding Policy General Policy Objectives 4. Support public policy goals of accountability and transparency Clear in intent and effect Allow assessment of whether, how and when sponsor will meet funding requirements Enhance credibility and objectivity of cost calculations Slide 5

184 OCERS Actuarial Funding Policy General Policy Objectives Policy objectives 2 and 3 reflect two aspects of the general policy objective of interperiod equity (IPE). Objective 2 promotes demographic matching intergenerational interperiod equity Objective 3 promotes volatility management period-to-period interperiod equity These two aspects of IPE tend to move funding policy in opposite directions. policy objectives 2 and 3 combine to seek to balance intergenerational and period-to-period IPE demographic matching vs. volatility management Slide 6

185 OCERS Actuarial Funding Policy OCERS Current Funding Policy Cost method Entry Age Normal (EAN) Asset smoothing method 5-year smoothing period without a market value corridor Reaffirmed by the Board in 2009 UAAL amortization policy Layered approach for UAAL established after 12/31/ years for gains or losses and plan amendments 30 years for assumption changes UAAL prior to 12/31/2004 combined and amortized over 30 years 22 years left as of 12/31/2012 Level percent of pay amortization Slide 7

186 OCERS Actuarial Funding Policy Funding Policy Recommendations No change to Entry Age Normal cost method Used by other California public retirement systems No change to asset smoothing method Most California public retirement systems use 5 years Sacramento CERS & two City of LA plans use 7 years Use the same period to smooth investment gains and losses Slide 8

187 OCERS Actuarial Funding Policy Funding Policy Recommendations Focus of today s discussion is on amortization policy Separate decisions on future versus current UAAL Emerging model practices for (future) UAAL amort. Shorter than 30 years for assumption changes Plan Amendments Shorter periods than for other sources of UAAL Particularly for Early Retirement Incentive Programs Surplus Longer periods than for UAAL Allows consideration of other Surplus management tools Slide 9

188 OCERS Actuarial Funding Policy Funding Policy Recommendations Amortization periods for current UAAL Equivalent single amortization period: between 19 and 20 years as of 12/31/2012 No compelling actuarial reasons for shortening or lengthening the amortization periods for current UAAL Unless goal is to accelerate or decelerate plan s progression to 100% funding With a corresponding increase or decrease in current employer contributions Slide 10

189 OCERS Actuarial Funding Policy Amortization Policy Component of Annual Contribution Normal cost plus amortization of unfunded liability Sources of Unfunded Liability Plan changes Assumption or method changes Gains / losses Amortization policy includes: Structure: Single UAAL or in layers Also: fixed (closed) or rolling (open) amortization Payment pattern: level dollar or level percent of pay Periods: how long to fund the UAAL Slide 11

190 OCERS Actuarial Funding Policy Amortization Structure OCERS amortizes UAAL in layers Model approach: multiple amortization layers First layer is the combined UAAL as of December 31, 2004 Each year, new layer of UAAL for gain/loss, assumption/method changes, plan amendments Can use different periods for different sources of UAAL OCERS: 15 years for gains or losses and plan amendments 30 years for assumption or method changes Key issue: current UAAL layers as of December 31, 2013 (proposed effective date) Current net amortization equivalent to about years Could simply continue current declining amortization periods Or adopt a shorter/longer period with immediate cost impact Slide 12

191 OCERS Actuarial Funding Policy Illustration of Amortization Methods 7.25% interest 30 years 30 years 25 years 20 years 15 years 3.75% salary incr. Flat dollar % of pay % of pay % of pay % of pay Increase in AAL 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Amortization factor (first year) Amortization amount Year 1 $ 82,620 $ 55,520 $ 62,088 $ 72,167 $ 89,272 Year 15 $ 82,620 $ 92,957 $ 103,954 $ 120,828 $ 149,469 Year 20 $ 82,620 $ 111,743 $ 124,963 $ 145,248 $ 0 Year 30 $ 82,620 $ 161,474 $ 0 $ 0 $ 0 Total amount paid Principal $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 Interest 1,478,589 1,986,918 1,500,357 1,094, ,709 Total $ 2,478,589 $ 2,986,918 $ 2,500,357 $ 2,094,084 $ 1,754,709 Slide 13

192 Annual Payment ($ in 000s) OCERS Actuarial Funding Policy Illustration of Amortization Periods Annual Payment ($ in 000s) $ Years Level Dollar 30 Years Level Percent 25 Years Level Percent 20 Years Level Percent 15 Years Level Percent $150 $100 $50 Annual Payment on $1 Million UAAL $ Beginning of Year Slide 14

193 OCERS Actuarial Funding Policy Negative Amortization $1,000,000 liability, 7.25% interest First year interest only is $72,500 With level dollar payments, payments are always greater than interest With level percentage payments, early payments can be less than interest UAAL increases (but not as a percentage of payroll!) Eventually larger payments cover interest plus increased UAAL With current assumptions, negative amortization if amort. period is longer than about 20 years Slide 15

194 Outstanding Balance ($ in 000s) OCERS Actuarial Funding Policy Illustration of Amortization Periods Outstanding UAAL Balance ($ in 000s) $1, Years Level Dollar 30 Years Level Percent 25 Years Level Percent 20 Years Level Percent 15 Years Level Percent $1 Million Initial UAAL Balance $1,000 $500 Outstanding UAAL Balance $ Beginning of Year Slide 16

195 OCERS Actuarial Funding Policy Model Fixed Layer Periods Tradeoff between demographic matching and volatility management Two aspects of interperiod equity Constraint: consideration of negative amortization Exception: volatility generally N/A for plan changes Under 15 years: too volatile Over 20 (25?) years: too much neg. amortization 25 is the new 30: out of bounds marker 30 years reserved for surplus Normal Cost requires UAAL/surplus asymmetry Slide 17

196 OCERS Actuarial Funding Policy Model Amortization Periods Gains and losses: 15 to 20 years Volatility management, but avoid too long a period Assumption and method changes: 20 to 25 years Long term remeasurements, so could justify longer amortization than for gains and losses To illustrate impact, what if assumption changes approved in the last 6 years were amortized over 25 year instead of 30 years? (see Segal s April 4, 2013 letter) 0.3% to 0.9% of payroll, depending on Rate Group Slide 18

197 OCERS Actuarial Funding Policy Model Amortization Periods Plan amendments: demographic (15 yrs. or less) Avoid any negative amortization since changes are within control of plan sponsor Demographic matching for actives or inactives Much shorter for Early Retirement Incentives (< 5 yrs) Slide 19

198 OCERS Actuarial Funding Policy Contributions when Plan has surplus Usual contribution is NC plus UAAL amortization Surplus: contribute NC minus Surplus amortization Short surplus amortization periods means contribution holidays, even with modest surplus See late 1990s for real life examples Recommended approach: minimum contribution 30 year amortization of surplus CalPEPRA further limits amortization of surplus Funded ratio has to be > 120% Slide 20

199 OCERS Actuarial Funding Policy Alternative Periods for Future UAALs Applies only to future changes in UAAL No immediate impact to contribution rates Any changes would be implemented in 12/31/2013 valuation and would apply to any new changes in UAAL on or after 1/1/2013 Source Current Alt #1 Alt #2 Alt #3 Actuarial Gains or Losses Assumptions or Method Changes Plan Amendments or less 15 or less 15 or less ERIPs 15 Up to 5 Up to 5 Up to 5 Actuarial Surplus Slide 21

200 OCERS Actuarial Funding Policy Alternative Periods for Future UAALs Option discussed at February 19 meeting Source Current Option Actuarial Gains or Losses Assumptions or Method Changes Plan Amendments or less ERIPs 15 Up to 5 Actuarial Surplus Balance policy objective 2 (demographic matching) vs objective 3 (volatility management) Need to consider balance between intergenerational and period-to-period IPE Slide 22

201 OCERS Actuarial Funding Policy Q U E S T I O N S Slide 23

202 OCERS Actuarial Funding Policy Alternative Periods for Current UAAL Board may consider shorter (or longer) amortization period for current UAAL Most clear and direct actuarial policy action to accelerate plan s progression to 100% funding Impact of shorter amortization for current UAAL Any change would not be implemented until 12/31/13 valuation Re-amortize UAAL from 12/31/12 Re-amortize change in investment return assumption Would already have been included in UAAL as of 12/31/12, with 30 year amortization Slide 24

203 OCERS Actuarial Funding Policy Alternative Periods for Current UAAL Impact of shorter amortization for current UAAL on employer rate: 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes UAAL Dollar Amount Change in ER Rate (% of Pay)* 10 Yrs 15 Yrs 20 Yrs $4,741.1 M +13.5% +3.6% -1.3% $934.6 M +3.9% +1.9% +0.9% Total $5,675.7 M +17.4% +5.5% -0.4% * Does not include adjustment for 18-month delay in contribution rate implementation. Slide 25

204 OCERS Actuarial Funding Policy Alternative Periods for Current UAAL Other amortization periods for current UAAL discussed at February 19 meeting shorter than current: 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes UAAL Dollar Amount Change in ER Rate (% of Pay)* 16 Yrs 17 Yrs 18 Yrs 19 Yrs $4,741.1 M +2.4% +1.3% +0.3% -0.5% $934.6 M +1.7% +1.4% +1.3% +1.1% Total $5,675.7 M +4.1% +2.7% +1.6% +0.6% * Does not include adjust. for 18-month delay in contribution rate implementation. Slide 26

205 OCERS Actuarial Funding Policy Alternative Periods for Current UAAL Other amortization periods for current UAAL discussed at February 19 meeting longer than current: 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes UAAL Dollar Amount Change in ER Rate (% of Pay)* 25 Yrs 30 Yrs $4,741.1 M -4.2% -6.0% $934.6 M +0.4% +0.0% Total $5,675.7 M -3.8% -6.0% * Does not include adjust. for 18-month delay in contribution rate implementation. Slide 27

206 OCERS Actuarial Funding Policy Alternative Periods for Current UAAL Other amortization period for current UAAL discussed at February 19 meeting future working lifetime: Funding the UAAL over the years the current active employees are expected to work before receiving benefit Referred to as average future working lifetime, average future service years, average remaining service lifetime, etc. No universal agreement on terminology or method of calculation Under one definition used for corporate pension plan: About 11 years for OCERS Balance policy objective 2 (demographic matching) vs objective 3 (volatility management) Need to consider balance between intergenerational and period-to-period IPE Slide 28

207 OCERS Actuarial Funding Policy Alternative Periods for Current UAAL Reverse pickups by certain employees Agreement between employer and employee to pay for the past and/or future cost of benefit enhancements Use at Orange County and some other California public retirement systems Terms of agreement not under purview of the board of retirement Slide 29

208 OCERS Actuarial Funding Policy Funding Policy Recommendations EAN Cost method No changes recommended Asset smoothing method No changes recommended UAAL amortization policy For (current) UAALs established prior to 12/31/2012 No changes recommended unless the Board wishes to accelerate or decelerate progress to 100% funding For (future) UAALs established after 12/31/2012 Consider one of the alternative sets of amortization period (Alt #1, #2 or #3) Slide 30

209 OCERS Actuarial Funding Policy Future Discussion Topics Aggregation of Tier 1 and Tier 2 normal cost Employer/member sharing of the cost of annual payoffs Anticipated COLA as an assumption in determining optional forms of retirement benefit GASB 67/68 Slide 31

210 OCERS Actuarial Funding Policy Q U E S T I O N S Slide 32

211 OCERS Board of Retirement November 18, 2013 Review of Actuarial Funding Policy and Follow-up Discussions Paul Angelo The Segal Company San Francisco Copyright 2013 by The Segal Group, Inc., parent of The Segal Company. All rights reserved v4

212 Agenda Review of actuarial funding policy Presentation from June 17, 2013 Board meeting Funding policy elements approved by the Board Follow-up discussions Revisiting UAAL amortization policy Additional information requested by the Board Appendix Detailed schedules of results 2

213 Review of Actuarial Funding Policy Review presentation from June 17, 2013 Board meeting Included as part of November 18, 2013 meeting materials 3

214 4 Review of Actuarial Funding Policy Funding policy elements approved on 6/17/2013 Continuation of Entry Age actuarial cost method Continuation of 5-year asset smoothing method UAAL Amortization policy Continuation of level percent of payroll amortization Amortization policy for changes after 12/31/2012 Source Before After Actuarial gains or losses Assumption or method changes Plan amendments ERIPs 15 Up to 5 Actuarial surplus Changes in amortization policy applied prospectively only» No impact on UAAL layers established on/before 12/31/2012

215 5 Follow-up Discussions Reaffirming funding policy elements approved 6/17/2013 Entry Age actuarial cost method Used by other California public retirement systems 5-year asset smoothing method, no MVA corridor Most California public retirement systems use 5 years Sacramento CERS and 2 LA City plans use 7 years Sacramento CERS uses 130% MVA corridor 2 LA City plans use 140% MVA corridor Use the same period to smooth investment gains and losses Amortization policy Level percent of payroll amortization

216 Level Percent of Payroll Amortization Illustration of amortization methods 7.25% interest 30 years 30 years 25 years 20 years 15 years 3.75% salary incr. Flat dollar % of pay % of pay % of pay % of pay Increase in AAL 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Amortization factor (first year) Amortization amount Year 1 $ 82,620 $ 55,520 $ 62,088 $ 72,167 $ 89,272 Year 15 $ 82,620 $ 92,957 $ 103,954 $ 120,828 $ 149,469 Year 20 $ 82,620 $ 111,743 $ 124,963 $ 145,248 $ 0 Year 30 $ 82,620 $ 161,474 $ 0 $ 0 $ 0 Total amount paid Principal $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 Interest 1,478,589 1,986,918 1,500,357 1,094, ,709 Total $ 2,478,589 $ 2,986,918 $ 2,500,357 $ 2,094,084 $ 1,754,709 6

217 Annual Payment ($ in 000s) Level Percent of Payroll Amortization Illustration of amortization methods annual payments $ Years Level Dollar 30 Years Level Percent 25 Years Level Percent 20 Years Level Percent 15 Years Level Percent Annual payment on $1 million UAAL $150 $100 $50 $ Beginning of Year 7

218 Level Percent of Payroll Amortization $1,000,000 liability, 7.25% interest First year interest only is $72,500 With level dollar payments, payments are always greater than interest With level percentage payments, early payments can be less than interest UAAL increases (but not as a percentage of payroll!) Eventually larger payments cover interest plus increased UAAL With current assumptions, negative amortization if amort. period is longer than about 20 years 8

219 Outstanding Balance ($ in 000s) Level Percent of Payroll Amortization Illustration of amortization methods outstanding UAAL balance $1, Years Level Dollar 30 Years Level Percent 25 Years Level Percent 20 Years Level Percent 15 Years Level Percent $1 million initial UAAL balance $1,000 $500 $ Beginning of Year 9

220 Level Percent of Payroll Amortization Amortization payment expressed as percent of payroll assuming future payroll increases at 3.75% per year Actual growth in payroll from 2003 to 2012 Year Ended Active Year-to-Year Payroll Year-to-Year Dec 31 Members (Incr)/Decr ($000) (Incr)/Decr ,672 1,243, , % 1,257, % , % 1,276, % , % 1,322, % , % 1,457, % , % 1,569, % , % 1,618, % , % 1,579, % , % 1,619, % , % 1,609, % 10 Average Change -0.7% 3.0%

221 Level Percent of Payroll Amortization Possible concern: Shortfall in UAAL contributions when payroll increases less than assumed (currently 3.75%) Policy could require full UAAL payment for fiscal year starting 18 months after valuation date Charge the employer the greater of: UAAL contribution rate on actual payroll for the fiscal year» Current method UAAL payment dollar amount as determined in valuation Method used by City of San Jose and Mendocino CERA Possible administrative issues for OCERS Determining the above payment amounts for Rate Groups with multiple employers Coordinate with employer pre-payments and true-ups 11

222 Follow-up Discussions Reaffirming funding policy elements approved on 6/17/2013 Level percent of payroll amortization Revisiting UAAL Amortization periods 3 decisions to make 1. Amortization of future UAAL changes (after 12/31/2012) 2. Amortization of current UAAL (established on or before 12/31/2012) 3. Amortization of UAAL ($934.6 million) from economic assumption changes established on 12/31/

223 UAAL Amortization Periods General Policy Objectives 1. Future contributions plus current assets sufficient to fund all benefits for current members Contributions = Normal Cost + full UAAL payment 2. Reasonable allocation of cost to years of service Both expected costs and variations from expected costs 3. Reasonable management and control of future employer contribution volatility Consistent with other policy objectives 13

224 UAAL Amortization Periods General Policy Objectives 4. Support public policy goals of accountability and transparency Clear in intent and effect Allow assessment of whether, how and when sponsor will meet funding requirements Enhance credibility and objectivity of cost calculations 14

225 UAAL Amortization Periods Policy objectives 2 and 3 reflect two aspects of the general policy objective of interperiod equity (IPE). Objective 2 promotes demographic matching intergenerational interperiod equity Objective 3 promotes volatility management period-to-period interperiod equity These two aspects of IPE tend to move funding policy in opposite directions. policy objectives 2 and 3 combine to seek to balance intergenerational and period-to-period IPE demographic matching vs. volatility management 15

226 UAAL Amortization Periods Tradeoff between demographic matching and volatility management Two aspects of interperiod equity Constraint: consideration of negative amortization Exception: volatility generally N/A for plan changes Under 15 years: too volatile Over 20 (25?) years: too much neg. amortization 25 is the new 30: out of bounds marker 30 years reserved for surplus Normal Cost requires UAAL/surplus asymmetry 16

227 UAAL Amortization Periods Gains and losses: 15 to 20 years Volatility management, but avoid too long a period Assumption and method changes: 20 to 25 years Long term remeasurements, so could justify longer amortization than for gains and losses 17

228 Amortization Policy for Future UAAL changes Amortization periods for other California public systems Effective with Valuation on Past UAAL System #1 System #13 12/31/12 6/30/13 No Change Future Change in UAAL Actuarial Gains/Losses Assumptions or Methods Plan Amendments System #3 System #4 6/30/13 6/30/12 No Change System #4 6/30/10 No Change 1 System #5 System #6 6/30/12 6/30/12 No Change System #7 System #8 System #9 System #10 Pending 3 6/30/12 6/30/11 6/30/13 No Change No Change No Change No Change System #11 System #12 6/30/12 6/30/13 No Change ERIPs Surplus Originally, there was no change in the amortization period for the past UAAL when the System conducted its initial review of the amortization period as part of reaffirming its actuarial funding policy for the June 30, 2010 valuation. However, as part of the June 30, 2012 valuation, the System decided to switch from the Projected Unit Credit Funding Method to the Entry Age Normal Funding Method and that increased the liability for the System. As a result of that increase in liability, the System decided to reamortize all the past UAAL over a 30-year period. 2 The System chose a 30-year period before the California Actuarial Advisory Panel issued its model practice guideline in February 2013 recommending a year period for amortizing UAAL from assumptions or methods. 3 A discussion is pending to change the amortization periods for plan amendments to 15 years, ERIP to 5 years and actuarial surplus to 30 years. 4 Prior to the investment losses in 2008 (that effectively wiped out most of the surplus), the System had a surplus for over a decade and the System was required by its governing statue to distribute its surplus to provide contribution rate relief and additional benefit. The System had used 15 years to amortize surplus during that time.

229 Amortization Policy for Future UAAL changes Decision #1: Amortization policy for future UAAL changes UAAL changes after 12/31/2012 Source Prior Adopted Other Alternatives from prior discussion Actuarial gains or losses Assumption or method changes Plan amendments ERIPs 15 Up to 5 Up to 5 Up to 5 Actuarial surplus

230 Amortization Policy for Future UAAL changes Discussion 20

231 Amortization Policy for Current UAAL Revisiting amortization periods for UAAL as of 12/31/2012 $5,675.7 million in total UAAL as of 12/31/2012 valuation (Decision #2) Equivalent single amortization period for total UAAL: between 19 and 20 years However, layered payment pattern not the same as payment over single equivalent period 21

232 Amortization Policy for Current UAAL Comparison of current layered UAAL amortization with 20 year single layer amortization: UAAL Dollar Amount Current Year UAAL Amortization Payment* Current Policy 20 Year Reamortization 12/31/12 UAAL Total $5,675.7 M 24.98% 24.64% * Does not include adjustment for 18-month delay in contribution rate implementation. 22

233 Annual Payment ('000) Amortization Policy for Current UAAL Annual UAAL payments under current amortization schedule Comparison of Annual UAAL Payments for OCERS Under Current Amortization Schedule (Payments Starting with Year Following the December 31, 2012 Valuation) $600,000 $500,000 Current Amortization Schedule $400,000 $300,000 $200,000 $100,000 $ Time 23

234 Percent of Payroll Amortization Policy for Current UAAL Annual UAAL payments under current amortization schedule Annual UAAL Payments as a Percent of Payroll for OCERS Under Current Amortization Schedule (Payments Starting with Year Following the December 31, 2012 Valuation) 30% 25% 20% 15% 10% 5% 0% Time 24

235 Annual Payment ('000) Amortization Policy for Current UAAL Annual UAAL payments under current and alternative amortization schedules $100,000 Comparison of Annual UAAL Payments for OCERS Under Current Amortization Schedule and Alternative Single Amortization Periods (Payments Starting with Year Following the December 31, 2012 Valuation) $90,000 $80,000 $70, Years 15 Years 20 Years Current Amortization Schedule $60,000 $50,000 $40,000 $30,000 $20,000 $10, $ Time

236 Percent of Payroll Amortization Policy for Current UAAL Annual UAAL payments under current and alternative amortization schedules 50% Comparison of Annual UAAL Payments as a Percent of Payroll for OCERS Under Current Amortization Schedule and Alternative Single Amortization Periods (Payments Starting with Year Following the December 31, 2012 Valuation) 40% 10 Years 15 Years 20 Years Current Amortization Schedule 30% 20% 10% 26 0% Time

237 Amortization Policy for Current UAAL Projected total (normal cost and UAAL) contribution rates under current and 20 year amortization schedules 27

238 28 Amortization Policy for Current UAAL Decision #2: Reamortize entire current UAAL Including UAAL from recent assumption changes Substantial change in employers cost expectations Decision #3: Reamortize only UAAL from recent assumption changes Relationship to Decision #1 future UAAL changes Suppose Decision #1 is to change amortization policy for future assumption changes Decision #3: should recent assumption changes be the last under the old policy or the first under the new policy?» Or should some other period be applied, not based on old or new ongoing policy Next slides show immediate impact of Decisions 2 & 3

239 Amortization Policy for Current UAAL Impact of shorter amortization for current UAAL on employer rate: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes (Decision #3) Dollar Amount 10 Yrs 15 Yrs 20 Yrs $4,741.1 M +13.5% +3.6% -1.3% $934.6 M +3.9% +1.9% +0.9% Total (Decision #2) $5,675.7 M +17.4% +5.5% -0.4% * Does not include adjustment for 18-month delay in contribution rate implementation. Note: Contribution rate impact for each Rate Group can be found in Appendix A 29

240 Amortization Policy for Current UAAL Other shorter amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes (Decision #3) Dollar Amount 16 Yrs 17 Yrs 18 Yrs 19 Yrs $4,741.1 M +2.4% +1.3% +0.3% -0.5% $934.6 M +1.7% +1.4% +1.3% +1.1% Total (Decision #2) $5,675.7 M +4.1% +2.7% +1.6% +0.6% * Does not include adjustment for 18-month delay in contribution rate implementation. Note: Contribution rate impact for each Rate Group can be found in Appendix A 30

241 Amortization Policy for Current UAAL Impact of longer amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes (Decision #3) Dollar Amount 25 Yrs 30 Yrs $4,741.1 M -4.2% -6.0% $934.6 M +0.4% +0.0% Total (Decision #2) $5,675.7 M -3.8% -6.0% * Does not include adjust. for 18-month delay in contribution rate implementation. Note: Contribution rate impact for each Rate Group can be found in Appendix A 31

242 Amortization of UAAL from Recent Assumption Changes Additional detail requested for amortization costs for $934.6 million from recent changes in economic assumption (Decision #3) Amortization periods: 15, 18, 20, 25, 30 Level percentage of pay and level dollar amortization Sample years and full amortization schedules Format similar to amortization illustrations using $1 million UAAL layer 32

243 Amortization of UAAL from Recent Assumption Changes Different amortization periods for $934.6 million from 12/31/12 assumption changes level percent of pay 7.25% interest 30 years 25 years 20 years 18 years 15 years 3.75% salary incr. % of pay % of pay % of pay % of pay % of pay ($000) Increase in AAL $ 934,619 $ 934,619 $ 934,619 $ 934,619 $ 934,619 Amortization factor (first year) Amortization amount Year 1 $ 50,252 $ 56,197 $ 65,319 $ 70,452 $ 80,802 Year 15 $ 84,137 $ 94,091 $ 109,364 $ 117,958 $ 135,288 Year 20 $ 101,141 $ 113,107 $ 131,467 $ 0 $ 0 Year 30 $ 146,154 $ 0 $ 0 $ 0 $ 0 Total amount paid Principal $ 934,619 $ 934,619 $ 934,619 $ 934,619 $ 934,619 Interest 1,768,906 1,328, , , , Total $ 2,703,525 $ 2,263,128 $ 1,895,401 $ 1,765,871 $ 1,588,226

244 Annual Payment ($ in millions) Level Percent of Payroll Amortization Amortization illustrations annual payments $ Years Level Percent 25 Years Level Percent 20 Years Level Percent 18 Years Level Percent 15 Years Level Percent Annual payment on $934.6 million UAAL $150 $100 $50 34 $ Beginning of Year Note: Detailed amortization schedules under different level percent of payroll amortization periods can be found in Appendix B.

245 Outstanding Balance ($ in millions) Level Percent of Payroll Amortization Amortization illustrations outstanding UAAL balance $1, Years Level Percent 25 Years Level Percent 20 Years Level Percent 18 Years Level Percent 15 Years Level Percent $934.6 million initial UAAL balance $1,000 $ $ Beginning of Year Note: Detailed amortization schedules under different level percent of payroll amortization periods can be found in Appendix B.

246 Amortization of UAAL from Recent Assumption Changes Different amortization periods for $934.6 million from 12/31/12 assumption changes level dollar amortization 7.25% interest 30 years 25 years 20 years 18 years 15 years 0.00% salary incr. Flat dollar Flat dollar Flat dollar Flat dollar Flat dollar ($000) Increase in AAL $ 934,619 $ 934,619 $ 934,619 $ 934,619 $ 934,619 Amortization factor (first year) Amortization amount Year 1 $ 74,765 $ 79,409 $ 87,086 $ 91,591 $ 100,931 Year 15 $ 74,765 $ 79,409 $ 87,086 $ 91,591 $ 100,931 Year 20 $ 74,765 $ 79,409 $ 87,086 $ 0 $ 0 Year 30 $ 74,765 $ 0 $ 0 $ 0 $ 0 Total amount paid Principal $ 934,619 $ 934,619 $ 934,619 $ 934,619 $ 934,619 Interest 1,308,328 1,050, , , , Total $ 2,242,947 $ 1,985,231 $ 1,741,714 $ 1,648,640 $ 1,513,964

247 Annual Payment ($ in millions) Level Dollar Amortization Amortization illustrations annual payments $ Years Level Dollar 25 Years Level Dollar 20 Years Level Dollar 18 Years Level Dollar 15 Years Level Dollar Annual payment on $934.6 million UAAL $150 $100 $50 37 $ Beginning of Year Note: Detailed amortization schedule under different level dollar amortization periods can be found in Appendix C.

248 Outstanding Balance ($ in millions) Level Dollar Amortization Amortization illustrations outstanding UAAL balance $1, Years Level Dollar 25 Years Level Dollar 20 Years Level Dollar 18 Years Level Dollar 15 Years Level Dollar $934.6 million initial UAAL balance $1,000 $ $ Beginning of Year Note: Detailed amortization schedule under different level dollar amortization periods can be found in Appendix C.

