Finance and Management Committee
June 27, 2023
AGENDA REPORT
TO: Jestin D. Johnson FROM: Erin Roseman
City Administrator Finance Director
SUBJECT: Oakland PFRS’s Investment Portfolio
and Actuarial Valuation for the
Quarter Ending December 31, 2022
DATE: May 26, 2023
City Administrator Approval Date:
RECOMMENDATION
Staff Recommends That the City Council Receive an Informational Report on the Oakland Police and Fire Retirement System’s (“PFRS”, or “System”) Investment Portfolio as of December 31, 2022 and the PFRS Actuarial Valuation as of July 1, 2022.
EXECUTIVE SUMMARY
The attached Quarterly Investment Performance report (Attachment A) provided by the PFRS Investment Consultant, Meketa Investment Group (MIG) summarizes the performance of the PFRS investment portfolio for the quarter ended December 31, 2022. In addition, the Council is being provided the recently updated PFRS’ Actuarial Valuation (Attachment B) as of July 1, 2022.
During the most recent quarter, the PFRS Total Portfolio generated an absolute return of
5.6 percent, gross of fees, underperforming its policy benchmark by -0.4 percent. The portfolio matched its benchmark over the latest one- and three periods and outperformed over the five- year period. This is discussed in more detail in the “Investment Performance” section of this report.
Quarter 1 Year 3 Year 5 Year
Total Portfolio 5.6 -14.5 2.3 4.3
Policy Benchmark 6.0 -14.5 2.3 4.0
Excess Return -0.4 0.0 0.0 0.3
As of July 1, 2022, the System’s Unfunded Actuarial Liability is approximately $130.2 million, and the System had a Funded Ratio of 72.6 percent on a Market Value of Assets (MVA) basis.
This is discussed in more detail in the “PFRS Actuarial Valuation” section of this report.
Jestin Johnson (Jun 14, 2023 08:19 PDT)
Jun 14, 2023
Jestin D. Johnson, City Administrator
Subject: Oakland PFRS’s Investment Portfolio and Actuarial Valuation for the Quarter ending December 31, 2022
Date: May 26, 2023 Page 2
Finance and Management Committee
June 27, 2023
BACKGROUND / LEGISLATIVE HISTORY
The Oakland Police and Fire Retirement System is a closed defined benefit plan established by the City of Oakland’s (the "City”) Charter. PFRS is governed by a board of seven trustees (the “PFRS Board”). PFRS covers the City’s sworn police and fire employees hired prior to July 1, 1976. PFRS was closed to new members on June 30,1976. As of December 31, 2022, PFRS had 674 retired members and no active members.
The System’s investment portfolio is governed by the investment policy set by the PFRS Board.
The PFRS Board sets an investment policy that authorizes investments in a variety of domestic and international equity and fixed income securities. Eleven external investment managers currently manage the System’s portfolio. Most of the portfolio is held in custody at Northern Trust. In accordance with the City Charter, the PFRS Board makes investment decisions in accordance with the prudent person standard as defined by applicable court decisions and as required by the California Constitution.
In March 1997, the City issued Taxable Pension Obligation Bonds, Series 1997 (“1997 POBs”) and as a result deposited $417 million into the System to pay the City’s contributions through June 2011. As a result of the funding agreement entered at the time the 1997 POBs were issued, City payments to PFRS were suspended from February 25, 1997 to June 30, 2011. The City of Oakland resumed contributing to PFRS effective July 1, 2011 and contributed $45.5 million for the fiscal year (FY) ended June 30, 2012.
In July 2012, the City issued $212.5 million of Taxable Pension Obligation Bonds, Series 2012 (“2012 POBs”). The City subsequently deposited $210 million into the System and entered a funding agreement with the PFRS Board. Thus, no additional contributions were required until July 1, 2017. As of the most recent actuary study dated July 1, 2022, the System’s Unfunded Actuarial Liability is approximately $130.2 million, and the System had a Funded Ratio of 72.6 percent on a Market Value of Assets (MVA) basis. The City of Oakland is currently making monthly payments to the Plan for the FY 2022/2023 required contribution of $32.7 million.
