BOSTON CHICAGO LONDON MIAMI NEW YORK PORTLAND SAN DIEGO MEKETA.COM Public Safety, Finance, and
Strategic Support Committee
(PSFSS) Meeting
San Jose Federated City Employees’ Retirement System
San Jose Police & Fire Department Retirement Plan
December 15, 2022
San Jose Federated City Employees’ Retirement System and San Jose Police & Fire Department Retirement Plan Public Safety, Finance, and Strategic Support Committee (PSFSS) Meeting There Has Been a Decline in Available Investment Returns1 → The chart above illustrates that a portfolio comprised of 65% domestic stocks and 35% investment grade bonds has produced diminishing expected returns, as well as actual returns, over the past 30 years. 1 Expected return assumptions for 1) Bonds equals the yield of the ten-year Treasury plus 100 basis points, and 2) Equities equals the dividend yield plus the earnings yield of the S&P 500 index (using the inflation-adjusted trailing 10-year earnings).
Probability calculation is for the subsequent ten years. 1980 1985 1990 1995 2000 2005 2010 2015 2020 2022
Equity Expected Return 16.6% 15.0% 8.9% 7.9% 3.5% 5.3% 6.7% 7.6% 6.4% 3.9% Bond Expected Return 12.4% 11.6% 9.6% 7.6% 7.0% 5.3% 4.2% 3.3% 2.9% 2.5% 65/35 Eq/Bond Exp. Ret. 15.4% 14.1% 9.4% 8.1% 5.0% 5.6% 6.1% 6.4% 5.5% 3.7% Actual 10-year Return 15.5% 12.8% 14.3% 10.8% 2.4% 6.9% 10.3% Probability of Earning 7.0% 99% 98% 74% 61% 29% 35% 40% 43% 33% 19% 0%
20%
40%
60%
80%
100%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Percent Return
Probability
San Jose Federated City Employees’ Retirement System and San Jose Police & Fire Department Retirement Plan Public Safety, Finance, and Strategic Support Committee (PSFSS) Meeting Investors Must Now Take More Risk to Achieve the Same Return as in the Past
San Jose Federated City Employees’ Retirement System and San Jose Police & Fire Department Retirement Plan Public Safety, Finance, and Strategic Support Committee (PSFSS) Meeting Asset Allocation–The Most Important Determinant of Return
San Jose Federated City Employees’ Retirement System and San Jose Police & Fire Department Retirement Plan Public Safety, Finance, and Strategic Support Committee (PSFSS) Meeting → The San Jose Federated City Employee’s Retirement System investment return ranked in the top half of the peer group for the past quarter/fiscal year-to-date time period, and in the top third for the calendar year-to-date time period. The peer group included 59 public defined benefit pension plans with market values over $1 billion.
San Jose Federated City Employees’ Retirement System and San Jose Police & Fire Department Retirement Plan Public Safety, Finance, and Strategic Support Committee (PSFSS) Meeting → The City of San Jose Police and Fire Department Retirement Plan investment returns ranked in the top 30% of the peer group between January 1, 2022 and September 30, 2022, and in the top quartile for the past quarter/fiscal year-to-date (since June 30, 2022) time period. The peer group included 59 public defined benefit pension plans with market values over $1 billion.
San Jose Federated City Employees’ Retirement System and San Jose Police & Fire Department Retirement Plan Public Safety, Finance, and Strategic Support Committee (PSFSS) Meeting Appendix
San Jose Federated City Employees’ Retirement System and San Jose Police & Fire Department Retirement Plan Public Safety, Finance, and Strategic Support Committee (PSFSS) Meeting Federated Discount Rate History
Years Fiscal Year
10 Year
US Treasury Rate
(%)
Discount Rate
(%)
Fiscal Year Return1
(%)
Excess Performance to
Discount Rate
(%)
1997 6.51 8.25
1 2013 2.52 7.25 8.0 0.8
2 2014 2.53 7.00 14.2 7.2
3 2015 2.35 7.00 -1.0 -8.0
4 2016 1.49 6.875 -0.7 -7.6
5 2017 2.31 6.875 7.5 0.6
6 2018 2.85 6.75 5.9 -0.9
7 2019 2.00 6.75 4.3 -2.5
8 2020 0.66 6.75 3.6 -3.2
9 2021 1.45 6.625 29.2 22.6
10 2022 2.98 6.625 -4.4 -11.0
Source: ORS, Meketa.
→ The Federated System has had an average annual return for the past 10 years of 6.7%. Financial optimizers typically project a 50% probability of meeting the expected returns each year, so we would expect that approximately half of the time, investments will outperform the expected return, and approximately half of the time, investments will lag the projected return.