249 39 Discussion

250 Appendix A. Impact of shorter/longer amortization for current UAAL by Rate Group B. Amortization schedules for $934.6 million under different level percent of payroll amortization methods C. Amortization schedules for $934.6 million under different level dollar amortization methods 40

251 Appendix A Rate Group #1 Impact of shorter amortization for current UAAL on employer rate: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 10 Yrs 15 Yrs 20 Yrs $93.0 M +7.2% +2.3% -0.2% $23.7 M +2.5% +1.2% +0.6% Total $116.7 M +9.7% +3.5% +0.4% * Does not include adjustment for 18-month delay in contribution rate implementation. 41

252 Appendix A Rate Group #1 (continued) Other shorter amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 16 Yrs 17 Yrs 18 Yrs 19 Yrs $93.0 M +1.7% +1.1% +0.6% +0.2% $23.7 M +1.0% +0.9% +0.8% +0.7% Total $116.7 M +2.7% +2.0% +1.4% +0.9% * Does not include adjustment for 18-month delay in contribution rate implementation. 42

253 Appendix A Rate Group #1 (continued) Impact of longer amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 25 Yrs 30 Yrs $93.0 M -1.6% -2.5% $23.7 M +0.2% +0.0% Total $116.7 M -1.4% -2.5% * Does not include adjustment for 18-month delay in contribution rate implementation. 43

254 Appendix A Rate Group #2 Impact of shorter amortization for current UAAL on employer rate: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 10 Yrs 15 Yrs 20 Yrs $2,911.6 M +13.6% +3.6% -1.3% $531.4 M +3.6% +1.8% +0.9% Total $3,443.0 M +17.2% +5.4% -0.4% * Does not include adjustment for 18-month delay in contribution rate implementation. 44

255 Appendix A Rate Group #2 (continued) Other shorter amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 16 Yrs 17 Yrs 18 Yrs 19 Yrs $2,911.6 M +2.4% +1.3% +0.3% -0.5% $531.4 M +1.5% +1.4% +1.2% +1.0% Total $3,443.0 M +3.9% +2.7% +1.5% +0.5% * Does not include adjustment for 18-month delay in contribution rate implementation. 45

256 Appendix A Rate Group #2 (continued) Impact of longer amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 25 Yrs 30 Yrs $2,911.6 M -4.2% -6.1% $531.4 M +0.3% +0.0% Total $3,443.0 M -3.9% -6.1% * Does not include adjustment for 18-month delay in contribution rate implementation. 46

257 Appendix A Rate Group #3 (Law Library, OCSD) Impact of shorter amortization for current UAAL on employer rate: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 10 Yrs 15 Yrs 20 Yrs $182.3 M +11.8% +2.3% -2.4% $32.2 M +3.3% +1.6% +0.8% Total $214.5 M +15.1% +3.9% -1.6% * Does not include adjustment for 18-month delay in contribution rate implementation. 47

258 Appendix A Rate Group #3 (continued) Other shorter amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 16 Yrs 17 Yrs 18 Yrs 19 Yrs $182.3 M +1.1% +0.1% -0.8% -1.6% $32.2 M +1.4% +1.2% +1.1% +0.9% Total $214.5 M +2.5% +1.3% +0.3% -0.7% * Does not include adjustment for 18-month delay in contribution rate implementation. 48

259 Appendix A Rate Group #3 (continued) Impact of longer amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 25 Yrs 30 Yrs $182.3 M -5.1% -6.9% $32.2 M +0.3% +0.0% Total $214.5 M -4.8% -6.9% * Does not include adjustment for 18-month delay in contribution rate implementation. 49

260 Appendix A Rate Group #5 (OCTA) Impact of shorter amortization for current UAAL on employer rate: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 10 Yrs 15 Yrs 20 Yrs $189.3 M +9.0% +2.7% -0.4% $43.0 M +2.8% +1.4% +0.7% Total $232.2 M +11.8% +4.1% +0.3% * Does not include adjustment for 18-month delay in contribution rate implementation. 50

261 Appendix A Rate Group #5 (continued) Other shorter amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 16 Yrs 17 Yrs 18 Yrs 19 Yrs $189.3 M +1.9% +1.2% +0.6% +0.1% $43.0 M +1.2% +1.1% +0.9% +0.8% Total $232.2 M +3.1% +2.3% +1.5% +0.9% * Does not include adjustment for 18-month delay in contribution rate implementation. 51

262 Appendix A Rate Group #5 (continued) Impact of longer amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 25 Yrs 30 Yrs $189.3 M -2.3% -3.5% $43.0 M +0.3% +0.0% Total $232.2 M -2.0% -3.5% * Does not include adjustment for 18-month delay in contribution rate implementation. 52

263 Appendix A Rate Group #9 (TCA) Impact of shorter amortization for current UAAL on employer rate: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 10 Yrs 15 Yrs 20 Yrs $9.9 M +9.0% +3.5% +0.8% $1.9 M +2.1% +1.0% +0.5% Total $11.8 M +11.1% +4.5% +1.3% * Does not include adjustment for 18-month delay in contribution rate implementation. 53

264 Appendix A Rate Group #9 (continued) Other shorter amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 16 Yrs 17 Yrs 18 Yrs 19 Yrs $9.9 M +2.8% +2.2% +1.7% +1.2% $1.9 M +0.9% +0.8% +0.7% +0.6% Total $11.8 M +3.7% +3.0% +2.4% +1.8% * Does not include adjustment for 18-month delay in contribution rate implementation. 54

265 Appendix A Rate Group #9 (continued) Impact of longer amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 25 Yrs 30 Yrs $9.9 M -0.8% -1.9% $1.9 M +0.2% +0.0% Total $11.8 M -0.6% -1.9% * Does not include adjustment for 18-month delay in contribution rate implementation. 55

266 Appendix A Rate Group #10 (OCFA) Impact of shorter amortization for current UAAL on employer rate: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 10 Yrs 15 Yrs 20 Yrs $62.1 M +12.9% +3.3% -1.4% $10.8 M +3.3% +1.6% +0.8% Total $72.9 M +16.2% +4.9% -0.6% * Does not include adjustment for 18-month delay in contribution rate implementation. 56

267 Appendix A Rate Group #10 (continued) Other shorter amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 16 Yrs 17 Yrs 18 Yrs 19 Yrs $62.1 M +2.1% +1.1% +0.2% -0.7% $10.8 M +1.4% +1.2% +1.1% +0.9% Total $72.9 M +3.5% +2.3% +1.3% +0.2% * Does not include adjustment for 18-month delay in contribution rate implementation. 57

268 Appendix A Rate Group #10 (continued) Impact of longer amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 25 Yrs 30 Yrs $62.1 M -4.2% -6.0% $10.8 M +0.3% +0.0% Total $72.9 M -3.9% -6.0% * Does not include adjustment for 18-month delay in contribution rate implementation. 58

269 Appendix A Rate Group #11 (Cemetery) Impact of shorter amortization for current UAAL on employer rate: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 10 Yrs 15 Yrs 20 Yrs $1.5 M +5.4% +1.1% -1.0% $0.4 M +2.4% +1.1% +0.6% Total $2.0 M +7.8% +2.2% -0.4% * Does not include adjustment for 18-month delay in contribution rate implementation. 59

270 Appendix A Rate Group #11 (continued) Other shorter amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 16 Yrs 17 Yrs 18 Yrs 19 Yrs $1.5 M +0.7% +0.2% -0.2% -0.7% $0.4 M +1.0% +0.9% +0.7% +0.7% Total $2.0 M +1.7% +1.1% +0.5% +0.0% * Does not include adjustment for 18-month delay in contribution rate implementation. 60

271 Appendix A Rate Group #11 (continued) Impact of longer amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 25 Yrs 30 Yrs $1.5 M -2.2% -2.9% $0.4 M +0.2% +0.0% Total $2.0 M -2.0% -2.9% * Does not include adjustment for 18-month delay in contribution rate implementation. 61

272 Appendix A Rate Group #6 (Probation) Impact of shorter amortization for current UAAL on employer rate: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 10 Yrs 15 Yrs 20 Yrs $153.6 M +10.4% +2.5% -1.4% $39.7 M +4.0% +2.0% +1.0% Total $193.2 M +14.4% +4.5% -0.4% * Does not include adjustment for 18-month delay in contribution rate implementation. 62

273 Appendix A Rate Group #6 (continued) Other shorter amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 16 Yrs 17 Yrs 18 Yrs 19 Yrs $153.6 M +1.5% +0.6% -0.1% -0.8% $39.7 M +1.7% +1.5% +1.3% +1.1% Total $193.2 M +3.2% +2.1% +1.2% +0.3% * Does not include adjustment for 18-month delay in contribution rate implementation. 63

274 Appendix A Rate Group #6 (continued) Impact of longer amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 25 Yrs 30 Yrs $153.6 M -3.7% -5.2% $39.7 M +0.4% +0.0% Total $193.2 M -3.3% -5.2% * Does not include adjustment for 18-month delay in contribution rate implementation. 64

275 Appendix A Rate Group #7 (Law Enf.) Impact of shorter amortization for current UAAL on employer rate: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 10 Yrs 15 Yrs 20 Yrs $811.2 M +19.7% +5.7% -1.3% $177.2 M +6.1% +3.0% +1.5% Total $988.4 M +25.8% +8.7% +0.2% * Does not include adjustment for 18-month delay in contribution rate implementation. 65

276 Appendix A Rate Group #7 (continued) Other shorter amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 16 Yrs 17 Yrs 18 Yrs 19 Yrs $811.2 M +3.9% +2.4% +1.0% -0.2% $177.2 M +2.6% +2.3% +2.0% +1.7% Total $988.4 M +6.5% +4.7% +3.0% +1.5% * Does not include adjustment for 18-month delay in contribution rate implementation. 66

277 Appendix A Rate Group #7 (continued) Impact of longer amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 25 Yrs 30 Yrs $811.2 M -5.4% -8.0% $177.2 M +0.6% +0.0% Total $988.4 M -4.8% -8.0% * Does not include adjustment for 18-month delay in contribution rate implementation. 67

278 Appendix A Rate Group #8 (OCFA) Impact of shorter amortization for current UAAL on employer rate: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 10 Yrs 15 Yrs 20 Yrs $326.5 M +12.8% +3.0% -1.9% $74.4 M +4.4% +2.2% +1.1% Total $400.9 M +17.2% +5.2% -0.8% * Does not include adjustment for 18-month delay in contribution rate implementation. 68

279 Appendix A Rate Group #8 (continued) Other shorter amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 16 Yrs 17 Yrs 18 Yrs 19 Yrs $326.5 M +1.8% +0.7% -0.3% -1.1% $74.4 M +1.9% +1.7% +1.4% +1.2% Total $400.9 M +3.7% +2.4% +1.1% +0.1% * Does not include adjustment for 18-month delay in contribution rate implementation. 69

280 Appendix A Rate Group #8 (continued) Impact of longer amortization periods for current UAAL: UAAL Change in ER Rate (% of Pay)* 12/31/12 UAAL excl. Assumption Changes 12/31/12 Assumption Changes Dollar Amount 25 Yrs 30 Yrs $326.5 M -4.7% -6.6% $74.4 M +0.4% +0.0% Total $400.9 M -4.3% -6.6% * Does not include adjustment for 18-month delay in contribution rate implementation. 70

281 Appendix B Orange County Employees Retirement System Unfunded Actuarial Accrued Liability Amortization Schedule under 30 Year Level Percent of Payroll (Based on December 31, 2012 Valuation) Annual Interest Rate: 7.25% Annual Payroll Inflation: 3.75% Beginning End of Year Annual Interest Principal of Year Year Balance Payment Paid Paid Balance 1 $ 934,619,000 $ 50,252,114 $ 66,122,208 $ (15,870,094) $ 950,489, ,489,094 52,136,568 67,211,377 (15,074,809) 965,563, ,563,903 54,091,689 68,240,585 (14,148,896) 979,712, ,712,799 56,120,128 69,200,275 (13,080,148) 992,792, ,792,947 58,224,632 70,080,002 (11,855,370) 1,004,648, ,004,648,317 60,408,056 70,868,361 (10,460,305) 1,015,108, ,015,108,621 62,673,358 71,552,909 (8,879,550) 1,023,988, ,023,988,172 65,023,609 72,120,084 (7,096,474) 1,031,084, ,031,084,646 67,461,994 72,555,113 (5,093,119) 1,036,177, ,036,177,765 69,991,819 72,841,920 (2,850,101) 1,039,027, ,039,027,866 72,616,512 72,963,016 (346,503) 1,039,374, ,039,374,369 75,339,632 72,899,393 2,440,238 1,036,934, ,036,934,130 78,164,868 72,630,404 5,534,464 1,031,399, ,031,399,667 81,096,050 72,133,631 8,962,419 1,022,437, ,022,437,247 84,137,152 71,384,749 12,752,403 1,009,684, ,009,684,844 87,292,295 70,357,376 16,934, ,749, ,749,925 90,565,757 69,022,916 21,542, ,207, ,207,084 93,961,972 67,350,380 26,611, ,595, ,595,492 97,485,546 65,306,210 32,179, ,416, ,416, ,141,254 62,854,072 38,287, ,128, ,128, ,934,051 59,954,647 44,979, ,149, ,149, ,869,078 56,565,402 52,303, ,845, ,845, ,951,669 52,640,337 60,311, ,534, ,534, ,187,356 48,129,729 69,057, ,476, ,476, ,581,882 42,979,837 78,602, ,874, ,874, ,141,203 37,132,605 89,008, ,866, ,866, ,871,498 30,525, ,346, ,520, ,520, ,779,179 23,090, ,688, ,831, ,831, ,870,898 14,754, ,116, ,714, ,714, ,153,557 5,438, ,714,746 - Total $ 2,703,525,379 $ 1,768,906,379 $ 934,619,000 Note: Totals may be slightly off due to rounding

282 Appendix B Orange County Employees Retirement System Unfunded Actuarial Accrued Liability Amortization Schedule under 25 Year Level Percent of Payroll (Based on December 31, 2012 Valuation) Annual Interest Rate: 7.25% Annual Payroll Inflation: 3.75% Beginning End of Year Annual Interest Principal of Year Year Balance Payment Paid Paid Balance 1 $ 934,619,000 $ 56,197,294 $ 65,928,460 $ (9,731,166) $ 944,350, ,350,166 58,304,693 66,565,291 (8,260,599) 952,610, ,610,765 60,491,119 67,092,931 (6,601,813) 959,212, ,212,577 62,759,536 67,497,637 (4,738,101) 963,950, ,950,679 65,113,018 67,764,451 (2,651,433) 966,602, ,602,112 67,554,756 67,877,106 (322,350) 966,924, ,924,462 70,088,060 67,817,919 2,270, ,654, ,654,321 72,716,362 67,567,680 5,148, ,505, ,505,639 75,443,225 67,105,534 8,337, ,167, ,167,948 78,272,346 66,408,853 11,863, ,304, ,304,455 81,207,559 65,453,094 15,754, ,549, ,549,989 84,252,843 64,211,652 20,041, ,508, ,508,799 87,412,325 62,655,702 24,756, ,752, ,752,176 90,690,287 60,754,021 29,936, ,815, ,815,910 94,091,172 58,472,810 35,618, ,197, ,197,547 97,619,591 55,775,490 41,844, ,353, ,353, ,280,326 52,622,493 48,657, ,695, ,695, ,078,338 48,971,027 56,107, ,588, ,588, ,018,776 44,774,831 64,243, ,344, ,344, ,106,980 39,983,915 73,123, ,221, ,221, ,348,492 34,544,265 82,804, ,417, ,417, ,749,060 28,397,549 93,351, ,065, ,065, ,314,650 21,480, ,833, ,231, ,231, ,051,449 13,725, ,325, ,906, ,906, ,965,879 5,059, ,906, Total $ 2,263,128,137 $ 1,328,509,137 $ 934,619,000 Note: Totals may be slightly off due to rounding

283 Appendix B Orange County Employees Retirement System Unfunded Actuarial Accrued Liability Amortization Schedule under 20 Year Level Percent of Payroll (Based on December 31, 2012 Valuation) Annual Interest Rate: 7.25% Annual Payroll Inflation: 3.75% Beginning End of Year Annual Interest Principal of Year Year Balance Payment Paid Paid Balance 1 $ 934,619,000 $ 65,319,492 $ 65,631,176 $ (311,684) $ 934,930, ,930,684 67,768,973 65,573,947 2,195, ,735, ,735,658 70,310,309 65,331,988 4,978, ,757, ,757,337 72,946,946 64,885,134 8,061, ,695, ,695,524 75,682,456 64,211,505 11,470, ,224, ,224,573 78,520,548 63,287,370 15,233, ,991, ,991,394 81,465,069 62,087,005 19,378, ,613, ,613,330 84,520,009 60,582,538 23,937, ,675, ,675,859 87,689,509 58,743,780 28,945, ,730, ,730,130 90,977,866 56,538,050 34,439, ,290, ,290,314 94,389,536 53,929,981 40,459, ,830, ,830,759 97,929,144 50,881,310 47,047, ,782, ,782, ,601,487 47,350,664 54,250, ,532, ,532, ,411,542 43,293,313 62,118, ,413, ,413, ,364,475 38,660,919 70,703, ,710, ,710, ,465,643 33,401,258 80,064, ,645, ,645, ,720,605 27,457,925 90,262, ,383, ,383, ,135,127 20,770, ,365, ,018, ,018, ,715,194 13,271, ,443, ,574, ,574, ,467,014 4,892, ,574, Total $ 1,895,400,945 $ 960,781,945 $ 934,619,000 Note: Totals may be slightly off due to rounding

284 Appendix B Orange County Employees Retirement System Unfunded Actuarial Accrued Liability Amortization Schedule under 18 Year Level Percent of Payroll (Based on December 31, 2012 Valuation) Annual Interest Rate: 7.25% Annual Payroll Inflation: 3.75% Beginning End of Year Annual Interest Principal of Year Year Balance Payment Paid Paid Balance 1 $ 934,619,000 $ 70,452,277 $ 65,463,903 $ 4,988,374 $ 929,630, ,630,626 73,094,237 65,016,147 8,078, ,552, ,552,536 75,835,271 64,341,158 11,494, ,058, ,058,423 78,679,094 63,415,157 15,263, ,794, ,794,486 81,629,560 62,212,369 19,417, ,377, ,377,295 84,690,668 60,704,864 23,985, ,391, ,391,490 87,866,569 58,862,393 29,004, ,387, ,387,315 91,161,565 56,652,210 34,509, ,877, ,877,960 94,580,124 54,038,874 40,541, ,336, ,336,710 98,126,878 50,984,048 47,142, ,193, ,193, ,806,636 47,446,273 54,360, ,833, ,833, ,624,385 43,380,729 62,243, ,589, ,589, ,585,299 38,738,982 70,846, ,743, ,743, ,694,748 33,468,701 80,226, ,517, ,517, ,958,301 27,513,367 90,444, ,072, ,072, ,381,737 20,811, ,569, ,502, ,502, ,971,053 13,298, ,672, ,830, ,830, ,732,467 4,902, ,830, Total $ 1,765,870,870 $ 831,251,870 $ 934,619,000 Note: Totals may be slightly off due to rounding

285 Appendix B Orange County Employees Retirement System Unfunded Actuarial Accrued Liability Amortization Schedule under 15 Year Level Percent of Payroll (Based on December 31, 2012 Valuation) Annual Interest Rate: 7.25% Annual Payroll Inflation: 3.75% Beginning End of Year Annual Interest Principal of Year Year Balance Payment Paid Paid Balance 1 $ 934,619,000 $ 80,802,478 $ 65,126,600 $ 15,675,879 $ 918,943, ,943,121 83,832,571 63,891,351 19,941, ,001, ,001,901 86,976,293 62,343,161 24,633, ,368, ,368,769 90,237,904 60,450,966 29,786, ,581, ,581,832 93,621,825 58,181,135 35,440, ,141, ,141,141 97,132,644 55,497,270 41,635, ,505, ,505, ,775,118 52,360,001 48,415, ,090, ,090, ,554,185 48,726,749 55,827, ,263, ,263, ,474,967 44,551,485 63,923, ,339, ,339, ,542,778 39,784,466 72,758, ,581, ,581, ,763,132 34,371,951 82,391, ,190, ,190, ,141,750 28,255,895 92,885, ,304, ,304, ,684,565 21,373, ,310, ,993, ,993, ,397,736 13,657, ,740, ,253, ,253, ,287,651 5,034, ,253, Total $ 1,588,225,597 $ 653,606,597 $ 934,619,000 Note: Totals may be slightly off due to rounding

286 Appendix C Orange County Employees Retirement System Unfunded Actuarial Accrued Liability Amortization Schedule under 30 Year Level Dollar (Based on December 31, 2012 Valuation) Annual Interest Rate: 7.25% Annual Payroll Inflation: 0.00% Beginning End of Year Annual Interest Principal of Year Year Balance Payment Paid Paid Balance 1 $ 934,619,000 $ 74,764,885 $ 65,306,896 $ 9,457,988 $ 925,161, ,161,012 74,764,885 64,621,192 10,143, ,017, ,017,319 74,764,885 63,885,775 10,879, ,138, ,138,209 74,764,885 63,097,039 11,667, ,470, ,470,364 74,764,885 62,251,120 12,513, ,956, ,956,600 74,764,885 61,343,872 13,421, ,535, ,535,587 74,764,885 60,370,849 14,394, ,141, ,141,552 74,764,885 59,327,281 15,437, ,703, ,703,949 74,764,885 58,208,055 16,556, ,147, ,147,119 74,764,885 57,007,685 17,757, ,389, ,389,920 74,764,885 55,720,288 19,044, ,345, ,345,323 74,764,885 54,339,555 20,425, ,919, ,919,993 74,764,885 52,858,718 21,906, ,013, ,013,827 74,764,885 51,270,521 23,494, ,519, ,519,464 74,764,885 49,567,180 25,197, ,321, ,321,759 74,764,885 47,740,346 27,024, ,297, ,297,221 74,764,885 45,781,067 28,983, ,313, ,313,404 74,764,885 43,679,741 31,085, ,228, ,228,260 74,764,885 41,426,068 33,338, ,889, ,889,443 74,764,885 39,009,004 35,755, ,133, ,133,562 74,764,885 36,416,702 38,348, ,785, ,785,380 74,764,885 33,636,459 41,128, ,656, ,656,954 74,764,885 30,654,648 44,110, ,546, ,546,717 74,764,885 27,456,656 47,308, ,238, ,238,489 74,764,885 24,026,809 50,738, ,500, ,500,413 74,764,885 20,348,299 54,416, ,083, ,083,828 74,764,885 16,403,096 58,361, ,722, ,722,039 74,764,885 12,171,867 62,593, ,129, ,129,022 74,764,885 7,633,873 67,131,012 71,998, ,998,010 74,764,885 2,766,875 71,998,010 - Total $ 2,242,946,539 $ 1,308,327,539 $ 934,619,000 Note: Totals may be slightly off due to rounding

287 Appendix C Orange County Employees Retirement System Unfunded Actuarial Accrued Liability Amortization Schedule under 25 Year Level Dollar (Based on December 31, 2012 Valuation) Annual Interest Rate: 7.25% Annual Payroll Inflation: 0.00% Beginning End of Year Annual Interest Principal of Year Year Balance Payment Paid Paid Balance 1 $ 934,619,000 $ 79,409,236 $ 65,154,519 $ 14,254,718 $ 920,364, ,364,282 79,409,236 64,121,052 15,288, ,076, ,076,097 79,409,236 63,012,658 16,396, ,679, ,679,519 79,409,236 61,823,906 17,585, ,094, ,094,189 79,409,236 60,548,970 18,860, ,233, ,233,922 79,409,236 59,181,600 20,227, ,006, ,006,286 79,409,236 57,715,097 21,694, ,312, ,312,147 79,409,236 56,142,272 23,266, ,045, ,045,182 79,409,236 54,455,417 24,953, ,091, ,091,362 79,409,236 52,646,265 26,762, ,328, ,328,391 79,409,236 50,705,949 28,703, ,625, ,625,104 79,409,236 48,624,961 30,784, ,840, ,840,828 79,409,236 46,393,101 33,016, ,824, ,824,693 79,409,236 43,999,431 35,409, ,414, ,414,888 79,409,236 41,432,221 37,977, ,437, ,437,872 79,409,236 38,678,887 40,730, ,707, ,707,522 79,409,236 35,725,937 43,683, ,024, ,024,223 79,409,236 32,558,897 46,850, ,173, ,173,883 79,409,236 29,162,248 50,246, ,926, ,926,895 79,409,236 25,519,341 53,889, ,036, ,036,999 79,409,236 21,612,324 57,796, ,240, ,240,086 79,409,236 17,422,047 61,987, ,252, ,252,897 79,409,236 12,927,976 66,481, ,771, ,771,637 79,409,236 8,108,085 71,301,152 76,470, ,470,485 79,409,236 2,938,751 76,470, Total $ 1,985,230,912 $ 1,050,611,912 $ 934,619,000 Note: Totals may be slightly off due to rounding

288 Appendix C Orange County Employees Retirement System Unfunded Actuarial Accrued Liability Amortization Schedule under 20 Year Level Dollar (Based on December 31, 2012 Valuation) Annual Interest Rate: 7.25% Annual Payroll Inflation: 0.00% Beginning End of Year Annual Interest Principal of Year Year Balance Payment Paid Paid Balance 1 $ 934,619,000 $ 87,085,692 $ 64,902,660 $ 22,183,033 $ 912,435, ,435,967 87,085,692 63,294,390 23,791, ,644, ,644,665 87,085,692 61,569,520 25,516, ,128, ,128,493 87,085,692 59,719,598 27,366, ,762, ,762,399 87,085,692 57,735,556 29,350, ,412, ,412,262 87,085,692 55,607,671 31,478, ,934, ,934,241 87,085,692 53,325,515 33,760, ,174, ,174,064 87,085,692 50,877,902 36,207, ,966, ,966,273 87,085,692 48,252,837 38,832, ,133, ,133,418 87,085,692 45,437,455 41,648, ,485, ,485,180 87,085,692 42,417,958 44,667, ,817, ,817,446 87,085,692 39,179,547 47,906, ,911, ,911,300 87,085,692 35,706,352 51,379, ,531, ,531,960 87,085,692 31,981,349 55,104, ,427, ,427,617 87,085,692 27,986,284 59,099, ,328, ,328,209 87,085,692 23,701,577 63,384, ,944, ,944,094 87,085,692 19,106,229 67,979, ,964, ,964,630 87,085,692 14,177,718 72,907, ,056, ,056,656 87,085,692 8,891,890 78,193,803 83,862, ,862,853 87,085,692 3,222,839 83,862, Total $ 1,741,713,848 $ 807,094,848 $ 934,619,000 Note: Totals may be slightly off due to rounding

289 Appendix C Orange County Employees Retirement System Unfunded Actuarial Accrued Liability Amortization Schedule under 18 Year Level Dollar (Based on December 31, 2012 Valuation) Annual Interest Rate: 7.25% Annual Payroll Inflation: 0.00% Beginning End of Year Annual Interest Principal of Year Year Balance Payment Paid Paid Balance 1 $ 934,619,000 $ 91,591,100 $ 64,754,841 $ 26,836,260 $ 907,782, ,782,740 91,591,100 62,809,212 28,781, ,000, ,000,852 91,591,100 60,722,525 30,868, ,132, ,132,276 91,591,100 58,484,553 33,106, ,025, ,025,729 91,591,100 56,084,328 35,506, ,518, ,518,957 91,591,100 53,510,087 38,081, ,437, ,437,944 91,591,100 50,749,214 40,841, ,596, ,596,057 91,591,100 47,788,177 43,802, ,793, ,793,134 91,591,100 44,612,465 46,978, ,814, ,814,499 91,591,100 41,206,514 50,384, ,429, ,429,913 91,591,100 37,553,632 54,037, ,392, ,392,445 91,591,100 33,635,915 57,955, ,437, ,437,260 91,591,100 29,434,164 62,156, ,280, ,280,324 91,591,100 24,927,787 66,663, ,617, ,617,010 91,591,100 20,094,697 71,496, ,120, ,120,606 91,591,100 14,911,206 76,679, ,440, ,440,712 91,591,100 9,351,915 82,239,185 88,201, ,201,527 91,591,100 3,389,573 88,201, Total $ 1,648,639,807 $ 714,020,807 $ 934,619,000 Note: Totals may be slightly off due to rounding

290 Appendix C Orange County Employees Retirement System Unfunded Actuarial Accrued Liability Amortization Schedule under 15 Year Level Dollar (Based on December 31, 2012 Valuation) Annual Interest Rate: 7.25% Annual Payroll Inflation: 0.00% Beginning End of Year Annual Interest Principal of Year Year Balance Payment Paid Paid Balance 1 $ 934,619,000 $ 100,930,934 $ 64,448,408 $ 36,482,526 $ 898,136, ,136, ,930,934 61,803,424 39,127, ,008, ,008, ,930,934 58,966,680 41,964, ,044, ,044, ,930,934 55,924,272 45,006, ,038, ,038, ,930,934 52,661,288 48,269, ,768, ,768, ,930,934 49,161,739 51,769, ,999, ,999, ,930,934 45,408,473 55,522, ,476, ,476, ,930,934 41,383,094 59,547, ,928, ,928, ,930,934 37,065,876 63,865, ,063, ,063, ,930,934 32,435,659 68,495, ,568, ,568, ,930,934 27,469,752 73,461, ,107, ,107, ,930,934 22,143,816 78,787, ,320, ,320, ,930,934 16,431,750 84,499, ,821, ,821, ,930,934 10,305,559 90,625,375 97,195, ,195, ,930,934 3,735,219 97,195, Total $ 1,513,964,008 $ 579,345,008 $ 934,619,000 Note: Totals may be slightly off due to rounding

