meeting minutes contra costa community college …€¦ · 10/11/2011 · meeting minutes - contra...

Keenan & Associates Tel: 800-654-8102/Fax: 310-533-1329 License No. 0451271

MEETING MINUTES

CONTRA COSTA COMMUNITY COLLEGE DISTRICT RETIREMENT BOARD OF AUTHORITY MEETING

November 10, 2011 9:00 AM – 11:00 AM

6th FLOOR CONFERENCE ROOM

500 COURT STREET MARTINEZ, CA 94553

(925) 229-1000

I. CALL TO ORDER The Meeting was called to order by Board member Eugene Huff at 9:10 AM. II. ROLL CALL

RETIREMENT BOARD OF AUTHORITY (the “BOARD”) MEMBERS Interim College President Richard Livingston Vice Chancellor, Administrative Services, ex officio Vacant Associate Vice, Chancellor Human Resources, ex officio Eugene Huff United Faculty Representative Michael Anker Local 1 Representative Krista Ducharme Management Council Representative Nick Dimitri PROGRAM COORDINATOR Senior Vice President Gail Beal Account Manager Roslyn Washington

CONSULTANTS Morgan Stanley Smith Barney Cary Allison Benefit Trust Company Scott Rankin RPM Consultant Group Chuck Thompson

GUESTS Chancellor Helen Benjamin OTHER None

Those Absent were: College Business Officer Bruce Cutler

MEETING MINUTES - Contra Costa Community College District Retirement Board of Authority Meeting November 10, 2011


III. APPROVAL OF AGENDA

A motion was made by Board member Richard Livingston to approve the Agenda platform as presented. The motion was seconded by Board member Nick Dimitri and was carried by the Board members present.

IV. APPROVAL OF MINUTES

Board member Eugene Huff inquired as to whether Board members would like Keenan Financial Services (KFS) to send the Meeting Minutes to each Board member separately to be reviewed prior to receiving the final Board materials. Board members advised that they are happy to continue the current process where they receive the Meeting Minutes in advance inclusive of the RBOA Meeting materials. A motion was made by Board member Nick Dimitri to approve the Minutes of the May 19, 2011 Meeting as presented. The motion was seconded by Board member Michael Anker and was carried by the Board members present.

V. INVESTMENTS

PORTFOLIO REVIEW

Cary Allison of Morgan Stanley Smith Barney (MSSB) provided an overview of the District’s Investment Trust Change in Portfolio, Asset Allocation, and Time Weighted Return (Gross and Net of Fees) for period ending October 31, 2011. As of October 31 , 2011, the District’s Investment Trust portfolio had an allocation of 56.3% in fixed income funds and 43.7% in equity funds (equity funds comprised 27.8% in domestic equity and 15.9% in international equity). The value of the portfolio on December 31, 2010 was $22,603,758.94, and with contributions of $4,550,000.00 the portfolio value as of October 31, 2011 is $27,273,784.44. The October 31, 2011 portfolio value represents an annualized inception to date net rate of return of 9.12% compared to the S&P/Barclays Blend of 10.02% and Barclays Aggregate of 6.75%. The investments results for the last 12 months show a net increase of 2.98% compared to the S&P/Barclays Blend of 6.97% and Barclays Aggregate of 5.03%.

After the Portfolio Review, Cary noted that the month of October was the best month relative to the markets since the 1970s. Cary noted that short-term rates will not be increasing until approximately 2013. Board member Eugene Huff inquired if Cary could provide a review of the District’s OPEB Portfolio to the Board of Trustees on January 25, 2012. Cary responded by indicating that he would be glad to provide the Portfolio Review as requested.

A motion was made by Board member Richard Livingston to accept the District’s Investment Trust Portfolio Review as presented. The motion was seconded by Board member Nick Dimitri and was carried by the Board members present.



MARKET OVERVIEW Cary Allison of Morgan Stanley Smith Barney (MSSB) provided Asset Allocation and Portfolio Updates for the Futuris Public Entity Investment Trust model portfolios for period ending September 30, 2011. Cary briefly reviewed the Futuris model portfolios. In his comments relative to current global market conditions, Cary Allison observed that equity investors grew agitated in the third quarter. Concerns about the global economy, the European sovereign debt crisis, continued high U.S. unemployment, the U.S. debt-ceiling debate, and the downgrade of the U.S. sovereign rating caused the “fear index” to register the largest increase in its history. Cary noted that he is not concerned about inflation right now as the Feds have indicated that they are not going to raise short-term rates. This means that Morgan Stanley Smith Barney (MSSB) is suggesting a balanced approach for the District’s portfolio. Board member Krista Ducharme inquired about the Target Rate of Return for the District’s Investment Trust. Scott Rankin of Benefit Trust Company responded by advising Board members that they are currently in the 7% Target Portfolio with 6.65% covering investments and .35% designated for expenses. Board member Michael Anker wondered if they should re-evaluate this risk and how much risk is acceptable in this environment. Cary Allison indicated that there is going to be volatility in the markets because of the issues in the euro zone. Board member Eugene Huff noted that the new reality is that there is currently more market volatility, but it is something that just has to be faced. Cary advised that the key to long-term investing is having conviction as to strategy. Board member Krista Ducharme wondered if there was a set time of the year that the Board approved deposits to the District’s Investment Trust. Board member Eugene Huff responded by indicating that last year the Board approved funding the District’s Annual Required Contribution (ARC) requirement on a quarterly basis.

VI. CORRESPONDENCE No correspondence was presented.

VII. ADMINISTRATION

ANNUAL REPORTING ON THE STATUS OF THE TRUST

Roslyn Washington of Keenan Financial Services (KFS) advised Board members that the California Government Code 53216.4 requires an annual reporting to participants and their potential beneficiaries of the funds held in the Investment Trust. At Contra Costa Community College District, the Investment Trust’s fiscal year end annual report incorporates Annual Account balances; Annual Fiduciary transactions and Asset details; and an Annual Investment Summary. In compliance with the provisions of the California Government Code, the Annual Report was promulgated with a Cover Letter and posted to the District’s Website in August, 2011.

A motion was made by Board member Michael Anker confirming the promulgation of the District’s Investment Trust’s annual report. The motion was seconded by Board member Richard Livingston and was carried by the Board members present.



REVIEW OF THE COMPREHENSIVE COMPLIANCE PLAN, INCLUDING THE SUBSTANTIVE PLAN Roslyn Washington of Keenan Financial Services (KFS) advised the Board that a new Electronic Library encompassing the Comprehensive Compliance Plan which includes the “Substantive Plan” was delivered to the District in September 2011. The new electronic library format is replacing the old hardcopy binder format. Roslyn further advised Board members that the layout of the electronic format is much easier to navigate. Should the District ever misplace their copy or require a duplicate copy, Keenan Financial Services (KFS) can facilitate their replacement request quickly and efficiently. STATUS OF UPDATES TO THE COMPREHENSIVE COMPLIANCE PLAN, INCLUDING THE SUBSTANTIVE PLAN Roslyn Washington of Keenan Financial Services (KFS) reported to Board members that the updates to the Substantive Plan Volume II have been completed and delivered to the District. She also advised that the District would now be receiving their updates electronically as opposed to the printed updates that they have received in the past. The District will be provided with a new electronic library that will include the updates for the previous fiscal year in January 2012. KFS will collect information regarding changes to the District’s Retiree Benefits in August instead of June. Information pertaining to the updates for the previous fiscal year will be added to the Substantive Plan and a new Electronic Library will be given to every client in January of the following year. Chuck Thompson of RPM Consultant Group noted that any memos regarding Retirement Board of Authority (RBOA) activity should be placed into a file that Jeannie Chruney keeps and it will be decided if it needs to be placed into one of the Comprehensive Compliance Plan or Substantive Plan Volume binders.

STATUS OF ACTUARIAL VALUATION STUDY

The District has engaged Total Compensation Systems, Inc. (TCS) as their new Actuarial Services provider. Two Actuarial Valuation Studies have been completed by TCS. The unfunded liability related to cash is $8, 000,000.00. Chuck Thompson of RPM Consultant Group briefly reviewed the District’s Actuarial Accrued Liability, Annual Required Contribution (ARC), and Pay-as-you-go (Paygo). Chuck continued by reviewing ways the District could lower their liability. Chuck presented Board members with a chart illustrating the history of the District’s last three Actuarial Valuation cycles. The District’s unfunded Actuarial Accrued Liability (UAAL) was decreased because the discount rate was increased. Relative to Classified & Management employees, Board member Eugene Huff noted an error in the section of the Actuarial Valuation Study entitled “Description of Retiree Benefits”. He advised that he will send out a new copy of the Actuarial Valuation Study with the error corrected.

FUTURE TRANSFER OF ASSETS INTO THE TRUST Per a motion of the Board, assets to be transferred into the District’s Investment Trust are scheduled on a quarterly basis. However, the record shows that there has not been a transfer since April 2011. Deposits are missing for quarters ending June 2011 and October 2011. Board member Eugene Huff will inquire relative to where the deposits are.



REPORT TO THE BOARD OF TRUSTEES

The Board of Trustees meeting will occur on January 25, 2012 at 6:00 pm. The Retirement Board of Authority (RBOA) requested the presence of the Futuris Team at the meeting in order to give a presentation on the status of the District’s Investment Trust. Cary Allison of Morgan Stanley Smith Barney, Scott Rankin of Benefit Trust Company, and Gail Beal of Keenan Financial Services agreed to attend the meeting. Roslyn Washington of Keenan Financial Services will send a meeting notice to Cary, Scott and Gail so the date is formally scheduled on their calendars.

PRIVATE LETTER RULING Gail Beal of Keenan Financial Services (KFS) advised the Board that the Private Letter Ruling (PLR) application is still in process at the IRS. Brian Johnston of Polsinelli Shughart PC recently met with the IRS where they requested additional information relative to fees coming out of the District’s Public Entity Investment Trust. The requested information has been provided and we are still waiting for the Service to respond. Brian Johnston of Polsinslli Shughart PC recently sent an update via memo to each PLR applicant regarding the status of their PLR application.

RETIREMENT BOARD OF AUTHORITY (RBOA) FIDUCIARY AND CONFLICT OF INTEREST PROTECTION FOR OPEB PLANS

Chuck Thompson of RPM Consultant Group indicated that his “Fiduciary and Conflict of Interest” presentation materials are now with his attorney and hopefully he can provide it to Board members at the next Retirement Board of Authority (RBOA) Meeting.

VIII. EDUCATION

Cary Allison of Morgan Stanley Smith Barney (MSSB) provided Board members with MSSB articles entitled “Behavioral Finance: Beware of Potentially Irrational Investment Decisions” and “A Case for Waiting out the Storm”

Cary reviewed the Theory of Behavioral Finance which is a new type of financial analysis related to how psychology affects financial decision making and its impact on financial markets. Behavioral finance incorporates technical analysis which is a security analysis approach followed by people who forecast the direction of stock prices through the study of past market data, primarily price and volume. Financial professionals who follow this technical analysis approach do not look at a company’s balance sheet or speak to a company’s management – they merely look at the trading patterns of the stock itself. Cary reviewed a graph provided in the Board materials reflecting the varying importance of factors driving asset prices across market phases. Behavioral Finance traits reviewed and supplied in the Board materials are as follows:

• Herding – herd behavior that mimics actions of a larger group when the individual would not have taken the

action alone. • Over-Confidence – a tendency to reinterpret past decisions to exaggerate foresight. • Loss Aversion/Future Regret – 85% of investors sell winners faster than losers.



• Anchoring – focusing on past performance and original investment. • Mental Accounting or Framing – reacting irrationally with different accounts – instead of focusing on the total

portfolio.

Cary referenced the technology boom of 1999 and the Real Estate boom of 2004/2005 as examples of behavioral finance. Cary noted that the Futuris Program is structured to avoid the behavioral traits mentioned by having a strong separation of function through Benefit Trust Company (BTC), Morgan Stanley Smith Barney (MSSB) and Keenan Financial Services (KFS).

Note: Avoiding Behavioral Finance Theory in Investment decisions involves understanding risk tolerance levels and maintaining focus on a long-term investment strategy. The MSSB article entitled “A Case for Waiting out the Storm” illustrates the importance of adhering to a long-term investment strategy.

IX. INFORMATION REPORTS

RETIREMENT BOARD OF AUTHORITY COMMENTS

Board member Eugene Huff inquired as to whether the Board should take another Risk Tolerance Questionnaire (RTQ)? Board members indicated that they will consider this process.

Chancellor Helen Benjamin commented that she is looking forward to the “Fiduciary and Conflict of Interest” Program to be provided by Chuck Thompson of RPM Consultant Group.

PROGRAM COORDINATOR/CONSULTANT COMMENTS

Chuck Thompson of RPM Consultant Group wondered if Morgan Stanley Smith Barney (MSSB) will suggest more investment in a fixed income strategy when the District’s OPEB Plan begins to payout Retiree Healthcare benefits. Chuck also made comments on the need to speak with Total Compensation Systems, Inc. relative to when assets will begin to come out of the District’s OPEB Trust. It was also noted that Keenan Financial Services (KFS) contract is up for renewal in August of next year and that the renewal process should begin around March 2012. VISITORS COMMENTS

There were no Visitor comments.

X. DATE, TIME AND AGENDA ITEMS FOR NEXT MEETING The next Retirement Board of Authority Meeting is scheduled as follows:

• March 1, 2012: 1:00 PM-3:00 PM.



Agenda Items to be discussed at the next RBOA Meeting

• Risk Tolerance Questionnaire (RTQ) -- A copy of the RTQ should be sent to Board members for review

ahead of the scheduled RBOA Meeting. • A complete review of the Investment Policy Statement (IPS). • New Member Forms. • Keenan Financial Services (KFS) Contract Renewal

XI. ADJOURNMENT The RBOA Meeting was adjourned adjourned at10:40 AM. _________________________________________________________________________________________ Americans with Disabilities Act The Contra Costa Community College District Retirement Board of Authority conforms to the protections and prohibitions contained in Section 202 of the Americans with Disabilities Act of 1990 and the federal rules and regulations adopted in implementation thereof. A request for disability-related modification or accommodation, in order to participate in a public meeting of the Contra Costa Community College District Retirement Board of Authority meeting, shall be made to: Eugene Huff, Associate Vice Chancellor Human Resources, ex officio, Contra Costa Community College District, 500 Court Street, Martinez, CA. 94553.


PRESENTED TO:

DATE:

11/10/2011

Retirement Board of Authority SUBJECT:

ITEM #:

2011/2012-001

Approval of Agenda Enclosure: Yes

Action Item Yes Prepared by:

Keenan Financial Services

Requested by:

Retirement Board of Authority

BACKGROUND: Under California Government Code Section §54950 (The Ralph M. Brown Act) the “Legislative Body” is required to post an agenda detailing each item of business to be discussed. The Authority posts the agenda in compliance with California Government Code Section §54954.2. STATUS: Unless items are added to the agenda according to G.C. §54954.2 (b) (1) (2) (3) the agenda is to be approved as posted. RECOMMENDATION: Subject to changes or corrections, the agenda is to be approved.

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MEETING AGENDA


November 10, 2011 9:00 AM – 11:00 AM

6th FLOOR CONFERENCE ROOM


(925) 229-1000

I. CALL TO ORDER II. ROLL CALL

RETIREMENT BOARD OF AUTHORITY (the “BOARD”) MEMBERS Interim College President Richard Livingston Vice Chancellor, District Wide Administrative Services, ex officio Vacant Associate Vice Chancellor/Chief Human Resources Officer, ex officio Eugene Huff College Business Director Bruce Cutler United Faculty Representative Michael Anker Local 1 Representative Krista Ducharme Management Council Representative Nick Dimitri PROGRAM COORDINATOR Senior Vice President Gail Beal Account Manager Roslyn Washington

CONSULTANTS Morgan Stanley Smith Barney Cary Allison Benefit Trust Company Scott Rankin RPM Consultant Group Chuck Thompson

GUESTS Chancellor Helen Benjamin OTHER None

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MEETING AGENDA - Contra Costa Community College District Retirement Board of Authority Meeting November 10, 2011 Page 2


III. APPROVAL OF AGENDA Action

2011/2012-001 The Retirement Board of Authority retains the right to change the order in which agenda items are discussed. Subject to review by the Retirement Board, the agenda is to be approved as presented. Items may be deleted or added for discussion only according to G.C. Section 54954.2.