ANALYSIS AND POLICY ALTERNATIVES
The attached report provided by the Oakland Police and Fire Retirement System’s (PFRS) Investment Consultant and Actuary summarizes the performance of the PFRS’ investment portfolio and actuarial funding status. These reports are being provided in accordance with the City of Oakland Charter, to provide an update to City Council on the status of the Oakland Police and Fire Retirement System.
The presentation of this report supports the Citywide priority of responsive, trustworthy government. This report communicates the PFRS's financial positions and obligations to the public, policy makers, retirees and stakeholders, while the annual audits of the PFRS finances provides assurance of the accuracy of information contained therein.
Jestin D. Johnson, City Administrator
Subject: Oakland PFRS’s Investment Portfolio and Actuarial Valuation for the Quarter ending December 31, 2022
Date: May 26, 2023 Page 3
Finance and Management Committee
June 27, 2023
PFRS’ Membership
The City Charter establishes plan membership, contribution, and benefit provisions. The System serves the City’s sworn employees hired prior to July 1, 1976 who have not transferred to the California Public Employees’ Retirement System (“CalPERS”). As of December 31, 2022, the System’s membership was 674 as shown on Table 1 below.
Table 1
PFRS Membership
as of December 31, 2022
Membership POLICE FIRE TOTAL
Retiree 289 167 456
Beneficiary 127 91 218
Total Membership 416 268 674
PFRS Investment Portfolio
As of December 31, 2022, the PFRS’ portfolio had an aggregate value of $398.44 million as shown in Table 2.
Table 2
PFRS Investment Portfolio
as of December 31, 2022
Investment Fair Value
Domestic Equities $159,779,185
Fixed Income 101,552,915
Covered Calls 27,503,720
International Equities 49,851,663
Crisis Risk Offset 39,452,288
Credit 8,603,832
Cash 11,692,108
Total Portfolio $398,435,711
As of December 31, 2022, the PFRS portfolio had an aggregate value of $398.4 million. This represents a $21.2 million increase in investment value and withdrew ($5.2) million in outflows for benefit payments over the quarter. During the previous one-year period, the PFRS Total Portfolio decreased in value by $69.1 million and withdrew ($15.7) million in outflows for benefit payments as shown in Table 3 below. The investment drawdowns for benefit payments are less City of Oakland Contributions to the PFRS Plan of $8.2 million for the Quarter and $32.7 million for the Year.
Jestin D. Johnson, City Administrator
Subject: Oakland PFRS’s Investment Portfolio and Actuarial Valuation for the Quarter ending December 31, 2022
Date: May 26, 2023 Page 4
Finance and Management Committee
June 27, 2023
Table 3
Change in PFRS Portfolio Valuation
as of December 31, 2022
Total Plan Value 1 Quarter 1 Year
Beginning Market Value $382,458,040 $483,220,978
Investment Drawdowns for Benefit Payments (5,217,746) (15,709,585) Gain/(Loss) on Investment 21,195,418 (69,075,682)
Ending Market Value $398,435,711 $398,435,711
PFRS Investment Performance
During the most recent quarter ending December 31, 2022, the PFRS Total Portfolio generated an absolute return of 5.6 percent, gross of fees, underperforming its policy benchmark by -0.4 percent. The portfolio kept pace with the benchmark over the one-year period and three-year period, and 0.3 percent over the five-year period.
Over the most recent quarter ending December 31, 2022, the Plan’s Domestic Equity allocation outperformed its benchmark by 1.0 percent. The Plan’s International Equity allocation outperformed its benchmark by 0.8 percent. The Plan’s Fixed Income allocation underperformed its benchmark of 0.1 percent. The Plan’s Credit allocation underperformed its benchmark of -2.3 percent. The Plan’s Crisis Risk Offset allocation underperformed its benchmark by -6.4 percent, while the Covered Calls allocation outperformed its benchmark by 0.9 percent. Table 4 shows PFRS recent investment performance in comparison to its corresponding benchmarks.