291 Appendix D Amortization of UAAL from Recent Assum. Changes with 2% Alt. Salary Inc. Assum. Different amortization periods for $934.6 million from 12/31/12 assum. changes level percent of 2% 7.25% interest 30 years 25 years 20 years 18 years 15 years 2.00% salary incr. % of pay % of pay % of pay % of pay % of pay ($000) Increase in AAL $ 934,619 $ 934,619 $ 934,619 $ 934,619 $ 934,619 Amortization factor (first year) Amortization amount Year 1 $ 61,062 $ 66,467 $ 75,001 $ 79,880 $ 89,823 Year 15 $ 80,569 $ 87,702 $ 98,962 $ 105,401 $ 118,520 Year 20 $ 88,955 $ 96,830 $ 109,262 $ 0 $ 0 Year 30 $ 108,436 $ 0 $ 0 $ 0 $ 0 Total amount paid Principal $ 934,619 $ 934,619 $ 934,619 $ 934,619 $ 934,619 Interest 1,542,531 1,194, , , ,728 Total $ 2,477,150 $ 2,128,968 $ 1,822,328 $ 1,710,425 $ 1,553,347

292 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM Review of Economic Actuarial Assumptions for the December 31, 2012 Actuarial Valuation 100 Montgomery Street, Suite 500 San Francisco, CA COPYRIGHT 2012 ALL RIGHTS RESERVED OCTOBER 2012

293 THE SEGAL COMPANY 100 Montgomery Street, Suite 500 San Francisco, CA T F October 5, 2012 Board of Retirement Orange County Employees Retirement System 2223 Wellington Avenue Santa Ana, CA Re: Review of Economic Actuarial Assumptions for the December 31, 2012 Actuarial Valuation Dear Members of the Board: We are pleased to submit this report of our review of the December 31, 2012 economic actuarial assumptions for the Orange County Employees Retirement System. This report includes our recommendations and the analysis supporting their development. Please note that the non-economic assumptions were last reviewed as part of the triennial experience study report as of December 31, 2010 and those assumptions were first applied in the December 31, 2011 valuation. We will continue to use those assumptions until they are reviewed again as of December 31, We are Members of the American Academy of Actuaries and meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion herein. We look forward to reviewing this report with you and answering any questions you may have. Sincerely, Paul Angelo, FSA, MAAA, FCA, EA Senior Vice President and Actuary Andy Yeung, ASA, MAAA, FCA, EA Vice President and Associate Actuary MYM/bqb v1/ Benefits, Compensation and HR Consulting Offices throughout the United States and Canada Founding Member of the Multinational Group of Actuaries and Consultants, a global affiliation of independent firms

294 TABLE OF CONTENTS Page I. INTRODUCTION, SUMMARY, AND RECOMMENDATIONS... 1 II. BACKGROUND AND METHODOLOGY... 4 III. ECONOMIC ASSUMPTIONS... 5 A. INFLATION... 5 B. INVESTMENT RETURN... 7 C. SALARY INCREASE... 19

295 I. INTRODUCTION, SUMMARY, AND RECOMMENDATIONS To project the cost and liabilities of the pension fund, assumptions are made about all future events that could affect the amount and timing of the benefits to be paid and the assets to be accumulated. Each year actual experience is compared against the projected experience, and to the extent there are differences, the future contribution requirement is adjusted. If assumptions are modified, contribution requirements are adjusted to take into account a change in the projected experience in all future years. There is a great difference in both philosophy and cost impact between recognizing the actuarial deviations as they occur annually and changing the actuarial assumptions. Taking into account one year s gains or losses without making a change in the assumptions in effect assumes that experience was temporary and that, over the long run, experience will return to what was originally assumed. Changing assumptions reflects a basic change in thinking about the future, and it has a much greater effect on the current contribution requirements than recognizing gains or losses as they occur. The use of realistic actuarial assumptions is important to maintain adequate funding, while paying promised benefit amounts to participants already retired and to those near retirement. The actuarial assumptions used do not determine the actual cost of the plan. The actual cost is determined solely by the benefits and administrative expenses paid out, offset by investment income received. However, it is desirable to estimate as closely as possible what the actual cost will be so as to permit an orderly method for setting aside contributions today to provide benefits in the future, and to maintain equity among generations of participants and taxpayers. This study was undertaken in order to review the economic actuarial assumptions. The study was performed in accordance with Actuarial Standard of Practice (ASOP) No. 27, Selection of Economic Assumptions for Measuring Pension Obligations. This Standard of Practice puts forth guidelines for the selection of the economic actuarial assumptions utilized in a pension plan actuarial valuation. -1-

296 We are recommending changes in the assumptions for investment return, inflation and the across the board salary increase assumption. Our recommendations for the economic actuarial assumptions for the December 31, 2012 Actuarial Valuation are as follows: Investment Return - The estimated average future net rate of return on current and future assets of the System as of the valuation date. This rate is used to discount liabilities. Recommendation: Reduce the current investment return assumption from 7.75% per annum to 7.50% per annum. As the 7.50% recommendation would only provide little margin under the risk-adjusted model used by Segal to evaluate this assumption, we are also making an alternative recommendation for a 7.25% assumption that is more consistent with the practice followed in the review of this assumption in the December 31, 2007 valuation prior to the last review for the December 31, 2011 valuation. Inflation Future increases in the Consumer Price Index (CPI) which drive investment returns and active member salary increases, as well as cost-of-living adjustments (COLAs) for retired employees. Recommendation: Reduce the current inflation assumption from 3.50% per annum to 3.25% per annum. Individual Salary Increases Increases in the salary of a member between the date of the valuation and the date of separation from active service. This assumption has three components: Inflationary salary increases, Real across the board salary increases, and Promotional and merit increases. Recommendation: Reduce the current inflationary salary increase assumption from 3.50% per annum to 3.25% per annum consistent with our recommended general inflation assumption and increase the current real across the board salary increase -2-

297 assumption from 0.25% to 0.50%. This means that the combined inflationary and real across the board salary increases will remain unchanged at 3.75% per annum. Please note that the promotional and merit increase assumptions were last reviewed by the Board in the December 31, 2010 triennial experience study. We would continue to use those assumptions in the valuations until they are reviewed again in the December 31, 2013 triennial experience study. Section II provides some background on basic principles and the methodology used for the review of the economic actuarial assumptions. A detailed discussion of each of the economic assumptions and reasons behind the recommendations is found in Section III. -3-

298 II. BACKGROUND AND METHODOLOGY For this study, we analyzed the economic assumptions only. The non-economic assumptions were last reviewed as part of the December 31, 2010 triennial experience study report. The primary economic assumptions reviewed are inflation, investment return and salary increases. Economic Assumptions Economic assumptions consist of: Inflation - Increases in the price of goods and services. The inflation assumption reflects the basic return that investors expect from securities markets. It also reflects the expected basic salary increase for active employees and drives increases in the allowances of retired members. Investment Return Expected long-term rate of return on the System s investments after expenses. This assumption has a significant impact on contribution rates. Salary Increases In addition to inflationary increases, it is assumed that salaries will also grow by real across the board pay increases in excess of price inflation. It is also assumed that employees will receive raises above these average increases as they advance in their careers. These are commonly referred to as promotional and merit increases. Payments to amortize any Unfunded Actuarial Accrued Liability (UAAL) are assumed to increase each year by the price inflation rate plus any across the board pay increases that are assumed. The setting of these assumptions is described in Section III. -4-

299 III. ECONOMIC ASSUMPTIONS A. INFLATION Unless an investment grows at least as fast as prices increase, investors will experience a reduction in the inflation-adjusted value of their investment. There may be times when riskless investments return more or less than inflation, but over the long term, investment market forces will generally require an issuer of fixed income securities to maintain a minimum return which protects investors from inflation. The inflation assumption is long term in nature, so it is set using primarily historical information. Following is an analysis of 15-year and 30-year moving averages of historical inflation rates: Historical Consumer Price Index 1930 to 2011 (U.S. City Average - All Urban Consumers) 25th Percentile Median 75th Percentile 15-year moving averages 2.7% 3.5% 4.8% 30-year moving averages 3.3% 4.2% 5.0% The average inflation rates have continued to decline gradually over the last several years due to the relatively low inflationary period over the past two decades. Also, the later of the 15-year averages during the period are lower as they do not include the high inflation years of the mid-1970s and early 1980s. In the 2011 public fund survey published by the National Association of State Retirement Administrators, the median inflation assumption used by 126 large public retirement funds in their 2010 valuations has decreased to 3.25% from the 3.50% used in the 2009 valuations. In California, CalPERS and LACERA have recently reduced their inflation assumptions to 2.75% and 3.00%, respectively. -5-

300 OCERS investment consultant, NEPC, anticipates an annual inflation rate of 3.00%, while the average inflation assumption provided by NEPC and by eight other investment advisory firms retained by Segal s California public sector retirement system clients was 2.61%. Note that, in general, investment consultants use a time horizon for this assumption that is shorter than the time horizon we use for the actuarial valuation. To find a forecast of inflation based on a longer time horizon, we referred to the 2012 report on the financial status of the Social Security program. The projected average increase in the Consumer Price Index (CPI) over the next 75 years under the intermediate cost assumptions used in that report was 2.80%. We also compared the yields on the thirtyyear inflation indexed U. S. Treasury bonds to comparable traditional U. S. Treasury bonds. As of July 2012, the difference in yields is about 2.20%, which provides a measure of market expectations of inflation. Based on all of the above information, we recommend that the current 3.50% annual inflation assumption be reduced to 3.25% for the December 31, 2012 actuarial valuation. -6-

301 B. INVESTMENT RETURN The investment return assumption is comprised of two primary components, inflation and real rate of investment return, with adjustments for expenses and risk. Real Rate of Investment Return This component represents the portfolio s incremental investment market returns over inflation. Theory has it that as an investor takes a greater investment risk, the return on the investment is expected to also be greater, at least in the long run. This additional return is expected to vary by asset class and empirical data supports that expectation. For that reason, the real rate of return assumptions are developed by asset class. Therefore, the real rate of return assumption for a retirement system s portfolio will vary with the Board s asset allocation among asset classes. The following is the System s current target asset allocation and the assumed real rate of return assumptions by asset class. The first column of real rate of return assumptions are determined by netting NEPC s total return assumptions by their assumed 3.00% for inflation. The second column of returns (except for Diversified Credit, Absolute Reurn, Real Return and Private Equity) represents the average of a sample of real rate of return expectations. The sample includes the expected annual real rates of return provided to us by NEPC and by eight other investment advisory firms retained by Segal s California public sector retirement system clients. We believe these averages reflect a reasonable consensus forecast of long-term future market returns. -7-

302 OCERS Target Asset Allocation as of May 2012 and Assumed Arithmetic Real Rate of Return Assumptions by Asset Class and for the Portfolio Asset Class Percentage of Portfolio NEPC s Assumed Real Rate of Return (1) Average Real Rate of Return from a Sample of Consultants to Segal s California Public Sector Clients (2) Large Cap Equity 14.50% 6.46% 6.13% Small/Mid Cap Equity Developed International Equity Emerging International Equity Core Bonds Global Bonds Emerging Market Debt Real Estate Diversified Credit (3) Absolute Return (Hedge Funds/GTAA) (3) Real Return (3) Private Equity (3) Total Portfolio % 5.12% 4.94% (1) (2) (3) Derived by netting NEPC s rate of return assumptions by their assumed 3.00% inflation rate. These are based on the projected arithmetic returns provided by the investment advisory firms serving the county retirement systems of Orange, Ventura, Mendocino, Alameda, Contra Costa, Fresno, the LA City Employees Retirement System, LA Department of Water and Power and the LA Fire & Police Pensions. These return assumptions are gross of any applicable investment expenses. For these asset classes, the NEPC assumption is applied in lieu of the average because there is a larger disparity in returns for these asset classes among the firms surveyed and using NEPC assumption should more closely reflect the underlying investments made specifically for OCERS. Please note that the above are representative of indexed returns and do not include any additional returns ( alpha ) from active management. This is consistent with the Actuarial Standard of Practice No. 27, Section e, which states: -8-

303 Investment Manager Performance - Anticipating superior (or inferior) investment manager performance may be unduly optimistic (or pessimistic). Few investment managers consistently achieve significant above-market returns net of expenses over long periods. The following are some observations about the returns provided above: 1. The investment consultants to our California public sector retirement system clients have each provided us with their expected real rates of return for each asset class, over various future periods of time. However, in general, the returns available from investment consultants are projected over time periods shorter than the duration of a retirement plan s liabilities. 2. Using an average of expected real rates of return allows the System s investment return assumption to reflect a broader range of capital market information and should help reduce year to year volatility in the System s investment return assumption. 3. Therefore, we recommend that the 4.94% portfolio real rate of return be used in the development of the System s investment return assumption. For comparison purposes, the expected portfolio real rate of return from the last review of the economic assumptions for the December 31, 2011 valuation using the prior asset allocation was 4.62%. System Expenses The real rate of return assumption for the portfolio needs to be adjusted for administrative and investment expenses expected to be paid from investment income. The following table provides these expenses in relation to the actuarial value of assets for the five years ending December 31,

304 Administrative and Investment Expenses as a Percentage of Actuarial Value of Assets (All dollars in 000 s) Actuarial FYE Value of Assets (1) Administrative Expenses Investment Expenses (2) Administrative % Investment % Total % 2007 $6,466,085 $10,459 $30, % 0.46% 0.62% ,288,900 10,928 30, ,748,380 10,893 34, ,154,687 12,448 68,027 (3) ,672,592 15,479 39, Average 0.16% 0.52% 0.68% (1) (2) (3) As of beginning of plan year. Net of securities lending expenses because we do not assume any additional net return for this program, we effectively assume that any expense will be offset by related income. We understand that the 2010 investment expenses included some one-time expenses such as foreign tax expense that is expected to be offset by a future tax reclaim. While the average administrative and investment expense percentage over this five year period is 0.68%, this is heavily influenced by the expenses in 2010.The average excluding 2010 is 0.61%. Based on our understanding that some of those expenses for 2010 are onetime only, we believe a future expense assumption of 0.60% is reasonable. Adjustment to Exclude Administrative Expenses in Developing Investment Return Assumption for use in GASB Financial Reporting GASB has recently adopted Statements 67 and 68 that replace Statements 25 and 27 for financial reporting purposes. GASB Statements 67 and 68 are effective for plan year 2014 for the Retirement System and fiscal year 2014/2015 for the employer 1. According to GASB, the investment return assumption for use in the financial reporting purposes should be based on the long-term expected rate of return on a retirement system s investments and should be net of investment expenses but not of administrative expenses 1 The new Statements (67 and 68) will require more rapid recognition for investment gains or losses and much shorter amortization for actuarial gains or losses. Because of the more rapid recognition of those changes, retirement systems that have generally utilized the previous Statements (25 and 27) as a guideline to establish the employer s contribution amounts for both funding and financial reporting purposes would now have to prepare two sets of cost results, one for contributions and one for financial reporting under the new Statements. -10-

305 (i.e., without reduction for administrative expenses). As can be observed from the above development of the expense assumption, if the Board would wish to develop a single investment return assumption for both funding and financial reporting purposes, then it would be necessary to exclude the roughly 0.16% administrative expense from the above development and to develop a separate treatment of administrative expenses. However, there are some complications associated with eliminating the administrative expense in developing the investment return assumption used for funding: 1. Even though GASB requires the exclusion of the administrative expense from the investment return assumption, such expense would continue to accrue for a retirement system. For private sector retirement plans, where the investment return is developed using an approach similar to that required by GASB (i.e., without deducting administrative expenses), contribution requirements are increased explicitly by the anticipated annual administrative expense. 2. Under the current approach of subtracting the administrative expense in the development of the investment return assumption, such annual administrative expense is accounted for implicitly by many public sector retirement systems by effectively deducting it from future expected investment returns. Since an investment return assumption net of investment and administrative expenses has been used historically to establish both the employer s and the employee s contribution requirements, such expense has been paid for implicitly by both the employer and the employees. 3. A switch from the method described in (2) to the method described in (1) may require discussion on how to allocate administrative expenses between employers and employees, including possibly establishing a new method to allocate the anticipated annual administrative expense between them. -11-

306 4. As the Board may be aware, legislative changes under AB 340 would impose major modifications to both the level of benefits and the funding of those benefits for county employees retirement systems. It is our understanding that included in such modifications is the requirement to fund the Normal Cost on a 50:50 basis between the employer and the employee. Based on all these considerations, including uncertainty as to how AB 340 will be implemented, it is our recommendation that a decision to adopt a single investment return assumption for both funding and financial reporting purposes be deferred until more analysis can be performed on the allocation of administrative expense. For that reason, this report continues to treat administrative expenses as an offset to future expected investment returns. Risk Adjustment The real rate of return assumption for the portfolio is adjusted to reflect the potential risk of shortfalls in the return assumptions. The System s asset allocation also determines this portfolio risk, since risk levels are driven by the variability of returns for the various asset classes and the correlation of returns among those asset classes. This portfolio risk is incorporated into the real rate of return assumption through a risk adjustment. The purpose of the risk adjustment (as measured by the corresponding confidence level) is to increase the likelihood of achieving the actuarial investment return assumption in the long term. The 4.94% expected real rate of return developed earlier in this report was based on expected mean or average arithmetic returns. This means there is a 50% chance of the actual return in each year being at least as great as the expected return (assuming a symmetrical distribution of future returns). The risk adjustment is intended to increase that probability. This is consistent with our experience that retirement plan fiduciaries would generally prefer that returns exceed the assumed rate more often than not. In our model, the confidence level associated with a particular risk adjustment represents the likelihood that the actual average return would equal or exceed the assumed value over -12-

307 a 15-year period. For example, if we set our real rate of return assumption using a risk adjustment that produces a confidence level of 60%, then there would be a 60% chance (6 out of 10) that the average return over 15 years will be equal to or greater than the assumed value. The 15-year time horizon represents an approximation of the duration of the fund s liabilities, where the duration of a liability represents the sensitivity of that liability to interest rate variations. Last year, Segal recommended an investment return assumption of either 7.50% or 7.25%; however, the Board adopted an investment return assumption of 7.75%. The 7.75% assumption prescribed by the Board and used in the December 31, 2011 valuation did not provide for any confidence level above 50% under the risk-adjusted model used by Segal. Prior to the assumption review performed for the December 31, 2011 valuation, the most recent review of the economic assumptions was performed for the December 31, 2007 valuation. In that review, the Board adopted an investment return assumption of 7.75%. In combination with the inflation, real return and expense components from that study, the return assumption adopted implied a risk adjustment of 0.80%, reflecting a confidence level of 61% that the actual average return over 15 years would not fall below the assumed return, assuming that the distribution of returns over that period follows the normal statistical distribution 2. If we were to use the same 61% confidence level from the return assumption adopted for the December 31, 2007 valuation to set this year s risk adjustment, based on the current long-term portfolio standard deviation of 10.30% provided by NEPC (which is reduced from the 11.74% provided by CAI for the December 31, 2011 assumptions study), the corresponding risk adjustment would be 0.75%. Together with the other investment return components, this would result in a preliminary investment return assumption of 6.84%, which is substantially lower than the current assumption of 7.75%. 2 Based on an annual portfolio return standard deviation of 10.95% provided by CAI for the December 31, 2007 assumptions study. Strictly speaking, future compounded long-term investment returns will tend to follow a lognormal distribution. However, we believe the Normal distribution assumption is reasonable for purposes of setting this type of risk adjustment. -13-

308 Because this would be such a substantial change in this long-term assumption, we evaluated the effect on the confidence level of alternative investment return assumptions. In particular, a net investment return assumption of 7.50%, together with the other investment return components, would produce a risk adjustment of 0.09%, which corresponds to a confidence level of 51%. As this 7.50% assumption would only provide a confidence level only slightly above 50%, we are also making an alternative recommendation for a 7.25% assumption. A net investment return assumption of 7.25%, together with the other investment return components, would produce a risk adjustment of 0.34% which corresponds to a confidence level of 55%. As we have discussed in prior years, the risk adjustment model and associated confidence level is most useful as a means for comparing how the System has positioned itself over periods of time 3. The use of either a 51% or a 55% confidence level should be considered in context with other factors, including: 1. As noted above, the confidence level is more of a relative measure than an absolute measure, and so can be reevaluated and reset for future comparisons. 2. The confidence level is based on the standard deviation of the portfolio that is determined and provided to us by NEPC. The standard deviation is a statistical measure of the future volatility of the portfolio and so is itself based on assumptions about future portfolio volatility and can be considered somewhat of a soft number. 3. A lower level of inflation should reduce the overall risk of failing to meet the investment return assumption. 3 In particular, it would not be appropriate to use this type of risk adjustment as a measure of determining an investment return rate that is risk-free. -14-

309 4. A confidence level of 51% (which is associated with a 7.50% investment return assumption) is below the range of 55% to 65% that corresponds to the risk adjustments used by most of Segal s other California public retirement system clients. Most public retirement systems that have recently reviewed their investment return assumptions have considered adopting more conservative investment return assumptions for their valuations, mainly to maintain the likelihood that future actual market return will meet or exceed the investment return assumption. While this may provide argument for a confident level of 55% (which is associated with a 7.25% investment return assumption), we would also note that a 0.50% reduction in the investment return assumption is a very significant reduction in a long-term assumption. 5. As with any model, the results of the risk adjustment model should be evaluated for reasonableness and consistency. This is discussed in the following Test of Risk Adjustment section, including (1) a discussion of the relationship between the inflation assumption and the risk adjustment and (2) a comparison with assumptions adopted by similarly situated public sector retirement systems. Taking into account the factors above, our recommendation is to reduce the net investment return assumption from 7.75% to 7.50%. As noted above, this return implies a risk adjustment of 0.09%, reflecting a confidence level of 51% that the actual average return over 15 years would not fall below the assumed return. For that reason, the Board should also consider our alternative recommendation of 7.25% with its associated confidence level of 55%. Recommended Investment Return Assumption The following table summarizes the components of the investment return assumption developed in the previous discussion. For comparison purposes, we have also included similar values from the last study and the study as of December 31,

310 Assumption Component Calculation of Net Investment Return Assumption December 31, 2012 Recommended Value December 31, 2012 Alternative Recommendation December 31, 2011 Adopted Value December 31, 2007 Recommended Value Inflation 3.25% 3.25% 3.50% 3.50% Plus Portfolio Real Rate of Return 4.94% 4.94% 4.62% 5.65% Minus Expense Adjustment (0.60%) (0.60%) (0.60%) (0.60%) Minus Risk Adjustment (0.09%) (0.34%) 0.23% (0.80%) Total 7.50% 7.25% 7.75% 7.75% Confidence Level 51% 55% <50% 61% Based on this analysis, we recommend that the investment return assumption be reduced from 7.75% per annum to 7.50% per annum with an alternative recommendation for a 7.25% assumption should the Board decide to increase the confidence level associated with this assumption to a level more consistent with the practice followed in the review of this assumption in the December 31, 2007 valuation prior to the last review for the December 31, 2011 valuation. Test of Risk Adjustment The original development of the risk adjustment component of our investment earnings assumption model arose from our experience with many retirement boards over many years. Quite simply, combining the boards inflation assumption with the real return and expense components produced and produces a substantially higher assumed return than what the boards actually adopt, regardless of the consulting actuary or the methods involved in the process. This led to the development of a risk adjustment component for our model. There is a range of risk adjustment methodologies that may be incorporated in the development of an earnings assumption. Ideally, the particular risk adjustment selected should reflect the downside risk tolerance of the boards making the decision. This is similar to the volatility risk that boards consider when selecting an appropriate asset allocation. -16-

311 In addition to the generally risk adverse attitude of retirement boards noted above, we believe another reason for this involves the inflation assumption. As noted earlier, the inflation assumption for actuarial valuations is generally longer term than that used by investment consultants. For many years, that has led to higher actuarial valuation inflation assumptions. A higher inflation assumption has a conservative effect - higher current cost - on the wage increase and COLA assumption, but is less conservative as part of the investment earnings assumption. In effect, the risk adjustment compensates for this by offsetting the effect of the higher inflation assumption on assumed investment earnings. One way to test the reasonableness of the risk adjustment incorporated in our recommendation is to compare our risk-adjusted investment return (i.e., 7.50%) against the expected net investment return that would result from using the average of all the capital market assumptions -- including the lower inflation assumption -- of the investment consultants in our sample. The following table shows that comparison. This table shows how the difference between our recommended return and that derived using the average of all the capital market assumptions of the investment consultants in our sample can be attributed to the relationship between the two different inflation assumptions and the risk adjustment. Assumption Element: Risk-Adjusted Method Average of Investment Consultant Sample Difference Inflation 3.25% 2.61% 0.64% Risk Adjustment (0.09%) 0.00% (0.09%) Real Rate of Return 4.94% 4.94% 0.00% Expenses (0.60%) (0.60%) 0.00% Total 7.50% 6.95% 0.55% The 0.55% (55 basis points) difference between the two calculations represents about an 8% lower confidence level under the higher inflation, risk-adjusted method, as compared to the lower inflation result without the risk adjustment. This indicates that the risk adjustment is not providing a significant offset to the effect of the higher inflation assumption on assumed investment earnings. -17-

312 Comparing with Other Public Retirement Systems One final test of the recommended investment return assumption is to compare it against those used by other public retirement systems, both in California and nationwide. We note that this 7.50% investment return assumption is emerging as a common assumption among those California public sector retirement systems that have studied this assumption recently. In particular two of the largest California systems, CalPERS and LACERA, recently adopted a 7.50% earnings assumption 4. Note that CalPERS uses a lower inflation assumption of 2.75% while LACERA uses an inflation assumption of 3.00%. The following table compares the OCERS recommended net investment return assumption against those of the nationwide public retirement systems that participated in the National Association of State Retirement Administrators (NASRA) 2011 Public Fund Survey: Assumption OCERS NASRA 2011 Public Fund Survey Low Median High Net Investment Return 7.50% 7.00% 8.00% 8.50% The detailed survey results show that of the systems that have an investment return assumption in the range of 7.50% to 7.90%, over a third of those systems have used an assumption of 7.50%. The survey also notes that several plans have reduced their investment return assumption during the last year, and others are considering doing so. State systems outside of California tend to change their economic assumptions less frequently and so may lag behind emerging practices in this area. While the recommended assumption of 7.50% provides only a slight risk margin within the risk adjustment model, it is consistent with the System s current practice relative to other public systems. 4 The approach adopted by LACERA was to phase in the reduction from their then current 7.75% assumption to their 7.50% assumption over a three-year period. -18-

313 C. SALARY INCREASE Salary increases impact plan costs in two ways: (i) by increasing members benefits (since benefits are a function of the members highest average pay) and future normal cost collections; and (ii) by increasing total active member payroll which in turn generates higher UAAL amortization payments (or higher amortization credits if the UAAL is negative). These two impacts are discussed separately below. As an employee progresses through his or her career, increases in pay are expected to come from three sources: 1. Inflation Unless pay grows at least as fast as consumer prices grow, employees will experience a reduction in their standard of living. There may be times when pay increases lag or exceed inflation, but over the long term, labor market forces will require an employer to maintain its employees standards of living. As discussed earlier in this report, we are recommending that the assumed rate of inflation be reduced from 3.50% per annum to 3.25% per annum. This inflation component will be used as part of the salary increase assumption. 2. Real Across the Board Pay Increases These increases are sometimes termed productivity increases since they are considered to be derived from the ability of an organization or an economy to produce goods and services in a more efficient manner. As that occurs, at least some portion of the value of these improvements can provide a source for pay increases. These increases are typically assumed to extend to all employees across the board. The State and Local Government Workers Employment Cost Index produced by the Department of Labor provides evidence that real across the board pay increases have averaged about 0.6% - 0.8% annually during the last ten to twenty years. -19-