PUBLIC COMMENTS: BOARD CONSIDERATION: IV. APPROVAL OF MINUTES Action

2011/2012-002 The Retirement Board of Authority will review the minutes from the previous meeting, May 19, 2011, for any adjustments and adoption. PUBLIC COMMENTS:

BOARD CONSIDERATION: V. INVESTMENTS

PORTFOLIO REVIEW Action 2011/2012-003 Morgan Stanley Smith Barney (MSSB) will review the overall performance of the District’s Futuris Public Entity Investment Trust portfolio. PUBLIC COMMENTS: BOARD CONSIDERATION: MARKET OVERVIEW Information 2011/2012-004 Morgan Stanley Smith Barney (MSSB) will provide an overview of the actions of the global capital markets since the last Retirement Board of Authority meeting. PUBLIC COMMENTS:

BOARD CONSIDERATION:

VI. CORRESPONDENCE Information 2011/2012-005 Correspondence will be presented and reviewed by the Retirement Board of Authority. No action may be taken

in response; only referred for action on a subsequent agenda. PUBLIC COMMENTS: BOARD CONSIDERATION: VII. ADMINISTRATION

ANNUAL REPORTING ON THE STATUS OF THE TRUST Action 2011/2012-006 California Government Code 53216.4 requires an annual reporting of the funds held in the Investment Trust to beneficiaries. Protocols for the promulgation of the Annual Financial Report to the District’s Investment Trust beneficiaries should be established and acknowledged by the Retirement Board of Authority. PUBLIC COMMENTS: BOARD CONSIDERATION:

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REVIEW OF THE COMPREHENSIVE COMPLIANCE PLAN, Information INCLUDING THE SUBSTANTIVE PLAN 2011/2012-007 Volume I, II & III of the Comprehensive Compliance Plan, including the Substantive Plan, are to be

reviewed relative to their electronic library status. PUBLIC COMMENTS: BOARD CONSIDERATION: STATUS OF UPDATES TO THE COMPREHENSIVE COMPLIANCE PLAN, INCLUDING THE SUBSTANTIVE PLAN Information 2011/2012-008 Updating the “Substantive Plan” is a dynamic process that requires an annual review to incorporate modifications to program provisions or changes to cost arrangements. The Retirement Board of Authority will review the current status of updates to the “Substantive Plan”. PUBLIC COMMENTS: BOARD CONSIDERATION: STATUS OF ACTUARIAL VALUATION STUDY Information

2011/2012-009 The Retirement Board of Authority members will discuss the status of the District’s new Actuarial Valuation Study. PUBLIC COMMENTS: BOARD CONSIDERATION: FUTURE TRANSFER OF ASSETS INTO THE TRUST Information 2011/2012-010 The District’s transfer of assets to the Investment Trust may require a tailored funding procedure. To meet the possibly tailored funding procedures, the Retirement Board of Authority (RBOA) will provide timing and asset transfer schedules related to the District’s Annual Required Contribution (ARC) and Pay-As-You-Go funding strategies based on current District financial considerations. PUBLIC COMMENTS: BOARD CONSIDERATION:

REPORT TO THE BOARD OF TRUSTEES Information 2011/2012-011 The Retirement Board of Authority will discuss a presentation to the Contra Costa Community College Board of Trustees that will provide information relating to the current status of the OPEB Trust. PUBLIC COMMENTS: BOARD CONSIDERATION:

PRIVATE LETTER RULING Information 2011/2012-012 The Retirement Board of Authority will review the status of the Private Letter Ruling (PLR) application to the Internal Revenue Service (IRS) regarding the Section 115 Trust arrangement.

PUBLIC COMMENTS: BOARD CONSIDERATION:

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RETIREMENT BOARD OF AUTHORITY (RBOA) FIDUCIARY AND CONFLICT OF

INTEREST PROTECTION FOR OPEB PLANS Information 2011/2012-013

California's Constitution positions the Retirement Board of Authority (RBOA) with "sole and exclusive" authority over the assets of the OPEB Plan. The RBOA can be relieved of the responsibility to manage the OPEB Trust's portfolio; the selection of investment providers & investment platforms by shifting these responsibilities to a full-service discretionary Trustee.

The RBOA ensures "conflict of interest" protection by administering the OPEB Plan per the "exclusive

purpose" standard of providing benefits promptly to participants and monitoring all OPEB Trust activity per the "prudent person" standard of care.

Relative to fiduciary and conflict of interest standards, Chuck Thompson, of RPM Consultants will provide a report on the status of the Policies, Procedures and Training program being developed for the RBOA. PUBLIC COMMENTS: BOARD CONSIDERATION:

VIII. EDUCATION Information 2011/2012-014 For OPEB plan governance, the Retirement Board of Authority is mandated to use the “prudent person” standard as codified by the California’s Constitution and Governmental Code. This standard requires that plan fiduciaries be (1)“familiar with such matters” as managing investments in a plan that pays OPEB benefits and that they take into account (2) “the circumstances then prevailing” relative to keeping abreast of changes in the economy, the marketplace for investment products and services to OPEB plans. The Education Agenda is for the furtherance of these OPEB requirements.

PUBLIC COMMENTS: BOARD CONSIDERATION:

IX. INFORMATION REPORTS

RETIREMENT BOARD OF AUTHORITY COMMENTS Information

2011/2012-015 Each member may report about various matters involving the Retirement Board of Authority. There will be no Retirement Board discussion except to ask questions or refer matters to staff, and no action will be taken unless listed on a subsequent agenda. PROGRAM COORDINATOR/CONSULTANT COMMENTS Information

2011/2012-016 The Program Coordinator and Consultants will report to the Authority about various matters involving the Authority. There will be no Authority discussion except to ask questions, and no action will be taken unless listed on a subsequent agenda.

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VISITORS COMMENTS Information 2011/2012-017 The public may address the Retirement Board of Authority on any matter pertaining to the Retirement Board that is not on the agenda. The Chairperson reserves the right to limit the time of presentations by individual or topic.

X. DATE, TIME AND AGENDA ITEMS FOR NEXT MEETING Information 2011/2012-018

The Agenda Items for the next meeting will be the same as for this meeting. Members and visitors may suggest additional items for consideration at the next Futuris Retirement Board of Authority meeting. PUBLIC COMMENTS: BOARD CONSIDERATION:

XI. ADJOURNMENT __________________________________________________________________________________________ Americans with Disabilities Act The Contra Costa Community College District Retirement Board of Authority conforms to the protections and prohibitions contained in Section 202 of the Americans with Disabilities Act of 1990 and the federal rules and regulations adopted in implementation thereof. A request for disability-related modification or accommodation, in order to participate in a public meeting of the Contra Costa Community College District Retirement Board of Authority meeting, shall be made to: Eugene Huff, Associate Vice Chancellor/Chief Human Resources Officer, Contra Costa Community College District, 500 Court Street, Martinez, CA. 94553.

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PRESENTED TO:

DATE:

11/10/2011


ITEM #:

2011/2012-002

Approval of Minutes Enclosure: Yes



Requested by:


BACKGROUND: As a matter of record and in accordance with the Brown Act, minutes of each meeting are kept and recorded. STATUS: The Board will review the minutes from the previous Retirement Board of Authority (RBOA) Meeting on May 19, 2011. RECOMMENDATION: Subject to changes or corrections, the minutes are to be approved.

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MINUTES - Contra Costa Community College District Retirement Board of Authority Meeting May 19, 2011

Keenan Financial Services 2355 Crenshaw Boulevard, Ste. 200, Torrance, CA. 90501

Tel: 800-654-8102 Fax: 310-599-1329 www.keenan.com

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MEETING MINUTES


May 19, 2011 9:00 AM – 11:00 AM

DISTRICT BOARDROOM


(925) 229-1000

I. CALL TO ORDER

The meeting was called to order by Eugene Huff at 9:03 AM.

II. ROLL CALL

Those in attendance were: RETIREMENT BOARD OF AUTHORITY (“BOARD”) MEMBERS: Interim College President Richard Livingston

Vice Chancellor, District Wide Administrative Services, ex officio Kindred Murillo Associate Vice Chancellor/Chief Human Resources Officer, ex officio Eugene Huff College Business Director Bruce Cutler United Faculty Representative Michael Anker Local 1 Representative Krista Ducharme Management Council Representative Nick Dimitri

PROGRAM COORDINATORS: Senior Vice President Gail Beal Account Manager Roslyn Washington Account Manager Ken Threeths

CONSULTANTS:

Benefit Trust Company Scott Rankin RPM Consultant Group Chuck Thompson

GUESTS

Polsinelli Shughart PC -- PLR Attorney Brian Johnston Those absent were: Morgan Stanley Smith Barney Cary Allison

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III. APPROVAL OF AGENDA

Board member Eugene Huff suggested repositioning the Private Letter Ruling (PLR) Agenda Item after the approval of the Meeting Minutes. As Brian Johnston of Polsinelli Shughart PC was only reporting on this single item, this would allow him the opportunity to speak and not have to wait until late in the meeting in order to report on the District’s PLR application. A motion was made by Board member Kindred Murillo, seconded by Board member Michael Anker and unanimously carried by the Board to reposition the Meeting Agenda and approve as amended.

IV. APPROVAL OF MINUTES

A motion was made by Board member Kindred Murillo, seconded by Board member Bruce Cutler and unanimously carried by the Board to approve the February 3, 2011 Meeting Minutes as presented.

V. PRIVATE LETTER RULING Attorney Brian Johnston of Polsinelli Shughart PC, advised the Board that the Private Letter Ruling

(PLR) has not been completed. Brian noted that although the PLR has not been completed it does not mean that there are issues with the District’s Investment Trust. The unique structure of the Futuris Public Entity Investment Trust Program is somewhat different from what the IRS normally works with and sees. Brian advised the Board that one of the reasons for the delay in the IRS issuing a PLR is due to the fact that the original IRS Agent he was working with had concerns about the use of the “Futuris” name vis-à-vis the Districts name. Brian also noted that the original IRS Agent that he worked with has retired and he has had to re-educate the new agent relative to the unique features of the District’s OPEB Trust.

Board member Eugene Huff asked Brian if other districts were encountering the same issues with their

PLR application. Brian noted that he is currently working on PLRs for eight different districts and none of these districts have received a Private Letter Ruling from the IRS at this time.

Board members inquired as to whether it was necessary to have a PLR affirmation from the IRS. Brian

advised that while it is not mandated to have a Private Letter Ruling, it is a best practice and adds an extra layer of protection for the Board and the district.

Chuck Thompson of RPM Consultant Group requested a commitment from Brian of more frequent

communication with the Board and consultants relative to the status of the PLR as well as committing to a date on when the PLR will be issued. Brian noted that he could not commit to the date of PLR approval by the IRS but did commit to communicating with the Board and consultants more frequently.

Chuck Thompson of RPM Consultant Group and Board member Eugene Huff articulated Board

concerns over the length of time involved in the PLR completion process. Brian Johnston requested the signature from Eugene Huff on Form 2848. Eugene executed Form 2848

to provide Brian with an updated Power of Attorney and allowing him to continue working on the PLR completion process with the IRS.

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VI. INVESTMENTS

PORTFOLIO REVIEW Scott Rankin of Benefit Trust Company provided an overview of the District’s Investment Trust Change in Portfolio, Asset Allocation, and Time Weighted Return (Gross and Net of Fees) for period ending April 30, 2011. As of April 30, 2011, the District’s Investment Trust portfolio had an allocation of

57.5% in fixed income funds and 42.5% in equity funds (equity funds comprised 26.1% in domestic equity and 16.4% in international equity). The value of the portfolio on December 31, 2010 was $22,603,758.94 and as of April 30, 2011 the value is $28,410,035.13.The April 30, 2011 portfolio value represents an inception to date net rate of return of 14.75% compared to the S&P/Barclays Blend of 13.89%. The investments results for the last 12 months show a net increase of 12.42% compared to the S&P/Barclays Blend of 11.74%.

Board member Kindred Murillo noted there should be a formal report that can be presented to the District’s Governing Board relative to the status of the Investment Trust. The meeting is scheduled for June 22, 2011. Scott Rankin indicated that he would provide a one page Investment Trust Report to Kindred for her presentation to the District’s Governing Board. A copy of this Investment Trust Report will be sent to all Retirement Board of Authority (RBOA) members. The District will invite Cary Allison of Morgan Stanley Smith Barney (MSSB) to this meeting.

A motion was made by Board member Kindred Murillo to accept the Portfolio Review as presented,

seconded by Board member Bruce Cutler and unanimously carried by the Board. MARKET OVERVIEW

Scott Rankin of Benefit Trust Company (BTC) provided the Asset Allocation and Portfolio Updates for the Futuris Portfolio models for period ending April 30, 2011. Scott also provided the “Capital Markets Overview” from Morgan Stanley Smith Barney (MSSB). The MSSB “Capital Markets Overview” provided positive indicators of a global economic recovery as follows:

• In the first quarter, despite the natural disaster in Japan and the political turmoil in the Middle East and

North Africa, the global business and equity bull cycles continued. Looking ahead, there is growing optimism that the recovery from the financial crisis has become self-sustaining.

• Both Morgan Stanley and Citi economists expect growth of about 6% in 2011 for emerging market economies, while developed-market economies could expand around 2%.

• Commodities posted a solid 4.4% quarterly gain, according to the Dow Jones-UBS Commodity Index. • The price of oil rose 16.8% in the first quarter. • Companies executed big mergers and acquisitions during the quarter, and this trend is expected to

continue for the rest of the year. Global mergers-and-acquisitions activity for the quarter totaled $716.3 billion, up 16% from a year ago.

• Worldwide there were 282 IPOs that raised a combined $43.6 billion in the quarter. • In March, the U.S. unemployment rate fell to 8.8%, its lowest level in two years, signifying the fastest

pace of job creation in almost a year.

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• The Dow Jones Industrials were up 7.1% for the first quarter. • The S&P 500 advanced 5.9% for the quarter. The largest advances in the S&P 500 Stock Sectors for

the quarter were for Energy (16.8%) and Industrials (8.8%). Health Care (5.6%) also rose respectably. Utilities and Consumer Staples were the laggards, up 2.8% and 2.5%, respectively.

• The NASDAQ Composite gained 4% for the quarter. Scott also presented the MSSB Global Investment Committee Outlook for 2011.

• Global GDP recovery has now become business cycle expansion. • Global economy growth of 4% with emerging economies expanding by 6% and developed ones by a

much slower 2%. • Low 1%-2% inflation in developed countries but 5% in developing ones. • Developing economy central banks tighten; developed economy central banks are on hold until 2012. • US and European policy risk is asymmetric to the upside; EM policy risk is asymmetric to downside. • Modest US trade-weighted dollar strength; broad developed country currencies weakness to developing

country currencies, especially Asia. • Longer-term prospects good for a multiyear global business cycle expansion.

VII. CORRESPONDENCE

No correspondence was presented. However, it was noted by Chuck Thompson of RPM Consultant Group that he believes that the letter supplied by Attorney Brian Johnston of Polsinelli Shughart PC to the District regarding the status of the Private Letter Ruling should be included in the correspondence agenda.

VIII. EDUCATION

Scott Rankin of Benefit Trust Company (BTC) advised the Board of asset-allocation changes in the District’s Investment Trust portfolio. Changes in the District’s Investment Trust portfolio were made as follows:

• Domestic Equities -- Royce Special Equity (RSEIX) replaced Perkins Mid-Cap Value (JMCVX). • Domestic Equities -- Prudential Global Real Estate (PURZX) replaced Cohen & Steers Global

Realty I(CSSPX). • International/Global Equities -- Royce Global Value (RGVIX) replaced Artio International Equity

II (JETIX)/ Dodge & Cox International Stock (DODFX). • Global Allocation – Blackrock Global Allocation (MALOX) was removed from this investment

category. • Fixed Income -- Prudential Total Return Bond Fund (PDBZX) replaced PIMCO Total Return

(PTTRX). • International Fixed Income – Brandywine Global Opportunities Bond was an addition to this

investment category.

