Finance and Management Committee March 26, 2024
AGENDA REPORTTO:Jestin D. JohnsonFROM:Erin Roseman City Administrator Finance Director SUBJECT: Oakland PFRS Investment Portfolioas of December 31, 2023DATE:February 22, 2024City 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, 2023. 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, 2023. During the most recent quarter, the PFRS Total Portfolio generated an absolute return of 8.4 percent, gross of fees, underperforming its policy benchmark by -0.4 percent. The portfolio also underperformed its benchmark over the latest one-year period, three-year period and 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 8.4 13.8 3.6 8.1Policy Benchmark 8.7 15.1 3.6 8.0Excess Return -0.4 -1.6 -0.3 -0.2 As of July 1, 2022, the System’s Unfunded Actuarial Liability is approximately $130.2 million, and the System had a Funded Ratio of 76.5 percent on an Actuarial Value of Assets (AVA) basis. This is discussed in more detail in the “PFRS Actuarial Valuation” section of this report.
Jestin Johnson (Mar 14, 2024 23:02 PDT)
3/14/2024
Jestin D. Johnson, City AdministratorSubject: Oakland PFRS Investment Portfolio as of December 31, 2023 Date: February 22, 2024 Page 2 Finance and Management Committee March 26, 2024
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, 2023, PFRS had 640 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 76.5 percent on an Actuarial Value of Assets (AVA) basis. The City of Oakland is currently making monthly payments to the Plan for the FY 2023/2024 required contribution of $40.76 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. This report is 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. 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 Jestin D. Johnson, City AdministratorSubject: Oakland PFRS Investment Portfolio as of December 31, 2023 Date: February 22, 2024 Page 3 Finance and Management Committee March 26, 2024
California Public Employees’ Retirement System (“CalPERS”). As of December 31, 2023, the System’s membership was 640 as shown on Table 1 below. Table 1 PFRS Membershipas of December 31, 2023 Membership POLICE FIRE TOTAL Retiree 272 153 425Beneficiary 127 88 215Total Membership399 241 640PFRS Investment Portfolio As of December 31, 2023, the PFRS’ portfolio had an aggregate value of $435.96 million as shown in Table 2. Table 2 PFRS Investment Portfolio as of December 31, 2023 Investment Fair Value Domestic Equities $183,174,978 Fixed Income 107,983,596Covered Calls 23,783,695International Equities 56,347,608Crisis Risk Offset39,468,172Credit9,697,822Cash 15,499,650Total Portfolio$435,955,522As of December 31, 2023, the PFRS portfolio had an aggregate value of $435.96 million. This represents a $33.4 million increase in investment value after $3.0 million in outflows for the benefit payments over the quarter. During the previous one-year period, the PFRS Total Portfolio increased in value by $53.0 million after drawdowns of $15.6 million 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 $10.2 million for the Quarter and $36.7 million for the past year.
Jestin D. Johnson, City AdministratorSubject: Oakland PFRS Investment Portfolio as of December 31, 2023 Date: February 22, 2024 Page 4 Finance and Management Committee March 26, 2024
Table 3Change in PFRS Portfolio Valuationas of December 31, 2023 Total Plan Value 1 Quarter 1 YearBeginning Market Value$ 405,143,449 $ 398,501,201Investment Drawdowns for Benefit Payments -2,587,879 -15,572,778Gain/(Loss) on Investment33,399,952 53,027,098Ending Market Value $ 435,955,522 $435,955,522 PFRS Investment Performance During the most recent quarter ending December 31, 2023, the PFRS Total Portfolio generated an absolute return of 8.4 percent, gross of fees, underperforming its policy benchmark by -0.4 percent. The portfolio underperformed with the benchmark over the one-year period, three-year and five-year period. Over the most recent quarter ending December 31, 2023, the Plan’s Domestic Equity allocation matched its benchmark. The Plan’s International Equity allocation underperformed its benchmark by -0.2 percent. The Plan’s Fixed Income allocation matched its benchmark. The Plan’s Credit allocation underperformed its benchmark by -3.1 percent. The Plan’s Crisis Risk Offset allocation underperformed its benchmark by -1.7 percent, while the Covered Calls allocation outperformed its benchmark by 3.1 percent. Table 4 shows PFRS recent investment performance in comparison to its corresponding benchmarks. Table 4PFRS Asset Class Performance as of December 31, 2023 Investment Type Quarter 1 Year 3 Year 5 Year PFRS Total Fund 8.4 13.8 3.6 8.1PFRS Policy Benchmark 8.7 15.1 3.6 8.0Excess Returns -0.3 -1.3 0.0 0.1 PFRS Domestic Equity12.1 20.3 7.8 14.1Benchmark: Russell 3000 12.1 26.0 8.5 15.2Excess Returns 0.0 -5.7 -0.7 -1.1 Jestin D. Johnson, City AdministratorSubject: Oakland PFRS Investment Portfolio as of December 31, 2023 Date: February 22, 2024 Page 5 Finance and Management Committee March 26, 2024