314 We also referred to the annual report on the financial status of the Social Security program published in April In that report, real across the board pay increases are forecast to be 1.1% per year under the intermediate assumptions. The real pay increase assumption is generally considered a more macroeconomic assumption, which is not based on individual plan experience specific to OCERS. However, we note that the actual average inflation plus across the board increase (i.e., wage inflation) over the past five years was 4.3%. Valuation Date Actual Average Increase (1) Actual Change in CPI (2) December 31, % 3.30% December 31, % 3.53% December 31, % -0.80% December 31, % 1.20% December 31, % 2.67% Average 4.27% 1.98% (1) (2) Reflects the increase in average salary for members at the beginning of the year versus those at the end of the year. It does not reflect the average salary increases received by members who worked the full year. Based on the change in the annual average CPI for the Los Angeles-Riverside- Orange County Area compared to the prior year. Considering these factors, we recommend increasing the real across the board salary increase assumption from 0.25% to 0.50% for the December 31, 2012 actuarial valuation. This means that the combined inflation and across the board salary increase assumption will remain unchanged at 3.75%. 3. Promotional and Merit Increases As the name implies, these increases come from an employee s career advances. This form of pay increase differs from the previous two, since it is specific to the individual. For OCERS, there are servicespecific promotional and merit increases. The review of the promotional and -20-

315 merit component was provided in a separate triennial experience study report as of December 31, For the December 31, 2012 valuation we would continue to use the assumptions adopted by the Board in the December 31, 2010 triennial experience study until those assumptions are reviewed again in the December 31, 2013 triennial experience study. All three of these components are incorporated into a salary increase assumption that is applied in the actuarial valuation to project future benefits and future normal cost contribution collections. Active Member Payroll Projected active member payrolls are used to develop the UAAL contribution rate. Future values are determined as a product of the number of employees in the workforce and the average pay for all employees. The average pay for all employees is assumed to increase only by inflation and real across the board pay increases. The merit and promotional increases are not an influence, because this average pay is not specific to an individual. For the December 31, 2012 valuation, we recommend that the active member payroll increase assumption be maintained at 3.75% annually, consistent with the combined inflation and across the board salary increase assumptions v1/

316 OCERS Board of Retirement November 18, 2013 Accelerated Funding of UAAL Paul Angelo The Segal Company San Francisco Copyright 2013 by The Segal Group, Inc., parent of The Segal Company. All rights reserved v1

317 Agenda Accelerated Funding of Unfunded Actuarial Accrued Liability (UAAL) Option A Immediate buy down of UAAL and associated UAAL contribution rates Option B Held back from UAAL and used to reduce UAAL payment period (Previously Discussed at September 19, 2013 Strategic Planning Workshop) 2

318 Accelerated Funding of Unfunded Actuarial Accrued Liability (UAAL) Two options Option A Immediate buy down of UAAL and associated UAAL contribution rates Illustration using results prepared for OCTA Option B Additional contribution held back from UAAL and used in later years to reduce UAAL payment period Requires an account similar to County Investment Account Illustration using results prepared for OCFA Special case: Employer pays off entire UAAL Illustration using results prepared for Cemetery District Special case: Reamortize UAAL over a single period and increase contribution to shorten that period Illustration using results prepared for OCFA 3

319 4 Accelerated Funding of UAAL Option A immediate buy down of UAAL and UAAL rates Illustration using results prepared for OCTA Hypothetical $10m additional contributions made on 6/30/14»Discounted value of $9,003,000 on 12/31/12 Three Alternatives Alt. 1: Apply additional contributions over 15 years»considered current policy since contribution is a gain Alt. 2: Apply additional contributions in proportion to all UAAL layers»currently longer than 15 years based on amortization layers for OCTA»Smaller immediate contribution relief than Alt. 1 Alt. 3: Apply additional contributions to shortest UAAL layers»larger immediate contribution relief than Alt. 1

320 Accelerated Funding of UAAL Amortization schedule for OCTA before additional contributions UAAL Amortization Schedule as of December 31, 2012 under Current Amortization Schedule Before Considering any Additional UAAL Contributions 5 Date Established Source Initial Base Years Remaining Remaining Base Amortization Amount Base 12/31/2004 Restart amortization $70,302, $77,577,000 $5,075,000 12/31/2005 Actuarial (gain) or loss 1,340, ,036, ,000 12/31/2006 Actuarial (gain) or loss (5,778,000) 9 (4,762,000) (625,000) 12/31/2007 Actuarial (gain) or loss (12,467,000) 10 (10,825,000) (1,299,000) 12/31/2007 Assumption change 11,504, ,364, ,000 12/31/2008 Actuarial (gain) or loss 24,594, ,275,000 2,469,000 12/31/2009 Inclusion of Premium Pay 26,400, ,105,000 1,773,000 12/31/2009 Actuarial (gain) or loss 22,306, ,902,000 2,157,000 12/31/2010 Reallocation of assets 95, ,000 6,000 12/31/2010 Actuarial (gain) or loss (2,073,000) 13 (1,996,000) (193,000) 12/31/2011 Actuarial (gain) or loss 20,064, ,737,000 1,800,000 12/31/2011 Assumption change 19,530, ,859,000 1,089,000 12/31/2012 Actuarial (gain) or loss 5,904, ,904, ,000 12/31/2012 Assumption change 42,963, ,963,000 2,310,000 $232,236,000 $15,966,000

321 Accelerated Funding of UAAL Projected future UAAL contributions for OCTA before additional contributions 6

322 Percent of Payroll Accelerated Funding of UAAL Projected future UAAL contributions for OCTA before additional contributions percentage of pay Comparison of Annual UAAL Payments as a Percent of Payroll for OCTA Under Current Amortization Schedule (Payments Starting with Year Following the December 31, 2012 Valuation) 20% 15% Current Amortization Schedule 10% 5% 7 0% Time

323 Accelerated Funding of UAAL Alt. 1 - Apply $10m additional contributions over 15 years 8

324 Accelerated Funding of UAAL Alt. 2 - Apply $10m additional contributions in proportion to all UAAL layers 9

325 Accelerated Funding of UAAL Alt. 3 - Apply $10m additional contributions over shortest UAAL layers 10

326 11 Accelerated Funding of UAAL Alt. 3 - Apply $10m additional contributions over shortest UAAL layers (OCTA) Date Established Source Initial Base UAAL Amortization Schedule as of December 31, 2012 under Alternative Three Years Remaining Remaining Base (before addl $10M) Amortization Amount Base (before addl $10M) Remaining Base (after addl $10M) Amortization Amount Base (after addl $10M) 12/31/2004 Restart amortization $70,302, $77,577,000 $5,075,000 $77,577,000 $5,075,000 12/31/2005 Actuarial (gain) or loss 1,340, ,036, , /31/2006 Actuarial (gain) or loss (5,778,000) 9 (4,762,000) (625,000) (4,762,000) (625,000) 12/31/2007 Actuarial (gain) or loss (12,467,000) 10 (10,825,000) (1,299,000) (10,825,000) (1,299,000) 12/31/2007 Assumption change 11,504, ,364, ,000 12,364, ,000 12/31/2008 Actuarial (gain) or loss 24,594, ,275,000 2,469,000 14,308,000 1,586,000 12/31/2009 Inclusion of Premium Pay 26,400, ,105,000 1,773,000 27,105,000 1,773,000 12/31/2009 Actuarial (gain) or loss 22,306, ,902,000 2,157,000 20,902,000 2,157,000 12/31/2010 Reallocation of assets 95, ,000 6,000 97,000 6,000 12/31/2010 Actuarial (gain) or loss (2,073,000) 13 (1,996,000) (193,000) (1,996,000) (193,000) 12/31/2011 Actuarial (gain) or loss 20,064, ,737,000 1,800,000 19,737,000 1,800,000 12/31/2011 Assumption change 19,530, ,859,000 1,089,000 19,859,000 1,089,000 12/31/2012 Actuarial (gain) or loss 5,904, ,904, ,000 5,904, ,000 12/31/2012 Assumption change 42,963, ,963,000 2,310,000 42,963,000 2,310,000 $232,236,000 $15,966,000 $223,233,000 $14,932,000

327 Accelerated Funding of UAAL Option B Additional contribution held back from UAAL and used in later years to reduce UAAL payment period Illustration using results prepared for OCFA OCFA Scenario #2 - $1m in year 1, $2m in year 2, through $10m in year 10»No UAAL contributions after 21 years OCFA Scenario #3 - $2m in year 1, $2m in year 2, etc.»no UAAL contributions after 22 years OCFA Scenario #1 Reduce period to 20, 15 or 10 years First must re-amortize UAAL over 20, 15 or 10 years Shows differences between current layered amortization and single layer restart of UAAL amortization 12

328 Accelerated Funding of UAAL Scenario #1 20, 15 and 10 years amortization of UAAL 13

329 Percent of Payroll Accelerated Funding of UAAL Scenario #1 20, 15 and 10 years amortization of UAAL - percentage of pay 50% Comparison of Annual UAAL Payments as a Percent of Payroll for OCFA Under Current Amortization Schedule and Alternative Single Amortization Periods Under Scenario #1 (Payments Starting with Year Following the December 31, 2012 Valuation) 40% 10 Years 15 Years 20 Years Current Amortization Schedule 30% 20% 10% 0% Time 14

330 Accelerated Funding of UAAL Scenario #2 $1m in year 1, $2m in year 2,.., $10m in year 10, applied at the end of the schedule 15

331 Accelerated Funding of UAAL Scenario #3 $2m in year 1, $2m in year 2, etc., applied at the end of the schedule 16

332 Accelerated Funding of UAAL Special Case employer pays off entire UAAL Illustration using results prepared for Cemetery District UAAL amount is $1,981,000 as of 12/31/12»actual payment required determined with interest adjustment and adjustment for 18-month delay between UAAL rate calculation and rate implementation»if made prior to 6/30/14, employer s contribution reduces to Normal Cost rate only for 2014/2015 New UAAL (positive or negative) in future valuations»positive UAAL requires resumption of UAAL contributions»negative UAAL (Surplus) allows actual employer contribution less than Normal Cost rate Under CalPEPRA, only if funded ratio >120% 17

333 18 Discussions

334 100 Montgomery Street Suite 500 San Francisco, CA T VIA AND USPS August 30, 2013 Mr. Steve Delaney Orange County Employees Retirement System 2223 Wellington Avenue Santa Ana, CA Re: Orange County Employees Retirement System Accelerated Funding of UAAL for Orange County Fire Authority (OCFA) Dear Steve: In our letter to you dated August 7, 2013, we outlined several options that may be considered by OCERS in treating additional contributions made by those participating employers interested in reducing their future Unfunded Actuarial Accrued Liability (UAAL) payments to OCERS. As we pointed out in our letter, there are two broad categories of option that differ primarily in whether the additional contribution amounts would be used to immediately buy down the employers UAAL and UAAL contribution rates (Option A), or held back from the current UAAL as an advance contribution so that those amounts, with future investment earnings, could be applied at the employer s discretion against future contributions (Option B). In particular, under Option B they could be used to reduce the UAAL payment periods for those employers. When we presented our letter at the Board meeting on August 19, we were directed by the Board to provide some examples to illustrate how the different options would impact the employers UAAL amount as well as current and future UAAL contribution rates. In our discussions following the Board meeting, we have been further directed by your office to prepare the examples based on actual requests made by three different employers. In this letter, we have provided the examples based on the request made by the Orange County Fire Authority (OCFA). Since OCFA has only requested a subset of the options outlined in our letter from August 7, we would defer providing illustrations of the other options until we prepare the examples for the other employers. Benefits, Compensation and HR Consulting. Member of The Segal Group. Offices throughout the United States and Canada

335 Mr. Steve Delaney August 30, 2013 Page 2 OCFA has requested that we provide them with the impacts on their contribution rate under the following scenarios: #1 How much would OCFA s General and Safety contribution rates need to increase in order for OCFA to reduce their current UAAL amortization to: (a) 20 years, (b) 15 years or (c) 10 years? #2 If OCFA starts to add an extra $1 million in retirement contributions each year (i.e., $ 1 million in the first year, $2 million in the second year, etc.) until it reaches $10 million in ten years, how many years would they be able to shorten the amortization period for their UAAL? #3 If OCFA starts to add an extra $2 million in retirement contributions each year, how many years would they be able to shorten their amortization period for their UAAL? The impacts on the UAAL amount and associated contribution rate under these three scenarios are provided below. SCENARIO #1 CONTRIBUTIONS UNDER 20, 15 AND 10-YEAR AMORTIZATION PERIODS In the December 31, 2012 valuation, there are 15 amortization layers for the UAAL for the OCFA General and 14 amortization layers for the UAAL for the OCFA Safety membership groups. The outstanding balance of the combined UAAL measured as of December 31, 2004 valuation was amortized over 30 years with 22 years left in that amortization as of December 31, Since 2004, depending on the cause that gave rise to the change in the UAAL (either positive or negative), the changes in the UAAL subsequent to the December 31, 2004 valuation have been amortized over different periods. Under OCERS funding policy, there are layers of UAAL with different amortization periods and not a single UAAL amortization layer. However, during our discussions with the Board on the review of actuarial funding policy, we noted that the net total current year UAAL contribution rates determined in the December 31, 2012 valuation for OCFA s General and Safety membership groups are equivalent to those that would result from an equivalent single amortization period of about 19 to 20 years. We emphasize that this single amortization period is only for illustration and comparison; it is not actually used to determine employer contributions. In the table below, we have compared OCFA s normal cost plus UAAL contribution rates determined in the December 31, 2012 valuation with those determined using a single UAAL amortization period of 20 years, 15 years or 10 years. In reviewing these results, of note is that the contribution rates determined using the current as well as the new amortization schedules have been determined without taking into consideration the 2-year phase-in of the impact of the employer s contribution rates as a result of the changes in the economic assumptions in the December 31, 2012 valuation. This reflects a simplifying assumption we have made that if an v2/

336 Mr. Steve Delaney August 30, 2013 Page 3 employer can budget for the accelerated funding of the UAAL, then that employer would also be able to pay the higher contributions without the 2-year phase-in. We would be available to refine our calculation to reflect the phase-in based on any actual funding proposal agreed to by OCERS and OCFA. General Rate Group #10 Safety Rate Group #8 Total Estimated Annual Estimated Annual Total Rate Amount (1) Total Rate Amount (1) Total Rate Estimated Annual Amount (1) Current Amortization (2) Normal Cost 13.93% $3, % $29, % $32,295 UAAL (3) 24.76% 5, % 30, % 35,420 Total 38.69% $8, % $59, % $67, year Amortization Normal Cost 13.93% $3, % $29, % $32,295 UAAL (3) 24.09% 5, % 29, % 34,300 Total 38.02% $8, % $58, % $66,595 Change from current -0.67% -$ % -$ % -$1, year Amortization Normal Cost 13.93% $3, % $29, % $32,295 UAAL (3) 30.31% 6, % 36, % 43,129 Total 44.24% $9, % $65, % $75,424 Change from current +5.55% +$1, % +$6, % +$7, year Amortization Normal Cost 13.93% $3, % $29, % $32,295 UAAL (3) 42.92% 9, % 51, % 61,023 Total 56.85% $12, % $80, % $93,318 Change from current % +$3, % +$21, % +$25,603 (1) Dollar amounts are in thousands and are based on December 31, 2012 projected annual compensation as follows: Rate Group #10 $21,832 Rate Group #8 $111,826 (2) Before reflecting two-year phase-in of the contribution rate impact from the change in economic assumptions in the December 31, 2012 valuation. (3) UAAL rate has been adjusted to reflect 18-month delay between date of valuation and date of rate implementation. A comparison of the UAAL contributions required under the current and the 20, 15 and 10 year amortization schedules is provide in Attachment A. The current year s UAAL contributions as provided in the table above are somewhat higher than the first year s contributions in Attachment A due to the adjustment in the UAAL for the 18- month delay between the date of the valuation and date of rate implementation v2/

337 Mr. Steve Delaney August 30, 2013 Page 4 Note that changing to a 20-year single period would actually reduce the employer s current rates since the equivalent single amortization period for OCFA s UAAL is between 19 and 20 years. We also stress that the use of a single amortization period for the entire UAAL is not current policy and may or may not be made available by the Board. In responding to this request from OCFA, we assume OCFA would be making a long-term commitment to fund using one of these amortization schedules. If our understanding is correct, neither Option A nor Option B as outlined in our letter dated August 7 may satisfy OCFA s intent. This is because there are 14 to 15 UAAL layers for OCFA s General and Safety groups, each with different amortization periods and some of those periods are longer than the 20, 15 or 10 years requested by OCFA. If the Board chooses to allow this scenario, it would require an action to combine all the UAAL layers into a single layer (with the requested amortization period), subject to approval by the Board. SCENARIO #2 IMPACT OF ADDITIONAL CONTRIBUTIONS OF $1 MILLION PER YEAR UNTIL THEY REACH $10 MILLION IN TEN YEARS We have been asked by OCFA to determine how many years would they be able to shorten the amortization period for their UAAL if OCFA starts to add an extra $1 million in retirement contributions each year beginning on March 31, 2014 (i.e., $ 1 million on March 31, 2014, $2 million on March 31, 2015, etc.) until they reach $10 million in ten years. As we outlined in our August 7 letter, under Option A any additional contributions made by OCFA would normally be used to immediately reduce both OCFA s UAAL and the related UAAL contribution rate in the next actuarial valuation. This is because those additional contributions would be used dollar-for-dollar to reduce OCFA s UAAL and a lower UAAL contribution rate would be calculated as a result in the next actuarial valuation. This is the reason why for OCFA s Scenario #2, Option B would be more appropriate. The additional contributions would be deposited into a booking-keeping type account (similar to the County Investment Account that has been maintained for the County of Orange). The balance in that account would not be included as valuation assets and therefore would not be used to immediately reduce OCFA s UAAL amount and the associated UAAL contribution rate in the next valuation. If OCERS would agree to establish this account for OCFA, that amount would be credited with the additional contributions made by OCFA. It would be adjusted annually by OCERS to reflect actual market returns (either positive or negative) earned by the System during the year. As we have already pointed out, OCFA has a number of UAAL layers each with its own amortization period. While we have used the terminology of an equivalent single amortization period to illustrate the duration that OCFA s UAAL would be paid off, in practice, OCFA s future dollar contributions would decrease in some years when those UAAL layers that are amortized with shorter periods are paid-off. Furthermore, those contributions would generally increase every year at the assumed rate of payroll increase (i.e., 3.75%) under the level percentage of payroll amortization approach. The interrelationship between these factors is best illustrated in the chart as provided in Attachment B v2/

338 Mr. Steve Delaney August 30, 2013 Page 5 We have estimated that additional contributions of $1 million per year until they reach $10 million in ten years when adjusted with assumed investment return at 7.25% per year would allow OCFA to eliminate their UAAL contributions after 21 years for both General and Safety. That result is shown in the dropping off of the contributions as illustrated by the red line in Attachment B. SCENARIO #3 IMPACT OF ADDITIONAL CONTRIBUTIONS OF $2 MILLION PER YEAR Scenario #3 is very similar to Scenario #2 except that the contributions under this Scenario are fixed and would continue to be made beyond ten years. Assuming again that OCERS would agree to establish a book-keeping account for OCFA, we have estimated that the $2 million per year contributions if made by OCFA for 21 years when adjusted with assumed investment return at 7.25% per year would allow OCFA to eliminate their UAAL contributions after 22 years for both General and Safety. That result is shown in the dropping off of the contributions as illustrated by the red line in Attachment C. We are members of the American Academy of Actuaries and we meet the qualification requirements to render the actuarial opinion contained herein. Please let us know if you have any questions. Sincerely, Paul Angelo, FSA, EA, MAAA, FCA Senior Vice President and Actuary Andy Yeung, ASA, EA, MAAA, FCA Vice President and Associate Actuary AYY/kek Enclosures cc: Brenda Shott Julie Wyne v2/

339 Attachment A Comparison of Annual UAAL Payments for OCFA Under Current Amortization Schedule and Alternative Single Amortization Periods Under Scenario #1 (Payments Starting with Year Following the December 31, 2012 Valuation) $100,000 $90,000 Annual Payment ('000) $80,000 $70,000 $60,000 $50,000 $40,000 $30, Years 15 Years 20 Years Current Amortization Schedule $20,000 $10,000 $ Time v2/

340 Attachment B Comparison of Annual UAAL Payments for OCFA Under Current Amortization Schedule With UAAL Payments After Additonal Contributions Under Scenario #2 (Payments Starting with Year Following the December 31, 2012 Valuation) $50,000 $45,000 Annual Payment ('000) $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 Scenario #2 Current Amortization Schedule $10,000 $5,000 $ Time v2/

341 Attachment C Comparison of Annual UAAL Payments for OCFA Under Current Amortization Schedule With UAAL Payments After Additonal Contributions Under Scenario #3 (Payments Starting with Year Following the December 31, 2012 Valuation) $50,000 $45,000 Annual Payment ('000) $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 Scenario #3 Current Amortization Schedule $10,000 $5,000 $ Time v2/

342 100 Montgomery Street Suite 500 San Francisco, CA T VIA AND USPS September 13, 2013 Mr. Steve Delaney Orange County Employees Retirement System 2223 Wellington Avenue Santa Ana, CA Re: Orange County Employees Retirement System Accelerated Funding of UAAL for Cemetery District Dear Steve: In our letter to you dated August 7, 2013, we outlined several options that may be considered by OCERS in treating additional contributions made by those participating employers interested in reducing their future Unfunded Actuarial Accrued Liability (UAAL) payments to OCERS. As we pointed out in our letter, there are two broad categories of options that differ primarily in whether the additional contribution amounts would be used to immediately buy down the employers UAAL and UAAL contribution rates (Option A), or held back from the current UAAL as an advance contribution so that those amounts, with future investment earnings, could be applied at the employer s discretion against future contributions (Option B). When we presented our letter at the Board meeting on August 19, we were directed by the Board to provide some examples to illustrate how the different options would impact the employers UAAL amount as well as current and future UAAL contribution rates. In our discussions following the Board meeting, we have been further directed by your office to prepare the examples based on actual requests made by three different employers. In this letter, we have provided the example based on the request made by the Cemetery District (District). The District has expressed interest in paying off their full UAAL with OCERS which is a unique extension of accelerating the funding of only part of the UAAL as contemplated by Options A and B above. For that reason, we will defer providing further illustrations of Options A and B, applicable to all plan sponsors as recently requested by the OCERS Board, until we prepare the examples for the other employers. Benefits, Compensation and HR Consulting. Member of The Segal Group. Offices throughout the United States and Canada

343 Mr. Steve Delaney September 13, 2013 Page 2 The District is the only employer in Rate Group #11. In the December 31, 2012 valuation, for Rate Group #11 there are 15 amortization layers for the UAAL and the total outstanding balance of their UAAL is $1,981,000. Also, in the December 31, 2012 valuation, the recommended employer contribution rates are comprised of an aggregate normal cost and a UAAL contribution rate of 12.34% * and 12.28%, respectively. The District s total contribution rates are 24.62% and 22.99% before and after the 2-year phase-in of the cost impact due to the new economic assumptions adopted for the December 31, 2012 valuation, respectively. While we understand that a specific date of paying off the UAAL has not been specified by the District, we propose that the payoff amount be determined by adjusting $1,981,000 with interest at the assumed rate of investment return (i.e., 7.25% per year) from December 31, 2012 to the actual date of the funding of the UAAL. We would also propose that upon receiving the amount required to pay off the UAAL, OCERS consider reducing the District s total contribution rate to only the level required to pay the normal cost. In particular, this means that if the District were to pay off their UAAL any time before June 30, 2014, then their total contribution rate for fiscal year 2014/2015 would be reduced to the normal cost rate of 12.34%. The followings are points of note for OCERS and the District to consider before the District finalizes its decision to pay off its entire UAAL: 1. If the District decides to pay off its UAAL during a fiscal year but it has already prepaid its employer contributions for that entire fiscal year, OCERS may consider reducing the District s total contribution rate to the normal cost rate effective with the date of the payment of the UAAL. This would produce a credit for the prepaid UAAL contributions applicable to the balance of the current year. 2. Even though the District may pay off their full UAAL, they should be reminded that new UAAL (either positive or negative) may emerge as a result of deviation in actual experience versus that expected by the assumptions. In practice, any new positive UAAL that emerges afterward would result in the District resuming the payment of UAAL contributions in a future valuation. Conversely, any new negative UAAL (or surplus) would be amortized over the Board s funding policy of 30 years and be used to reduce the District s contribution to a level below the normal cost rate. However, because of the requirements imposed by the California Public Employees Pension Reform Act of 2013, surplus would not be amortized until the funded status is in excess of 120%. * Note there is a separate normal cost rate included in the December 31, 2012 valuation for each of Plan U and the combined Plans M and N. Note that in practice, there is also a need to make an adjustment to account for the 18-month delay between the calculation of the normal cost rate calculated in the December 31, 2012 valuation and the implementation of that normal cost rate in fiscal year 2014/ v2/

344 Mr. Steve Delaney September 13, 2013 Page 3 We are members of the American Academy of Actuaries and we meet the qualification requirements to render the actuarial opinion contained herein. Please let us know if you have any questions. Sincerely, Paul Angelo, FSA, EA, MAAA, FCA Senior Vice President and Actuary Andy Yeung, ASA, EA, MAAA, FCA Vice President and Associate Actuary AYY/kek cc: Brenda Shott Julie Wyne v2/

345 100 Montgomery Street Suite 500 San Francisco, CA T VIA AND USPS September 16, 2013 Mr. Steve Delaney Orange County Employees Retirement System 2223 Wellington Avenue Santa Ana, CA Re: Orange County Employees Retirement System Accelerated Funding of UAAL for Orange County Transportation Authority (OCTA) Dear Steve: In our letter to you dated August 7, 2013, we outlined several options that may be considered by OCERS in treating additional contributions made by those participating employers interested in reducing their future Unfunded Actuarial Accrued Liability (UAAL) payments to OCERS. As we pointed out in our letter, there are two broad categories of options that differ primarily in whether the additional contribution amounts would be used to immediately buy down the employers UAAL and UAAL contribution rates (Option A), or held back from the current UAAL as an advance contribution so that those amounts, with future investment earnings, could be applied at the employer s discretion against future contributions (Option B). When we presented our letter at the Board meeting on August 19, we were directed by the Board to provide some examples to illustrate how the different options would impact the employers UAAL amount as well as current and future UAAL contribution rates. In our discussions following the Board meeting, we have been further directed by your office to prepare the examples based on actual requests made by three different employers. We understand that Orange County Transportation Authority (OCTA) is still in the preliminary stage of evaluating the feasibility of accelerating the funding of their UAAL with OCERS. As no specific proposals have been identified, we have included in this letter only the cost impact associated with the alternatives identified with Option A as outlined in our letter from August 7, as that is the approach that would usually be applied under an actuarial funding policy. Benefits, Compensation and HR Consulting. Member of The Segal Group. Offices throughout the United States and Canada

346 Mr. Steve Delaney September 16, 2013 Page 2 Since we have not been provided with specific amount of additional contributions OCTA would consider paying to OCERS, we have prepared the following illustrative cost impacts assuming that additional contributions of $10 million would be paid on June 30, Of course we would revise our calculations based on the amount and the date of any additional contributions actually made. Discussion and Analysis of Alternatives under Option A OCTA is the only employer in Rate Group #5. In the December 31, 2012 valuation, for Rate Group #5 there are 14 amortization layers for the UAAL and the total outstanding balance of their UAAL is $232,236,000. The outstanding balance of the combined UAAL measured as of December 31, 2004 valuation was amortized over 30 years with 22 years left in that amortization as of December 31, Since 2004, depending on the cause that gave rise to the change in the UAAL (either positive or negative), the changes in the UAAL subsequent to the December 31, 2004 valuation have been amortized over different periods. We have included as Attachment A the complete amortization schedule for Rate Group #5 from the December 31, 2012 valuation. We have also included in Attachment B the future UAAL contributions in order to fully amortize OCTA s UAAL of $232,236,000. As we discussed in our August 7 letter, there are three alternatives as to how to apply the additional contribution against the 14 UAAL amortization layers for OCTA: Alternative One: Alternative Two: Alternative Three: Under this alternative, the additional contributions would be treated as an actuarial gain and they would be amortized over the 15-year period used by the Board for amortizing actuarial gains/losses. (This is the default option under OCERS current funding policy.) The additional contributions would be allocated in proportion to the outstanding balances in the employer s current UAAL layers and amortized using those corresponding periods. The employers would be allowed to select the prior UAAL layer(s) they would want to have the payment applied against, using the amortization periods for such layer(s). As discussed in our August 7 letter, this selection could be subject to conditions developed by the Board. Results Under Alternative One If we discount the $10 million in contributions assumed to be made on June 30, 2014 at the rate of 7.25% back to December 31, 2012, that would be equivalent to an amount of $9,003,000 as of December 31, Under Alternative One, the current contribution rates determined in the December 31, 2012 valuation would be as revised as follows: v1/

347 Mr. Steve Delaney September 16, 2013 Page 3 Alternative One v1/ Before $10 million in Additional Contributions Rate Estimated Annual Amount (1) After $10 million in Additional Contributions Rate Estimated Annual Amount (1) Normal Cost 11.83% $11, % $11,911 UAAL (2) 16.48% $16, % $15,716 Total 28.31% $28, % $27,627 Total Contribution After 2- Year Phase-in (1) (2) 26.62% $26, % $25,926 Dollar amounts are in thousands and are based on December 31, 2012 projected annual compensation of $100,681. UAAL rate has been adjusted to reflect 18-month delay between date of valuation and date of rate implementation. We would recommend Alternative One especially if the additional contributions made by the employers are relatively small when compared to their UAAL. In Attachment C, we have provided a graphic depiction of how the $10 million would be used to reduce OCTA s future contributions to the UAAL under this Alternative. Results Under Alternative Two Under Alternative Two, the current contribution rates determined in the December 31, 2012 valuation would be as revised as follows: Alternative Two Before $10 million in Additional Contributions Rate Estimated Annual Amount (1) After $10 million in Additional Contributions Rate Estimated Annual Amount (1) Normal Cost 11.83% $11, % $11,911 UAAL (2) 16.48% $16, % $15,898 Total 28.31% $28, % $27,809 Total Contribution After 2- Year Phase-in (1) (2) 26.62% $26, % $26,108 Dollar amounts are in thousands and are based on December 31, 2012 projected annual compensation of $100,681. UAAL rate has been adjusted to reflect 18-month delay between date of valuation and date of rate implementation.