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Scott also provided Board members with two articles from the Royce Funds. One article was a Royce Funds Research Paper entitled “Small-Cap: The Evergreen Asset Class” while the other article focused on how Royce Funds manage the risk and volatility of the small company universe and was entitled “Risky Business: Risk Management Begins with the Idea of Attempting to Establish a Margin of Safety”. The Royce Funds Research Paper reflected the fact that the investment universe of small companies is both large and diverse. Small-cap equities form the largest domestic equity universe, accounting for approximately 85% of all traded companies in the U.S. At Royce Funds, the universe of small-cap equities are divided into two distinct segments namely:

• Micro-caps have market caps up to $500 million. The U.S. micro-cap segment consists of more than

3,300 companies with approximately $400 billion in total capitalization. • Small-caps have market capitalization between $500 million and $2.5 trillion. The U.S. small-cap

segment encompasses more than 1,100 companies with a total capitalization of approximately $1.3 trillion.

In the Royce Funds article entitled “Risky Business: Risk Management Begins with the Idea of Attempting to Establish a Margin of Safety”, Royce Funds recognize that the historically superior long-term returns of small-cap stocks come with higher business risk and greater volatility. For Royce portfolio managers, paying attention to this risk begin with the basic concept of establishing a “Margin of Safety”. Establishing a “Margin of Safety” begins with the company’s balance sheet and ends with the purchase price in the context of a detailed analysis of the company’s fundamentals.

IX. ADMINISTRATION REVIEW OF THE COMPREHENSIVE COMPLIANCE PLAN, INCLUDING THE

SUBSTANTIVE PLAN Roslyn Washington of Keenan Financial Services (KFS) informed the Board that KFS is nearing the

completion of the electronic library for the Comprehensive Compliance Plan, including the Substantive Plan. Roslyn indicated that this project should be completed by the end of June. Board member Kindred Murillo requested that the finalized Data Disc be sent to the district via an FTP site. Kindred also requested that the electronic library be positioned on a jump drive as back-up.

STATUS OF ACTUARIAL STUDY Board members Eugene Huff and Kindred Murillo informed the Board that Total Compensation

Systems (TCS) has been hired to complete the District’s Actuarial Valuation Study. As part of the Actuarial Valuation Study, TCS have been requested to complete two Actuarial Valuation Report models. One model will employ a discount rate using a percentage of pay-roll, while the other will use a flat discount rate. It is believed that the flat discount rate is 7%, however Kindred will confirm this. TCS had completed a preliminary draft on May 28, 2011 and the final Actuarial Valuation Study should be completed in time for the June Board meeting.

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6

FUTURE TRANSFER OF ASSETS INTO THE TRUST Board members Eugene Huff and Kindred Murillo informed the other Retirement Board of Authority

members that the District’s current Investment Trust funding process is to make quarterly deposits and the last scheduled quarterly deposit will happen in June 2011. Eugene and Kindred will make recommendations to the Governing Board that the District continue to make deposits on a quarterly basis. An inquiry was made as to the amount of the District’s Investment Trust funding. Eugene and Kindred informed the Board that the District will continue to fund at whatever the current ARC level requires until a new Actuarial Valuation Study has been completed.

RETIREMENT BOARD OF AUTHORITY (RBOA) FIDUCIARY AND CONFLICT OF

INTEREST PROTECTION FOR OPEB PLANS Chuck Thompson of RPM Consultant Group informed the Board that he has worked with individual

attorneys to design a “Conflict of Interest” program. He will attempt to provide the finalized program to the Board at the next meeting and set-up dates for a RBOA training schedule.

X. INFORMATION REPORTS RETIREMENT BOARD OF AUTHORITY COMMENTS Board members acknowledged Kindred Murillo for her Retirement Board of Authority activities as well

as her work within the District and wished her good luck on her new position as President at Lake Tahoe Community College.

PROGRAM COORDINATOR/CONSULTANT COMMENTS Scott Rankin of Benefit Trust Company (BTC) informed the Board that BTC is creating a new Trust

accounting system. Communications regarding tutorials will be available prior to the release of the new system.

VISITORS COMMENTS There were no Visitor comments XI. DATE, TIME AND AGENDA ITEMS FOR NEXT MEETING Among the Agenda Items for the next RBOA Meeting are the following:

• Conflict of Interest Policies. Procedures and Training Update • Actuarial Valuation Study • Private Letter Ruling (PLR) Update • Investment Letter to the Board

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7

The next RBOA Meeting is scheduled as follows:

• November 10, 2011 at 9:00 AM XII. ADJOURNMENT

A motion was made by Board member Michael Anker to adjourn the RBOA Meeting at 10:40 AM, seconded by Board member Nick Dimitri and unanimously carried by the Board.

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PRESENTED TO:

DATE:

11/10/2011


ITEM #:

2011/2012-003

Portfolio Review Enclosure: Yes


Morgan Stanley Smith Barney

Requested by:


BACKGROUND: As Board members of the Retirement Board of Authority you have a fiduciary responsibility as described in Government Code section 53215, et seq. As part of fulfilling your fiduciary responsibility, it is important to periodically review the District’s Public Entity Investment Trust Portfolio. STATUS: Morgan Stanley Smith Barney (MSSB) will provide a review of the District’s Futuris Public Entity Investment Trust Portfolio Performance Report. RECOMMENDATION: The Retirement Board of Authority should review and accept the Investment Trust Portfolio Performance Report and file as appropriate.

15 of 116

CO�TRA COSTA COMMU�ITY COLLEGE DISTRICT FUTURIS PUB E�TITY I�V TR

September 30, 2011

Time Weighted Return - Net of Fees

Annualized Annualized

Month Quarter Year Latest 1 Latest 3 Inception

To Date To Date To Date Year Year To Date

Account -5.60 -7.74 -4.34 -0.40 - 6.71

S&P/Barclays Blend -3.15 -5.28 -1.11 3.49 5.34 7.63

Barclays Aggregate 0.73 3.83 6.67 5.29 7.99 6.98

S&P 500 Adj for Divs -7.03 -13.86 -8.67 1.15 1.22 7.20

NASDAQ -6.36 -12.91 -8.95 1.97 5.07 9.25

MSCI EAFE -9.53 -19.01 -14.98 -9.36 -1.13 -1.36

Time Weighted Return - Gross of Fees

Annualized Annualized

Month Quarter Year Latest 1 Latest 3 Inception

To Date To Date To Date Year Year To Date

Account -5.60 -7.73 -4.17 -0.16 - 7.03

S&P/Barclays Blend -3.15 -5.28 -1.11 3.49 5.34 7.63

Barclays Aggregate 0.73 3.83 6.67 5.29 7.99 6.98

S&P 500 Adj for Divs -7.03 -13.86 -8.67 1.15 1.22 7.20

NASDAQ -6.36 -12.91 -8.95 1.97 5.07 9.25

MSCI EAFE -9.53 -19.01 -14.98 -9.36 -1.13 -1.36

Asset Allocation

PORTFOLIO SUMMARY

September 30, 2011

15.4%

26.2%58.4%

0.0%

CASH AND RECEIVABLES 0.38

FIXED INCOME FUNDS 15,093,392.81

DOMESTIC EQUITY FUNDS 6,773,524.98

INTERNATIONAL EQUITY FUNDS

3,978,434.81

Change In Portfolio

Portfolio Value on 12-31-10 22,603,758.94

Contributions 4,550,000.00

Withdrawals -25,252.80

Change in Market Value -1,750,149.45

Income Received 510,213.35

Portfolio Fees -43,217.07

Portfolio Value on 09-30-11 25,845,352.97

25,845,352.97

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PORTFOLIO APPRAISAL September 30, 2011

Security Unit Total Market Pct. Cur.

Quantity Security Symbol Cost Cost Price Value Assets Yield

CASH A&D RECEIVABLES

NORTHERN INSTL

FUNDS

GOVERNMENT

SELECT

BGSX.X 0.38 0.38 0.0 0.0

FIXED I&C MUTUAL FU&DS

Taxable Funds

283,551.052 DELAWARE

DIVERSIFIED

INCOME INSTL

DPFF.X 9.32 2,642,123.54 9.28 2,631,353.76 10.2 4.6

93,930.398 LEGG MASON BW

GLOBAL OPPS BD IS

GOBS.X 10.70 1,004,723.96 10.98 1,031,355.77 4.0 7.2

254,188.982 METROPOLITAN

WEST TOTAL

RETURN BOND I

MWTI.X 10.50 2,668,747.08 10.47 2,661,358.64 10.3 4.6

197,610.003 OPPENHEIMER

INTERNATIONAL

BOND Y

OIBY.X 6.52 1,287,435.92 6.29 1,242,966.92 4.8 4.4

186,096.528 PRUDENTIAL TOTAL

RETURN BOND Z

PDBZ.X 13.82 2,571,740.99 14.18 2,638,848.77 10.2 4.0

176,402.680 TEMPLETON

GLOBAL BOND ADV

TGBA.X 13.12 2,314,231.61 12.65 2,231,493.90 8.6 5.0

240,799.188 WESTERN ASSET

CORE PLUS BOND

INSTL

WACP.X 10.47 2,520,253.20 11.03 2,656,015.04 10.3 4.1

15,009,256.30 15,093,392.81 58.4 4.6

15,009,256.30 15,093,392.81 58.4 4.6

DOMESTIC EQUITY FU&DS

Large Cap Funds

64,966.260 BLACKROCK

EQUITY DIVIDEND

INSTL

MADV.X 16.17 1,050,418.69 16.45 1,068,694.98 4.1 2.4

43,749.722 HARTFORD CAPITAL

APPRECIATION Y

HCAY.X 33.25 1,454,765.55 29.53 1,291,929.29 5.0 0.0

75,126.656 JHANCOCK CLASSIC

VALUE I

JCVI.X 15.04 1,129,932.66 13.86 1,041,255.45 4.0 0.6

24,022.249 NUVEEN

TRADEWINDS

VALUE

OPPORTUNITIES I

NVOR.X 31.69 761,150.56 31.62 759,583.51 2.9 1.9

4,396,267.46 4,161,463.23 16.1 1.1

Mid Cap Funds

21,861.591 COHEN & STEERS

INSTL REALTY

SHARES

CSRI.X 32.94 720,218.58 34.78 760,346.13 2.9 2.3

26,171.478 HARTFORD MIDCAP

Y

HMDY.X 20.83 545,142.82 19.85 519,503.84 2.0 0.0

1,265,361.41 1,279,849.97 5.0 1.4

Small Cap Funds

29,399.290 ROYCE SPECIAL

EQUITY INSTL

RSEI.X 21.35 627,800.61 18.30 538,007.01 2.1 0.5

6,289,429.47 5,979,320.21 23.1 1.1

1

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PORTFOLIO APPRAISAL September 30, 2011

Security Unit Total Market Pct. Cur.

Quantity Security Symbol Cost Cost Price Value Assets Yield

I&TER&ATIO&AL FU&DS

International

78,426.883 BRANDES INSTL

INTERNATIONAL

EQUITY

BIIE.X 14.84 1,164,213.52 12.99 1,018,765.21 3.9 2.7

29,298.144 NUVEEN

TRADEWINDS

GLOBAL ALL-CAP I

NWGR.X 27.05 792,474.16 26.10 764,681.56 3.0 2.2

15,312.853 PRUDENTIAL

GLOBAL REAL

ESTATE Z

PURZ.X 19.64 300,716.07 16.36 250,518.28 1.0 3.0

100,587.153 ROYCE GLOBAL

VALUE INVMT

RGVI.X 14.92 1,500,510.52 11.80 1,186,928.41 4.6 0.9

32,031.347 THORNBURG

INTERNATIONAL

VALUE I

TGVI.X 26.19 838,834.08 23.65 757,541.36 2.9 1.5

4,596,748.36 3,978,434.81 15.4 1.8

4,596,748.36 3,978,434.81 15.4 1.8

BALA&CED EQUITY FU&DS

Balanced Funds

45,643.952 THORNBURG

INVESTMENT

INCOME BUILDER I

TIBI.X 19.08 870,740.74 17.40 794,204.76 3.1 7.0

870,740.74 794,204.76 3.1 7.0

TOTAL PORTFOLIO 26,766,175.25 25,845,352.97 100.0 3.5

2

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PRESENTED TO:

DATE:

11/10/2011


ITEM #:

2011/2012-004

Market Overview Enclosure: Yes

Action Item No Prepared by:


Requested by:


BACKGROUND: As Members of the Retirement Board of Authority you have a fiduciary responsibility as described in Government Code section 53215, et seq. In fulfilling your fiduciary responsibility, it is important to understand the impact of global capital market conditions on the assets in the trust. STATUS: Morgan Stanley Smith Barney (MSSB) will provide an overview of the current global capital market conditions. RECOMMENDATION: The Retirement Board of Authority should receive the information.

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Asset Allocation and Portfolio Updates

Cary M. Allison, CIMA®Senior Vice President, Senior Investment Management ConsultantSeptember 30, 2011

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MODELS (USING CAPITAL MARKET ASSUMPTIONS AND EFFICIENT FRONTIER)

Portfolio 4.5 Portfolio 5 Portfolio 6 Portfolio 7 Portfolio 8 Portfolio 9

Target Returns 4.5% 5% 6% 7% 8% 9%EQUITIESLarge Cap Growth 0% 1% 3% 5% 5% 7%Large Cap Value 0% 4% 7% 8% 11% 14%Small/Mid Growth 0% 0% 1% 2% 4% 6%Small/Mid Value 0% 2% 3% 5% 8% 10%

0% 7% 14% 20% 28% 37%

International 0% 6% 13% 18% 25% 32%

REITs 0% 1% 3% 4% 5% 7%

Total Equities 0% 14% 30% 42% 58% 76%

FIXED INCOMEDomestic Intermediate 80% 60% 48% 40% 27% 14%International Intermediate 20% 26% 22% 18% 15% 10%

Total Fixed Income 100% 86% 70% 58% 42% 24%

Grand Total 100% 100% 100% 100% 100% 100%

PORTFOLIO STATISTICSAvg Annual Return 4.61% 5.03% 6.09% 7.11% 8.01% 9.15%Standard Deviation (Risk) 3.92% 3.89% 5.24% 6.84% 8.66% 11.33%Sharpe Ratio 0.54 0.65 0.69 0.68 0.64 0.58

Nominal BenchmarksStandard & Poor's 500 0% 10% 25% 40% 60% 75%Barclay's Aggregate Bond 100% 90% 75% 60% 40% 25%

NOTE: The Futuris portfolios listed above are sample representations only and may be altered from time to time at the discretion of the Trustee.

Cary M. Allison, CIMASenior Vice President, Senior Investment Management Consultant

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Portfolio 4.5 Portfolio 5 Portfolio 6 Portfolio 7 Portfolio 8 Portfolio 9EQUITIES Style Ticker Expenses 4.5% Target 5% Target 6% Target 7% Target 8% Target 9% TargetDomestic EquitiesHartford Capital Appreciation Large Growth HCAYX 0.71% 0% 1% 3% 5% 5% 7%Blackrock Equity Dividend Large Value MADVX 0.74% 0% 2% 3% 4% 5% 7%John Hancock Classic Value Large Value JCVIX 0.88% 0% 2% 4% 4% 6% 7%

Subtotals 0% 5% 10% 13% 16% 21%

Hartford Midcap Mid Growth HMDYX 0.79% 0% 0% 1% 2% 4% 6%Nuveen Tradewinds Value Opportunities Mid Blend NVORX 1.17% 0% 1% 2% 3% 4% 5%Royce Special Equity Small Blend RSEIX 1.05% 0% 1% 1% 2% 4% 5%

Subtotals 0% 2% 4% 7% 12% 16%

Cohen & Steers Realty Shares Real Estate CSRIX 0.75% 0% 1% 2% 3% 3% 5%Prudential Global Real Estate Real Estate PURZX 1.07% 0% 0% 1% 1% 2% 2%

Subtotals 0% 1% 3% 4% 5% 7%

International/Global EquitiesRoyce Global Value Small Blend RGVIX 1.63% 0% 2% 3% 5% 7% 10%Brandes International Equity Large Value BIIEX 1.13% 0% 1% 3% 4% 5% 6%Nuveen Tradewinds Global All-Cap Multi Value NWGRX 1.08% 0% 1% 2% 3% 4% 5%Thornburg International Value Large Blend TGVIX 0.89% 0% 1% 3% 3% 5% 6%Thornburg Investment Income Builder World Allocation TIBIX 0.89% 0% 1% 2% 3% 4% 5%

Subtotals 0% 6% 13% 18% 25% 32%

FIXED INCOMEDomestic Fixed IncomeMetropolitan West Total Return Bond Intermediate Term MWTIX 0.45% 20% 15% 12% 10% 7% 3%Delaware Diversified Income Intermediate Term DPFFX 0.72% 20% 15% 12% 10% 7% 4%Prudential Total Return Bond Fund Intermediate Term PDBZX 0.72% 20% 15% 12% 10% 6% 3%Western Asset Core Plus Bond Intermediate Term WACPX 0.46% 20% 15% 12% 10% 7% 4%

Subtotals 80% 60% 48% 40% 27% 14%

International Fixed IncomeBrandywine Global Opportunities Bond Global Bond GOBSX 0.65% 5% 6% 5% 4% 3% 2%Oppenheimer International Bond Inst International Bond OIBYX 0.54% 5% 7% 6% 5% 4% 3%Templeton Global Bond Inst Global Bond TGBAX 0.67% 10% 13% 11% 9% 8% 5%

Subtotals 20% 26% 22% 18% 15% 10%

SUMMARYTotal Equities 0% 14% 30% 42% 58% 76%Total Fixed Income 100% 86% 70% 58% 42% 24%Grand Total 100% 100% 100% 100% 100% 100%

Blended Expense Ratio 0.59% 0.65% 0.71% 0.76% 0.83% 0.90%

PORTFOLIOS

NOTE: The Futuris portfolios listed above are sample representations only and may be altered from time to time at the discretion of the Trustee.