Table 4 PFRS Asset Class Performance as of December 31, 2023,cont’dInvestment Type Quarter 1 Year 3 Year 5 Year PFRS International Equity 9.6 20.2 4.2 9.1Benchmark: MSCI ACWI Ex US (Net) 9.8 15.6 1.5 7.1Excess Returns -0.2 4.6 2.7 2.0 PFRS Fixed Income 6.8 6.3 -2.6 1.7Benchmark: Bloomberg US Universal 6.8 6.2 -3.0 1.4Excess Returns 0.0 0.1 0.4 0.3 PFRS Credit 4.1 13.3 4.7 5.4Benchmark: Bloomberg US Corp HY 7.2 13.4 2.0 5.4Excess Returns-3.1 -0.1 2.7 0.0 PFRS Crisis Risk Offset0.4 1.0 -6.3 -6.7Benchmark: Crisis Risk Offset 2.1 2.4 4.9 0.4Excess Returns -1.7-1.4 -11.2 -7.1 PFRS Covered Calls7.3 20.3 9.5 12.3Benchmark: CBOE S&P 500 Buy Write 4.2 11.8 6.1 6.2Excess Returns3.1 8.5 3.4 6.1 Note: Investment returns are gross of fees.Crisis Risk Offset Benchmark is composed of 100% SG Multi Alternative Risk Premia Index through 12/31/2022; 33.34% SG Trend Index, 33.33% SG Multi Alternative Risk Premia Index, and 33.33% Bloomberg US Government Long Term Bond Index thereafter.
Jestin D. Johnson, City AdministratorSubject: Oakland PFRS Investment Portfolio as of December 31, 2023 Date: February 22, 2024 Page 6 Finance and Management Committee March 26, 2024
Table 5 compares PFRS Total Portfolio performance to other pension funds and benchmarks. Table 5PFRS Total Fund Performanceas of December 31, 2023Quarter 1 Year 3 Year 5 Year PFRS Fund (Gross of Fees)8.4 13.8 3.6 8.1 Comparisons: PFRS Actuarial Expected Rate of Return (blend) (a) (b) 1.5 6.0 6.0 6.0 Policy Benchmark (blend) (c) 8.7 15.1 3.6 8.0 Median Fund (d) 7.9 12.6 3.8 8.8 CalSTRS Investment Returns (Gross of Fees) 5.5 9.3 6.1 9.9 East Bay Mud Investment Returns (Gross of Fees) --- --- --- --- San Joaquin County ERA Investment Returns (Gross of Fees)5.2 9.7 5.3 7.7 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 US (Net), 31% Bloomberg US Universal, 2% Bloomberg US Corp. High Yield, 5% CBOE S&P 500 Buy Write Index (BXM), 10% Crisis Risk Offset Benchmark since 1/1/ 2019. Crisis Risk Offset Benchmark is composed of 100% SG Multi Alternative Risk Premia Index through 12/31/2022; 33.34% SG Trend Index, 33.33% SG Multi Alternative Risk Premia Index, and 33.33% Bloomberg US Government Long Term Bond Index thereafter. d) Median Fund is of Public Defined Benefits Plans with $250 million to $1 billion in assets. e) East Bay Mud Investment Returns data is not available yet. 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 76.5 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 2023/2024 is $40.76 million. Table 6 below shows a summary of the July 1, 2022 PFRS Actuarial valuation results.
Jestin D. Johnson, City AdministratorSubject: Oakland PFRS Investment Portfolio as of December 31, 2023 Date: February 22, 2024 Page 7 Finance and Management Committee March 26, 2024
Table 6 Summary of Plan Results($ in thousands) July 01, 2022Actuarial Liability $ 552,966Less: Actuarial Value of Assets (422,762)Unfunded Actuarial Liability $ 130,204Funded Ratio (AVA) liability 76.5%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 ContributionsPolice and Fire Retirement System(in millions)Fiscal YearEndingEmployer Contribution2024 $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 (Meketa) and PFRS’ Actuary (Cheiron).
Jestin D. Johnson, City AdministratorSubject: Oakland PFRS Investment Portfolio as of December 31, 2023 Date: February 22, 2024 Page 8 Finance and Management Committee March 26, 2024
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 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, 2023. For questions regarding this report, please contact Erin Roseman, Director of Finance, at (510) 238-2026. Respectfully submitted, ERIN ROSEMAN Director of Finance, Finance Department Reviewed by: David Jones, Treasury Administrator Prepared by: Téir Jenkins, Investment & Operations Manager, Retirement Unit Attachments (1): Attachment A: Oakland Police and Fire System Quarterly Investment Performance Report as of December 31, 2023