Table 4
PFRS Asset Class Performance
as of December 31, 2022
Investment Type Quarter 1 Year 3 Year 5 Year
PFRS Total Fund
5.6 -14.5
2.3 4.3
PFRS Policy Benchmark 6.0 -14.5 2.3 4.0
Excess Returns -0.4 0.0 0.0 0.3
PFRS Domestic Equity
8.2 -16.7
7.2 8.5
Benchmark: Russell 3000 7.2 -19.2 7.1 8.8
Excess Returns 1.0 2.5 0.1 -0.3
PFRS International Equity 15.1 -15.7 0.3 1.7
Benchmark: MSCI ACWI Ex US 14.3 -16.0 0.1 0.9
Excess Returns 0.8 0.3 0.2 0.8
Jestin D. Johnson, City Administrator
Subject: Oakland PFRS’s Investment Portfolio and Actuarial Valuation for the Quarter ending December 31, 2022
Date: May 26, 2023 Page 5
Finance and Management Committee
June 27, 2023
Table 4
PFRS Asset Class Performance
as of December 31, 2022 cont’d
Investment Type Quarter 1 Year 3 Year 5 Year
PFRS Fixed Income
2.1 -12.9
-2.1
0.5 Benchmark: Bloomberg Barclays 2.2 -13.0 -2.5 0.2
Excess Returns -0.1 0.1 0.4 0.3
PFRS Credit
1.9 -7.6
3.0 3.0
Benchmark: Bloomberg US High Yield 4.2 -11.2 0.0 2.3
Excess Returns -2.3 3.6 3.0 0.7
PFRS Crisis Risk Offset
-4.9
-14.5
-14.6
-
Benchmark: SG Multi Alt Risk Premia 1.5 4.8 -1.3 -
Excess Returns -6.4 -19.3 -13.3 -
PFRS Covered Calls
7.7 -12.5
6.7 7.2
Benchmark: CBOE BXM 6.8 -11.4 1.3 2.9
Excess Returns 0.9 -1.1 5.4 4.3
Cash
0.0 0.0
0.4 1.1
Citigroup 3 Month T-Bill Index 0.9 1.5 0.7 1.2
Excess Returns -0.9 -1.5 -0.3 -0.1
Table 5 compares PFRS Total Portfolio performance to other pension funds and benchmarks.
Jestin D. Johnson, City Administrator
Subject: Oakland PFRS’s Investment Portfolio and Actuarial Valuation for the Quarter ending December 31, 2022
Date: May 26, 2023 Page 6
Finance and Management Committee
June 27, 2023
Table 5
PFRS Total Fund Performance
as of December 31, 2022
Quarter 1 Year 3 Year 5 Year
PFRS Fund (Gross of Fees)
5.6%
-14.5%
2.3%
4.3%
Comparisons:
PFRS Actuarial Expected Rate of Return (blend) (a) (b) 1.5% 6.0% 6.0% 6.0% Policy Benchmark (blend) (c) 6.0% -14.5% 2.3% 4.0%
Median Fund (d) 5.8% -13.4% 4.0% 5.2%
CalSTRS Investment Returns (Gross of Fees) 4.0% -6.7% 7.3% 7.3% East Bay Mud Investment Returns (Gross of Fees) 7.5% -13.4% 3.3% 4.9% San Joaquin County Returns (Gross of Fees) 3.7% -6.8% 5.1% 5.4% a) The actuarial expected rate of return was 8% through 6/30/2009, 7.5% through 6/30/2010, 7% through 6/30/2011, 6.75% through 6/30/2014, 6.5% through 12/31/2017, and 6.0% currently. b) The quarterly actuarial expected rate of return is calculated based on the 6.0% annual return assumption. c) The Policy Benchmark currently consists of 40% Russell 3000, 12% MSCI ACWI ex U.S., 31% Bloomberg US Universal, 5% CBOE BXM, 10% SG Multi Alternative Risk Premia, 2% Bloomberg US High Yield. d) Median Fund is of Public Defined Benefits Plans with $250 million to $1 billion in assets.