Prepared by Cary M. Allison, CIMASenior Vice President, Senior Investment Management Consultant

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Disclosures

Other Important Disclosures2000, research which has been prepared by any of its affiliates. Private U.K. investors should obtain the advice of their Morgan Stanley & Co. International plc representative about the investments concerned. RMB Morgan Stanley (Proprietary) Limited is a member of the JSE Limited and regulated by the Financial Services Board in South Africa. RMB Morgan Stanley (Proprietary) Limited is a joint venture owned equally by Morgan Stanley International Holdings Inc. and RMB Investment Advisory (Proprietary) Limited, which is wholly owned by FirstRand Limited.The information in Morgan Stanley & Co. Incorporated Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial Services Authority (the DFSA), and is directed at wholesale customers only, as defined by the DFSA. This research will only be made available to a wholesale customer who we are satisfied meets the regulatory criteria to be a client.The information in Morgan Stanley & Co. Incorporated Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA.As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations.The trademarks and service marks contained in Morgan Stanley & Co. Incorporated Research are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property of MSCI and S&P.

Investments and services offered through Morgan Stanley Smith Barney LLC, member SIPC.© 2009 Morgan Stanley Smith Barney

Morgan Stanley Smith Barney Investment Strategy

23 of 116

Q1 2010

Please refer to important information, disclosures and qualifications at the end of this material. 1

Capital Markets Overview Q3 2011

Introduction In the third quarter, the global equity upswing of the first half of the year stalled due to concerns over the cumulative effects on the global economy of the

European sovereign debt crisis, partisan bickering in the U.S. Congress, and persistently high unemployment.

Although the likelihood of a U.S. recession is slight, in our view, the Federal Reserve has pledged to stand by the economy and housing market via lower borrowing costs.

Both Morgan Stanley and Citi economists reduced global growth expectations for 2011 to 3.9% and 3.0%, respectively, and 3.8% and 2.9% for 2012. U.S. economic growth is expected by both firms to be 1.7% in 2011 and about 2% in 2012.

According to the Dow Jones-UBS Commodity Index, commodity prices fell more steeply in the third quarter than they fell in the second quarter.

The third quarter saw the slowing of emerging-market economies—and China’s in particular. However, given the relatively strong overall pace of growth in the more fiscally sound emerging economies, the underlying demand for commodities should be persistent.

Mergers-and-acquisitions activity decreased in the third quarter. Global M&A volume for the quarter totaled $595.2 billion, down 18% from the second quarter. Global deal volume for the third quarter was down 21% from a year ago.

The Dow Jones Industrials were down 11.5% for the third quarter.

The NASDAQ Composite declined 12.9% for the quarter.

The S&P 500 lost 13.9% for the quarter.

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The U.S. Economy In its September 29 update, the Department of Commerce estimated that Gross Domestic Product grew at an annual rate of 1.3% in the second quarter of

2011, in comparison with 0.4% in the first quarter of 2011. Both Morgan Stanley and Citi economists forecast that U.S. GDP will grow 1.7% in 2011.

For the quarter, the seasonally adjusted unemployment rate fell from 9.3% for July to 9.1% for September. The slight increase in employment was caused by the return to work in August of 45,000 striking telecommunications workers. Job gains in the quarter took place in construction, health care, and professional and business services. Government jobs continued their downward trend.

According to the most recent estimate from the Commerce Department, corporate profits rose 3.3% between the first quarter of 2011 and the second quarter of 2011, and rose 8.5% between the second quarter of 2010 and the second quarter of 2011.

Inflation remained low in the U.S. According to the Bureau of Labor Statistics, the seasonally adjusted Consumer Price Index rose 0.5% in July and 0.4% in August. Both Morgan Stanley and Citi economists expect an inflation rate of 1.6% for 2011.

The Census Bureau reported that privately owned housing starts in August 2011 were at a seasonally adjusted annual rate of 571,000—5.0% below the revised July estimate, and 5.8% below August 2010 housing starts. Most experts agree that uncertainties about the economy and expectations of ongoing declines in house prices continue to weigh down demand for new homes.

The Census Bureau also reported that seasonally adjusted retail and food services sales were unchanged between July and August, but increased 7.2% between August 2010 and August 2011.

In September, the Institute for Supply Management’s manufacturing-sector index (“PMI”) was 51.6, up 1.0 from August, and up from July’s 50.9. PMI has been above 50 for 26 consecutive months, and above 42 for 28 consecutive months.

The ISM Nonmanufacturing Index (“NMI”) fell 0.3 points to 53.0 between August and September, but rose 0.6 between July and August. The index has now been above 50 for twenty-two consecutive months. Generally speaking, a PMI or NMI over 50 indicates that the sector is expanding, and a PMI over 42 indicates that the overall economy is expanding.

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The U.S. Equity Markets For the third quarter, the Dow Jones Industrials were down 11.5%, the NASDAQ Composite declined 12.9%, and the S&P 500 lost 13.9%.

Nine out of ten sectors of the S&P 500 Stock Sectors fell for the quarter. Utilities fared the best, with a 1.6% gain. Consumer Staples showed a comparatively small drop of 4.2%. Information Technology and Telecommunications Services also fell moderately, losing 7.7% and 8.0%, respectively. Financials and Materials were the laggards, down 22.8% and 24.5%, respectively.

Equity investors grew agitated during the third quarter, according to the CBOE VIX volatility index, the so-called “fear index.” Concerns about the global economy, the European sovereign debt crisis, continued high U.S. unemployment, the U.S. debt-ceiling debate, and the downgrade of the U.S. sovereign rating caused the VIX to register the largest quarterly increase in its history, rising 160% to 42.96. This level has been surpassed just 3% of the time in the past 20 years.

On August 4 to 8, the VIX experienced its largest three-day increase ever. It closed during that period at a 29-month high of 48. The index hovered above 30 for 41 days through the end of the quarter. Analysts suggest that such levels can occur prior to stock rebounds.

In a quarter of minimal growth, stocks of large-capitalization companies outperformed stocks of mid- and small-cap companies. The Russell 1000 index, a large-cap index, fell 14.7% for the quarter. In comparison, the Russell 2000 index, a small-cap index, fell 21.9% for the third quarter. The Russell Midcap index declined 18.9% for the quarter.

Although the third quarter was challenging for both value- and growth-style stocks, growth stocks fared slightly better. Growth stocks often outperform as the pace of earnings growth moderates. The large-cap Russell 1000 Value index fell 16.2% for the quarter, while the Russell 1000 Growth index fell 13.1% for the quarter. The Russell Midcap Value index fell 18.5% for the quarter, while the Russell Midcap Growth index fell 19.3% for the quarter. In small caps, the Russell 2000 Value index fell 21.5% for the quarter, while the Russell 2000 Growth index also fell steeply for the quarter.

Key U.S. Stock-Market Index Returns (%) for the Period Ending 9/30/11 Quarter 12 Months Five Years

(Annualized)Seven Years(Annualized)

S&P 500 (13.9) 1.1 (1.2) 2.3Dow Jones (11.5) 3.8 1.4 3.8Russell 2000 (21.9) (3.5) (1.0) 3.0Russell Midcap (18.9) (0.9) 0.6 5.0Russell 1000 (14.7) 0.9 (0.9) 2.7Source: Vestek Past performance is not a guarantee of future results. Investors cannot invest directly in an index. The performance of unmanaged indices reflects no deductions for fees, expenses or taxes that would affect the performance of actively managed assets.

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Global Equity Markets Europe’s protracted debt woes, along with the weakening Chinese and U.S. economies, roiled overseas equity markets in the third quarter.

The MSCI EAFE index (a benchmark for developed markets) fell 19.0% for U.S.-currency investors, and fell 15.7% for local-currency investors, as the U.S. dollar appreciated in relation to the currencies of other nations on the index. In contrast, in the second quarter of 2011, the MSCI EAFE index was up 1.8% in U.S. dollars, and fell 0.5% in local currency.

The worsening of the global economic outlook has helped drive emerging-market equities down from their May 2 peak. For the third quarter, the MSCI Emerging Markets index was down 22.5% for U.S.-currency investors, and fell 14.9% for local-currency investors, as the U.S. dollar appreciated in relation to many emerging-market currencies. This contrasts with the previous quarter, when the MSCI Emerging Markets index was down 1.1% for U.S.-dollar based investors, and fell 2.6% for local-currency investors.

The MSCI Europe index of developed markets fell 22.6% for U.S.-currency investors, and dropped 17.5% for local-currency investors during the quarter. In comparison, the MSCI Far East index fell 8.7% for the quarter in terms of the dollar, and fell 11.8% in terms of local currencies.

More-specific emerging-economy equity market indices also struggled in the face of the quarter’s European debt concerns. The MSCI BRIC (Brazil, Russia, India, and China) index fell 25.8% for the quarter in terms of the dollar. The MSCI BRIC fell 19.0% for the quarter in local terms. For the quarter, the MSCI EM Asia index fell 21.1% in U.S.-dollar terms, and fell 16.9% in local terms.

Key Global Equity-Market Indices Based on the U.S. Dollar (%) for the Period Ending 9/30/11 Quarter 12 Months Five Years

(Annualized) Seven Years(Annualized)

MSCI EAFE (19.0) (9.0) (3.0) 3.8MSCI EAFE Growth (19.0) (8.5) (1.8) 4.3MSCI EAFE Value (19.0) (9.5) (4.3) 3.3MSCI Europe (22.6) (11.3) (3.6) 3.6MSCI Japan (6.4) 0.1 (4.8) 1.7MSCI Emerging Markets (22.5) (15.9) 5.2 12.6Source: Vestek Past performance is not a guarantee of future results. Investors cannot invest directly in an index. The performance of unmanaged indices reflects no deductions for fees, expenses or taxes that would affect the performance of actively managed assets.

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The U.S. Bond Market As U.S. economic data and European sovereign debt worries worsened in the third quarter, investors shopped for safe havens among bonds.

Investors flocked to Treasury bonds, in particular, in the third quarter. This flight to safety sparked a strong Treasurys rally. Treasurys that mature in 10 or more years rose in price, while yields fell to historic lows. The yield on 30-year Treasury bonds fell to 2.9% at the end of the quarter, which represents the best quarterly return on Treasurys since the end of 2008, at the peak of the financial crisis.

At the same time, yields on corporate bonds rose relative to Treasurys, as yields on the latter fell to levels not seen since the 1940s.

The Barclays Capital U.S. Aggregate Bond index, a general measure of the fixed-income market, rose 3.8% for the third quarter. In contrast, the Barclays Capital High Yield index, a measure of lower-rated corporate bonds, fell 6.1% for the quarter.

Investors shook off their wariness of mortgage-backed securities, sending the Barclays Capital Mortgage Backed index up 2.4% for the quarter.

During the third quarter, investors overlooked the ongoing negative headlines about state and local government finances, which was a boon to the municipal-bond market.

In addition, the rally in U.S. Treasurys sparked municipal bond price gains. As a result, the Barclays Capital Muni index was up 3.8% for the quarter.

U.S. Bond-Market Index Returns (%) for the Period Ending 9/30/11 Quarter 12 Months Five Years

(Annualized) Seven Years (Annualized)

Barclays Capital U.S. Aggregate 3.8 5.3 6.5 5.6Barclays Capital High Yield (6.1) 1.8 7.1 7.2Barclays Capital Govt/Credit 4.7 5.1 6.5 5.5Barclays Capital Government 5.9 5.6 6.6 5.5Barclays Capital Intermediate Govt/Credit 2.4 3.4 5.9 4.9Barclays Capital Long Govt/Credit 15.6 12.7 9.4 8.0Barclays Capital Mortgage Backed Securities 2.4 5.6 6.7 5.8Barclays Capital Muni 3.8 3.9 5.0 4.8Source: Vestek Past performance is not a guarantee of future results. Investors cannot invest directly in an index. The performance of unmanaged indices reflects no deductions for fees, expenses or taxes that would affect the performance of actively managed assets.

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THE BARCLAYS CAPITAL U.S. AGGREGATE BOND INDEX: A broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS. BARCLAYS CAPITAL GOVERNMENT INDEX: Barclays Capital Treasury bond and agency bond indices (all publicly issued debt of agencies of the U.S. government, quasi-federal corporations and corporate debt guaranteed by the U.S. government, but no mortgage-backed securities) are combined to form the government bond index. BARCLAYS CAPITAL U.S. INTERMEDIATE GOVERNMENT/CREDIT BOND INDEX: The Barclays Capital U.S. Intermediate Government/Credit Bond index is a total return index consisting of investment-grade corporate debt issues as well as debt issues of U.S. government agencies and the U.S. Treasury. The debt issues all maintain maturities within a range of one to 10 years. An investment cannot be made directly in a market index. BARCLAYS CAPITAL HIGH YIELD INDEX: The Barclays Capital U.S. High Yield index covers the universe of fixed rate, non-investment-grade debt. Pay-in-kind (PIK) bonds, Eurobonds and debt issues from countries designated as emerging markets (e.g., Argentina, Mexico, Venezuela, etc.) are excluded, but Yankee and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes and step-up coupon structures are also included. Liquidity Rules: All bonds included in the High Yield index must be dollar-denominated and nonconvertible and have at least one year remaining to maturity and an outstanding par value of at least $150 million. Quality Rating Rules: Securities in the index must be rated Ba1 or lower. If both Moody’s and S&P provide a rating for a security, the lower of the two ratings is used. A small number of unrated bonds are included in the index; to be eligible they must have previously held a high yield rating or have been associated with a high yield issuer, and must trade accordingly. Components: The index has several subcomponents. Intermediate indices include bonds with remaining maturities of less than 10 years; long indices include bonds with remaining maturities of 10 years or more. The index also has subdivisions by credit quality, and subindices are available that exclude securities in default. BARCLAYS CAPITAL MUNI INDEX: The composite measure of the total return performance of the muni-bond market. The muni market contains over 2 million bond issues. The market is divided into seven major sectors: state G.O. debt (31%), prerefunded bonds (7.7%); electric-utility revenue bonds (7.79%); hospital revenue bonds (3.4%); state-housing revenue bonds (3.4%); industrial-development and /pollution-control revenue bonds (1.8%); and transportation revenue bonds (7.1%). These weightings are reviewed annually. BARCLAYS CAPITAL GOVT/CREDIT INDEX: The U.S. Government/Credit index is the nonsecuritized component of the U.S. Aggregate index and was the first macro index launched by Barclays Capital. The U.S. Government/Credit index includes Treasuries (i.e., public obligations of the U.S. Treasury that have remaining maturities of more than one year), government-related issues (i.e., agency, sovereign, supranational and local-authority debt) and U.S. dollar corporates. In order to qualify for inclusion in the U.S. Government/Credit index, a bond or security must have at least one year to maturity; at least $250 million par amount outstanding; must be rated Baa3 by Moody’s, BBB- by Standard & Poor’s, and BBB- by Fitch Investor Service; must be fixed rate, although it can carry a coupon that steps up; and it must be U.S.-dollar denominated. BARCLAYS CAPITAL LONG GOVERNMENT/CREDIT INDEX: Composed of all bonds covered by BARCLAYS CAPITAL GCB index with maturities of 10 years or greater. Total return comprises price appreciation/depreciation and income as a percent of the original investment. Indices are rebalanced monthly by market capitalization. BARCLAYS CAPITAL MORTGAGE BACKED SECURITIES INDEX: Includes all fixed securities issued and backed by mortgage pools of Ginnie Mae (GNMA), Fannie Mae (FNMA), Freddie Mac (FHLMC) and half-coupon securities. The index excludes buydowns, graduated equity mortgages (GEM), project loans, Nonagency (whole loans),