348 Mr. Steve Delaney September 16, 2013 Page 4 We would recommend Alternative Two if the additional contributions are relatively large and if it is the intent of the Board and/or the employers to provide contribution rate relief longer than 15 years. In Attachment D, we have provided a graphic depiction of how the $10 million would be used to reduce OCTA s future contributions to the UAAL under this Alternative. Results Under Alternative Three As we have noted above, the additional contributions have been used to provide UAAL contribution rate relief over 15 years under Alternative One and longer than 15 years under Alternative Two. If OCERS would allow OCTA to choose the prior UAAL layer(s) they might decide to choose based on what would provide them with the maximum near-term contribution rate relief. This would be achieved by applying the additional contributions to pay off the UAAL layers with the shortest remaining amortization periods. How this would work out would depend actually on the size of the additional payment relative to the outstanding balances of the shortest UAAL layers. In our example a $10 million payment would completely eliminate the UAAL balance of $1,036,000 in the actuarial loss layer created in the 2005 valuation with eight years left in the amortization period. However, the remaining contributions ($9,003,000 minus $1,036,000 or $7,967,000) would be sufficient to only partially eliminate the UAAL balance of $22,275,000 remaining in the actuarial loss layer created in the 2008 valuation with 11 years left in the amortization period. The change in the amortization bases before and after the additional contributions of $10 million is provided in Attachment F. Under Alternative Three, the current contribution rates determined in the December 31, 2012 valuation would be as revised as follows: Alternative Three Before $10 million in Additional Contributions Rate Estimated Annual Amount (1) After $10 million in Additional Contributions Rate Estimated Annual Amount (1) Normal Cost 11.83% $11, % $11,911 UAAL (2) 16.48% $16, % $15,424 Total 28.31% $28, % $27,335 Total Contribution After 2- Year Phase-in (1) (2) 26.62% $26, % $25,634 Dollar amounts are in thousands and are based on December 31, 2012 projected annual compensation of $100,681. UAAL rate has been adjusted to reflect 18-month delay between date of valuation and date of rate implementation v1/

349

350 Attachment A UAAL Amortization Schedule as of December 31, 2012 under Current Amortization Schedule Before Considering any Additional UAAL Contributions Date Established Source Initial Base Years Remaining Remaining Base Amortization Amount Base 12/31/2004 Restart amortization $70,302, $77,577,000 $5,075,000 12/31/2005 Actuarial (gain) or loss 1,340, ,036, ,000 12/31/2006 Actuarial (gain) or loss (5,778,000) 9 (4,762,000) (625,000) 12/31/2007 Actuarial (gain) or loss (12,467,000) 10 (10,825,000) (1,299,000) 12/31/2007 Assumption change 11,504, ,364, ,000 12/31/2008 Actuarial (gain) or loss 24,594, ,275,000 2,469,000 12/31/2009 Inclusion of Premium Pay 26,400, ,105,000 1,773,000 12/31/2009 Actuarial (gain) or loss 22,306, ,902,000 2,157,000 12/31/2010 Reallocation of assets 95, ,000 6,000 12/31/2010 Actuarial (gain) or loss (2,073,000) 13 (1,996,000) (193,000) 12/31/2011 Actuarial (gain) or loss 20,064, ,737,000 1,800,000 12/31/2011 Assumption change 19,530, ,859,000 1,089,000 12/31/2012 Actuarial (gain) or loss 5,904, ,904, ,000 12/31/2012 Assumption change 42,963, ,963,000 2,310,000 $232,236,000 $15,966, v1/

351 Attachment B Annual UAAL Payments for OCTA Under Current Amortization Schedule Before Considering Any Additional UAAL Contributions (Payments Starting with Year Following the December 31, 2012 Valuation) $30,000 $25,000 Current Amortization Schedule Annual Payment ('000) $20,000 $15,000 $10,000 $5,000 $ Time v1/

352 Attachment C Comparison of Annual UAAL Payments for OCTA Under Current Amortization Schedule With UAAL Payments After Additonal Contributions Under Alternative One (Payments Starting with Year Following the December 31, 2012 Valuation) $30,000 Annual Payment ('000) $25,000 $20,000 $15,000 $10,000 Alternative #1 Current Amortization Schedule $5,000 $ Time v1/

353 Attachment D Comparison of Annual UAAL Payments for OCTA Under Current Amortization Schedule With UAAL Payments After Additonal Contributions Under Alternative Two (Payments Starting with Year Following the December 31, 2012 Valuation) $30,000 Annual Payment ('000) $25,000 $20,000 $15,000 $10,000 Alternative #2 Current Amortization Schedule $5,000 $ Time v1/

354 Attachment E Comparison of Annual UAAL Payments for OCTA Under Current Amortization Schedule With UAAL Payments After Additonal Contributions Under Alternative Three (Payments Starting with Year Following the December 31, 2012 Valuation) $30,000 Annual Payment ('000) $25,000 $20,000 $15,000 $10,000 Alternative #3 Current Amortization Schedule $5,000 $ Time v1/

355 Attachment F Date Established Source Initial Base UAAL Amortization Schedule as of December 31, 2012 under Alternative Three Years Remaining Remaining Base (before addl $10M) Amortization Amount Base (before addl $10M) Remaining Base (after addl $10M) Amortization Amount Base (after addl $10M) 12/31/2004 Restart amortization $70,302, $77,577,000 $5,075,000 $77,577,000 $5,075,000 12/31/2005 Actuarial (gain) or loss 1,340, ,036, , /31/2006 Actuarial (gain) or loss (5,778,000) 9 (4,762,000) (625,000) (4,762,000) (625,000) 12/31/2007 Actuarial (gain) or loss (12,467,000) 10 (10,825,000) (1,299,000) (10,825,000) (1,299,000) 12/31/2007 Assumption change 11,504, ,364, ,000 12,364, ,000 12/31/2008 Actuarial (gain) or loss 24,594, ,275,000 2,469,000 14,308,000 1,586,000 12/31/2009 Inclusion of Premium Pay 26,400, ,105,000 1,773,000 27,105,000 1,773,000 12/31/2009 Actuarial (gain) or loss 22,306, ,902,000 2,157,000 20,902,000 2,157,000 12/31/2010 Reallocation of assets 95, ,000 6,000 97,000 6,000 12/31/2010 Actuarial (gain) or loss (2,073,000) 13 (1,996,000) (193,000) (1,996,000) (193,000) 12/31/2011 Actuarial (gain) or loss 20,064, ,737,000 1,800,000 19,737,000 1,800,000 12/31/2011 Assumption change 19,530, ,859,000 1,089,000 19,859,000 1,089,000 12/31/2012 Actuarial (gain) or loss 5,904, ,904, ,000 5,904, ,000 12/31/2012 Assumption change 42,963, ,963,000 2,310,000 42,963,000 2,310,000 $232,236,000 $15,966,000 $223,233,000 $14,932, v1/

356 100 Montgomery Street Suite 500 San Francisco, CA T Andy Yeung, ASA, MAAA, FCA, EA Vice President & Associate Actuary VIA AND USPS August 30, 2013 Mr. Steve Delaney Chief Executive Officer Orange County Employees Retirement System 2223 Wellington Avenue Santa Ana, CA Re: Illustrations of Retirement Costs, Unfunded Actuarial Accrued Liability and Funded Ratio under Alternative Economic Scenarios Dear Steve: As requested, we have developed 15-year illustrations of the employer contribution rates for OCERS under three sets of market return scenarios after December 31, In this letter, we have also provided the Unfunded Actuarial Accrued Liability (UAAL) in dollars and the funded ratio associated with those projected employer contribution rates. These results have been prepared using the amortization periods approved by the Board at its meeting in June The three market rate of return scenarios are as follows: Scenario #1: 0.00% for 2013 and 7.25% thereafter. Scenario #2: 7.25% for all years. Scenario #3: 14.50% for 2013 and 7.25% thereafter. The projected contribution rates for the aggregate plan are provided in Attachment A. The projected contribution rates for the ten Rate Groups are provided in Attachment B. The projected UAAL and funded ratio for the aggregate plan are provided in Attachment C. The projected UAAL and funded ratio for the ten Rate Groups are provided in Attachments D through M. Benefits, Compensation and HR Consulting. Member of The Segal Group. Offices throughout the United States and Canada

357 Mr. Steve Delaney August 30, 2013 Page 2 This projection also reflects the potential employer savings as current employees leave employment and are replaced by new members covered under the tiers required by the California Public Employees Pension Reform Act of 2013 (CalPEPRA) starting at January 1, Please note that some of the changes made by CalPEPRA, such as the sharing of the total Normal Cost on a 50:50 basis, may result in employer savings for current employees. As the impact of those potential savings has not been studied by OCERS, we have not included those in this illustration. Methods and Assumptions The methods and actuarial assumptions we used to prepare the employer contribution rates, the UAAL and the funded ratio are as summarized below: The illustrations are based on the actuarial assumptions and census data used in our December 31, 2012 valuation report for the Retirement Plan. With the exception of the market rates of return specified above, it is assumed that all actuarial assumptions would be met in the future and that there would be no change in the future for any of the actuarial assumptions adopted by the Board for the December 31, 2012 valuation. The detailed amortization schedule for OCERS UAAL as of December 31, 2012 is provided in the valuation report. Any subsequent change in the UAAL due to actuarial gains or losses (e.g., from investment returns on actuarial value greater or less than the assumed 7.25% at market value) are amortized over separate 15-year periods. No adjustment has been made to reflect the long-term impact on OCERS of the two-year phase-in of the cost increase due to the change in the economic assumptions (especially the 7.25% investment return assumption) adopted by the Board for the December 31, 2012 valuation. (That impact, if reflected in our projections, would have increased the contribution rates for the System as a whole by about 0.2% of payroll starting with the December 31, 2013 valuation.) However, we have provided in Attachments A and B the contribution rates from the December 31, 2012 valuation both before and after the adjustment for the first year of the two-year phase-in. CalPEPRA prescribes new benefit formulas for members with a membership date on and after January 1, For Rate Groups 1, 3, 5, 9, 10 and 11, we have estimated the Normal Cost savings 1 associated with the enrollment of those employees under the new 2.5% at 67 formula. We have also estimated the changes in employee contributions in accordance with Section of CalPEPRA (i.e., 50:50 sharing of the total Normal Cost with the new employees). For Rate Group 2, with the exception of the County s attorneys, San Juan Capistrano employees and OCERS Management employees who will receive the 2.5% at 67 formula, all new employees in Rate Group 2 will receive the new 1.62% at 65 formula. 1 To estimate the savings, we have made a simplifying assumption that current active members would be replaced over the next 20 years (starting in 2013) by new members under 2.5% at 67 on a prorated basis v2/

358 Mr. Steve Delaney August 30, 2013 Page 3 We assumed that the proportion of the total payrolls from County s attorneys, San Juan Capistrano employees and OCERS Management employees in the future would remain unchanged from that observed at the December 31, valuation. As of December 31, 2011, payroll for active members in these three categories represented about 7.5% of the total payroll for all members in Rate Group 2. We have estimated the Normal Cost savings 3 associated with the enrollment of new members under the two new formulas. We have also estimated the changes in employee contributions in accordance with Section of CalPEPRA. For Rate Group 6, 7 and 8 members with a membership date on and after January 1, 2013, we have estimated the Normal Cost savings 4 associated with the enrollment of those members under the new 2.7% at 57 formula. We have also estimated the changes in employee contributions in accordance with Section of CalPEPRA. Please note that new members will be enrolled under the CalPEPRA benefit formulas effective January 1, 2013 and it is anticipated that the actual payrolls for these members will first be reported in the December 31, 2013 valuation. In preparing the contribution rates for each Rate Group (and the aggregate rate for the System as a whole), we have utilized the projected proportions of payroll for the members covered under the pre-calpepra and the CalPEPRA benefit formulas starting with the December 31, 2013 valuation and in each subsequent valuation. As the results from the December 31, 2013 valuation will not be used in setting the contribution rates until the 2015/2016 fiscal year, the contribution rates provided in these illustrations are somewhat overstated since employers in the different Rate Groups will start to pay lower contribution rates for new hires under the CalPEPRA benefit formulas effective January 1, We understand that, with the exception of new members who would be covered under the new 1.62% at 65 formula, in the determination of pension benefits under the CalPEPRA formulas the maximum compensation that can be taken into account for new members on and after January 1, 2013 is equal to 120% of the Social Security Taxable Wage Base ($136,440 in 2013). To the extent this provision will limit compensation of the new members, our assumption that the total payroll will increase by 3.75% each year over the projection period (for use in determining the contribution rate for the UAAL) may be overstated somewhat. 2 This is the most recent date for which data was provided by OCERS to isolate the County s attorneys. 3 To estimate the savings, we have made a simplifying assumption that current County s attorneys, San Juan Capistrano and OCERS Management active members would be replaced over the next 20 years (starting in 2013) by new members under 2.5% at 67 on a prorated basis. All other active members would be replaced over the next 20 years (starting in 2013) by new members under 1.62% at 65 on a prorated basis. 4 To estimate the savings, we have made a simplifying assumption that current active members would be replaced over the next 20 years (starting in 2013) by new members under 2.7% at 57 on a prorated basis v2/

359

360 Attachment A: Projected Employer Rates Aggregate Plan 46% 42% Percent of Payroll 38% 34% #1: 0% (2013) and 7.25% thereafter 30% #2: 7.25% for all years #3: 14.5% (2013), 7.25% thereafter 26% Valuation Date (12/31) Valuation Date (12/31) #1: 0% (2013) and 7.25% thereafter 41.6% 41.7% 42.5% 43.3% 43.4% 43.7% 43.4% 42.9% 41.7% 41.6% 41.2% 38.0% 35.5% 34.8% 32.3% #2: 7.25% for all years 41.6% 40.8% 40.7% 40.6% 39.8% 39.4% 39.0% 38.6% 37.4% 37.3% 36.9% 33.6% 31.1% 30.5% 28.0% #3: 14.5% (2013), 7.25% thereafter 41.6% 40.0% 38.8% 37.8% 36.2% 35.0% 34.7% 34.2% 33.0% 32.9% 32.5% 29.3% 26.8% 26.1% 23.6% Rates shown above have not been adjusted for the two-year phase-in of the cost increase due to the change in the economic assumptions adopted by the Board for the December 31, 2012 valuation. For instance, the aggregate employer contribution rate as of December 31, 2012 after the two-year phase-in is 39.3% and the two-year phase-in, if reflected in our projections would have increased the contribution rates for the System as a whole by about 0.2% of payroll starting with the December 31, 2013 valuation v2/ SEGAL

361 Attachment B Projected Employer Rates by Rate Group Scenario 1: 0% for 2013 and 7.25% thereafter Valuation Date (12/31) General RG #1 - Plans A, B and U (non-octa, non-ocsd) 22.6% 22.8% 23.7% 24.5% 24.8% 25.2% 25.2% 25.1% 25.8% 25.3% 26.0% 24.0% 21.5% 22.4% 21.2% RG #2 - Plans I, J, O, P, S, T and U 39.4% 39.4% 40.1% 40.8% 40.7% 41.0% 40.6% 40.1% 38.6% 38.4% 37.8% 34.9% 32.4% 31.6% 29.0% RG #3 - Plans B, G, H and U (Law Library, OCSD) 38.3% 38.5% 39.3% 40.1% 40.3% 40.7% 40.5% 40.2% 38.1% 37.5% 37.3% 35.6% 33.9% 31.2% 27.9% RG #5 - Plans A, B and U (OCTA) 28.3% 28.5% 29.4% 30.4% 30.7% 31.2% 31.2% 31.1% 30.9% 31.6% 32.8% 30.0% 27.6% 27.7% 25.6% RG #9 - Plans M, N and U (TCA) 27.2% 27.2% 27.7% 28.2% 28.3% 28.6% 28.4% 28.2% 28.5% 29.0% 29.0% 27.7% 25.7% 26.3% 26.7% RG #10 - Plans I, J, M, N and U (OCFA) 38.7% 38.7% 39.3% 39.9% 39.9% 40.2% 39.8% 39.4% 38.0% 35.4% 36.5% 35.5% 33.5% 32.7% 29.0% RG #11 - Plans M and N, future service, and U (Cemetery) 24.6% 24.7% 25.2% 25.8% 25.7% 25.9% 25.5% 25.1% 25.2% 24.5% 23.6% 21.4% 21.4% 20.6% 19.6% Safety RG #6 - Plans E, F and V (Probation) 43.2% 43.1% 43.9% 44.7% 44.7% 45.1% 44.7% 44.1% 41.7% 40.9% 40.7% 38.0% 36.9% 36.5% 34.9% RG #7 - Plans E, F, Q, R and V (Law Enforcement) 61.0% 61.1% 62.6% 64.1% 64.4% 65.2% 64.7% 64.3% 63.9% 64.6% 64.4% 58.6% 55.6% 54.8% 52.2% RG #8 - Plans E, F, Q, R and V (Fire Authority) 53.0% 52.9% 53.8% 54.8% 54.8% 55.3% 54.7% 54.2% 53.3% 53.3% 52.4% 47.4% 44.2% 44.1% 41.7% Rates shown above have not been adjusted for the two-year phase-in of the cost increase due to the change in the economic assumptions adopted by the Board for the December 31, 2012 valuation. For instance, the employer contribution rates as of December 31, 2012 after the two-year phase-in are as follows: Rate Group #1 21.0% Rate Group #2 37.3% Rate Group #3 36.4% Rate Group #5 26.6% Rate Group #9 25.7% Rate Group # % Rate Group # % Rate Group #6 40.5% Rate Group #7 57.3% Rate Group #8 49.8% Note that the two-year phase-in, if reflected in our projections would have increased the contribution rates for the System as a whole by about 0.2% of payroll starting with the December 31, 2013 valuation. We have not determined that impact for each Rate Group v2/ SEGAL

362 Attachment B Projected Employer Rates by Rate Group Scenario 2: 7.25% for all years Valuation Date (12/31) General RG #1 - Plans A, B and U (non-octa, non-ocsd) 22.6% 22.2% 22.3% 22.4% 22.1% 22.0% 21.9% 21.9% 22.6% 22.1% 22.8% 20.8% 18.3% 19.2% 18.0% RG #2 - Plans I, J, O, P, S, T and U 39.4% 38.6% 38.4% 38.3% 37.5% 37.0% 36.6% 36.1% 34.6% 34.4% 33.8% 30.9% 28.4% 27.6% 25.0% RG #3 - Plans B, G, H and U (Law Library, OCSD) 38.3% 37.8% 37.8% 37.8% 37.3% 37.0% 36.8% 36.5% 34.4% 33.8% 33.6% 32.0% 30.2% 27.5% 24.3% RG #5 - Plans A, B and U (OCTA) 28.3% 27.8% 27.9% 28.1% 27.7% 27.7% 27.6% 27.5% 27.3% 28.0% 29.2% 26.4% 24.1% 24.1% 22.1% RG #9 - Plans M, N and U (TCA) 27.2% 26.8% 26.7% 26.7% 26.3% 26.1% 25.9% 25.7% 26.0% 26.5% 26.5% 25.2% 23.2% 23.8% 24.2% RG #10 - Plans I, J, M, N and U (OCFA) 38.7% 38.1% 37.9% 37.8% 37.2% 36.8% 36.5% 36.1% 34.6% 32.0% 33.2% 32.1% 30.2% 29.3% 25.6% RG #11 - Plans M and N, future service, and U (Cemetery) 24.6% 24.1% 23.9% 23.9% 23.2% 22.9% 22.7% 22.4% 22.6% 21.9% 21.1% 18.9% 18.9% 18.2% 17.2% Safety RG #6 - Plans E, F and V (Probation) 43.2% 42.4% 42.1% 42.0% 41.2% 40.7% 40.3% 39.8% 37.4% 36.5% 36.3% 33.7% 32.6% 32.2% 30.6% RG #7 - Plans E, F, Q, R and V (Law Enforcement) 61.0% 59.8% 59.7% 59.7% 58.7% 58.3% 57.9% 57.5% 57.0% 57.8% 57.5% 51.7% 48.8% 48.0% 45.3% RG #8 - Plans E, F, Q, R and V (Fire Authority) 53.0% 51.9% 51.6% 51.4% 50.4% 49.8% 49.3% 48.7% 47.9% 47.8% 46.9% 41.9% 38.8% 38.6% 36.3% Rates shown above have not been adjusted for the two-year phase-in of the cost increase due to the change in the economic assumptions adopted by the Board for the December 31, 2012 valuation. For instance, the employer contribution rates as of December 31, 2012 after the two-year phase-in are as follows: Rate Group #1 21.0% Rate Group #2 37.3% Rate Group #3 36.4% Rate Group #5 26.6% Rate Group #9 25.7% Rate Group # % Rate Group # % Rate Group #6 40.5% Rate Group #7 57.3% Rate Group #8 49.8% Note that the two-year phase-in, if reflected in our projections would have increased the contribution rates for the System as a whole by about 0.2% of payroll starting with the December 31, 2013 valuation. We have not determined that impact for each Rate Group v2/ SEGAL

363 Attachment B Projected Employer Rates by Rate Group Scenario 3: 14.5% for 2013 and 7.25% thereafter Valuation Date (12/31) General RG #1 - Plans A, B and U (non-octa, non-ocsd) 22.6% 21.6% 20.9% 20.3% 19.4% 18.8% 18.7% 18.7% 19.3% 18.8% 19.6% 17.6% 15.1% 16.0% 14.8% RG #2 - Plans I, J, O, P, S, T and U 39.4% 37.9% 36.7% 35.7% 34.2% 33.1% 32.6% 32.1% 30.7% 30.5% 29.8% 26.9% 24.4% 23.6% 21.0% RG #3 - Plans B, G, H and U (Law Library, OCSD) 38.3% 37.2% 36.3% 35.5% 34.3% 33.4% 33.1% 32.8% 30.8% 30.1% 30.0% 28.3% 26.6% 23.9% 20.6% RG #5 - Plans A, B and U (OCTA) 28.3% 27.2% 26.4% 25.9% 24.8% 24.1% 24.1% 24.0% 23.8% 24.5% 25.7% 22.9% 20.5% 20.6% 18.6% RG #9 - Plans M, N and U (TCA) 27.2% 26.3% 25.7% 25.1% 24.2% 23.5% 23.4% 23.2% 23.5% 24.0% 24.0% 22.7% 20.7% 21.4% 21.7% RG #10 - Plans I, J, M, N and U (OCFA) 38.7% 37.5% 36.6% 35.8% 34.4% 33.5% 33.1% 32.7% 31.3% 28.6% 29.8% 28.7% 26.8% 26.0% 22.3% RG #11 - Plans M and N, future service, and U (Cemetery) 24.6% 23.5% 22.7% 22.0% 20.9% 20.1% 19.9% 19.7% 19.9% 19.3% 18.5% 16.4% 16.4% 15.7% 14.7% Safety RG #6 - Plans E, F and V (Probation) 43.2% 41.6% 40.4% 39.3% 37.6% 36.4% 36.0% 35.5% 33.1% 32.2% 32.0% 29.4% 28.3% 27.9% 26.3% RG #7 - Plans E, F, Q, R and V (Law Enforcement) 61.0% 58.5% 56.8% 55.4% 53.0% 51.4% 51.0% 50.6% 50.2% 50.9% 50.7% 44.9% 41.9% 41.1% 38.5% RG #8 - Plans E, F, Q, R and V (Fire Authority) 53.0% 50.9% 49.4% 48.0% 45.9% 44.4% 43.8% 43.3% 42.5% 42.4% 41.5% 36.5% 33.4% 33.2% 30.9% Rates shown above have not been adjusted for the two-year phase-in of the cost increase due to the change in the economic assumptions adopted by the Board for the December 31, 2012 valuation. For instance, the employer contribution rates as of December 31, 2012 after the two-year phase-in are as follows: Rate Group #1 21.0% Rate Group #2 37.3% Rate Group #3 36.4% Rate Group #5 26.6% Rate Group #9 25.7% Rate Group # % Rate Group # % Rate Group #6 40.5% Rate Group #7 57.3% Rate Group #8 49.8% Note that the two-year phase-in, if reflected in our projections would have increased the contribution rates for the System as a whole by about 0.2% of payroll starting with the December 31, 2013 valuation. We have not determined that impact for each Rate Group v2/ SEGAL

364 Attachment C Projected UAAL and Funded Ratio for Aggregate Plan 7,000,000 6,000,000 Projected UAAL for Aggregate Plan #1: 0% (2013) and 7.25% thereafter #2: 7.25% for all years #3: 14.5% (2013), 7.25% thereafter 5,000,000 ($000) 4,000,000 3,000,000 2,000,000 1,000, Valuation Date (12/31) UAAL #1: 0% (2013) and 7.25% thereafter 5,675,680 5,859,753 6,098,822 6,288,194 6,315,502 6,369,296 6,240,969 6,070,411 5,857,562 5,606,719 5,323,879 5,003,139 4,631,041 4,243,221 3,869,083 #2: 7.25% for all years 5,675,680 5,720,052 5,768,779 5,771,410 5,625,788 5,524,004 5,398,153 5,249,077 5,070,456 4,860,064 4,624,264 4,357,649 4,047,530 3,730,263 3,436,024 #3: 14.5% (2013), 7.25% thereafter 5,675,680 5,580,351 5,438,736 5,254,623 4,936,258 4,679,104 4,555,658 4,428,189 4,284,154 4,114,271 3,925,457 3,713,024 3,464,949 3,218,172 3,003,761 #4: 4.0% for all years 5,675,680 5,782,676 5,983,055 6,230,486 6,422,876 6,750,529 7,080,744 7,408,041 7,721,419 8,016,677 8,298,077 8,557,653 8,779,924 8,997,958 9,237,694 Funded Ratio #1: 0% (2013) and 7.25% thereafter 62.5% 63.7% 64.4% 65.5% 67.4% 68.9% 71.3% 73.6% 75.9% 78.2% 80.4% 82.5% 84.6% 86.6% 88.4% #2: 7.25% for all years 62.5% 64.5% 66.4% 68.3% 70.9% 73.1% 75.2% 77.2% 79.1% 81.1% 82.9% 84.8% 86.6% 88.2% 89.7% #3: 14.5% (2013), 7.25% thereafter 62.5% 65.4% 68.3% 71.2% 74.5% 77.2% 79.0% 80.7% 82.4% 84.0% 85.5% 87.0% 88.5% 89.8% 91.0% v2/ SEGAL

365 Attachment D Projected UAAL and Funded Ratio for Rate Group #1 Plans A, B and U (non-octa, non-ocsd) Projected UAAL for Rate Group #1 #1: 0% (2013) and 7.25% thereafter #2: 7.25% for all years 160,000 #3: 14.5% (2013), 7.25% thereafter 140, , ,000 ($000) 80,000 60,000 40,000 20, Valuation Date (12/31) UAAL #1: 0% (2013) and 7.25% thereafter 116, , , , , , , , , , , , ,197 99,785 92,458 #2: 7.25% for all years 116, , , , , , , , , , ,506 97,468 91,440 85,082 80,075 #3: 14.5% (2013), 7.25% thereafter 116, , , ,930 97,303 91,758 90,154 88,713 87,111 85,095 82,297 78,840 74,617 70,308 67,627 #4: 4.0% for all years 116, , , , , , , , , , , , , , ,178 Funded Ratio #1: 0% (2013) and 7.25% thereafter 71.5% 71.8% 71.5% 71.5% 72.4% 73.1% 74.6% 76.2% 77.9% 79.5% 81.2% 82.9% 84.7% 86.4% 87.9% #2: 7.25% for all years 71.5% 72.8% 73.7% 74.7% 76.4% 77.8% 79.1% 80.4% 81.6% 82.9% 84.3% 85.7% 87.1% 88.4% 89.5% #3: 14.5% (2013), 7.25% thereafter 71.5% 73.8% 75.9% 77.9% 80.5% 82.5% 83.5% 84.5% 85.5% 86.4% 87.4% 88.4% 89.4% 90.4% 91.1% v2/ SEGAL

