CalPERS Update: A Solid Foundation for the Future California State Association of Counties Government Finance & Administration Policy Committee Marcie Frost, CalPERS CEO May 17, 2018 Thank you for having me here Good to be back with you again When we last met at your Annual Meeting, I talked to you about our financial challenges and the work we’ve been doing to strengthen the fund Understand our decisions have made things challenging for you Thank you for your additional contributions We’re a stronger fund today And … we’re going to be here to pay the benefits you’ve promised your employees and that they’ve earned A year from now if I’m invited back, we’ll be an even stronger fund Going to tell you how we’ve strengthened the fund and why we had to make these tough decisions

Our Members Are Our Focus Members At the Heart of All We Do Every decision we make is focused on serving our members CalPERS is about people 1.9 million members 2,945 employer partners Schools Public agencies State agencies Largest pension system in the U.S. Second largest purchaser of public health benefits – behind federal government

Partnering with California's Counties 37 Counties 76,904 Employees/Members CSAC Stats – (animated slide) Maintaining healthy relationships with our employer partners is essential to serving our members Recognize that not all CSAC members are CalPERS members 37 counties contract with us Represents nearly 77,000 members 21 counties have their own retirement system Like most pension systems around the U.S., they will also face similar challenges

Our Members Tell Our Story $2,876 Average allowance for all retirees 64% $21.4 billion Receive less than $3,000 Paid in pension benefits annually 3% Earn pensions greater than $100,000 We Believe In … Retirement security and the role defined benefit plans play in providing reasonable financial security Story of Grandparents Aligned to our mission Benefits are critical to attracting, retaining skilled employees Of the $21 billion we paid last fiscal year in benefits: 64 % receive less than $3,000 per month Approx. 3% receive more than $100K—the exception; they’ve made their contributions Will rise for 10-15 years until PEPRA fully takes effect

Funded Status Funded Status FY 2015–16 Calendar Year 2017 Challenges of Funded Status Limits our ability to take risks Puts greater pressure on your budgets Maturing fund Retiree population is growing People are living longer Factors we plan for … ensure we’re on the right path Low-return environment predicted for the next decade

Market Volatility Prompts Key Decisions 70% 71% 70% 76% 73% 68% 2012 PEPRA law Discount rate lowered from 7.75% to 7.5% 2013 2014 2015 2016 2017 Additional $6 billion from State Steps to strengthen the fund: Discount rate Amortization policy 2018 Market Volatility Prompts Key Decisions Important to remember we have faced challenges over the decades and paid benefits consistently Market volatility primary driver of risk Three key decisions helped turn the corner since 2012 Lowering of discount rate $6 billion State UAL payment Amortization policy Goal is 80%; 90% will be even better It will take time (Note: All figures listed are FY, except 71%, which is calendar year)

Addressing Financial Challenges 7.5% 7% Lower Discount Rate 30 yrs. 20 yrs. = significant long-term savings Shorter Amortization Discount Rate Reduction Infuses the system with additional cash Gradual reduction from 7.5% to 7% over three years Starting in Fiscal Year 2018-2019 for counties We’re keenly aware of impact on your budgets A tough decision that had to be made Doing all we can to help you understand valuations and the costs of the benefits you provide Amortization Policy Shortens the period to pay down future unfunded liabilities Will save significant amounts of money in the long run

Operating As Efficiently As Possible 1.5–2% reduction 70% in-house $170 mil. savings Doing Our Part—Savings & Efficiencies If we’re going to ask employers to contribute to the long-term success of the fund, then we need to do our part to run the system as efficiently and effectively as possible Realized significant savings: Striving for 1.5 to 2% reduction in expenses in each of the next 5 fiscal years No new staff positions for past two years Managing 70% of funds in-house Working strategically with the right external managers Saving $170 million in investment expenses Every dollar we save goes back to paying benefits

The Big Decisions Have Been Made Necessary Prudent Meet our fiduciary duty The result is an improving cash flow Thank you for facing the challenges head on Prior to discount rate and amortization policy, cash flow projections were negative $6 billion payment from State made significant impact  

$350 billion assets 15.7% investment returns $47 billion increase Investment Earnings Calendar year 2017 $350 billion assets 15.7% investment returns $47 billion increase Where We Stand Today These decisions put us in a good place to focus on the investments - the one piece that we have complete control over Significant asset growth –calendar year $350 billion: currently about $355 billion Improving returns – market remains volatile Always invest with our 7% assumed rate of return of in mind (Note: these are calendar year figures – December 31, 2017)

Campaigns Focused on Total Fund Return Engagement vs. Divestment CalPERS Role Clarity ESG Campaigns Focused on Total Fund Return Next five years will be one of focus on what we call “total fund return and total fund performance” Campaigns CalPERS role clarity Engagement/Divestment ESG– about risk and how we see it with focus on 7% return

Shared Responsibility We Have to Work Together Pensions are a shared responsibility between you, our employer partners, the employees, and CalPERS Have a solid foundation to grow; positioned to pay benefits for decades to come Want to continue these conversations about our future together Come before our board on issues that matter to you Talk to me, email me, reach out to our actuaries We may not always agree I always want to be able to have a conversation with you

Focused on Total Return Where Do We Go from Here? Focused on Total Return 115 Trust Education Where Do We Go from Here? Support 115 Trust Providing education and resources you want Significant effort to work with local elected officials Employer Education Special education track at Educational Forum – October 22-24 (Registration opens June 4) Prefunding webinar How to read actuarial valuations webinar Note: Compliment Dorothy- has done a good job representing you

Thank You Thank you again for having me here today I’m happy to take your questions