INDEX DESCRIPTIONS: DOW JONES INDUSTRIAL AVERAGE: The most widely used indicator of the overall condition of the stock market, a price-weighted average of 30 actively traded blue-chip stocks, primarily industrials. The 30 stocks are chosen by the editors of the Wall Street Journal (which is published by Dow Jones & Company), a practice that dates back to the beginning of the century. Charles Dow officially started the Dow in 1896, at which time it consisted of only 11 stocks. The Dow is computed using a price-weighted indexing system, rather than the more common market cap-weighted indexing system. Simply put, the editors at WSJ add up the prices of all the stocks and then divide by the number of stocks in the index. (In actuality, the divisor is much higher today in order to account for stock splits that have occurred in the past.) DOW JONES-UBS COMMODITY INDEX: Composed of futures contracts on physical commodities which are traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc, which trade on the London Metal Exchange (LME). NASDAQ COMPOSITE INDEX: Covers 4,500 stocks traded over the counter. It represents many small company stocks but is heavily influenced by about 100 of the largest NASDAQ stocks. It is a value-weighted index calculated on price change only and does not include income. S&P 500 INDEX: Covers 400 industrial, 40 utility, 20 transportation and 40 financial companies in the U.S. markets (mostly NYSE issues). The index represents about 75% of NYSE market cap and 30% of NYSE issues. It is a capitalization-weighted index calculated on a total-return basis with dividends reinvested. RUSSELL 1000 INDEX: Measures the performance of the 1,000 largest companies in the Russell 3000 index, which represents approximately 89% of the total market capitalization of the Russell 3000 index. As of the latest reconstitution, the average market capitalization was approximately $9.9 billion; the median market capitalization was approximately $3.7 billion. The smallest company in the index had an approximate market capitalization of $1,404.7 million. RUSSELL 1000 GROWTH INDEX: Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. RUSSELL 1000 VALUE INDEX: Measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. RUSSELL 2000 INDEX: Measures the performance of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 11% of the total market capitalization of the Russell 3000 index. As of the latest reconstitution, the average market capitalization was approximately $592.0 million; the median market capitalization was approximately $500.0 million. The largest company in the index had an approximate market capitalization of $1,402.7 million. RUSSELL 2000 GROWTH INDEX: Measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. RUSSELL 2000 VALUE INDEX: Measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. RUSSELL 3000 INDEX: Measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market. RUSSELL MIDCAP INDEX: Measures the performance of the 800 smallest companies in the Russell 1000 index, which represent approximately 35% of the total market capitalization of the Russell 1000 index. As of the latest reconstitution, the average market capitalization was approximately $3.7 billion; the median market capitalization was approximately $2.9 billion. The largest company in the index had an approximate market capitalization of $10.3 billion. RUSSELL MIDCAP GROWTH INDEX: Russell Midcap Growth index measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth index. An investment cannot be made directly in a market index. RUSSELL MIDCAP VALUE INDEX: Measures the performance of those Russell Midcap companies with lower price-to-book ratios and lower forecasted growth values. The stocks are also members of the Russell 1000 Value index. An investment cannot be made directly in a market index. VIX INDEX: (Chicago Board Options Exchange Volatility Index) Estimates volatility in the S&P 500 index for the next 30 days using a weighted blend of prices for various options on the S&P 500 index.

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Please refer to important information, disclosures and qualifications at the end of this material.

7

jumbos, collateralized mortgage obligations (CMOs), graduated payment mortgages (GPMs), adjustable rate mortgages (ARMs), manufactured home mortgages, prepayment-penalty collateral. Formed by grouping the universes of over 1 million individual fixed-rate MBS pools into approximately 5,500 generic aggregates. Pool aggregates must be U.S.-dollar denominated, have at least $250 million current outstanding and average weighted life of at least one year. MSCI EUROPE, AUSTRALASIA AND THE FAR EAST (EAFE) INDEX: A free-float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. and Canada. As of May 27, 2010, the index consisted of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. MSCI EUROPE INDEX: A free-float-adjusted market capitalization weighted index that is designed to measure developed market equity performance in Europe. As of June 2007, the index consisted of the following 16 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. This series approximates the maximum possible dividend reinvestment. The amount reinvested is the dividend distributed to individuals resident in the country of the company, but does not include tax credits. MSCI JAPAN INDEX: A free-float-adjusted market capitalization index that is designed to measure equity market performance in Japan. MSCI EAFE GROWTH INDEX: A free-float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. and Canada. As of May 27, 2010, the index consisted of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. The MSCI Global Value and Growth Indices cover the full range of developed, emerging and All Country MSCI International Equity Indices across all size segmentations. MSCI Barra uses a two dimensional framework for style segmentation in which value and growth securities are categorized using a multifactor approach, which uses three variables to define the value investment-style characteristics and five variables to define the growth investment-style characteristics, including forward-looking variables. The objective of the index design is to divide constituents of an underlying MSCI Equity index into respective value and growth indices, each targeting 50% of the free float-adjusted market capitalization of the underlying market index. MSCI EAFE VALUE INDEX: A free-float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. and Canada. As of May 27, 2010, the index consisted of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. The MSCI Value and Growth Indices cover the full range of developed, emerging and All Country MSCI Equity Indices. The MSCI Value and Growth Indices cover the full range of developed, emerging and All Country MSCI Equity Indices. As of the close of May 30, 2003, MSCI implemented an enhanced methodology for the MSCI Global Value and Growth Indices, adopting a two dimensional framework for style segmentation in which value and growth securities are categorized using different attributes: three for value and five for growth including forward-looking variables. The objective of the index design is to divide constituents of an underlying MSCI Standard Country index into a value index and a growth index, each targeting 50% of the free float-adjusted market capitalization of the underlying country index. Country Value/Growth indices are then aggregated into regional value/growth indices. Prior to May 30, 2003, the indices used price/book value (P/BV) ratios to divide the standard MSCI country indices into value and growth indices. All securities were classified as either “value” securities (low P/BV securities) or “growth” securities (high P/BV securities), relative to each MSCI country index. MSCI FAR EAST INDEX: A free-float-adjusted market capitalization weighted index that is designed to measure developed market equity performance in the Far East. As of March 2010, the index consists of the following three developed country indices: Japan, Hong Kong, and Singapore. MSCI EMERGING MARKETS INDEX: A free-float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of May 27, 2010, the index consisted of the following 21 emerging-market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey. MSCI BRIC INDEX: A free-float-adjusted market capitalization index that measures equity market performance in larger emerging markets. The index consists of the following emerging-market country indices: Brazil, Russia, India and China. MSCI EM ASIA INDEX: A free-float-adjusted market capitalization index that measures equity market performance in emerging markets in Asia. The index consists of the following emerging-market country indices: China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan and Thailand.

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DISCLOSURES Although the statements of fact and data in this report have been obtained from, and are based upon, sources the firm believes reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the firm’s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. This report may contain forward-looking statements, and there can be no guarantee that they will come to pass. Past performance is not a guarantee of future results. The indices are unmanaged, and an investor cannot invest directly in an index. The indices are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns consist of income and capital appreciation (or depreciation) and do not take into account fees, taxes or other charges. Such fees and charges would reduce performance. To the extent the investments depicted herein represent international securities, you should be aware that there may be additional risks associated with international investing, including foreign economic, political, monetary and/or legal factors, changing currency exchange rates, foreign taxes and differences in financial and accounting standards. These risks may be magnified in emerging markets. International investing may not be for everyone. Value investing involves the risk that the market may not recognize that securities are undervalued and they may not appreciate as anticipated. Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations. Small- and mid-capitalization companies may lack the financial resources, product diversification and competitive strengths of larger companies. In addition, the securities of small-capitalization companies may not trade as readily as, and be subject to higher volatility than, those of larger, more established companies. Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond’s maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which allows the issuer to retain the right to redeem the debt, fully or partially, before the scheduled maturity date. Proceeds from sales prior to maturity may be more or less than originally invested due to changes in market conditions or changes in the credit quality of the issuer. With respect to fixed income securities, please note that, in general, as prevailing interest rates rise, fixed income securities prices will fall. High-yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. © 2011 Morgan Stanley Smith Barney LLC. Member SIPC. Consulting Group is a business of Morgan Stanley Smith Barney LLC.

2011-PS-2897

10/2011

8 31 of 116


PRESENTED TO:

DATE:

11/10/2011


ITEM #:

2011/2012-006

Annual Reporting on the Status of the Trust Enclosure: Yes



Requested by:


BACKGROUND: California Government Code 53216.4 requires an annual reporting of the funds held in the Investment Trust to participants and their beneficiaries. STATUS: The Retirement Board of Authority approved the method of how the reporting on the status of funds held in trust will be made in compliance with California Government Code 53216.4. The Retirement Board of Authority has established Investment Trust beneficiary reporting protocols which should be acknowledged by a motion of the Board. RECOMMENDATION: The Retirement Board of Authority will make a decision as necessary and take appropriate action.

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Contra Costa Community College District 500 Court Street, Martinez, California 94553

925.229.1000 Fax: 925.370.2019 www.4cd.edu

ANNUAL REPORT FOR THE

CONTRA COSTA COMMUNITY COLLEGE DISTRICT

FUTURIS TRUST

AUGUST 2011

The Contra Costa Community College District has established the Futuris Public Entity Investment Trust. This Trust is an IRS Section 115 Trust that is used for the purposes of investment and disbursement of funds irrevocably designated by the District for the payment of its obligations to eligible employees (and former employees) of the District and their eligible dependents and beneficiaries for life, sick, hospitalization, major medical, accident, disability, dental and other similar benefits (sometimes referred to as “other post-employment benefits,” or “OPEB”), in compliance with governmental Accounting Statement Nos. 43 and 45. The Governmental Accounting Standards Board (GASB) adopted Statements 43 and 45 for public sector employers to identify and report their Other Post-Employment Benefits (OPEB) liabilities. GASB Statements 43 and 45 establish uniform financial reporting standards for OPEB and improve relevance and usefulness of the reporting. In particular, the statements require systematic, accrual-based measurement and recognition of OPEB expenses over the employees’ years of service as well as providing information regarding the progress being made toward funding the plan. GASB 43 establishes uniform financial reporting standards for OPEB Plans, while GASB 45 establishes uniform financial reporting standards for Employers. Both of these standards provide instructions for calculating expenses and liabilities as well as requiring supplementary information schedules to be added to the year–end financial reports. The District has created a Retirement Board of Authority consisting of District personnel to oversee and run the Futuris Trust. Benefit Trust Company is the qualified Discretionary Trustee for asset and fiduciary management and investment policy development. Keenan & Associates is the Program Coordinator for the Futuris Trust providing oversight of the Futuris program and guidance to the District. Attached to this notice is the most recent annual statement for the Trust. This statement shows (as of the date of the statement); the total assets in the Trust, the market value, the book value, all contribution and distribution activity (including all fees and expenses associated with the Trust), income activity, purchase activity, sale activity, and realized gains and losses. Please note that the Trust is not itself an employee benefit plan. Rather, the assets in the Trust are irrevocably designated for the funding of employee benefit plans. You are being provided this information pursuant to California Government Code Section 53216.4. For more information regarding the Futuris Public Entity Investment Trust, please contact Eugene Huff, Vice Chancellor, Human Resources, (925) 229-1000, ext. 1297, with the Contra Costa Community College District.

Governing Board Chancellor John T. Nejedly, President Helen Benjamin, Ph.D. Tomi Van de Brooke, Vice President Sheila A. Grilli, Secretary College Presidents John E. Marquez Contra Costa College McKinley Williams Robert Calone Diablo Valley College Peter Garcia (Interim) Francisco Hinojosa, Student Trustee Los Medanos College Richard Livingston (Interim)

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CONTRA COSTA COMMUNITY COLLEGE DISTRICT

RETIREMENT BOARD OF AUTHORITY MEETING

PRESENTED TO:

DATE:

11/10/2011


ITEM #:

2011/2012-008

Status of Updates to the Comprehensive Compliance, including the Substantive Plan

Enclosure:

Yes



Requested by:


BACKGROUND: Under the Futuris program, Keenan Financial Services prepares a written summary of the Substantive Plan, as part of an overall Comprehensive Compliance Plan, which acts as both a road map and a record of the Retirement Board of Authority’s compliance with its fiduciary duties. STATUS: For the ongoing maintenance of the Comprehensive Compliance Plan, including the Substantive Plan, any required updates will be reviewed by the Retirement Board of Authority (RBOA). RECOMMENDATION: The Retirement Board of Authority will review the information presented and file the information accordingly.

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PRESENTED TO:

DATE:

11/10/2011


ITEM #:

2011/2012-009

Status of Actuarial Valuation Study Enclosure: Yes



Requested by:


BACKGROUND: Paragraph 12, of GASB Statement 45, states that an Actuarial Valuation Study should be performed at least biannually. The recent Exposure Draft from the Governmental Accounting Standards Board (GASB) may have an impact on future Actuarial Valuations for OPEB Plans. STATUS: The Retirement Board of Authority (RBOA) members will review of the District’s new Actuarial Valuation Study, and discuss the recent Exposure Draft from the Governmental Accounting Standards Board (GASB). RECOMMENDATION: The Retirement Board of Authority should receive the information.

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Total Compensation Systems, Inc.

Contra Costa Community College District Actuarial Study of

Retiree Health Liabilities As of February 1, 2011

Prepared by:


Date: June 15, 2011

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2

Table of ContentsPART I: EXECUTIVE SUMMARY ............................................................................................................ 3

A. INTRODUCTION............................................................................................................................................................................ 3 B. GENERAL FINDINGS..................................................................................................................................................................... 4 C. DESCRIPTION OF RETIREE BENEFITS ........................................................................................................................................... 4 D. RECOMMENDATIONS................................................................................................................................................................... 6

PART II: BACKGROUND........................................................................................................................... 7

A. SUMMARY ................................................................................................................................................................................... 7 B. ACTUARIAL ACCRUAL ................................................................................................................................................................ 7

PART III: LIABILITIES AND COSTS FOR RETIREE BENEFITS ................................................... 9

A. INTRODUCTION............................................................................................................................................................................ 9 B. MEDICARE................................................................................................................................................................................... 9 C. LIABILITY FOR RETIREE BENEFITS. ............................................................................................................................................. 9 D. COST TO PREFUND RETIREE BENEFITS ..................................................................................................................................... 10

1. Normal Cost ......................................................................................................................................................................... 10 2. Amortization of Unfunded Actuarial Accrued Liability (UAAL) ........................................................................................ 11 3. Annual Required Contributions (ARC)................................................................................................................................ 11 4. Other Components of Annual OPEB Cost (AOC)............................................................................................................... 12

PART IV: "PAY AS YOU GO" FUNDING OF RETIREE BENEFITS .............................................. 13

PART V: RECOMMENDATIONS FOR FUTURE VALUATIONS ................................................... 14

PART VI: APPENDICES ........................................................................................................................... 15

APPENDIX A: MATERIALS USED FOR THIS STUDY ......................................................................................................... 15 APPENDIX B: EFFECT OF ASSUMPTIONS USED IN CALCULATIONS........................................................................... 16 APPENDIX C: ACTUARIAL ASSUMPTIONS AND METHODS .......................................................................................... 17 APPENDIX D: DISTRIBUTION OF ELIGIBLE PARTICIPANTS BY AGE.......................................................................... 21 APPENDIX E: CALCULATION OF GASB 43/45 ACCOUNTING ENTRIES ....................................................................... 22 APPENDIX F: GLOSSARY OF RETIREE HEALTH VALUATION TERMS........................................................................ 24

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3

Contra Costa Community College District Actuarial Study of Retiree Health Liabilities

PART I: EXECUTIVE SUMMARY

A. Introduction Contra Costa Community College District engaged Total Compensation Systems, Inc. (TCS) to analyze liabilities associated with its current retiree health program as of February 1, 2011 (the valuation date). The numbers in this report are based on the assumption that they will first be used to determine accounting entries for the fiscal year ending June 30, 2011. If the report will first be used for a different fiscal year, the numbers will need to be adjusted accordingly. This report does not reflect any cash benefits paid unless the retiree is required to provide proof that the cash benefits are used to reimburse the retiree’s cost of health benefits. Costs and liabilities attributable to cash benefits paid to retirees are reportable under Governmental Accounting Standards Board (GASB) Standards 25/27. This actuarial study is intended to serve the following purposes:

» » »

To provide information to enable Contra Costa CCD to manage the costs and liabilities associated with its retiree health benefits. To provide information to enable Contra Costa CCD to communicate the financial implications of retiree health benefits to internal financial staff, the Board, employee groups and other affected parties. To provide information needed to comply with Governmental Accounting Standards Board Accounting Standards 43 and 45 related to "other postemployment benefits" (OPEB's).