366 Attachment E Projected UAAL and Funded Ratio for Rate Group #2 Plans I, J, O, P, S, T and U Projected UAAL for Rate Group #2 #1: 0% (2013) and 7.25% thereafter ($000) 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, , Valuation Date (12/31) #2: 7.25% for all years #3: 14.5% (2013), 7.25% thereafter UAAL #1: 0% (2013) and 7.25% thereafter 3,442,983 3,552,879 3,683,225 3,782,216 3,789,535 3,810,019 3,728,241 3,621,315 3,489,176 3,334,268 3,161,866 2,968,898 2,747,448 2,516,306 2,291,118 #2: 7.25% for all years 3,442,983 3,474,876 3,499,176 3,494,282 3,405,654 3,339,975 3,259,437 3,164,420 3,051,314 2,918,841 2,772,606 2,609,810 2,422,910 2,231,016 2,050,276 #3: 14.5% (2013), 7.25% thereafter 3,442,983 3,396,872 3,315,121 3,206,325 3,021,669 2,869,722 2,790,531 2,707,543 2,613,602 2,503,644 2,383,591 2,250,986 2,098,656 1,946,030 1,809,596 #4: 4.0% for all years 3,442,983 3,509,842 3,618,630 3,749,897 3,848,890 4,021,123 4,192,681 4,360,122 4,517,186 4,661,311 4,796,685 4,918,841 5,018,264 5,111,860 5,212,997 Funded Ratio #1: 0% (2013) and 7.25% thereafter 60.6% 61.7% 62.6% 63.7% 65.6% 67.3% 69.6% 72.0% 74.4% 76.7% 79.0% 81.2% 83.4% 85.4% 87.3% #2: 7.25% for all years 60.6% 62.5% 64.4% 66.5% 69.1% 71.3% 73.5% 75.5% 77.6% 79.6% 81.6% 83.5% 85.3% 87.1% 88.7% #3: 14.5% (2013), 7.25% thereafter 60.6% 63.4% 66.3% 69.2% 72.6% 75.3% 77.3% 79.1% 80.8% 82.5% 84.2% 85.7% 87.3% 88.7% 90.0% v2/ SEGAL

367 Attachment F Projected UAAL and Funded Ratio for Rate Group #3 Plans B, G, H and U (Law Library, OCSD) Projected UAAL for Rate Group #3 #1: 0% (2013) and 7.25% thereafter #2: 7.25% for all years 250,000 #3: 14.5% (2013), 7.25% thereafter 200,000 ($000) 150, ,000 50, Valuation Date (12/31) UAAL #1: 0% (2013) and 7.25% thereafter 214, , , , , , , , , , , , , , ,240 #2: 7.25% for all years 214, , , , , , , , , , , , , , ,442 #3: 14.5% (2013), 7.25% thereafter 214, , , , , , , , , , , , , ,283 99,749 #4: 4.0% for all years 214, , , , , , , , , , , , , , ,688 Funded Ratio #1: 0% (2013) and 7.25% thereafter 59.0% 60.6% 62.0% 63.6% 66.0% 68.1% 70.8% 73.6% 76.2% 78.8% 81.3% 83.6% 85.8% 87.9% 89.8% #2: 7.25% for all years 59.0% 61.4% 63.8% 66.3% 69.4% 72.0% 74.5% 76.9% 79.3% 81.5% 83.7% 85.6% 87.5% 89.3% 91.0% #3: 14.5% (2013), 7.25% thereafter 59.0% 62.2% 65.6% 69.0% 72.7% 75.9% 78.2% 80.3% 82.3% 84.2% 86.0% 87.7% 89.3% 90.8% 92.1% v2/ SEGAL

368 Attachment G Projected UAAL and Funded Ratio for Rate Group #5 Plans A, B and U (OCTA) Projected UAAL for Rate Group #5 #1: 0% (2013) and 7.25% thereafter 300,000 #2: 7.25% for all years #3: 14.5% (2013), 7.25% thereafter 250, ,000 ($000) 150, ,000 50, Valuation Date (12/31) UAAL #1: 0% (2013) and 7.25% thereafter 232, , , , , , , , , , , , , , ,184 #2: 7.25% for all years 232, , , , , , , , , , , , , , ,195 #3: 14.5% (2013), 7.25% thereafter 232, , , , , , , , , , , , , , ,199 #4: 4.0% for all years 232, , , , , , , , , , , , , , ,328 Funded Ratio #1: 0% (2013) and 7.25% thereafter 68.0% 68.7% 69.0% 69.5% 70.9% 72.1% 74.0% 76.0% 78.0% 79.9% 81.8% 83.7% 85.7% 87.6% 89.3% #2: 7.25% for all years 68.0% 69.7% 71.1% 72.6% 74.7% 76.5% 78.2% 79.8% 81.4% 83.0% 84.6% 86.1% 87.8% 89.3% 90.6% #3: 14.5% (2013), 7.25% thereafter 68.0% 70.6% 73.2% 75.6% 78.6% 80.9% 82.3% 83.6% 84.9% 86.1% 87.3% 88.5% 89.8% 91.0% 92.0% v2/ SEGAL

369 Attachment H Projected UAAL and Funded Ratio for Rate Group #9 Plans M, N and U (TCA) Projected UAAL for Rate Group #9 #1: 0% (2013) and 7.25% thereafter 16,000 14,000 #2: 7.25% for all years #3: 14.5% (2013), 7.25% thereafter 12,000 10,000 ($000) 8,000 6,000 4,000 2, Valuation Date (12/31) UAAL #1: 0% (2013) and 7.25% thereafter 11,822 12,352 13,010 13,558 13,769 14,070 13,968 13,790 13,537 13,221 12,813 12,275 11,606 10,876 10,187 #2: 7.25% for all years 11,822 12,064 12,315 12,451 12,267 12,199 12,095 11,960 11,780 11,550 11,243 10,821 10,283 9,702 9,181 #3: 14.5% (2013), 7.25% thereafter 11,822 11,775 11,621 11,346 10,772 10,341 10,241 10,152 10,047 9,903 9,696 9,389 8,982 8,550 8,196 #4: 4.0% for all years 11,822 12,193 12,769 13,444 14,028 14,967 15,964 17,013 18,091 19,193 20,291 21,348 22,361 23,400 24,561 Funded Ratio #1: 0% (2013) and 7.25% thereafter 61.9% 63.6% 64.9% 66.4% 68.6% 70.5% 73.0% 75.4% 77.7% 79.9% 81.9% 84.0% 85.9% 87.8% 89.4% #2: 7.25% for all years 61.9% 64.4% 66.7% 69.1% 72.1% 74.4% 76.6% 78.7% 80.6% 82.4% 84.1% 85.9% 87.5% 89.1% 90.4% #3: 14.5% (2013), 7.25% thereafter 61.9% 65.3% 68.6% 71.9% 75.5% 78.3% 80.2% 81.9% 83.4% 84.9% 86.3% 87.7% 89.1% 90.4% 91.4% v2/ SEGAL

370 Attachment I Projected UAAL and Funded Ratio for Rate Group #10 Plans I, J, M, N and U (OCFA) ($000) 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Projected UAAL for Rate Group # Valuation Date (12/31) #1: 0% (2013) and 7.25% thereafter #2: 7.25% for all years #3: 14.5% (2013), 7.25% thereafter UAAL #1: 0% (2013) and 7.25% thereafter 72,888 75,149 77,558 79,344 79,383 79,704 77,960 75,694 72,899 69,623 65,994 62,353 58,286 53,493 48,463 #2: 7.25% for all years 72,888 73,759 74,221 74,043 72,214 70,802 69,070 67,022 64,584 61,727 58,587 55,511 52,091 48,035 43,837 #3: 14.5% (2013), 7.25% thereafter 72,888 72,370 70,886 68,748 65,057 61,922 60,201 58,371 56,290 53,854 51,203 48,690 45,915 42,593 39,227 #4: 4.0% for all years 72,888 74,382 76,396 78,795 80,620 83,977 87,435 90,940 94,375 97, , , , , ,573 Funded Ratio #1: 0% (2013) and 7.25% thereafter 56.0% 57.9% 59.7% 61.7% 64.3% 66.6% 69.5% 72.4% 75.1% 77.8% 80.3% 82.5% 84.7% 86.8% 88.8% #2: 7.25% for all years 56.0% 58.7% 61.4% 64.2% 67.5% 70.3% 73.0% 75.5% 78.0% 80.3% 82.5% 84.4% 86.3% 88.2% 89.8% #3: 14.5% (2013), 7.25% thereafter 56.0% 59.5% 63.2% 66.8% 70.7% 74.1% 76.5% 78.7% 80.8% 82.8% 84.7% 86.4% 87.9% 89.5% 90.9% v2/ SEGAL

371 Attachment J Projected UAAL and Funded Ratio for Rate Group #11 Plans M and N, future service, and U (Cemetery) Projected UAAL for Rate Group #11 #1: 0% (2013) and 7.25% thereafter 3,000 #2: 7.25% for all years #3: 14.5% (2013), 7.25% thereafter 2,500 2,000 ($000) 1,500 1, Valuation Date (12/31) UAAL #1: 0% (2013) and 7.25% thereafter 1,981 2,082 2,219 2,328 2,354 2,400 2,354 2,292 2,215 2,127 2,024 1,905 1,780 1,662 1,546 #2: 7.25% for all years 1,981 2,008 2,042 2,050 1,983 1,944 1,898 1,847 1,786 1,715 1,629 1,529 1,425 1,332 1,242 #3: 14.5% (2013), 7.25% thereafter 1,981 1,933 1,865 1,772 1,610 1,485 1,438 1,393 1,345 1,289 1,219 1,139 1, #4: 4.0% for all years 1,981 2,041 2,157 2,298 2,414 2,611 2,817 3,030 3,245 3,460 3,670 3,876 4,085 4,311 4,548 Funded Ratio #1: 0% (2013) and 7.25% thereafter 71.8% 72.5% 72.9% 73.6% 75.2% 76.4% 78.5% 80.5% 82.4% 84.2% 86.0% 87.7% 89.2% 90.6% 91.8% #2: 7.25% for all years 71.8% 73.5% 75.0% 76.7% 79.1% 80.9% 82.7% 84.3% 85.8% 87.3% 88.7% 90.1% 91.4% 92.4% 93.4% #3: 14.5% (2013), 7.25% thereafter 71.8% 74.5% 77.2% 79.9% 83.0% 85.4% 86.9% 88.1% 89.3% 90.4% 91.6% 92.6% 93.6% 94.4% 95.1% v2/ SEGAL

372 Attachment K Projected UAAL and Funded Ratio for Rate Group #6 Plans E, F and V (Probation) Projected UAAL for Rate Group #6 #1: 0% (2013) and 7.25% thereafter #2: 7.25% for all years 250,000 #3: 14.5% (2013), 7.25% thereafter 200,000 ($000) 150, ,000 50, Valuation Date (12/31) UAAL #1: 0% (2013) and 7.25% thereafter 193, , , , , , , , , , , , , , ,758 #2: 7.25% for all years 193, , , , , , , , , , , , , , ,051 #3: 14.5% (2013), 7.25% thereafter 193, , , , , , , , , , , , , , ,484 #4: 4.0% for all years 193, , , , , , , , , , , , , , ,760 Funded Ratio #1: 0% (2013) and 7.25% thereafter 65.0% 66.7% 67.9% 69.2% 71.4% 73.1% 75.6% 78.0% 80.3% 82.5% 84.5% 86.4% 88.1% 89.7% 91.2% #2: 7.25% for all years 65.0% 67.6% 69.9% 72.1% 75.0% 77.3% 79.5% 81.5% 83.4% 85.3% 86.9% 88.4% 89.8% 91.1% 92.3% #3: 14.5% (2013), 7.25% thereafter 65.0% 68.5% 71.8% 75.0% 78.6% 81.4% 83.3% 85.0% 86.5% 88.0% 89.3% 90.4% 91.6% 92.5% 93.4% v2/ SEGAL

373 Attachment L Projected UAAL and Funded Ratio for Rate Group #7 Plans E, F, Q, R and V (Law Enforcement) Projected UAAL for Rate Group #7 #1: 0% (2013) and 7.25% thereafter 1,200,000 #2: 7.25% for all years #3: 14.5% (2013), 7.25% thereafter 1,000, ,000 ($000) 600, , , Valuation Date (12/31) UAAL #1: 0% (2013) and 7.25% thereafter 988,418 1,020,358 1,067,550 1,107,358 1,117,035 1,132,157 1,113,680 1,087,879 1,054,811 1,015, , , , , ,631 #2: 7.25% for all years 988, ,610 1,004,529 1,008, , , , , , , , , , , ,791 #3: 14.5% (2013), 7.25% thereafter 988, , , , , , , , , , , , , , ,847 #4: 4.0% for all years 988,418 1,005,600 1,045,417 1,096,226 1,137,034 1,203,579 1,270,849 1,337,858 1,402,644 1,464,438 1,522,428 1,574,061 1,617,827 1,662,413 1,711,925 Funded Ratio #1: 0% (2013) and 7.25% thereafter 64.8% 65.8% 66.3% 67.1% 68.7% 70.1% 72.2% 74.3% 76.5% 78.6% 80.7% 82.7% 84.8% 86.8% 88.5% #2: 7.25% for all years 64.8% 66.7% 68.3% 70.0% 72.4% 74.3% 76.2% 78.0% 79.8% 81.6% 83.3% 85.0% 86.8% 88.4% 89.8% #3: 14.5% (2013), 7.25% thereafter 64.8% 67.6% 70.3% 72.9% 76.0% 78.5% 80.2% 81.7% 83.1% 84.5% 85.9% 87.4% 88.8% 90.1% 91.1% v2/ SEGAL

374 Attachment M Projected UAAL and Funded Ratio for Rate Group #8 Plans E, F, Q, R and V (Fire Authority) Projected UAAL for Rate Group #8 #1: 0% (2013) and 7.25% thereafter ($000) 500, , , , , , , , ,000 50, Valuation Date (12/31) #2: 7.25% for all years #3: 14.5% (2013), 7.25% thereafter UAAL #1: 0% (2013) and 7.25% thereafter 400, , , , , , , , , , , , , , ,158 #2: 7.25% for all years 400, , , , , , , , , , , , , , ,276 #3: 14.5% (2013), 7.25% thereafter 400, , , , , , , , , , , , , , ,532 #4: 4.0% for all years 400, , , , , , , , , , , , , , ,354 Funded Ratio #1: 0% (2013) and 7.25% thereafter 66.2% 67.8% 68.7% 69.9% 71.8% 73.5% 75.9% 78.2% 80.5% 82.6% 84.7% 86.7% 88.6% 90.3% 91.7% #2: 7.25% for all years 66.2% 68.7% 70.7% 72.8% 75.5% 77.7% 79.8% 81.8% 83.6% 85.4% 87.1% 88.8% 90.4% 91.8% 92.9% #3: 14.5% (2013), 7.25% thereafter 66.2% 69.6% 72.7% 75.8% 79.2% 81.9% 83.7% 85.3% 86.8% 88.2% 89.6% 90.9% 92.2% 93.2% 94.1% v2/ SEGAL

375 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM MEMORANDUM DATE: November 5, 2013 TO: FROM: Members of the Board of Retirement Brenda Shott, Assistant CEO, Finance and Internal Operations SUBJECT: OCERS Administrative and Investment Budget for Fiscal Year 2014 Recommendation: 1. Adopt the Administrative and Investment Budget for Fiscal Year 2014 in the amounts presented in the budget package for the categories of Personnel Costs, Services and Supplies and Capital Expenditures. 2. Approve the addition of four new positions for a total of 72 authorized positions. 3. Approve the OCERS Direct Staff Salary Ranges. 4. Approve the position title changes. Background: On October 21, 2013, the Board of Retirement approved the 2014 Business Plan (The Plan). The theme for this year s Plan is Looking Ahead which reflects cross departmental goals to continually improve service to our members and carry out OCERS (the System) mission to be well positioned operationally, strategically and in the markets in the future. Working within this theme, the Plan was developed to ensure all employees of OCERS work together to support the System s Mission Statement and Supporting Goals. The Plan contains a series of goals and initiatives for individual departments at OCERS which, along with the System s Mission Statement and three year Strategic Plan (also adopted by the Board of Retirement on October 21, 2013), are staff s directive for developing the proposed budget that is being recommended for adoption with an emphasis on the completion of the Pension Administration System Solution (PASS) project, V3. The Fiscal Year 2014 budget package is comprised of four components: A. Budget Memo a. Appendix A Budget Detail by Department b. Appendix B Budget Detail by Expense Category c. Appendix C Personnel Costs d. Appendix D 21 and 18 Basis Points Test e. Appendix E - Historical Statistics f. Appendix F 2014 Budget Transfers I-9 OCERS Administrative and Investment Budget for Fiscal Year 2014 Page 1 of 11 November 2013 Regular Board Meeting

376 B. Budget Presentation C. Budget Authority and Policy D. Salary Range Options This budget memo gives a brief overview of the proposed budget for the upcoming fiscal year, provides information regarding the basis for developing various budget items and highlights significant changes in the proposed 2014 Administrative and Investment Budget from the prior year s budget and actual expenses. The appendix section of this memo includes the following information related to the proposed FY14 budget: detail budget by department; detail budget for each budget category for both administrative and investment costs; detail of personnel costs for each budgeted position; 21 and 18 basis point calculations for the administrative budget; historical statistics that are the cost drivers for OCERS; and a summary of 2014 budget transfers between departments and/or budget categories. Section B of the 2014 budget package consists of slides that are the basis of staff s presentation to the Board of Retirement at the regularly scheduled Board meeting to be held on November 18, The slides are presented as a visual representation of the proposed budget outlined in this memo and are based on the slides presented at the Proposed FY14 Budget Workshop held on October 25, 2013 OCERS budgeting authority is regulated by California Government Code Sections and An excerpt of the applicable regulations is included in Section C Budget Authority and Policy. A notable provision within the regulations is that OCERS budget for administrative expenses (which excludes investment related costs and expenditures for computer software, hardware and related technology consulting services) is limited to twenty-one hundredths of one percent of the accrued actuarial liability of the retirement system (commonly referred to as the 21 basis point test). The proposed FY14 administrative budget represents 8.01 basis points of the projected actuarial accrued liability. The proposed FY14 budget also meets the System s previous policy limitation of 18 basis points of the projected actuarial value of total assets and represents basis points of assets for FY14. Although the System is no longer bound by this test by the Government Code, the Board of Retirement directed staff to continue to prepare the calculations for this test when compiling the budget. In addition to the state code, Section C also includes OCERS Budget Approval Policy adopted by the Board of Retirement on February 19, 2002 and last revised June 18, This policy provides the purpose, roles and guidelines related to approving the annual budget for covering the expenses of administering the retirement system including the authority of the Chief Executive Officer, or the Assistant CEO, to transfer funds within the three broad categories of the budget: 1) Salaries and Benefits, 2) Services and Supplies, and 3) Capital Projects. Funds may not be moved from one category to another without approval from the Board of Retirement. Section D consists of proposed options for salary ranges for OCERS direct line staff. Based on discussions at the October 25, 2013 Proposed FY14 Budget Workshop, staff is presenting two options for the Board for their consideration: Option 1 consists of a 9% maximum CPI range increase with a market adjustment for positions out of sync with market data (Hay Group and CALAPRS) using the average minimum and maximum points for comparable positions at I-9 OCERS Administrative and Investment Budget for Fiscal Year 2014 Page 2 of 11 November 2013 Regular Board Meeting

377 similarly sized systems included in the CALAPRS 2013 Salary Survey, or Option 2 which consists of a 14.5% maximum CPI range increase with a market adjustment where appropriate as discussed in Option 1. Discussion: The proposed overall budget for 2014 is summarized by the following categories of expenses: Personnel Costs Services and Supplies Capital Expenditures Comparison to 2013 Budget 80,000 (Dollars in Thousands) 70,000 60,000 50,000 40,000 30,000 20,000 10, Amended Budget Proposed 2014 Budget Personnel Costs Services and Supplies Capital Expenditures The total proposed budget for 2014 is $54.1 million; $33.9 million for investment related activities and $20.2 million for administration of the retirement system, representing a decrease of $7.6 million or -12.4% from the 2013 amended budget of $61.7 million. The majority of this decrease relates to a $5.8 million or -14.5% reduction in investment costs from the 2013 amended investment budget of $39.7 million. This is primarily due to OCERS investment allocation moving from investments that incur direct investment management fees to at-source type of investment strategies where investment management fees are deducted directly from investment returns. In addition, the administrative budget decreased by $1.8 million or -8.5% from the 2013 amended budget of $22.0 million primarily due to the near completion of the V3 conversion project. Excluding capital expenditures, the administrative budget increased $500,000 or 3.9% due to a proposed increase in personnel costs of $720,000 or 7.6%. This is a result of recommending the addition of four new positions, as well as an increase in fringe benefits related to rising costs of medical premiums and employer retirement contributions as discussed further I-9 OCERS Administrative and Investment Budget for Fiscal Year 2014 Page 3 of 11 November 2013 Regular Board Meeting

378 in the Proposed Personnel Costs (Including Investments) section of this memo. This increase was offset by a decrease of $228,000 in administrative services and supplies attributed to a reduction in equipment/software expenses and training costs. Administrative Summary A summary of the proposed FY14 administrative budget (excluding investments) compared to the FY13 Amended Budget is provided below: Amended Budget 2013 Proposed Budget 2014 $ Variance FY13-FY14 % Variance FY13-FY14 Personnel Costs $8,340,227 $9,045,546 $705, % Services and Supplies Building Prop Mgmt/Maintenance 625, ,500 13, % Equipment Lease 82,500 93,000 10, % Equipment Maintenance 624, ,768 24, % Equipment/Software Expenses 337, ,000 (187,750) -55.6% Legal Services 390, ,000 (20,000) -5.1% Meetings & Mileage 72,775 48,200 (24,575) -33.8% Membership/Periodicals 127, ,530 1, % Office Supplies 50,000 70,500 20, % Postage 171, ,500 (3,500) -2.0% Printing 134, ,000 (24,100) -18.0% Professional Services 1,471,900 1,596, , % Telephone 90,000 90, % Training 535, ,485 (162,897) -30.4% Services and Supplies 4,712,042 4,483,883 (228,159) -4.8% Capital Expenditures* 8,985,525 6,624,738 (2,360,787) -26.3% Administrative Expense Total $22,037,794 $20,154,167 -$1,883, % *Capital expenditures represent purchases of assets to be amortized in future periods. Proposed Administrative Personnel Costs Administrative Personnel Costs for 2014 are proposed at $9.0 million and represent 45% of the total administrative budget. The total proposed budget for administrative personnel costs is $705,000 or 8.5% higher than the 2013 amended budget for administrative personnel costs. A detailed discussion of total personnel costs, including investments, is discussed further under the I-9 OCERS Administrative and Investment Budget for Fiscal Year 2014 Page 4 of 11 November 2013 Regular Board Meeting

379 section of this memo titled Proposed Personnel Costs (Including Investments). A detailed breakdown of administrative personnel costs can be found in Appendix C Personnel Costs. Proposed Administrative Services and Supplies Administrative Services and Supplies costs for 2014 are proposed at $4.5 million, which is 22% of the total administrative budget. Included in services and supplies are professional services, legal services, equipment expenses (other than those that are capitalized on OCERS books as assets that will be depreciated over time and budgeted as a capital expenditure), maintenance costs, office expenses, training, and meetings & mileage costs as detailed in Appendix B Budget Detail by Expense Category. The Administrative Services and Supplies budget decreased by $228,000 or -4.8% compared to the 2013 budget. The budget for this category decreased primarily as a result of IT completing its planned update/upgrade of OCERS technology in line with the 2013 Business Plan, including updating staff with new computers and software and the purchase of ipads for Board Members and the Executive Team which resulted in a decrease to the equipment/software budget by $208,000. In addition, there was a cross departmental reduction in the training budget totaling $163,000 due to completion of all staff training related to newly purchased software in 2013 and the commitment of staff to focus on the testing and implementation of V3 in 2014 as a result of the goals outlined in 2014 Business Plan. These decreases were offset by an increase in professional services primarily due to a $158,000 increase in IT related consulting related to expanding internet capabilities, hiring a technical writer to assist with the creation of training manuals for V3, and upgrading online data storage capabilities. Proposed Capital Expenditures Capital Expenditures for 2014 are proposed at $6.6 million and are 33% of the total administrative budget. This budget category primarily consists of costs for software implementation, project consulting, and software licensing related to the completion of the V3 project. The 2014 budget is approximately $2.4 million lower than the 2013 Capital Expenditure budget. The decrease in the 2014 budget is a result of the near completion of the V3 project and the completion of the $165,000 third floor expansion of the headquarters building to accommodate additional staff and consultants working on the V3 project. The capital expenditures budget for 2014 also includes $830,000 for the completion of OCERS data center and $85,000 for improvements to the headquarters building, including HVAC repairs and expansion of the 2 nd floor break room. Investment Summary Investment Costs Costs related to investing the System s money are all included in the Investment department and are not considered to be a cost of administration of the retirement system, but are instead considered a charge against the assets of the retirement system. There are no other costs I-9 OCERS Administrative and Investment Budget for Fiscal Year 2014 Page 5 of 11 November 2013 Regular Board Meeting

380 included in the Investment department other than those related to investing, or said another way, there are no administrative costs included in the Investment department s budget. A summary of the proposed FY14 investment budget compared to the FY13 Amended Budget is provided below: Amended Budget 2013 Proposed Budget 2014 $ Variance FY13-FY14 % Variance FY13- FY14 Personnel Costs $1,189,179 $1,203,990 $14, % Services and Supplies Due Diligence 65,675 87,422 21, % Equipment/Software Purchase 25,000 25, % Meetings & Mileage 15,000 5,000 (10,000) -66.7% Membership/Periodicals 26,510 28,795 2, % Professional Services 38,347,580 32,530,456 (5,817,124) -15.2% Training 37,225 54,625 17, % Services and Supplies 38,516,990 32,731,298 (5,785,692) -15.0% Investment Expense Total $39,706,169 $33,935,288 ($5,770,881) -14.5% Proposed Investment Personnel Costs Investment Personnel Costs for 2014 are proposed at $1.2 million and represent 3.5% of the total investment budget. The total proposed budget for investment personnel costs is approximately $15,000 or 1.2% higher than the 2013 budget for investment personnel. A detailed discussion of total personnel costs, including investments, is discussed further under the section of this memo titled Proposed Personnel Costs (Including Investments) and a detailed breakdown of investment personnel costs can be found in Appendix C Personnel Costs. Proposed Investment Services and Supplies Investment Services and Supplies costs for 2014 are proposed at $32.7 million, which is 96.5% of the total investment budget. Included in services and supplies are professional services (including investment related legal services), due diligence and related investment conferences, training, equipment expenses, miscellaneous office expenses, and meetings & mileage costs as detailed in Appendix B Budget Detail by Expense Category. The investment related Services and Supplies budget is lower by $5.8 million or -15.0% than the 2013 budget, primarily due to investment management fees which are included in the professional services budget line item. As mentioned earlier, this is primarily due to OCERS investment allocation moving from investments that incur direct investment management fees to at-source type of investment strategies where investment management fees are deducted directly I-9 OCERS Administrative and Investment Budget for Fiscal Year 2014 Page 6 of 11 November 2013 Regular Board Meeting