1 Fiscal Year Ends 6/30. Returns are net of fund management fees.
8.0%
14.2%
-1.0% -0.7%
7.5% 5.9% 4.3% 3.6%
29.2%
-4.4%
7.3% 7.0% 7.0% 6.9% 6.9% 6.8% 6.8% 6.8% 6.6% 6.6%
0.8%
7.2%
-8.0% -7.6%
0.6%
-0.9% -2.5% -3.2%
22.6%
-11.0%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Plan Return versus Discount Rate
Fiscal Return Discount Rate Excess Return
San Jose Federated City Employees’ Retirement System and San Jose Police & Fire Department Retirement Plan Public Safety, Finance, and Strategic Support Committee (PSFSS) Meeting Police & Fire Discount Rate History
Years Fiscal Year
10 Year
US Treasury Rate
(%)
Discount Rate
(%)
Fiscal Year Return1
(%)
Excess Performance to
Discount Rate
(%)
1997 6.51 8.00
1 2013 2.52 7.125 9.6 2.5
2 2014 2.53 7.00 13.5 6.5
3 2015 2.35 7.00 -1.0 -8.0
4 2016 1.49 6.875 -0.6 -7.5
5 2017 2.31 6.875 9.7 2.8
6 2018 2.85 6.75 6.9 0.2
7 2019 2.00 6.75 4.3 -2.5
8 2020 0.66 6.75 3.1 -3.7
9 2021 1.45 6.625 26.3 19.7
10 2022 2.98 6.625 -5.0 -11.6
Source: ORS, Meketa.
→ The Police & Fire Plan has had an average annual return for the past 10 years of 6.7%. Financial optimizers typically project a 50% probability of meeting the expected returns each year, so we would expect that half of the time, investments will outperform the expected return, and half the time, investments will lag the projected return. 1 Fiscal Year Ends 6/30. Returns are net of fund management fees.
9.6%
13.5%
-1.0% -0.6%
9.7% 6.9% 4.3% 3.1%
26.3%
-5.0%
7.1% 7.0% 7.0% 6.9% 6.9% 6.8% 6.8% 6.8% 6.6% 6.6%
2.5%
6.5%
-8.0% -7.5%
2.8% 0.2%
-2.5% -3.7%
19.7%
-11.6%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Plan Return versus Discount Rate
Fiscal Return Discount Rate Excess Return
Disclaimer
WE HAVE PREPARED THIS REPORT (THIS “REPORT”) FOR THE SOLE BENEFIT OF THE INTENDED RECIPIENT (THE “RECIPIENT”).
SIGNIFICANT EVENTS MAY OCCUR (OR HAVE OCCURRED) AFTER THE DATE OF THIS REPORT AND THAT IT IS NOT OUR FUNCTION OR RESPONSIBILITY TO UPDATE THIS REPORT. ANY OPINIONS OR RECOMMENDATIONS PRESENTED HEREIN REPRESENT OUR GOOD FAITH VIEWS AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE AT ANY TIME. ALL INVESTMENTS INVOLVE RISK. THERE CAN BE NO GUARANTEE THAT THE STRATEGIES, TACTICS, AND METHODS DISCUSSED HERE WILL BE SUCCESSFUL.
INFORMATION USED TO PREPARE THIS REPORT WAS OBTAINED FROM INVESTMENT MANAGERS, CUSTODIANS, AND OTHER EXTERNAL SOURCES. WHILE WE HAVE EXERCISED REASONABLE CARE IN PREPARING THIS REPORT, WE CANNOT GUARANTEE THE ACCURACY OF ALL SOURCE INFORMATION CONTAINED HEREIN.
CERTAIN INFORMATION CONTAINED IN THIS REPORT MAY CONSTITUTE “FORWARD - LOOKING STATEMENTS,” WHICH CAN BE IDENTIFIED BY THE USE OF TERMINOLOGY SUCH AS “MAY,” “WILL,” “SHOULD,” “EXPECT,” “AIM”, “ANTICIPATE,” “TARGET,” “PROJECT,” “ESTIMATE,” “INTEND,” “CONTINUE” OR “BELIEVE,” OR THE NEGATIVES THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. ANY
FORWARD-LOOKING STATEMENTS, FORECASTS, PROJECTIONS, VALUATIONS, OR RESULTS IN THIS PRESENTATION ARE BASED UPON CURRENT ASSUMPTIONS. CHANGES TO ANY ASSUMPTIONS MAY HAVE A MATERIAL IMPACT ON FORWARD - LOOKING STATEMENTS, FORECASTS, PROJECTIONS, VALUATIONS, OR RESULTS. ACTUAL RESULTS MAY THEREFORE BE MATERIALLY DIFFERENT FROM ANY FORECASTS, PROJECTIONS, VALUATIONS, OR RESULTS IN THIS PRESENTATION.
PERFORMANCE DATA CONTAINED HEREIN REPRESENT PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.