Because this report was prepared in compliance with GASB 43 and 45, as appropriate, Contra Costa CCD should not use this report for any other purpose without discussion with TCS. This means that any discussions with employee groups, governing Boards, etc. should be restricted to the implications of GASB 43 and 45 compliance. This actuarial report includes several estimates for Contra Costa CCD's retiree health program. In addition to the tables included in this report, we also performed cash flow adequacy tests as required under Actuarial Standard of Practice 6 (ASOP 6). Our cash flow adequacy testing covers a twenty-year period. We would be happy to make this cash flow adequacy test available to Contra Costa CCD in spreadsheet format upon request. We calculated the following estimates separately for active employees and retirees. As requested, we also separated results by the following employee classifications: Faculty, Classified and Management. We estimated the following: the total liability created. (The actuarial present value of total projected benefits or

APVTPB) the ten year "pay-as-you-go" cost to provide these benefits. the "actuarial accrued liability (AAL)." (The AAL is the portion of the APVTPB

attributable to employees’ service prior to the valuation date.)

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4

the amount necessary to amortize the UAAL over a period of 27 years.

the annual contribution required to fund retiree benefits over the working lifetime of eligible employees (the "normal cost").

The Annual Required Contribution (ARC) which is the basis of calculating the annual OPEB cost and net OPEB obligation under GASB 43 and 45.

We summarized the data used to perform this study in Appendix A. No effort was made to verify this information beyond brief tests for reasonableness and consistency. All cost and liability figures contained in this study are estimates of future results. Future results can vary dramatically and the accuracy of estimates contained in this report depends on the actuarial assumptions used. Normal costs and liabilities could easily vary by 10 - 20% or more from estimates contained in this report.

B. General Findings We estimate the "pay-as-you-go" cost of providing retiree health benefits in the year beginning February 1, 2011 to be $9,317,553 (see Section IV.A.). The “pay-as-you-go” cost is the cost of benefits for current retirees. For current employees, the value of benefits "accrued" in the year beginning February 1, 2011 (the normal cost) is $3,098,189. This normal cost would increase each year based on covered payroll. Had Contra Costa CCD begun accruing retiree health benefits when each current employee and retiree was hired, a substantial liability would have accumulated. We estimate the amount that would have accumulated to be $198,640,665. This amount is called the "actuarial accrued liability” (AAL). Contra Costa CCD has set aside $23,373,801 to fund retiree health liabilities. This leaves an unfunded actuarial accrued liability (UAAL) of $175,266,864. We calculated the annual cost to amortize the unfunded actuarial accrued liability using a 6.65% discount rate. We used a 27 year amortization period. The current year cost to amortize the unfunded "actuarial accrued liability" is $14,141,547. Combining the normal cost and UAAL amortization costs in the first year produces a total first year annual required contribution (ARC) of $17,239,736. The ARC is used as the basis for determining expenses and liabilities under GASB 43/45. The ARC is used in lieu of (rather than in addition to) the “pay-as-you-go” cost. We based all of the above estimates on employees as of January, 2011. Over time, liabilities and cash flow will vary based on the number and demographic characteristics of employees and retirees.

C. Description of Retiree Benefits Following is a description of the current retiree benefit plan:

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5

Faculty Classified Management

Applies to Hired < 7/1/84 Hired < 7/1/84 Hired < 7/1/84 Benefit types provided Medical and dental Medical and dental Medical and dental

Duration of Benefits Lifetime Lifetime Lifetime Required Service 10 years 10 years 10 years

Minimum Age 55 50 50/55 Dependent Coverage Yes Yes Yes

College Contribution % 100% 100% 100% College Cap Active Active Active

Faculty Classified Management

Applies to Hired 7/1/84 to 6/30/05 Hired 7/1/84 to 6/30/05 Hired 7/1/84 to 6/30/05 Benefit types provided Medical and dental Medical and dental Medical and dental

Duration of Benefits Lifetime Lifetime Lifetime Required Service 10 years 10 years 10 years

Minimum Age 55 50 50/55 Dependent Coverage Yes Yes Yes

College Contribution % Age+Service: 80+ 100% for employee 50% for dependent Age+Service: 70-79 50% for employee 25% for dependent

Age+Service: 80+ 100% for employee 50% for dependent Age+Service: 70-79 50% for employee 25% for dependent

Age+Service: 80+ 100% for employee 50% for dependent Age+Service: 70-79 50% for employee 25% for dependent

College Cap Active Active Active

Faculty Classified Management Applies to Hired > 6/30/05 Hired < 7/1/84 Hired < 7/1/84

Benefit types provided Medical and dental Medical and dental Medical and dental Duration of Benefits Lifetime Lifetime Lifetime

Required Service 10 years 10 years 10 years Minimum Age 55 50 50/55

Dependent Coverage Yes Yes Yes College Contribution % Age+Service: 80+

< 65: 100% for employee, 50% for dependent

Age 65+: 50% Employee only

Age+Service: 70-79 <65: 50% for employee

25% for dependent Age 65+: 25% Employee

only

Age+Service: 80+ < 65: 100% for employee,


only Age+Service: 70-79

<65: 50% for employee 25% for dependent


Age+Service: 80+ < 65: 100% for employee,


only Age+Service: 70-79

<65: 50% for employee 25% for dependent


College Cap Active Active Active

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D. Recommendations It is outside the scope of this report to make specific recommendations of actions Contra Costa CCD should take to manage the substantial liability created by the current retiree health program. Total Compensation Systems, Inc. can assist in identifying and evaluating options once this report has been studied. The following recommendations are intended only to allow the College to get more information from this and future studies. Because we have not conducted a comprehensive administrative audit of Contra Costa CCD’s practices, it is possible that Contra Costa CCD is already complying with some or all of our recommendations. We recommend that Contra Costa CCD inventory all benefits and services provided to retirees –

whether contractually or not and whether retiree-paid or not. For each, Contra Costa CCD should determine whether the benefit is material and subject to GASB 43 and/or 45.

We recommend that Contra Costa CCD conduct a study whenever events or contemplated

actions significantly affect present or future liabilities, but no less frequently than every two or three years, as required under GASB 43/45.

We recommend that the College communicate the magnitude of these costs to employees

and include employees in discussions of options to control the costs.

Under GASB 45, it is important to isolate the cost of retiree health benefits. Contra Costa CCD should have all premiums, claims and expenses for retirees separated from active employee premiums, claims, expenses, etc. To the extent any retiree benefits are made available to retirees over the age of 65 – even on a retiree-pay-all basis – all premiums, claims and expenses for post-65 retiree coverage should be segregated from those for pre-65 coverage. Furthermore, Contra Costa CCD should arrange for the rates or prices of all retiree benefits to be set on what is expected to be a self-sustaining basis.

Contra Costa CCD should establish a way of designating employees as eligible or ineligible for future OPEB benefits. Ineligible employees can include those in ineligible job classes; those hired after a designated date restricting eligibility; those who, due to their age at hire cannot qualify for College-paid OPEB benefits; employees who exceed the termination age for OPEB benefits, etc.

Several assumptions were made in estimating costs and liabilities under Contra Costa

CCD's retiree health program. Further studies may be desired to validate any assumptions where there is any doubt that the assumption is appropriate. (See Appendices B and C for a list of assumptions and concerns.) For example, Contra Costa CCD should maintain a retiree database that includes – in addition to date of birth, gender and employee classification – retirement date and (if applicable) dependent date of birth, relationship and gender. It will also be helpful for Contra Costa CCD to maintain employment termination information – namely, the number of OPEB-eligible employees in each employee class that terminate employment each year for reasons other than death, disability or retirement.

Respectfully submitted, Geoffrey L. Kischuk, FSA, MAAA, FCA Consultant Total Compensation Systems, Inc. (805) 496-1700

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PART II: BACKGROUND

A. Summary Accounting principles provide that the cost of retiree benefits should be “accrued” over employees' working lifetime. For this reason, the Governmental Accounting Standards Board (GASB) issued in 2004 Accounting Standards 43 and 45 for retiree health benefits. These standards apply to all public employers that pay any part of the cost of retiree health benefits for current or future retirees (including early retirees).

B. Actuarial Accrual To actuarially accrue retiree health benefits requires determining the amount to expense each year so that the liability accumulated at retirement is, on average, sufficient (with interest) to cover all retiree health expenditures without the need for additional expenses. There are many different ways to determine the annual accrual amount. The calculation method used is called an “actuarial cost method.” Under most actuarial cost methods, there are two components of actuarial cost - a “normal cost” and amortization of something called the “unfunded actuarial accrued liability.” Both accounting standards and actuarial standards usually address these two components separately (though alternative terminology is sometimes used). The normal cost can be thought of as the value of the benefit earned each year if benefits are accrued during the working lifetime of employees. This report will not discuss differences between actuarial cost methods or their application. Instead, following is a description of a commonly used, generally accepted actuarial cost method that will be permitted under GASB 43 and 45. This actuarial cost method is called the “entry age normal” method. Under the entry age normal cost method, the actuary determines the annual amount needing to be expensed from hire until retirement to fully accrue the cost of retiree health benefits. This amount is the normal cost. Under GASB 43 and 45, normal cost can be expressed either as a level dollar amount or a level percentage of payroll. The normal cost is determined using several key assumptions: The current cost of retiree health benefits (often varying by age, Medicare status and/or dependent

coverage). The higher the current cost of retiree benefits, the higher the normal cost. The “trend” rate at which retiree health benefits are expected to increase over time. A higher trend

rate increases the normal cost. A “cap” on College contributions can reduce trend to zero once the cap is reached thereby dramatically reducing normal costs.

Mortality rates varying by age and sex. (Unisex mortality rates are not often used as individual

OPEB benefits do not depend on the mortality table used.) If employees die prior to retirement, past contributions are available to fund benefits for employees who live to retirement. After retirement, death results in benefit termination or reduction. Although higher mortality rates reduce normal costs, the mortality assumption is not likely to vary from employer to employer.

Employment termination rates have the same effect as mortality inasmuch as higher termination

rates reduce normal costs. Employment termination can vary considerably between public agencies. The service requirement reflects years of service required to earn full or partial retiree benefits.

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While a longer service requirement reduces costs, cost reductions are not usually substantial unless the service period exceeds 20 years of service.

Retirement rates determine what proportion of employees retire at each age (assuming employees

reach the requisite length of service). Retirement rates often vary by employee classification and implicitly reflect the minimum retirement age required for eligibility. Retirement rates also depend on the amount of pension benefits available. Higher retirement rates increase normal costs but, except for differences in minimum retirement age, retirement rates tend to be consistent between public agencies for each employee type.

Participation rates indicate what proportion of retirees are expected to elect retiree health benefits if

a significant retiree contribution is required. Higher participation rates increase costs. The discount rate estimates investment earnings for assets earmarked to cover retiree health benefit

liabilities. The discount rate depends on the nature of underlying assets. For example, employer funds earning money market rates in the county treasury are likely to earn far less than an irrevocable trust containing a diversified asset portfolio including stocks, bonds, etc. A higher discount rate can dramatically lower normal costs. GASB 43 and 45 require the interest assumption to reflect likely long term investment return.

The assumptions listed above are not exhaustive, but are the most common assumptions used in actuarial cost calculations. The actuary selects the assumptions which - taken together - will yield reasonable results. It's not necessary (or even possible) to predict individual assumptions with complete accuracy. If all actuarial assumptions are exactly met and an employer expensed the normal cost every year for all past and current employees and retirees, a sizeable liability would have accumulated (after adding interest and subtracting retiree benefit costs). The liability that would have accumulated is called the actuarial accrued liability or AAL. The excess of AAL over the actuarial value of plan assets is called the unfunded actuarial accrued liability (or UAAL). Under GASB 43 and 45, in order for assets to count toward offsetting the AAL, the assets have to be held in an irrevocable trust that is safe from creditors and can only be used to provide OPEB benefits to eligible participants. The actuarial accrued liability (AAL) can arise in several ways. At inception of GASB 43 and 45, there is usually a substantial UAAL. Some portion of this amount can be established as the "transition obligation" subject to certain constraints. UAAL can also increase as the result of operation of a retiree health plan - e.g., as a result of plan changes or changes in actuarial assumptions. Finally, AAL can arise from actuarial gains and losses. Actuarial gains and losses result from differences between actuarial assumptions and actual plan experience. Under GASB 43 and 45, employers have several options on how the UAAL can be amortized as follows:

The employer can select an amortization period of 1 to 30 years. (For certain situations that result in a reduction of the AAL, the amortization period must be at least 10 years.)

The employer may apply the same amortization period to the total combined UAAL or can apply different periods to different components of the UAAL.

The employer may elect a “closed” or “open” amortization period.

The employer may choose to amortize on a level dollar or level percentage of payroll method.

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PART III: LIABILITIES AND COSTS FOR RETIREE BENEFITS

A. Introduction. We calculated the actuarial present value of projected benefits (APVPB) separately for each employee. We determined eligibility for retiree benefits based on information supplied by Contra Costa CCD. We then selected assumptions for the factors discussed in the above Section that, based on plan experience and our training and experience, represent our best prediction of future plan experience. For each employee, we applied the appropriate factors based on the employee's age, sex and length of service. We summarized actuarial assumptions used for this study in Appendix C.

B. Medicare The extent of Medicare coverage can affect projections of retiree health costs. The method of coordinating Medicare benefits with the retiree health plan's benefits can have a substantial impact on retiree health costs. We will be happy to provide more information about Medicare integration methods if requested.

C. Liability for Retiree Benefits. For each employee, we projected future premium costs using an assumed trend rate (see Appendix C). To the extent Contra Costa CCD uses contribution caps, the influence of the trend factor is further reduced. We multiplied each year's projected cost by the probability that premium will be paid; i.e. based on the probability that the employee is living, has not terminated employment and has retired. The probability that premium will be paid is zero if the employee is not eligible. The employee is not eligible if s/he has not met minimum service, minimum age or, if applicable, maximum age requirements. The product of each year's premium cost and the probability that premium will be paid equals the expected cost for that year. We discounted the expected cost for each year to the valuation date February 1, 2011 at 6.6500000000000004% interest. Finally, we multiplied the above discounted expected cost figures by the probability that the retiree would elect coverage. A retiree may not elect to be covered if retiree health coverage is available less expensively from another source (e.g. Medicare risk contract) or the retiree is covered under a spouse's plan. For any current retirees, the approach used was similar. The major difference is that the probability of payment for current retirees depends only on mortality and age restrictions (i.e. for retired employees the probability of being retired and of not being terminated are always both 1.0000). We added the APVPB for all employees to get the actuarial present value of total projected benefits (APVTPB). The APVTPB is the estimated present value of all future retiree health benefits for all current employees and retirees. The APVTPB is the amount on February 1, 2011 that, if all actuarial assumptions are exactly right, would be sufficient to expense all promised benefits until the last current employee or retiree dies or reaches the maximum eligibility age.