381 from investment returns. This budget does not include the projected $62.8 million of anticipated indirect investment costs that will be deducted from investment returns. Consistent with the amended 2013 budget, the proposed investment budget for FY14 also does not include foreign income tax/other expense or securities lending fees which, similar to indirect investment management fees, are difficult to predict and impossible to control. To assure full transparency, we are providing the following projected total costs of investment management for FY14 compared to estimated actuals for 2013, reflecting both budgeted and unbudgeted investment management costs: Investment Management Costs Estimated Actuals $ Variance FY13-FY14 % Variance FY13-FY14 Budgeted Costs: Direct Investment Management Fees $28,775,890 $29,895,656 $1,119, % Custodial Bank Fees 300, , % Total Budgeted Costs $29,075,890 $30,195,656 $1,119, % Unbudgeted Costs: Indirect Investment Management Fees* $54,507,617 $62,839,763 $8,332, % Foreign Income Tax/Other Expense* 1 8,656,964 11,582,199 2,925, % Security Lending Fees* 1 400, , , % Total Unbudgeted Costs $63,565,309 $74,951,218 $11,385, % Total Investment Management Costs $92,641,199 $105,146,874 $12,505, % Total FY13 Est Act & FY14 Budget $52,639,347 $54,089,455 $1,450, % Total FY13 Est Act & FY14 Budget + Unbudgeted Costs $116,204,656 $129,040,673 $12,836, % % of Total Investment Management Costs to Total FY13 Est Act & FY14 Budget + Unbudgeted Costs 79.7% 81.5% 1.8% NA *For informational purposes only; not a budgetary line item 1 Fees estimated for 2013 based on actuals through September, 2013; 2014 based on 5 year average from 2008 to 2012 actual expenses I-9 OCERS Administrative and Investment Budget for Fiscal Year 2014 Page 7 of 11 November 2013 Regular Board Meeting

382 Proposed Personnel Costs (Including Investments) Personnel Costs for 2014 are proposed at $10.2 million and represent 18.9% of the total budget. Personnel costs are detailed in Appendix C and include salaries, estimated overtime, fringe benefits (health insurance, retirement and deferred compensation), salary adjustment pool (including a 2% pool for merit based salary adjustments, step increases for 13 line staff not at top of their salary range, and four position reclassifications), accrued leave buyouts and temporary help costs. The total proposed budget for personnel costs is $720,000 or 7.6% higher than the 2013 amended budget for personnel costs. A key component in the increase of personnel costs is due to four new positions being requested in 2014, bringing the total employee count to 72: Chief Legal Officer Administrative Services Staff Assistant Member Services Supervisor Member Services Office Technician The total amount included in the budget for the four new positions is $565,000. As stated in the 2014 Business Plan, two of the proposed positions, Administrative Services Staff Assistant and Member Services Office Technician, are to put OCERS in compliance with MOU s related to the hiring policies of long-term temporary and extra help positions which will result in a total cost reduction of $94K to help offset the cost of these new positions. The Member Services Supervisor, also outlined in the 2014 Business Plan, is to put OCERS in compliance with the I-9 OCERS Administrative and Investment Budget for Fiscal Year 2014 Page 8 of 11 November 2013 Regular Board Meeting

383 MOU related to the number of employees that should report to a supervisor. Currently, there is only one Member Services Supervisor responsible for 17 employees. The position of Chief Legal Officer is to reinstate this as a separate position from the Assistant CEO of External Operations due to the recent departure of Julie Wyne who had held both these positions simultaneously since Including the total cost of the four new proposed positions, the net increase in personnel costs is attributed to an overall increase in salaries of $300,000; an increase in overtime of $34,000 due to the testing and implementation of V3; an increase in fringe benefits of $493,000 that can be attributed to rising costs of $274,000 for employer retirement contributions, $132,000 for medical premiums, and $51,000 for workers compensation; and lastly, a $25,000 increase in estimated leave buyouts. These increases were offset by decreases in the salary adjustment pool of $53,000 primarily due to the suspension of funding for P4P awards in FY14 and an overall reduction of $79,000 in temporary help primarily due to eliminating two of these positions and replacing with two regular positions as previously discussed. Comparison of 2013 estimated actuals and proposed 2014 budget 80,000 (Dollars in Thousands) 70,000 60,000 50,000 40,000 30,000 20,000 10, Estimated Actuals Proposed 2014 Budget Personnel Costs Services and Supplies Capital Expenditures Personnel Costs for 2014 are budgeted at $10.2 million and are $1.3 million higher than the estimated actuals for 2013 of $8.9 million. The primary reason for the increase is the proposed addition of the four new positions as discussed previously under Proposed Personnel Costs (Including Investments), as well as including a full year of salaries and benefits for all the other 68 positions in the 2014 budget, in which there were several vacancies during 2013 causing actual expenses incurred to be less than the annual cost assumed for those positions. I-9 OCERS Administrative and Investment Budget for Fiscal Year 2014 Page 9 of 11 November 2013 Regular Board Meeting

384 A summary of the proposed FY14 administrative budget (excluding investments) compared to estimated actuals for FY13 is provided below: Estimated Actuals 2013 Proposed Budget 2014 $ Variance FY13-FY14 % Variance FY13-FY14 Personnel Costs $7,796,997 $9,045,546 $1,248, % Services and Supplies Building Prop Mgmt/Maintenance 591, ,500 47, % Equipment Lease 74,994 93,000 18, % Equipment Maintenance 518, , , Equipment/Software Expenses 269, ,000 (119,305) -44.3% Legal Services 193, , , % Meetings & Mileage 21,128 48,200 27, % Membership/Periodicals 125, ,530 3, % Office Supplies 47,191 70,500 23, % Postage 113, ,500 54, % Printing 69, ,000 40, % Professional Services 1,221,947 1,596, , % Telephone 59,313 90,000 30, % Training 292, ,485 80, % Services and Supplies 3,596,414 4,483, , % Capital Expenditures* 8,575,061 6,624,738 (1,950,323) -22.7% Administrative Expense Total $19,968,472 $20,154,167 $185, % *Capital expenditures represent purchases of assets to be amortized in future periods. Administrative Services and Supplies costs budgeted for 2014 are $887,000 higher than the estimated actual expense for 2013 of $3.6 million. Overall, this is due to amounts being budgeted for in 2013 on an as-needed basis and re-budgeted for in 2014, such as professional services which includes Pension Gold customizations and CEO contingency, which were unused in 2013, but re-budgeted for in 2014, and legal services which were underutilized in 2013 and rebudgeted for in The training budget was also underutilized in 2013 due to training sessions budgeted for member services and finance but postponed due to their focus on V3 implementation and testing. Capital Expenditures are projected to be approximately $8.6 million for The 2014 budget for Capital Expenditures is lower by $1.9 million than the 2013 estimated actuals which is expected given the near completion of the V3 project and planned implementation of the OCERS data center. A summary of the proposed FY14 investment budget compared to estimated actuals for FY13 is provided below: I-9 OCERS Administrative and Investment Budget for Fiscal Year 2014 Page 10 of 11 November 2013 Regular Board Meeting

385 Estimated Actuals 2013 Proposed Budget 2014 $ Variance FY13-FY14 % Variance FY13- FY14 Personnel Costs $1,142,108 $1,203,990 $61, % Services and Supplies Due Diligence 28,852 87,422 58, % Meetings & Mileage 13,423 5,000 (8,423) -62.8% Training 10,783 54,625 43, % Equipment/Software Purchase 25,000 25, % Membership/Periodicals 19,089 28,795 9, % Professional Services 31,431,620 32,530,456 1,098, % Services and Supplies 31,528,767 32,731,298 1,202, % Investment Expense Total $32,670,875 $33,935,288 $1,264, % The proposed FY14 investment budget of $33.9 million is $1.2 million or 3.9% higher than the estimated actuals for FY13. The increase in the budget is predominately related to estimated investment management fees being budgeted $1.1 million higher than projected 2013 investment management fees. The budget for investment management fees is based on the portfolio earning the actuarial assumed rate of 7.25% and contributions into the portfolio by plan sponsors based on projected salaries. The variance between FY13 estimated actuals and amounts budgeted in FY14 for meetings and training is primarily due to the transfer of the education forum budget from the meeting category into the training category as detailed in Appendix F Budget Transfers. The increases in Due Diligence and Membership/Periodicals is attributed to amounts being budgeted in 2013, but not used and re-budgeted in Budget Limitation Tests The proposed budget for Administration meets the state mandated 21 basis point test total budgeted costs represent 8.01 basis points of the projected actuarial accrued liability. The budget also meets the OCERS prior policy limitation of 18 basis points of the projected actuarial value of total assets total budget costs represent basis points of assets. Prepared By: Reviewed By: Reviewed By: Tracy Bowman Brenda Shott Steve Delaney Director of Finance Assistant CEO, Internal Operations Chief Executive Officer I-9 OCERS Administrative and Investment Budget for Fiscal Year 2014 Page 11 of 11 November 2013 Regular Board Meeting

386 Appendix A 2014 Budget Detail by Department Department Account Group Description Total BOARD Personnel Cost Annual Salary $15,000 Personnel Cost Total $15,000 Professional Svcs Security $3,000 Professional Svcs Total $3,000 Legal Svcs Outside Counsel Services $250,000 Legal Svcs Total $250,000 Training Board Approved Conferences $20,000 CALAPRS - General Assembly 5,500 CALAPRS - Roundtable 4,000 CII(Council of Inst. Investors) 2,500 NCPERS 3,250 NCPERS Legislation 2,150 NEPC Institute 4,600 SACRS (No CA) 15,000 SACRS (So CA) 15,000 Strategic Planning 10,000 UC Berkeley 16,000 Training Total $98,000 Mtg/Mileage Legislative Meetings $4,000 Miscellaneous Meetings 15,000 Mtg/Mileage Total $19,000 Membership NCPERS $600 SACRS 6,100 Membership Total $6,700 Postage Messenger to deliver Board Agenda $500 Postage Total $ BOARD Total $392, EXECUTIVE Personnel Cost Annual Salary $717,400 Fringe Benefits 460,017 Overtime 4,328 Leave P/O 23,756 Salary Adj. Pool 16,322 Temp Help 20,000 Personnel Cost Total $1,241,823 Professional Svcs CEO Contingency $50,000 Professional Svcs Total $50,000 Training Tuition Reimbursement $3,000 CALAPRS - General Assembly 2,300 CALAPRS - Roundtable 2,000 Executive Management Training 1,000 GFOA Conference 5,300 LCW Employment Law Conference 1,800 Miscellaneous Conferences 6,000 NASRA 4,500 Public Pension Financial Forum 2,500 SACRS (No CA) 6,000 SACRS (So CA) 6,000 Wharton 10,500 Training Total $50,900 Mtg/Mileage Manager visits to So Cal Retirment Systems $2,800 Miscellaneous Meetings 5,000 Mtg/Mileage Total $7,800 Membership AICPA $550 American Express 200 CALAPRS 3,000 CalCPA 600 GFOA 690 International Foundation (IFEBP) 1,500 P2F2 - Public Pension Financial Forum 150 State Board of Accountancy 120 Membership Total $6,810 Periodicals Miscellaneous periodicals $400 Public Retirement Journal 950 Periodicals Total $1, EXECUTIVE Total $1,358,683

387 Appendix A 2014 Budget Detail by Department Department Account Group Description Total INVESTMENTS Personnel Cost Annual Salary $723,197 Fringe Benefits 412,957 Overtime 2,315 Leave P/O 23,944 Salary Adj. Pool 26,570 Temp Help 15,000 Personnel Cost Total $1,203,983 Professional Svcs Consulting Fees $1,284,800 Actuarial Fees 500,000 Legal Services 525,000 Custodial Bank Fees 300,000 Investment Management Fees 29,895,656 Proxy Voting Service Provider 25,000 Professional Svcs Total $32,530,456 Due Diligence Energy $6,345 Hedge Funds 13,748 NEPC Client Conference 7,050 Potential Due Diligence 48,645 Private Equity 3,173 Real Estate 5,288 Timbers 3,173 Due Diligence Total $87,422 Training Tuition Reimbursement $6,000 CII(Council of Inst. Investors) 2,350 Educational Forum 15,000 ILPA Spring Conference 2,350 Investment Conferences 16,920 Pension West 2,745 SACRS (No CA) 2,360 SACRS (So CA) 4,600 World Pension Forum 2,300 Training Total $54,625 Mtg/Mileage Investment Committee Meetings $5,000 Mtg/Mileage Total $5,000 Membership American Express $220 CFA Society 1,000 CII Membership 13,500 ILPA Private Equity Membership 2,500 Pacific Pension Institute 5,000 Pension West 175 PREA 350 Membership Total $22,745 Periodicals Barron's $100 Grant's Interest Rate Observer 1,205 Hedge Funds Publication 2,000 Pensions and Investments 1,000 Private Equity Analyst 1,595 The Economist 150 Periodicals Total $6,050 Equipment / Software Expenses Bloomberg $25,000 Equipment / Software Expenses Total $25, INVESTMENTS Total $33,935, COMMUNICATIONS Personnel Cost Annual Salary $151,569 Fringe Benefits 91,341 Overtime 2,657 Leave P/O 5,019 Salary Adj. Pool 5,007 Personnel Cost Total $255,593 Professional Svcs Financial Seminars $12,000 Professional Svcs Total $12,000 Training CALAPRS - Roundtable $1,500 Computer Classes 1,300 Miscellaneous Conferences 800 Pub. Rel. Society Meeting 720 SACRS (So CA) 330 Training Total $4,650

388 Appendix A 2014 Budget Detail by Department Department Account Group Description Total Mtg/Mileage Miscellaneous Meetings $1,000 Mtg/Mileage Total $1,000 Printing Svcs Brochures $15,000 CAFR (Comprehensive Annual Financial Report) 20,000 Quarterly newsletters 65,000 Printing Svcs Total $100,000 Periodicals Organizational Communication $500 Periodicals Total $500 Postage Miscellaneous Mailing/Mass Mailing $20,000 Quarterly Newsletters - All Members 67,000 Postage Total $87,000 Office Supplies Public Relation Materials $11,000 Office Supplies Total $11,000 Equipment / Software Expenses Communications A/V Equipment $5,000 Equipment / Software Expenses Total $5, COMMUNICATIONS Total $476, LEGAL Personnel Cost Annual Salary $655,416 Fringe Benefits 354,497 Leave P/O 21,704 Salary Adj. Pool 13,109 Personnel Cost Total $1,044,726 Professional Svcs Admin. Hearing Process Fees $150,000 Court Filing Fees/Courier Services 800 Court Reporter Fees 30,000 Medical Record Reviews/Expert Testimony 10,000 Subpoena Fees 2,000 Writ of Mandate (court-ordered payment) 75,000 Professional Svcs Total $267,800 Legal Svcs Tax Attorney $120,000 Legal Svcs Total $120,000 Training CALAPRS - General Assembly $2,000 CALAPRS - Roundtable 2,000 MCLE and other training 2,500 NAPPA Spring 7,200 SACRS (No CA) 4,000 SACRS (So CA) 4,000 Training Total $21,700 Mtg/Mileage Miscellaneous Meetings $750 Mtg/Mileage Total $750 Membership NAPPA (National Assoc.of Public Pension Attorneys) $1,050 Orange County Bar fees 600 State Bar Dues 1,640 Membership Total $3,290 Periodicals Legal Publications, Daily Journal, Law Book Updates, Reference Books$6,000 Periodicals Total $6,000 Equipment Lease LEXIS $19,000 STATE NET 4,000 Equipment Lease Total $23, LEGAL Total $1,487,266

389 Appendix A 2014 Budget Detail by Department Department Account Group Description Total MEMBER SERVICES Personnel Cost Annual Salary $1,365,474 Fringe Benefits 824,379 Overtime 62,281 Leave P/O 45,219 Salary Adj. Pool 20,203 Temp Help 30,000 Personnel Cost Total $2,347,556 Professional Svcs Death Records Match $5,000 Professional Svcs Total $5,000 Training Tuition Reimbursement $5,000 CALAPRS - Roundtable 2,100 SACRS (No CA) 1,505 SACRS (So CA) 2,310 Staff Development Training 4,000 Training Total $14,915 Mtg/Mileage Miscellaneous Meetings $250 Mtg/Mileage Total $250 Periodicals ABA Key to Routing Numbers $1,000 Periodicals Total $1, MEMBER SERVICES Total $2,368, FINANCE Personnel Cost Annual Salary $746,958 Fringe Benefits 414,947 Overtime 15,588 Leave P/O 24,737 Salary Adj. Pool 23,633 Personnel Cost Total $1,225,863 Professional Svcs Bank Charges $40,000 Extra Help - CAFR 18,000 Financial Audit Cost 102,000 GFOA Certificate Application Fee 1,100 Solomon Consulting 5,000 Professional Svcs Total $166,100 Training Tuition Reimbursement $6,000 Continuing Education 6,000 GFOA Conference 3,040 SACRS (No CA) 2,000 SACRS (So CA) 2,000 Solomon Training 4,000 Staff Training 2,500 Training Total $25,540 Mtg/Mileage Miscellaneous Meetings $500 Mtg/Mileage Total $500 Membership AICPA $750 American Express 55 CalCPA 1,500 GFOA 600 P2F2 - Public Pension Financial Forum 150 State Board of Accountancy 200 Membership Total $3,255 Periodicals Miscellaneous periodicals $1,000 Periodicals Total $1,000 Equipment / Software Expenses State Street GL Download Software $15,000 Equipment / Software Expenses Total $15, FINANCE Total $1,437,258

390 Appendix A 2014 Budget Detail by Department Department Account Group Description Total DISABILITY Personnel Cost Annual Salary $274,332 Fringe Benefits 142,556 Overtime 10,062 Leave P/O 9,085 Salary Adj. Pool 4,701 Temp Help 22,000 Personnel Cost Total $462,736 Professional Svcs Investigations $1,000 Medical Panel Reviews 250,000 Professional Svcs Total $251,000 Training Tuition Reimbursement $5,000 CALAPRS - Roundtable 1,700 Miscellaneous Training 1,000 SACRS (No CA) 4,000 SACRS (So CA) 4,000 Training Total $15,700 Mtg/Mileage Miscellaneous Meetings $250 Mtg/Mileage Total $250 Printing Svcs Disability Agenda $5,000 Printing Svcs Total $5, DISABILITY Total $734, ADMINISTRATIVE SERVICES Personnel Cost Annual Salary $295,370 Fringe Benefits 159,939 Overtime 2,006 Leave P/O 9,781 Salary Adj. Pool 2,200 Temp Help 30,000 Personnel Cost Total $499,296 Professional Svcs Civic Center Parking Cards $1,000 CWCAP(County Wide Cost Allocation Plan) 32,000 Iron Mountain 7,500 Plant Maintenance 2,000 Recruitment Costs 80,000 Security Shredding 4,000 Universal Protection Security (UPS) 5,000 Professional Svcs Total $131,500 Training Tuition Reimbursement $3,000 All Staff Training 3,000 CALAPRS - Roundtable 500 Computer Training (All Staff) 10,000 HR Conferences 2,500 LCW Employment Law Conference 1,800 OCERS Management/Supervisor Training 3,000 Qtrly Employee Brown Bag Lunches/ Educational Sem 500 Seminars 500 Training Total $24,800 Mtg/Mileage Employee Recognition $6,500 Miscellaneous Meetings 500 Mtg/Mileage Total $7,000 Membership National Human Resources Association (NHRA) Monthly $180 Orange County HR Consortium 3,000 Professional In Human Resources Association 250 Society of Human Resources Management 180 Membership Total $3,610 Printing Svcs Printing $5,000 Printing Svcs Total $5,000 Postage Pony Mail Services $2,000 Postage Expense 78,000 Postage Total $80,000 Office Supplies Building photo replacement $8,000 Building Safety Programs 1,500 Chair Replacement 15,000 General Office Expense 35,000 Office Supplies Total $59,500 Capital Expenditures 2nd Floor Breakroom Expansion $35,000 Building AC Repair 50,000 Capital Expenditures Total $85,000 Equipment Lease Pitney Bowes Postage Machine $7,000 Equipment Lease Total $7,000 Building Prop. Mgmt. / Maintenance Carpet Cleaning $3,500

391 Appendix A 2014 Budget Detail by Department Department Account Group Description Total Interior Window cleaning 5,000 Parking rail addition (Building Safety) 5,000 Property Management/Maintenance 625,000 Building Prop. Mgmt. / Maintenance Total $638, ADMINISTRATIVE SERVICES Total $1,541, INFORMATION TECHNOLOGY Personnel Cost Annual Salary $859,554 Fringe Benefits 462,968 Overtime 48,368 Leave P/O 28,464 Salary Adj. Pool 44,726 Temp Help 100,000 Personnel Cost Total $1,544,080 Professional Svcs County VPN Access $50,000 DR/BC Consultant 100,000 Internet Access 90,000 Network Consulting 10,000 Network Security Testing 30,000 Off-Site Storage 10,000 Online Data Storage 45,000 Oracle Consulting 25,000 PensionGold - Customization Costs 100,000 SharePoint 2010 Consultant 115,000 Technical Writing Consultant 115,000 Professional Svcs Total $690,000 Training Tuition Reimbursement $30,000 CALAPRS - Roundtable 2,500 IT Certification Budget (for exam costs) 2,000 Miscellaneous Training Materials 5,000 Network Security Training 10,000 Oracle 11G 10,000 PMP Certification 4,000 PRISM Conference 3,000 Sidepath Compellent SANS training 25,000 Training Total $91,500 Mtg/Mileage Miscellaneous Meetings $2,000 Mtg/Mileage Total $2,000 Membership Gartner $90,000 Microsoft Technet 750 MSDN 1,000 Public Retirement Information System Managers 300 Membership Total $92,050 Equip Maintenance ACL AuditEschange license and annual support $5,300 Anti-virus Software Maintenance 20,000 Audio Visual Maintenance (Board room) 2,500 Cibermaxima Annual Maintenance Fee 1,200 Cisco SmartNet Support 3,500 Computer Room AC/Humidifier Maintenance 8,000 Computer Room UPS Maintenance 8,000 Dell Compellent Annual Support 9,628 Fujitsu Scanner Maintenance 1,500 HP 1 Year Post Warranty Next Business Day 2,500 HP 2 year Post Warranty 4 hour 24x7 ProLiant DL360 G7 Hardware Support 10,000(6 Server HP 2 year Post Warranty 4 hour 24x7 ProLiant DL380 G4 Hardware Support 2,000(2 servers HP 2 year Post Warranty 4 hour 24x7 ProLiant DL380 G5 Hardware Support 7,500(6 Server HP 2 year Post Warranty 4 hour 24x7 ProLiant DL580 G7 Hardware Support 10,000(6 Server LivePerson Chat Software 7,200 LogMeIn Central Annual Maintenance Fee 1,000 Microfiche Reader/Printer 1,000 Microsoft Software Assurance 175,000 Novanis Liberty Maintenance 15,000 Oracle Maintenance 10,000 PensionGold Maintenance 265,740 Phone System Service Calls 2,500 Printer Maintenance 2,500 Quest - Toad Software 7,500 Sandler Kahne Annual Maintenance Fee 1,200 Server Hardware Support 10,000 Solomon Software Maintenance 7,500 SSL Certificate Renewals 10,000 Teamsite Annual Maintenance 2,500

392 Appendix A 2014 Budget Detail by Department Department Account Group Description Total Telephone System Maintenance 7,500 Telerik 1,000 VmWare Annual Support 20,000 Work Station Hardware Support 10,000 Equip Maintenance Total $648,768 Periodicals PC Magazines, Computer World, and Technical Manuals. $500 Periodicals Total $500 Equipment / Software Expenses Board Portal $20,000 Computers/Laptops/Monitors 10,000 Imaging Software 5,000 ipad purchase (Board Members only) 5,000 Miscellaneous Software 15,000 Miscellaneous Tools 15,000 New HP Printers 10,000 Printer Supplies (Toner, Maintenance Kits, etc.) 10,000 Recordable Media and Backup Tapes 10,000 SharePoint Framework 25,000 Telecom Equipment 2,500 Upgrade Wireless infastructure 2,500 Equipment / Software Expenses Total $130,000 Capital Expenditures OCERS Data Center $830,000 V3 Pension System - Services 5,124,738 V3 Pension System Software 585,000 Capital Expenditures Total $6,539,738 Equipment Lease Copier/Printer Lease $60,000 Folder/Sealer Lease 3,000 Equipment Lease Total $63,000 Telephone Cellular/Mobile Services $40,000 Telecom Services 50,000 Telephone Total $90, INFORMATION TECHNOLOGY Total $9,891, INTERNAL AUDIT Personnel Cost Annual Salary $250,174 Fringe Benefits 145,412 Leave P/O 8,284 Salary Adj. Pool 5,003 Personnel Cost Total $408,873 Professional Svcs Audit consultant / specialist / expert $20,000 Professional Svcs Total $20,000 Training Tuition Reimbursement $3,000 Assoc. Pension Fund Audit 8,100 CALAPRS - Roundtable 590 Institute of Internal Auditor 1,480 Miscellaneous Conferences 9,000 SACRS (No CA) 1,505 SACRS (So CA) 1,105 Training Total $24,780 Mtg/Mileage Miscellaneous Meetings $350 Travel for Audits 9,300 Mtg/Mileage Total $9,650 Membership AICPA $450 APPFA (Assoc. Public Pension Fund Auditors-IA) 300 GFOA 310 IIA (Institute Of Internal Auditor-IA) 340 ISACA 265 State Board of Accountancy 400 Membership Total $2,065 Periodicals Reference books / research materials $400 Periodicals Total $ INTERNAL AUDIT Total $465, Grand Total Budget $54,089,448

393 Appendix B 2014 Budget Detail by Expense Category Administrative Account Group Description Total Personnel Cost Annual Salary $5,331,247 Overtime 145,290 Fringe Benefits 3,056,056 Salary Adj. Pool 134,904 Leave P/O 176,049 Temp Help 202,000 Personnel Cost Total $9,045,546 Professional Svcs Admin. Hearing Process Fees $150,000 Audit consultant / specialist / expert 20,000 Bank Charges 40,000 CEO Contingency 50,000 Civic Center Parking Cards 1,000 County VPN Access 50,000 Court Filing Fees/Courier Services 800 Court Reporter Fees 30,000 CWCAP(County Wide Cost Allocation Plan) 32,000 Death Records Match 5,000 DR/BC Consultant 100,000 Extra Help - CAFR 18,000 Financial Audit Cost 102,000 Financial Seminars 12,000 GFOA Certificate Application Fee 1,100 Investigations 1,000 Medical Panel Reviews 250,000 Medical Record Reviews/Expert Testimony 10,000 Network Consulting 10,000 Online Data Storage 45,000 Oracle Consulting 25,000 Plant Maintenance 2,000 Recruitment Costs 80,000 Security 3,000 Security Shredding 4,000 SharePoint 2010 Consultant 115,000 Solomon Consulting 5,000 Subpoena Fees 2,000 Technical Writing Consultant 115,000 Universal Protection Security (UPS) 5,000 Writ of Mandate (court-ordered payment) 75,000 Off-Site Storage 10,000 Internet Access 90,000 PensionGold - Customization Costs 100,000 Network Security Testing 30,000 Iron Mountain 7,500 Professional Svcs Total $1,596,400

394 Appendix B 2014 Budget Detail by Expense Category Administrative Account Group Description Total Legal Svcs Outside Counsel Services $250,000 Tax Attorney 120,000 Legal Svcs Total $370,000 Training Tuition Reimbursement $55,000 All Staff Training 3,000 Assoc. Pension Fund Audit 8,100 CII(Council of Inst. Investors) 2,500 Computer Classes 1,300 Computer Training (All Staff) 10,000 Continuing Education 6,000 GFOA Conference 8,340 HR Conferences 2,500 Institute of Internal Auditor 1,480 IT Certification Budget (for exam costs) 2,000 LCW Employment Law Conference 3,600 MCLE and other training 2,500 Miscellaneous Training 1,000 NAPPA Spring 7,200 NASRA 4,500 NCPERS 3,250 NCPERS Legislation 2,150 NEPC Institute 4,600 Network Security Training 10,000 Oracle 11G 10,000 PMP Certification 4,000 PRISM Conference 3,000 Pub. Rel. Society Meeting 720 Public Pension Financial Forum 2,500 Quarterly Employee Brown Bag Lunches/ Educational Seminars 500 SACRS (No CA) 34,010 SACRS (So CA) 34,745 Seminars 500 Solomon Training 4,000 Staff Development Training 4,000 Staff Training 2,500 Strategic Planning 10,000 UC Berkeley 16,000 Wharton 10,500 CALAPRS - General Assembly 9,800 CALAPRS - Roundtable 16,890 OCERS Management/Supervisor Training 3,000 Board Approved Conferences 20,000 Executive Management Training 1,000 Miscellaneous Conferences 15,800 Miscellaneous Training Materials 5,000 Sidepath Compellent SANS training 25,000 Training Total $372,485