PFRS Actuarial Valuation
As of the latest actuarial valuation dated July 1, 2022, the PFRS Funded Ratio (actuarial value of assets divided by present value of future benefits) is 72.6 percent. As a result of the funding agreement and the City’s deposit of $210 million in 2012 POBs to the System, no contributions were required until fiscal year 2017/2018. The City resumed contributions to the System on July 1, 2017. The required contribution for fiscal year 2022/2023 is $32.71 million. Table 6 below shows a summary of the July 1, 2022 PFRS Actuarial valuation results.
Table 6
Summary of Plan Results
($ in thousands)
July 01, 2022
Actuarial Liability $ 552,966
Less: Actuarial Value of Assets (422,762)
Unfunded Actuarial Liability $ 130,204
Funded Ratio (AVA) liability 76.5%
Jestin D. Johnson, City Administrator
Subject: Oakland PFRS’s Investment Portfolio and Actuarial Valuation for the Quarter ending December 31, 2022
Date: May 26, 2023 Page 7
Finance and Management Committee
June 27, 2023
Projected City of Oakland Contributions
Article XXVI Section 2619 (6) required that the City fully fund the PFRS Plan by 2026. Table 7 summarizes the projected employer contributions.
Table 7
Projected Employer Contributions
Police and Fire Retirement System
(in millions)
Fiscal Year
Ending
Employer
Contribution
2023 $32.7
2024 40.8
2025 44.0
2026 48.8
FISCAL IMPACT
This is an informational report. There are no budget implications associated with this report
PUBLIC OUTREACH / INTEREST
This item did not require public outreach other than the required posting on the City’s website.
COORDINATION
This report was prepared in coordination with the PFRS’ Investment Consultant (MIG) and PFRS’ Actuary (Cheiron).
SUSTAINABLE OPPORTUNITIES
Economic: Whenever possible, the PFRS Board seeks to benefit the local Oakland based economy. In 2006, the PFRS Board, along with staff, created the PFRS Local Broker provision.
This provision mandates that the PFRS Investment Managers consider using Oakland based brokers for all trades conducted on behalf of the fund based on best execution. This program aims to regenerate some of the commissions generated by the System into the Oakland economy.
Environmental: The PFRS Board supports a sustainable environment. On June 29, 2016, the PFRS Board passed Resolution No. 6927 prohibiting PFRS investment managers from Jestin D. Johnson, City Administrator
Subject: Oakland PFRS’s Investment Portfolio and Actuarial Valuation for the Quarter ending December 31, 2022
Date: May 26, 2023 Page 8
Finance and Management Committee
June 27, 2023
investing PFRS funds in any publicly traded company which derives at least 50 percent of its revenue from the mining and extracting of thermal coal.
Race & Equity: There are no race and equity opportunities associated with this report.
ACTION REQUESTED OF THE CITY COUNCIL
Staff recommends that the Council receive this informational report on the Oakland Police and Fire Retirement System (“PFRS”) Investment Portfolio as of December 31, 2022 and the PFRS Actuarial Valuation as of July 1, 2022.
For questions regarding this report, please contact Erin Roseman, Director of Finance, at (510) 238-2026.
Respectfully submitted,
Erin Roseman (Jun 13, 2023 16:54 PDT)
ERIN ROSEMAN
Director of Finance, Finance Department
Reviewed by:
David Jones, Treasury Administrator
Prepared by:
Téir Jenkins, Investment & Operations Manager
Retirement Unit
Attachments (2):
Attachment A: Oakland Police and Fire System Quarterly Investment Performance Report as of December 31, 2022
Attachment B: Oakland Police and Fire System Actuarial Valuation Report as of July 1, 2022