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Actuarial Present Value of Total Projected Benefits February 1, 2011 Total Faculty Classified Management

Active: Pre-65 $20,944,129 $10,510,788 $8,025,911 $2,407,430Post-65 $81,981,953 $44,408,513 $26,755,534 $10,817,906

Subtotal $102,926,082 $54,919,301 $34,781,445 $13,225,336

Retiree: Pre-65 $7,701,010 $1,972,294 $4,607,154 $1,121,562Post-65 $106,779,597 $59,346,168 $31,276,299 $16,157,130

Subtotal $114,480,607 $61,318,462 $35,883,453 $17,278,692

Grand Total $217,406,689 $116,237,763 $70,664,898 $30,504,028

Subtotal Pre-65 $28,645,138 $12,483,082 $12,633,065 $3,528,991Subtotal Post-65 $188,761,551 $103,754,681 $58,031,833 $26,975,037

The APVTPB should be accrued over the working lifetime of employees. At any time much of it has not been “earned” by employees. The APVTPB is used to develop expense and liability figures. To do so, the APVTFB is divided into two parts: the portions attributable to service rendered prior to the valuation date (the past service liability or actuarial accrued liability under GASB 43 and 45) and to service after the valuation date but prior to retirement (the future service liability). The past service and future service liabilities are each funded in a different way. We will start with the future service liability which is funded by the normal cost.

D. Cost to Prefund Retiree Benefits

1. Normal Cost The average hire age for eligible employees is 39. To accrue the liability by retirement, the College would accrue the retiree liability over a period of about 21 years (assuming an average retirement age of 60). We applied an "entry age normal" actuarial cost method to determine funding rates for active employees. The table below summarizes the calculated normal cost. Normal Cost Year Beginning February 1, 2011 Total Faculty Classified Management # of Employees 1069 449 500 120 Per Capita Normal Cost

Pre-65 Benefit N/A $1,428 $1,209 $1,238 Post-65 Benefit N/A $1,853 $1,220 $2,183

First Year Normal Cost

Pre-65 Benefit $1,394,232 $641,172 $604,500 $148,560 Post-65 Benefit $1,703,957 $831,997 $610,000 $261,960

Total $3,098,189 $1,473,169 $1,214,500 $410,520

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Accruing retiree health benefit costs using normal costs levels out the cost of retiree health benefits over time and more fairly reflects the value of benefits "earned" each year by employees. This normal cost would increase each year based on covered payroll.

2. Amortization of Unfunded Actuarial Accrued Liability (UAAL) If actuarial assumptions are borne out by experience, the College will fully accrue retiree benefits by expensing an amount each year that equals the normal cost. If no accruals had taken place in the past, there would be a shortfall of many years' accruals, accumulated interest and forfeitures for terminated or deceased employees. This shortfall is called the actuarial accrued liability (AAL). We calculated the AAL as the APVTPB minus the present value of future normal costs. The UAAL was amortized using a closed amortization period of 30 years beginning with the 2007-08 fiscal year. The table below shows the annual amount necessary to amortize the UAAL at 6.65% interest. (Thirty years is the longest amortization period allowable under GASB 43 and 45.) GASB 43 and 45 will allow amortizing the UAAL using either payments that stay the same as a dollar amount, or payments that are a flat percentage of covered payroll over time. The figures below reflect the dollar method. Actuarial Accrued Liability as of February 1, 2011 Total Faculty Classified Management Active: Pre-65 $12,439,962 $6,780,131 $4,053,145 $1,606,686 Post-65 $71,720,096 $39,567,541 $22,746,622 $9,405,933 Subtotal $84,160,058 $46,347,672 $26,799,767 $11,012,619 Retiree: Pre-65 $7,701,010 $1,972,294 $4,607,154 $1,121,562 Post-65 $106,779,597 $59,346,168 $31,276,299 $16,157,130 Subtotal $114,480,607 $61,318,462 $35,883,453 $17,278,692 Subtot Pre-65 $20,140,972 $8,752,425 $8,660,299 $2,728,248 Subtot Post-65 $178,499,693 $98,913,709 $54,022,921 $25,563,063 Grand Total $198,640,665 $107,666,134 $62,683,220 $28,291,311 Actuarial Value of Plan Assets $24,700,884 $13,728,304 $7,235,018 $3,737,562 Unfunded AAL (UAAL) $173,939,781 $93,937,830 $55,448,202 $24,553,749 UAAL Amortization at 7.0% over 27 Years

$14,034,471 $7,579,449 $4,473,883 $1,981,139

3. Annual Required Contributions (ARC) If the College determines retiree health plan expenses in accordance with GASB 43 and 45, costs will include both normal cost and one or more components of UAAL amortization costs. The sum of normal cost and UAAL amortization costs is called the Annual Required Contribution (ARC) and is shown below.

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Annual Required Contribution (ARC) Year Beginning February 1, 2011 Total Faculty Classified Management Normal Cost $3,098,189 $1,473,169 $1,214,500 $410,520 UAAL Amortization $14,034,471 $7,579,449 $4,473,883 $1,981,139

ARC $17,132,660 $9,052,618 $5,688,383 $2,391,659

Pay-As-You-Go Cost $9,317,553 $5,253,923 $2,776,522 $1,287,108 Added Cost of GASB 43/45 $7,815,107 $3,798,695 $2,911,861 $1,104,551

The normal cost remains as long as there are active employees who may some day qualify for College-paid retiree health benefits. This normal cost would increase each year based on covered payroll.

4. Other Components of Annual OPEB Cost (AOC) Expense and liability amounts may include more components of cost than the normal cost plus amortization of the UAAL. This will apply to employers that don’t fully fund the Annual Required Cost (ARC) through an irrevocable trust. The annual OPEB cost (AOC) will include assumed interest on the net OPEB obligation

(NOO). The annual OPEB cost will also include an amortization adjustment for the net OPEB obligation. (It should be noted that there is no NOO if the ARC is fully funded through a qualifying “plan”.)

The net OPEB obligation will equal the accumulated differences between the (AOC) and

qualifying “plan” contributions.

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PART IV: "PAY AS YOU GO" FUNDING OF RETIREE BENEFITS We used the actuarial assumptions shown in Appendix C to project ten year cash flow under the retiree health program. Because these cash flow estimates reflect average assumptions applied to a relatively small number of employees, estimates for individual years are certain to be inaccurate. However, these estimates show the size of cash outflow. The following table shows a projection of annual amounts needed to pay the College share of retiree health premiums. Year Beginning February 1 Total Faculty Classified Management

2011 $9,317,553 $5,253,923 $2,776,522 $1,287,108 2012 $9,733,253 $5,526,153 $2,864,566 $1,342,534 2013 $10,465,320 $5,976,102 $3,041,077 $1,448,141 2014 $11,163,319 $6,389,402 $3,223,812 $1,550,105 2015 $11,872,109 $6,782,983 $3,432,803 $1,656,323 2016 $12,581,348 $7,181,474 $3,645,167 $1,754,707 2017 $13,406,530 $7,599,038 $3,929,793 $1,877,699 2018 $14,165,047 $8,001,081 $4,180,057 $1,983,909 2019 $14,700,096 $8,244,092 $4,377,751 $2,078,253 2020 $15,148,762 $8,426,221 $4,565,095 $2,157,446

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PART V: RECOMMENDATIONS FOR FUTURE VALUATIONS To effectively manage benefit costs, an employer must periodically examine the existing liability for retiree benefits as well as future annual expected premium costs. GASB 43/45 require biennial or triennial valuations. In addition, a valuation should be conducted whenever plan changes, changes in actuarial assumptions or other employer actions are likely to cause a material change in accrual costs and/or liabilities. Following are examples of actions that could trigger a new valuation. An employer should perform a valuation whenever the employer considers or puts in place

an early retirement incentive program. An employer should perform a valuation whenever the employer adopts a retiree benefit

plan for some or all employees. An employer should perform a valuation whenever the employer considers or implements

changes to retiree benefit provisions or eligibility requirements. An employer should perform a valuation whenever the employer introduces or changes

retiree contributions. We recommend Contra Costa CCD take the following actions to ease future valuations. We have used our training, experience and information available to us to establish the

actuarial assumptions used in this valuation. We have no information to indicate that any of the assumptions do not reasonably reflect future plan experience. However, the College should review the actuarial assumptions in Appendix C carefully. If the College has any reason to believe that any of these assumptions do not reasonably represent the expected future experience of the retiree health plan, the College should engage in discussions or perform analyses to determine the best estimate of the assumption in question.

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PART VI: APPENDICES

APPENDIX A: MATERIALS USED FOR THIS STUDY We relied on the following materials to complete this study. We used paper reports and digital files containing employee demographic data from the

College personnel records. We used relevant sections of collective bargaining agreements provided by the College.

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APPENDIX B: EFFECT OF ASSUMPTIONS USED IN CALCULATIONS While we believe the estimates in this study are reasonable overall, it was necessary for us to use assumptions which inevitably introduce errors. We believe that the errors caused by our assumptions will not materially affect study results. If the College wants more refined estimates for decision-making, we recommend additional investigation. Following is a brief summary of the impact of some of the more critical assumptions. 1. Where actuarial assumptions differ from expected experience, our estimates could be

overstated or understated. One of the most critical assumptions is the medical trend rate. The College may want to commission further study to assess the sensitivity of liability estimates to our medical trend assumptions. For example, it may be helpful to know how liabilities would be affected by using a trend factor 1% higher than what was used in this study. There is an additional fee required to calculate the impact of alternative trend assumptions.

2. We used an "entry age normal" actuarial cost method to estimate the actuarial accrued

liability and normal cost. GASB will allow this as one of several permissible methods under its upcoming accounting standard. Using a different cost method could result in a somewhat different recognition pattern of costs and liabilities.

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APPENDIX C: ACTUARIAL ASSUMPTIONS AND METHODS Following is a summary of actuarial assumptions and methods used in this study. The College should carefully review these assumptions and methods to make sure they reflect the College's assessment of its underlying experience. It is important for Contra Costa CCD to understand that the appropriateness of all selected actuarial assumptions and methods are Contra Costa CCD’s responsibility. Unless otherwise disclosed in this report, TCS believes that all methods and assumptions are within a reasonable range based on the provisions of GASB 43 and 45, applicable actuarial standards of practice, Contra Costa CCD’s actual historical experience, and TCS’s judgment based on experience and training. ACTUARIAL METHODS AND ASSUMPTIONS: ACTUARIAL COST METHOD: Entry age normal. The allocation of OPEB cost is based on years of

service. We used the level percentage of payroll method to allocate OPEB cost over years of service.

Entry age is based on the age at hire for eligible employees. The attribution period is determined as the difference between the expected retirement age and the age at hire. The present value of future benefits and present value of future normal costs are determined on an employee by employee basis and then aggregated.

To the extent that different benefit formulas apply to different employees of the same class, the normal cost is based on the benefit plan applicable to the most recently hired employees (including future hires if a new benefit formula has been agreed to and communicated to employees).

AMORTIZATION METHODS: We used the flat dollar amount method to allocate amortization cost by

year. We used a closed 27 year amortization period. SUBSTANTIVE PLAN: As required under GASB 43 and 45, we based the valuation on the substantive

plan. The formulation of the substantive plan was based on a review of written plan documents as well as historical information provided by Contra Costa CCD regarding practices with respect to employer and employee contributions and other relevant factors.

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ECONOMIC ASSUMPTIONS: Economic assumptions are set under the guidance of Actuarial Standard of Practice 27 (ASOP 27). Among other things, ASOP 27 provides that economic assumptions should reflect a consistent underlying rate of general inflation. For that reason, we show our assumed long-term inflation rate below. INFLATION: We assumed 3% per year. INVESTMENT RETURN / DISCOUNT RATE: We assumed 6.65% per year. This is based on assumed long-

term return on plan assets assuming 100% funding. We used the “Building Block Method” as described in ASOP 27 Paragraph 3.6.2.

TREND: We assumed 4% per year. Our long-term trend assumption is based on the conclusion that,

while medical trend will continue to be cyclical, the average increase over time cannot continue to outstrip general inflation by a wide margin. Trend increases in excess of general inflation result in dramatic increases in unemployment, the number of uninsured and the number of underinsured. These effects are nearing a tipping point which will inevitably result in fundamental changes in health care finance and/or delivery which will bring increases in health care costs more closely in line with general inflation. We do not believe it is reasonable to project historical trend vs. inflation differences several decades into the future.

PAYROLL INCREASE: We assumed 3% per year. This assumption applies only to the extent that either or

both of the normal cost and/or UAAL amortization use the level percentage of payroll method. For purposes of applying the level percentage of payroll method, payroll increase must not assume any increases in staff or merit increases.

ACTUARIAL ASSET VALUATION: We used asset values provided by Contra Costa CCD. We used a 15

year smoothing formula with a 20% corridor around market value. (1) Market value at 1/31/11: $22,612,572 (2) Accumulated contributions(disbursements) at 7.00%: $21,462,844 (3) Value in (2) + 1/15 of (1) minus (2) $21,539,493 (4) Value in (3) adjusted to minimum or maximum* $21,539,493 (5) AVA at 1/31/11 adjusted to valuation date at 7.00% $21,667,551 (6) Authorized but unmade contributions** $ 3,033,333 (7) AVA at 2/1/11 $24,700,884 * Minimum is 80% of market value; maximum is 120% of market value ** 7/12 of $5,200,000

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NON-ECONOMIC ASSUMPTIONS: Economic assumptions are set under the guidance of Actuarial Standard of Practice 35 (ASOP 35). MORTALITY: CalSTRS mortality for faculty employees. CalPERS mortality for Miscellaneous employees for other employees. RETIREMENT RATES: CalSTRS retirement rates for faculty employees. CalPERS retirement rates for the school employees for other employees. VESTING RATES: See table page 5 COSTS FOR RETIREE COVERAGE: There was not sufficient information available to determine whether there is an implicit subsidy for retiree health costs. Based on ASOP 6, there can be justification for using “community-rated” premiums as the basis for the valuation where the insurer is committed to continuing rating practices. This is especially true where sufficient information is not available to determine the magnitude of the subsidy. However, Contra Costa CCD should recognize that costs and liabilities in this report could change significantly if either the current insurer changes rating practices or if Contra Costa CCD changes insurers. First Year costs are as shown below. Subsequent years’ costs are based on first year costs adjusted for trend and limited by any College contribution caps.

Faculty Classified Management Current Retirees: based on actual costs

Current Plan:

Future Retirees Pre-65 $13,056 $10,916 $13,056 Future Retirees Post-65 $4,474 $3,440 $4,848

PARTICIPATION RATES: 100% TURNOVER: CalSTRS turnover for faculty employees. CalPERS turnover for Miscellaneous employees for other employees. SPOUSE PREVALENCE: To the extent not provided and when needed to calculate benefit liabilities, 80%

of retirees assumed to be married at retirement. After retirement, the percentage married is adjusted to reflect mortality.

SPOUSE AGES: To the extent spouse dates of birth are not provided and when needed to calculate benefit

liabilities, female spouse assumed to be three years younger than male.

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AGING FACTORS:

Attained Age Medical Annual

Increases 50-64 3.5% 65-69 3.0 70-74 2.5 75-79 1.5 80-84 0.5 85+ 0.0

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APPENDIX D: DISTRIBUTION OF ELIGIBLE PARTICIPANTS BY AGE ELIGIBLE ACTIVE EMPLOYEES:

Age Total Faculty Classified Management Under 25 1 0 1 0

25-29 33 5 28 0 30-34 80 25 52 3 35-39 87 35 41 11 40-44 115 49 55 11 45-49 162 62 82 18 50-54 187 73 90 24 55-59 190 87 75 28 60-64 144 69 57 18 65 and older

70 44 19 7

Total 1069 449 500 120 ELIGIBLE RETIREES:


50-54 5 2 3 0 55-59 24 5 14 5 60-64 109 36 52 21 65-69 125 57 43 25 70-74 125 63 48 14 75-79 104 72 24 8 80-84 97 68 19 10 85-89 61 41 18 2 90 and older

14 4 7 3

Total 671 349 234 88

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APPENDIX E: CALCULATION OF GASB 43/45 ACCOUNTING ENTRIES This report is to be used to calculate accounting entries rather than to provide the dollar amount of accounting entries. How the report is to be used to calculate accounting entries depends on several factors. Among them are:

1) The amount of prior accounting entries;

2) Whether individual components of the ARC are calculated as a level dollar amount or as a level percentage of payroll;

3) Whether the employer using a level percentage of payroll method elects to use for this purpose projected payroll, budgeted payroll or actual payroll;

4) Whether the employer chooses to adjust the numbers in the report to reflect the difference between the valuation date and the first fiscal year for which the numbers will be used.