395 Appendix B 2014 Budget Detail by Expense Category Administrative Account Group Description Total Mtg/Mileage Employee Recognition $6,500 Legislative Meetings 4,000 Manager visits to So Cal Retirment Systems 2,800 Miscellaneous Meetings 25,600 Travel for Audits 9,300 Mtg/Mileage Total $48,200 Membership AICPA $1,750 American Express 255 APPFA (Assoc. Public Pension Fund Auditors-IA) 300 CALAPRS 3,000 CalCPA 2,100 Gartner 90,000 GFOA 1,600 IIA (Institute Of Internal Auditor-IA) 340 International Foundation (IFEBP) 1,500 ISACA 265 MSDN 1,000 NAPPA (National Assoc.of Public Pension Attorneys) 1,050 National Human Resources Association (NHRA) Monthly 180 NCPERS 600 Orange County Bar fees 600 Orange County HR Consortium 3,000 Professional In Human Resources Association 250 Society of Human Resources Management 180 State Bar Dues 1,640 State Board of Accountancy 720 Public Retirement Information System Managers 300 Microsoft Technet 750 SACRS 6,100 P2F2 - Public Pension Financial Forum 300 Membership Total $117,780 Equip Maintenance ACL AuditEschange license and annual support $5,300 Cibermaxima Annual Maintenance Fee 1,200 Cisco SmartNet Support 3,500 Computer Room AC/Humidifier Maintenance 8,000 Computer Room UPS Maintenance 8,000 Dell Compellent Annual Support 9,628 Fujitsu Scanner Maintenance 1,500 HP 1 Year Post Warranty Next Business Day LTO Autoloader 2,500 Hardware Support HP 2 year Post Warranty 4 hour 24x7 ProLiant DL360 G7 10,000 Hardware Support (6 Servers) HP 2 year Post Warranty 4 hour 24x7 ProLiant DL380 G4 Hardware 2,000 Support (2 servers) HP 2 year Post Warranty 4 hour 24x7 ProLiant DL380 G5 Hardware 7,500 Support (6 Servers) HP 2 year Post Warranty 4 hour 24x7 ProLiant DL580 G7 10,000 Hardware Support (6 Servers) LivePerson Chat Software 7,200 LogMeIn Central Annual Maintenance Fee + 10 Pro Client annual 1,000 renewals Microfiche Reader/Printer 1,000 Microsoft Software Assurance 175,000 Novanis Liberty Maintenance 15,000 Sandler Kahne Annual Maintenance Fee 1,200 SSL Certificate Renewals 10,000 Teamsite Annual Maintenance 2,500 Telerik 1,000

396 Appendix B 2014 Budget Detail by Expense Category Administrative Account Group Description Total VmWare Annual Support 20,000 PensionGold Maintenance (Benefits administration support) 265,740 Solomon Software Maintenance 7,500 Oracle Maintenance 10,000 Printer Maintenance 2,500 Telephone System Maintenance (Meridian phone system) 7,500 Phone System Service Calls 2,500 Server Hardware Support 10,000 Work Station Hardware Support 10,000 Audio Visual Maintenance (Board room) 2,500 Anti-virus Software Maintenance 20,000 Quest - Toad Software 7,500 Equip Maintenance Total $648,768 Printing Svcs Brochures $15,000 CAFR (Comprehensive Annual Financial Report) 20,000 Disability Agenda 5,000 Quarterly newsletters 65,000 Printing 5,000 Printing Svcs Total $110,000 Periodicals ABA Key to Routing Numbers $1,000 Legal Publications, Daily Journal, Law Book Updates, Reference 6,000 Books Miscellaneous periodicals 1,400 Organizational Communication 500 PC Magazines, Computer World, and Technical Manuals. 500 Public Retirement Journal 950 Reference books / research materials 400 Periodicals Total $10,750 Postage Messenger to deliver Board Agenda $500 Miscellaneous Mailing/Mass Mailing 20,000 Pony Mail Services 2,000 Postage Expense 78,000 Quarterly Newsletters - All Members 67,000 Postage Total $167,500 Office Supplies Building photo replacement $8,000 Building Safety Programs 1,500 Chair Replacement 15,000 General Office Expense 35,000 Public Relation Materials 11,000 Office Supplies Total $70,500

397 Appendix B 2014 Budget Detail by Expense Category Administrative Account Group Description Total Equipment / Software Expenses Board Portal $20,000 Communications A/V Equipment 5,000 Imaging Software 5,000 ipad purchase (Board Members only) 5,000 New HP Printers 10,000 SharePoint Framework 25,000 State Street GL Download Software 15,000 Telecom Equipment 2,500 Upgrade Wireless infastructure 2,500 Computers/Laptops/Monitors 10,000 Miscellaneous Tools 15,000 Recordable Media and Backup Tapes(CD/DVD, Audio, Blank 10,000 tapes) Miscellaneous Software 15,000 Printer Supplies (Toner, Maintenance Kits, etc.) 10,000 Equipment / Software Expenses Total $150,000 Capital Expenditures Building AC Repair $50,000 OCERS Data Center 830,000 V3 Pension System - Services 5,124,738 V3 Pension System Software 585,000 2nd Floor Breakroom Expansion 35,000 Capital Expenditures Total $6,624,738 Equipment Lease Copier/Printer Lease $60,000 Folder/Sealer Lease 3,000 LEXIS 19,000 Pitney Bowes Postage Machine 7,000 STATE NET 4,000 Equipment Lease Total $93,000 Building Prop. Mgmt. / Maintenance Carpet Cleaning $3,500 Interior Window cleaning 5,000 Parking rail addition (Building Safety) 5,000 Property Management/Maintenance 625,000 Building Prop. Mgmt. / Maintenance Total $638,500 Telephone Cellular/Mobile Services $40,000 Telecom Services 50,000 Telephone Total $90,000 Total Administrative Budget $20,154,167

398 Appendix B 2014 Budget Detail by Expense Category Investments Account Group Description Total Personnel Cost Annual Salary $723,197 Fringe Benefits 412,957 Overtime 2,315 Leave P/O 23,944 Salary Adj. Pool 26,570 Temp Help 15,000 Personnel Cost Total $1,203,983 Professional Svcs Consulting Fees $1,284,800 Actuarial Fees 500,000 Legal Services 525,000 Custodial Bank Fees 300,000 Investment Management Fees 29,895,656 Proxy Voting Service Provider 25,000 Professional Svcs Total $32,530,456 Due Diligence Hedge Funds $13,748 NEPC Client Conference 7,050 Potential Due Diligence 48,645 Private Equity 3,173 Real Estate 5,288 Timbers 3,173 Energy 6,345 Due Diligence Total $87,422 Training Tuition Reimbursement $6,000 CII(Council of Inst. Investors) 2,350 Educational Forum 15,000 ILPA Spring Conference 2,350 Investment Conferences 16,920 Pension West 2,745 SACRS (No CA) 2,360 SACRS (So CA) 4,600 World Pension Forum 2,300 Training Total $54,625 Mtg/Mileage Investment Committee Meetings $5,000 Mtg/Mileage Total $5,000 Membership American Express $220 CFA Society 1,000 CII Membership 13,500 ILPA Private Equity Membership 2,500 Pacific Pension Institute 5,000 Pension West 175 PREA 350 Membership Total $22,745 Periodicals Barron's $100 Grant's Interest Rate Observer 1,205 Hedge Funds Publication 2,000 Pensions and Investments 1,000 Private Equity Analyst 1,595 The Economist 150 Periodicals Total $6,050

399 Appendix B 2014 Budget Detail by Expense Category Investments Account Group Description Total Equipment / Software Expenses Bloomberg $25,000 Equipment / Software Expenses Total $25,000 Total Investment Budget $33,935,281 Total Administrative Budget $20,154,167 Total Investments Budget $33,935, Grand Total Budget $54,089,448

400 Appendix C 2014 Personnel Cost Budget ORG Division Position Change Annual Salary Overtime Fringe Benefits Salary Adj. Pool Leave P/O Temp Help 2014 Total 0001 Board Board Members 3, Board Members 3, Board Members 3, Board Members 3, Board Members 3, Board Total 15, , Executive Chief Executive Officer 248, ,840 Assistant CEO-Internal Ops 217, ,163 Assistant CEO-External Ops 155, ,526 Executive Secretary II 48,714 2,276 30,239 Secretary II 47,424 2,052 28,249 Temporary Help Executive Total 717,400 4, ,017 16,322 23,756 20,000 1,241, Investment Chief Investment Officer 275, ,529 Investment Director 209, ,200 Investment Officer 99,470-57,166 Investment Analyst 89,544-48,967 Staff Specialist 49,546 2,315 23,095 Temporary Help Investment Total 723,197 2, ,957 26,570 23,951 15,000 1,203, Comm. Public Relations Analyst 93,308-58,945 Staff Specialist 58,261 2,657 32,396 Comm. Total 151,569 2,657 91,341 5,007 5, , Legal Chief Legal Counsel New 220, ,006 Staff Attorney III 145,181-81,048 Staff Attorney III 148,088-68,130 Staff Attorney III 142,147-75,313 Legal Total 655, ,497 13,109 21,704-1,044,726

401 Appendix C 2014 Personnel Cost Budget ORG Division Position Change Annual Salary Overtime Fringe Benefits Salary Adj. Pool Leave P/O Temp Help 2014 Total 0030 Member Svcs. Member Services Director 110,000-73,059 Member Services Manager 98,845-56,561 Member Services Manager 91,229-53,666 Sr. Staff Development Specialist 70,491 4,526 42,754 Retirement Program Supervisor 68,619 3,959 41,911 Member Services Supervisor New 68,619 3,959 41,911 Sr. Retirement Program Specialist 61,402 3,542 34,869 Retirement Program Specialist 53,997 3,115 41,568 Retirement Program Specialist 53,997 3,115 34,277 Retirement Program Specialist 53,997 3,115 28,115 Retirement Program Specialist 53,997 3,115 26,976 Retirement Program Specialist 53,997 3,115 36,364 Retirement Program Specialist 53,997 3,115 30,390 Retirement Program Specialist 45,947 2,863 24,009 Retirement Program Specialist 53,997 3,115 31,252 Retirement Transmittal Technician 49,962 2,882 34,264 Retirement Transmittal Technician 49,962 2,882 34,840 Office Specialist 43,805 2,527 32,514 Retirement Benefits Technician 42,474 2,450 23,762 Retirement Benefits Technician 31,970 1,992 21,578 Retirement Benefits Technician 42,474 2,450 23,762 Office Technician 37,232 2,148 14,689 Office Technician 37,232 2,148 20,644 Office Technician New 37,232 2,148 20,644 Temporary Help Member Svcs. Total 1,365,474 62, ,379 20,203 45,219 30,000 2,347, Finance Finance Director 136,992-82,514 Finance Reporting Manager 97,288-53,623 Finance Reporting Manager 84,000-46,333 Finance Reporting Manager 84,000-45,363 Accountant II Under Reclassification 70,762 3,228 27,432 Accountant II 68,827 3,062 42,006 Accountant II 63,544 2,969 30,068 Accounting Technician 49,962 2,162 26,591 Accounting Technician 49,962 2,162 34,840 Sr. Accounting Assistant 41,621 2,005 26,177 Temporary Help Finance Total 746,958 15, ,947 23,633 24,737-1,225,863

402 Appendix C 2014 Personnel Cost Budget ORG Division Position Change Annual Salary Overtime Fringe Benefits Salary Adj. Pool Leave P/O Temp Help 2014 Total 0050 Disability Retirement Coordinator 68,619 2,474 24,404 Retirement Investigator 56,701 2,214 26,526 Retirement Investigator 61,402 2,214 39,163 Office Specialist 43,805 1,580 28,199 Office Specialist 43,805 1,580 24,264 Temporary Help Disability Total 274,332 10, ,556 4,701 9,085 22, , Admin. Svcs. Administrative Svc. Director 110,000-63,593 Staff Specialist 61, ,163 Staff Assistant 52, ,070 Store Clerk 40, ,170 Staff Assistant-Part Time New 31, ,943 Temporary Help Admin. Svcs. Total 295,370 2, ,939 2,200 9,781 30, , IT IT Director 127,061-65,144 IT Manager 101,920-56,734 IT Operations Supervisor 78,645 6,125 45,802 IT Programming Supervisor 92,498 7,243 51,038 Sr. Applications Developer 100,443 7,243 51,325 Programmer Analyst II 85,363 6,156 38,121 Programmer Analyst II 72,696 5,662 40,500 Info. System Tech. Under Reclassification 66,976 5,313 41,402 Info. System Tech. Under Reclassification 66,976 5,313 41,402 Info. System Tech. Under Reclassification 66,976 5,313 31,500 Temporary Help IT Total 859,554 48, ,968 44,726 28, ,000 1,544, IA Internal Audit Director 134,021-77,493 Internal Auditor 116,153-67,919 IA Total 250, ,412 5,003 8, ,873 Grand Total 6,054, ,605 3,469, , , ,000 10,249,536

403 Appendix D Orange County Employees Retirement System 21 Basis Points for Budget Year 2014 Projected actuarial accrued liability as of December 31, 2013 $ 16,083,792, basis points of projected actuarial accrued liability 33,775,963 FY14 proposed budget amount subject to 21 basis points limitation 1 12,884,429 Amount under 21 basis points $ 20,891,534 Budgeted amount expressed as basis points of projected actuarial accrued liability-fy Budgeted amount expressed as basis points of projected actuarial accrued liability-fy Reconciliation of amount subject to 21 basis points limitation: Total FY14 proposed administrative budget $ 20,154,167 Less: Capital expenses (6,624,738) Computer hardware/software (150,000) IT-Professional services consulting * (495,000) FY14 proposed budget amount subject to 21 basis points limitation $ 12,884,429 *Excludes off-site storage/online data storage, internet access, and County VPN access costs.

404 Appendix D Orange County Employees Retirement System 18 Basis Points for Budget Year 2014 Projected actuarial value of total assets as of December 31, 2013 $ 10,689,558, basis points of projected actuarial value of assets 19,241,204 FY14 proposed budget amount subject to 18 basis points limitation 1 13,683,171 Amount under 18 basis points $ 5,558,033 Budgeted amount expressed as basis points of projected actuarial value of assets-fy Budgeted amount expressed as basis points of projected actuarial value of assets-fy Reconciliation of amount subject to 18 basis points limitation Total FY14 proposed administrative budget $ 20,154,167 Less: Capital expenses (6,624,738) Add: Projected depreciation cost 153,742 FY14 proposed budget amount subject to 18 basis points limitation $ 13,683,171 Note: The 18 basis points calculation above is for informational and comparison purposes only.

405 Appendix E Historical Statistics No. of Full-Time Positions Budgeted No. of Retirees Beginning of Year 11,778 12,243 12,762 13,289 13,947 No. of Additional Retirements , No. Removed from Payroll 1 (279) (332) (361) (368) (293) Payroll $ (in thousands) 2 * $461,530 $459,383 $493,749 $541,154 $583,267 No. of Members** 1 38,970 38,812 39,116 39,618 40,559 No. of New Members** , Seminars figures are as of October figures are annualized estimates based on actuals through September 2013 *Payroll represents retirement payroll, withdrawals and death benefits **Number of members includes active, deferred, and retired (including beneficiaries)

406 Appendix F 2014 Budget Transfers Division Budget Item From Division To Division From Category To Category 2014 Budget 0070 CALAPRS - Roundtable N/A N/A Mtg/Mileage Training 2, PRISM Conference N/A N/A Mtg/Mileage Training 3, Educational Forum N/A N/A Mtg/Mileage Training 15, Strategic Planning N/A N/A Training Mtg/Mileage 10, CALAPRS membership N/A N/A 3, Employee Recognition N/A N/A Training Mtg/Mileage 6,500 Division Codes: 0001 Board 0010 Executive 0011 Investments 0015 Communications 0020 Legal 0030 Member Services 0040 Finance 0050 Disability 0060 Administrative Services 0070 Information Technology 0080 Internal Audit

407 OCERS Finance Presentation 2014 Proposed Budget November 18, 2013

408 Agenda Purpose of Presentation General review of 2014 Budget and follow up from Budget Workshop detailed discussion Recommended actions: Adopt 2014 Budget Approve the addition of four new staff positions Approve OCERS Direct Salary Ranges Approve position title changes Background OCERS Mission Statement, Strategic Plan and 2014 Business Plan set parameters for budget development Initial budget requests prepared by each department head for their respective area CEO, Assistant CEO (Internal Operations) and Director of Finance met individually with department heads to review and discuss each line item of their budget - resulting in trimming of budget as presented Overall Proposed FY14 Budget 5 Year Budget Comparison Actual Expenses Comparison Investment Budget Administrative Budget 21 and 18 Basis Point Tests 2

409 FY14 Proposed Budget - Summary Overall Budget: FY14 proposed budget is $54.1M vs. $61.7M in FY13 Decrease of $7.6M or -12.4% compared to FY13 budget Administrative Budget: FY14 proposed administrative budget is $20.2M vs. $22.0M in FY13 Decrease of $1.8M or -8.5% compared to FY13 budget Excluding capital expenditures increased $500K or 3.9% Capital expenditures consist of $5.7M for V3 software conversion project, $830K for data center and $85K in building improvements, a decrease of $2.4M or -26.3% compared to FY13 budgeted capital expenditures Investment Budget: FY14 proposed investment budget is $33.9M vs. $39.7M in FY13 Decrease of $5.8M or -14.5% compared to FY13 budget 3

410 Historical Statistics No. of Full-Time Positions Budgeted No. of Retirees Beginning of Year 11,778 12,243 12,762 13,289 13,947 No. of Additional Retirements , No. Removed from Payroll 1 (279) (332) (361) (368) (293) Payroll $ (in thousands) 2 * $461,530 $459,383 $493,749 $541,154 $583,267 No. of Members** 1 38,970 38,812 39,116 39,618 40,559 No. of New Members** , Seminars figures are as of October figures are annualized estimates based on actuals through September 2013 *Payroll represents retirement payroll, withdrawals and death benefits **Number of members includes active, deferred, and retired (including beneficiaries) 4

411 5 Year Budget Comparison Budget 2010 Amended Budget 2011 Budget 2012 Amended Budget 2013 Proposed Budget 2014 $ Variance FY13-FY14 % Variance FY13-FY14 Administrative Budget: Personnel cost $6,471,715 $6,553,373 $7,734,803 $8,340,227 $9,045,546 $705, % Services and supplies 5,879,830 3,616,987 3,753,812 4,712,042 4,483,883 (228,159) -4.8% Capital expenditures 0 4,917,201 4,112,500 8,985,525 6,624,738 (2,360,787) -26.3% Total $12,351,545 $15,087,561 $15,601,115 $22,037,794 $20,154,167 ($1,883,627) -8.5% Investment Budget: Personnel cost $618,326 $918,625 $1,006,858 $1,189,179 $1,203,990 $14, % Services and supplies 41,081,463 54,890,588 54,843,830 38,516,990 32,731,298 (5,785,692) -15.0% Capital expenditures % Total $41,699,789 $55,809,213 $55,850,688 $39,706,169 $33,935,288 ($5,770,881) -14.5% Grand Total $54,051,334 $70,896,774 $71,451,803 $61,743,963 $54,089,455 ($7,654,508) -12.4% 5

412 Actuals Comparison Actuals 2010 Actuals 2011 Actuals 2012 Estimated Actuals 2013 Proposed Budget 2014 $ Variance FY13-FY14 % Variance FY13-FY14 Administrative Budget: Personnel cost $6,153,379 $6,331,167 $7,297,958 $7,796,997 $9,045,546 $1,248, % Services and supplies 3,527,013 3,440,669 3,384,573 3,596,414 4,483, , % Capital expenditures 0 3,145,357 4,095,302 8,575,061 6,624,738 (1,950,323) -22.7% Total $9,680,392 $12,917,193 $14,777,833 $19,968,472 $20,154,167 $185, % Investment Budget: Personnel cost $581,747 $969,498 $957,944 $1,142,108 $1,203,990 $61, % Services and supplies * 41,126,756 31,371,923 33,986,608 31,528,767 32,731,298 1,202, % Capital expenditures % Total $41,708,503 $32,341,421 $34,944,552 $32,670,875 $33,935,288 $1,264, % Grand Total $51,388,895 $45,258,614 $49,722,385 $52,639,347 $54,089,455 $1,450, % *Services and supplies has been modified for years for comparative purposes to exclude items w ithin professional services that are no longer budgeted for as of FY13; indirect management fees, foreign income tax/other expense, and security lending fees. 6

413 Investment FY14 Budget vs. Actuals (Dollars in Thousands) 80,000 60,000 40,000 20, Budget 2010 Actuals 2011 Amended Budget 2011 Actuals 2012 Budget 2012 Actuals 2013 Amended Budget 2013 Estimated Actuals 2014 Proposed Budget Personnel Costs Services and Supplies 7

414 Investments FY14 Budget vs. Actuals 11 - Investments Actuals 2010 Actuals 2011 Actuals 2012 Estimated Actuals 2013 Proposed Budget 2014 $ Variance FY13-FY14 % Variance FY13-FY14 Personnel Costs: $581,747 $969,498 $957,944 $1,142,108 $1,203,990 $61, % Services and Supplies: Due Diligence/Investment Conferences $32,825 $28,119 $15,651 $28,852 $87,422 $58, % Equipment/Software Expenses 0 5,975 48,700 25,000 25, % Meeting & Mileage 2,105 6,987 5,543 13,423 5,000 (8,423) -62.8% Miscellaneous Office Expenses 16,295 19,174 4,943 19,089 28,795 9, % Professional Services * 41,063,916 31,284,420 33,907,083 31,431,620 32,530,456 1,098, % Training 11,615 27,248 4,688 10,783 54,625 43, % Total Services and Supplies: $41,126,756 $31,371,923 $33,986,608 $31,528,767 $32,731,298 $1,202, % Total Investments $41,708,503 $32,341,421 $34,944,552 $32,670,875 $33,935,288 $1,264, % *For comparative purposes, professional services excludes items no longer budgeted as of FY13; indirect management fees, foreign income tax/other expenses, and security lending fees. 8

415 Investments Professional Services 11 - Investments Actuals 2010 * Actuals 2011 * Actuals 2012 * Estimated Actuals 2013 * Proposed Budget 2014 $ Variance FY13-FY14 % Variance FY13-FY14 Professional Services: Investment Management Fees 39,649,230 29,956,312 31,974,766 28,775,890 $29,895,656 $1,119, % Consulting Fees ** 282, , ,021 1,110,398 1,284, , % Legal Fees 283, , , , ,000 (195,332) -27.1% Actuarial Fees 378, , , , , % Custodial Bank Fees 275, , , , , % Proxy Voting Service Provider ,000 25, % Investment Search Service 194, , , NA Total Professional Services $41,063,916 $31,284,420 $33,907,083 $31,431,620 $32,530,456 $1,098, % *Actuals exclude items no longer budgeted; indirect management fees, foreign income tax/other, and security lending fees. **Consulting fees include a $50,000 place holder budget for a third-party fee audit. 9

416 Projected Total Costs of Investment Management 11 - Investments Estimated Actuals $ Variance FY13-FY14 % Variance FY13-FY14 Investment Management Costs Budgeted Costs Direct Investment Management Fees $28,775,890 $29,895,656 $1,119, % Custodial Bank Fees 300, , % Total Budgeted Costs $29,075,890 $30,195,656 $1,119, % Unbudgeted Costs Indirect Investment Management Fees* $54,507,617 $62,839,763 $8,332, % Foreign Income Tax/Other Expense* 1 8,656,964 11,582,199 2,925, % Security Lending Fees* 1 400, , , % Total Unbudgeted Costs $63,565,309 $74,951,218 $11,385, % Total Investment Management Costs $92,641,199 $105,146,874 $12,505, % Total FY13 Est Act/FY14 Budget $52,639,347 $54,089,455 $1,450, % Total FY13 Est Act/FY14 Budget + Unbudgeted Costs $116,204,656 $129,040,673 $12,836, % % of Total Investment Management Costs to Total FY13 Est Act/FY14 Budget + Unbudgeted Costs 79.7% 81.5% 1.8% NA *For informational purposes only; not a budgetary line item 1 Fees estimated for 2013 based on actuals through September, 2013; 2014 based on 5 year average from 2008 to 2012 actual expenses 10

417 Administrative FY14 Budget vs. Actuals Includes Capital Expenditures (Dollars in Thousands) 10,000 8,000 6,000 4,000 2, Budget 2010 Actuals 2011 Amended Budget 2011 Actuals 2012 Budget 2012 Actuals 2013 Amended Budget 2013 Estimated Actuals 2014 Proposed Budget Capital Expenditures Services and Supplies Personnel Costs 11

418 Administrative Budget by Classification FY13 Amended Administrative Budget FY14 Proposed Administrative Budget 41% 38% Personnel Cost 33% 45% Personnel Cost 21% Services and Supplies Capital Expenditures 22% Services and Supplies Capital Expenditures 12

419 Administrative FY14 Budget vs. Actuals Actuals 2010 Actuals 2011 Actuals 2012 Estimated Actuals 2013 Proposed Budget 2014 $ Variance FY13-FY14 % Variance FY13-FY14 Personnel Costs: $6,153,379 $6,331,167 $7,297,958 $7,796,997 $9,045,546 $1,248,549 16% Services and Supplies: Equipment/Software Expenses $417,900 $72,065 $264,024 $269,305 $150,000 ($119,305) -44.3% Building Property Mgmt. / Maintenance 797, , , , ,500 47, % Equipment Lease 66,939 83,019 91,150 74,994 93,000 18, % Legal Services 384, , , , , , % Equipment Maintenance 351, , , , , , % Meeting & Mileage 21,138 14,146 16,188 21,128 48,200 27, % Miscellaneous Office Expenses 366, , , , , , % Professional Services 975,628 1,077, ,126 1,221,947 1,596, , % Training 144, , , , ,485 80, % Total Services and Supplies: $3,527,013 $3,440,669 $3,384,573 $3,596,414 $4,483,883 $887, % Capital Expenditures: V3 Project $0 $2,853,324 $4,083,187 $7,700,525 $5,709,738 ($1,990,787) -25.9% Data Center , , , % OCERS Virtual Server 0 202, % Shoretel Phone System 0 89,187 12, % Third Floor Build-Out / Parking Lot Repair ,388 0 (156,388) % Building HVAC Repair ,000 50,000 NA 2nd Floor Breakroom Expansion ,000 35,000 NA Total Capital Expenditures: $0 $3,145,357 $4,095,302 $8,575,061 $6,624,738 ($1,950,323) -22.7% Total Administrative $9,680,392 $12,917,193 $14,777,833 $19,968,472 $20,154,167 $185, % 13

420 Organizational Chart Board of Retirement Executive Secretary (1) CEO Steve Delaney Director of Internal Audit David James Chief Investment Officer Girard Miller Assistant CEO (External Operations) Vacant Secretary II (1) Chief Legal Officer * Vacant Assistant CEO (Finance & Internal Operations) Brenda Shott Internal Auditor Mark Adviento Director of Investment Operations Shanta Chary Investment Officer David Beeson Investment Analyst Christine Kluger Staff Specialist (1) Director of Member Services Suzanne Jenike Communications Manager Robert Kinsler Staff Attorneys (3) David Lantzer Dawn Matsuo Director of Finance Tracy Bowman Director of Administrative Services Cynthia Hockless Director of IT Jenny Sadoski Member Services Managers (2) Heidi Halbur Catherine Fairley Disability Coordinator (1) Senior Staff Development Specialist (1) Staff Specialist (1) Jerry Weissburg Finance Managers (3) Diane Dillard Darlene Huynh Jennifer Dalisay Staff Specialist (1) Staff Assistant (1) Staff Assistant PT (1) * Store Clerk (1) IT Manager Jon Gossard IT Supervisor Operations Javier Lara (temp promo) IT Supervisor Programming Allan Browning Member Services Supervisors (2) **** Senior Retirement Program Specialist (1) Retirement Program Specialist (8) Benefits Technician (3) Accounting Technicians (2) Office Technician (3) **** Office Specialist (1) Disability Investigators (2) Office Specialists (2) Acct/Auditor II (3) ** Acct Technician (2) Sr. Acct Assistant (1) Notes: * Proposed new position. ** One Acct/Auditor position is under a reclassification study. *** These positions are under a reclassification study. **** One of these positions is a proposed new position. Senior Applications Developer (1) Contractors (13) Systems Technicians (3) *** Proposed Total Budgeted EE s: 72 Systems Programmer Analysts II (2) 14

421 Proposed Personnel Costs (Including Investments) (Dollars in Thousands) $7,090 $6,735 $7,472 $7,300 $8,742 $8,256 $9,529 $8,939 $10, Budget (62 EE) 2010 Actuals 2011 Amended Budget (62 EE) 2011 Actuals 2012 Budget (66 EE) 2012 Actuals 2013 Amended Budget (68 EE) 2013 Estimated Actuals 2014 Proposed Budget (72 EE) 15

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