To the extent the level percentage of payroll method is used, the employer should adjust the numbers in this report as appropriate to reflect the change in OPEB covered payroll. It should be noted that OPEB covered payroll should only reflect types of pay generating pension credits for plan participants. Please note that plan participants do not necessarily include all active employees eligible for health benefits for several reasons. Following are examples.

1) The number of hours worked or other eligibility criteria may differ for OPEB compared to active health benefits;

2) There may be active employees over the maximum age OPEB are paid through. For example, if an OPEB plan pays benefits only to Medicare age, any active employees currently over Medicare age are not plan participants;

3) Employees hired at an age where they will exceed the maximum age for benefits when the service requirement is met are also not plan participants.

Finally, GASB 43 and 45 require reporting covered payroll in RSI schedules regardless of whether any ARC component is based on the level percentage of payroll method. This report does not provide, nor should the actuary be relied on to report covered payroll. GASB 45 Paragraph 26 specifies that the items presented as RSI "should be calculated in accordance with the parameters." The RSI items refer to Paragraph 25.c which includes annual covered payroll. Footnote 3 provides that when the ARC is based on covered payroll, the payroll measure may be the projected payroll, budgeted payroll or actual payroll. Footnote 3 further provides that comparisons between the ARC and contributions should be based on the same measure of covered payroll. At the time the valuation is being done, the actuary may not know which payroll method will be used for reporting purposes. The actuary may not even know for which period the valuation will be used to determine the ARC. Furthermore, the actuary doesn’t know if the client will make adjustments to the ARC in order to use it for the first year of the biennial or triennial period. (GASB 45 is silent on this.) Even if the actuary were to know all of these things, it would be a rare situation that would result in me knowing the appropriate covered payroll

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number to report. For example, if the employer uses actual payroll, that number would not be known at the time the valuation is done. As a result, we believe the proper approach is to report the ARC components as a dollar amount. It is the client's responsibility to turn this number into a percentage of payroll factor by using the dollar amount of the ARC (adjusted, if desired) as a numerator and then calculating the appropriate amount of the denominator based on the payroll determination method elected by the client for the appropriate fiscal year. If we have been provided with payroll information, we are happy to use that information to help the employer develop an estimate of covered payroll for reporting purposes. However, the validity of the covered payroll remains the employer’s responsibility even if TCS assists the employer in calculating it.

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APPENDIX F: GLOSSARY OF RETIREE HEALTH VALUATION TERMS Note: The following definitions are intended to help a non-actuary understand concepts related to retiree health

valuations. Therefore, the definitions may not be actuarially accurate. Actuarial Accrued Liability: The amount of the actuarial present value of total projected benefits attributable to

employees’ past service based on the actuarial cost method used. Actuarial Cost Method: A mathematical model for allocating OPEB costs by year of service. Actuarial Present Value of Total Projected Benefits: The projected amount of all OPEB benefits to be paid to current and future retirees

discounted back to the valuation date. Actuarial Value of Assets: Market-related value of assets which may include an unbiased formula for

smoothing cyclical fluctuations in asset values. Annual OPEB Cost: This is the amount employers must recognize as an expense each year. The annual

OPEB expense is equal to the Annual Required Contribution plus interest on the Net OPEB obligation minus an adjustment to reflect the amortization of the net OPEB obligation.

Annual Required Contribution: The sum of the normal cost and an amount to amortize the unfunded actuarial

accrued liability. This is the basis of the annual OPEB cost and net OPEB obligation.

Closed Amortization Period: An amortization approach where the original ending date for the amortization

period remains the same. This would be similar to a conventional, 30-year mortgage, for example.

Discount Rate: Assumed investment return net of all investment expenses. Generally, a higher

assumed interest rate leads to lower normal costs and actuarial accrued liability. Implicit Rate Subsidy: The estimated amount by which retiree rates are understated in situations where, for

rating purposes, retirees are combined with active employees. Mortality Rate: Assumed proportion of people who die each year. Mortality rates always vary by

age and often by sex. A mortality table should always be selected that is based on a similar “population” to the one being studied.

Net OPEB Obligation: The accumulated difference between the annual OPEB cost and amounts

contributed to an irrevocable trust exclusively providing retiree OPEB benefits and protected from creditors.

Normal Cost: The dollar value of the “earned” portion of retiree health benefits if retiree health

benefits are to be fully accrued at retirement.

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OPEB Benefits: Other PostEmployment Benefits. Generally medical, dental, prescription drug, life, long-term care or other postemployment benefits that are not pension benefits.

Open Amortization Period: Under an open amortization period, the remaining unamortized balance is subject to

a new amortization schedule each valuation. This would be similar, for example, to a homeowner refinancing a mortgage with a new 30-year conventional mortgage every two or three years.

Participation Rate: The proportion of retirees who elect to receive retiree benefits. A lower

participation rate results in lower normal cost and actuarial accrued liability. The participation rate often is related to retiree contributions.

Retirement Rate: The proportion of active employees who retire each year. Retirement rates are

usually based on age and/or length of service. (Retirement rates can be used in conjunction with vesting rates to reflect both age and length of service). The more likely employees are to retire early, the higher normal costs and actuarial accrued liability will be.

Transition Obligation: The amount of the unfunded actuarial accrued liability at the time actuarial accrual

begins in accordance with an applicable accounting standard. Trend Rate: The rate at which the cost of retiree benefits is expected to increase over time. The

trend rate usually varies by type of benefit (e.g. medical, dental, vision, etc.) and may vary over time. A higher trend rate results in higher normal costs and actuarial accrued liability.

Turnover Rate: The rate at which employees cease employment due to reasons other than death,

disability or retirement. Turnover rates usually vary based on length of service and may vary by other factors. Higher turnover rates reduce normal costs and actuarial accrued liability.

Unfunded Actuarial Accrued Liability: This is the excess of the actuarial accrued liability over assets irrevocably

committed to provide retiree health benefits. Valuation Date: The date as of which the OPEB obligation is determined. Under GASB 43 and 45,

the valuation date does not have to coincide with the statement date. Vesting Rate: The proportion of retiree benefits earned, based on length of service and,

sometimes, age. (Vesting rates are often set in conjunction with retirement rates.) More rapid vesting increases normal costs and actuarial accrued liability.

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Contra Costa Community College District Actuarial Study of

Retiree Cash Benefit Liabilities As of February 1, 2011

Prepared by:


Date: June 16, 2011

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Table of ContentsPART I: EXECUTIVE SUMMARY ............................................................................................................ 3

A. INTRODUCTION............................................................................................................................................................................ 3 B. GENERAL FINDINGS..................................................................................................................................................................... 4 C. DESCRIPTION OF RETIREE BENEFITS ........................................................................................................................................... 4 D. RECOMMENDATIONS................................................................................................................................................................... 4

PART II: BACKGROUND........................................................................................................................... 6

A. SUMMARY ................................................................................................................................................................................... 6 B. ACTUARIAL ACCRUAL ................................................................................................................................................................ 6

PART III: LIABILITIES AND COSTS FOR RETIREE BENEFITS ................................................... 8

A. INTRODUCTION............................................................................................................................................................................ 8 B. LIABILITY FOR RETIREE BENEFITS. ............................................................................................................................................. 8 C. COST TO PREFUND RETIREE BENEFITS........................................................................................................................................ 9

1. Normal Cost ........................................................................................................................................................................... 9 2. Amortization of Unfunded Actuarial Accrued Liability (UAAL) .......................................................................................... 9 3. Annual Required Contributions (ARC)................................................................................................................................ 10 4. Other Components of Annual OPEB Cost (AOC)............................................................................................................... 10

PART IV: "PAY AS YOU GO" FUNDING OF RETIREE BENEFITS .............................................. 12

PART V: RECOMMENDATIONS FOR FUTURE VALUATIONS ................................................... 13

PART VI: APPENDICES ........................................................................................................................... 14

APPENDIX A: MATERIALS USED FOR THIS STUDY ......................................................................................................... 14 APPENDIX B: EFFECT OF ASSUMPTIONS USED IN CALCULATIONS........................................................................... 15 APPENDIX C: ACTUARIAL ASSUMPTIONS AND METHODS .......................................................................................... 16 APPENDIX D: DISTRIBUTION OF ELIGIBLE PARTICIPANTS BY AGE.......................................................................... 19 APPENDIX E: CALCULATION OF GASB 25/27 ACCOUNTING ENTRIES ....................................................................... 20 APPENDIX F: GLOSSARY OF RETIREE CASH BENEFIT VALUATION TERMS............................................................ 21

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Contra Costa Community College District Actuarial Study of Retiree Cash Benefit Liabilities

PART I: EXECUTIVE SUMMARY

A. Introduction Contra Costa Community College District engaged Total Compensation Systems, Inc. (TCS) to analyze liabilities associated with its current retiree cash benefit program as of February 1, 2011 (the valuation date). The numbers in this report are based on the assumption that they will first be used to determine accounting entries for the fiscal year ending June 30, 2011. If the report will first be used for a different fiscal year, the numbers will need to be adjusted accordingly. This report does not reflect any retiree health benefits. Costs and liabilities attributable to retiree health benefits are reportable under Governmental Accounting Standards Board (GASB) Standards 43/45. This actuarial study is intended to serve the following purposes:

» » »

To provide information to enable Contra Costa CCD to manage the costs and liabilities associated with its retiree cash benefits. To provide information to enable Contra Costa CCD to communicate the financial implications of retiree cash benefits to internal financial staff, the Board, employee groups and other affected parties. To provide information needed to comply with Governmental Accounting Standards Board Accounting Standards 25 and 27 related to pension benefits

Because this report was prepared in compliance with GASB 25 and 27, as appropriate, Contra Costa CCD should not use this report for any other purpose without discussion with TCS. This means that any discussions with employee groups, governing Boards, etc. should be restricted to the implications of GASB 25 and 27 compliance. This actuarial report includes several estimates for Contra Costa CCD's retiree cash benefit program. In addition to the tables included in this report, we also performed cash flow adequacy tests as required under Actuarial Standard of Practice 6 (ASOP 6). Our cash flow adequacy testing covers a twenty-year period. We would be happy to make this cash flow adequacy test available to Contra Costa CCD in spreadsheet format upon request. We calculated the following estimates separately for active employees and retirees. As requested, we also separated results by the following employee classifications: Faculty, Classified and Management. We estimated the following: the total liability created. (The actuarial present value of total projected benefits or

APVTPB) the ten year "pay-as-you-go" cost to provide these benefits. the "actuarial accrued liability (AAL)." (The AAL is the portion of the APVTPB

attributable to employees’ service prior to the valuation date.) the amount necessary to amortize the UAAL over a period of 27 years.

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the annual contribution required to fund retiree benefits over the working lifetime of eligible

employees (the "normal cost").

The Annual Required Contribution (ARC) which is the basis of calculating the annual pension cost and net pension obligation under GASB 25 and 27.

We summarized the data used to perform this study in Appendix A. No effort was made to verify this information beyond brief tests for reasonableness and consistency. All cost and liability figures contained in this study are estimates of future results. Future results can vary dramatically and the accuracy of estimates contained in this report depends on the actuarial assumptions used. Normal costs and liabilities could easily vary by 10 - 20% or more from estimates contained in this report.

B. General Findings We estimate the "pay-as-you-go" cost of providing retiree cash benefits in the year beginning February 1, 2011 to be $339,903 (see Section IV.A.). The “pay-as-you-go” cost is the cost of benefits for current retirees. For current employees, the value of benefits "accrued" in the year beginning February 1, 2011 (the normal cost) is $309,818. This normal cost would increase each year based on covered payroll. Had Contra Costa CCD begun accruing retiree cash benefits when each current employee and retiree was hired, a substantial liability would have accumulated. We estimate the amount that would have accumulated to be $8,113,913. This amount is called the "actuarial accrued liability” (AAL). We calculated the annual cost to amortize the unfunded actuarial accrued liability using a 6.65% discount rate. We used a 27 year amortization period. The current year cost to amortize the unfunded AAL is $654,677. Combining the normal cost and UAAL amortization costs in the first year produces a total first year annual required contribution (ARC) of $964,495. The ARC is used as the basis for determining expenses and liabilities under GASB 25/27. The ARC is used in lieu of (rather than in addition to) the “pay-as-you-go” cost. We based all of the above estimates on employees as of January, 2011. Over time, liabilities and cash flow will vary based on the number and demographic characteristics of employees and retirees.

C. Description of Retiree Benefits Following is a description of the current retiree benefit plan:

Faculty Classified Management Duration of Benefits Lifetime Lifetime Lifetime

Required Service 10 years 10 years 10 years Minimum Age 55 55 55

Cash Benefit Kaiser Single Rate Kaiser Single Rate Kaiser Single Rate

D. Recommendations It is outside the scope of this report to make specific recommendations of actions Contra Costa CCD should take to manage the substantial liability created by the current retiree cash benefit program. Total Compensation

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Systems, Inc. can assist in identifying and evaluating options once this report has been studied. The following recommendations are intended only to allow the College to get more information from this and future studies. Because we have not conducted a comprehensive administrative audit of Contra Costa CCD’s practices, it is possible that Contra Costa CCD is already complying with some or all of our recommendations. We recommend that Contra Costa CCD conduct a study whenever events or contemplated

actions significantly affect present or future liabilities, but no less frequently than every two years, as required under GASB 25/27.

Several assumptions were made in estimating costs and liabilities under Contra Costa

CCD's retiree cash benefit program. Further studies may be desired to validate any assumptions where there is any doubt that the assumption is appropriate. (See Appendices B and C for a list of assumptions and concerns.) For example, Contra Costa CCD should maintain a retiree database that includes – in addition to date of birth, gender and employee classification – retirement date and (if applicable) dependent date of birth, relationship and gender. It will also be helpful for Contra Costa CCD to maintain employment termination information – namely, the number of OPEB-eligible employees in each employee class that terminate employment each year for reasons other than death, disability or retirement.

Respectfully submitted, Geoffrey L. Kischuk, FSA, MAAA, FCA Consultant Total Compensation Systems, Inc. (805) 496-1700

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PART II: BACKGROUND

A. Summary Accounting principles provide that the cost of retiree benefits should be “accrued” over employees' working lifetime. For this reason, the Governmental Accounting Standards Board (GASB) issued Accounting Standards 25 and 27 for retiree cash benefits.

B. Actuarial Accrual To actuarially accrue retiree cash benefits requires determining the amount to expense each year so that the liability accumulated at retirement is, on average, sufficient (with interest) to cover all retiree cash benefit expenditures without the need for additional expenses. There are many different ways to determine the annual accrual amount. The calculation method used is called an “actuarial cost method.” Under most actuarial cost methods, there are two components of actuarial cost - a “normal cost” and amortization of something called the “unfunded actuarial accrued liability.” Both accounting standards and actuarial standards usually address these two components separately (though alternative terminology is sometimes used). The normal cost can be thought of as the value of the benefit earned each year if benefits are accrued during the working lifetime of employees. This report will not discuss differences between actuarial cost methods or their application. Instead, following is a description of a commonly used, generally accepted actuarial cost method that will be permitted under GASB 25 and 27. This actuarial cost method is called the “entry age normal” method. Under the entry age normal cost method, the actuary determines the annual amount needing to be expensed from hire until retirement to fully accrue the cost of retiree cash benefits. This amount is the normal cost. Under GASB 25 and 27, normal cost can be expressed either as a level dollar amount or a level percentage of payroll. The normal cost is determined using several key assumptions: The current amount of retiree cash benefits. The higher the benefit, the higher the normal cost. The “trend” rate at which retiree cash benefits are expected to increase over time. A higher trend

rate increases the normal cost. Mortality rates varying by age and sex. (Unisex mortality rates are not often used as individual

OPEB benefits do not depend on the mortality table used.) If employees die prior to retirement, past contributions are available to fund benefits for employees who live to retirement. After retirement, death results in benefit termination or reduction. Although higher mortality rates reduce normal costs, the mortality assumption is not likely to vary from employer to employer.

Employment termination rates have the same effect as mortality inasmuch as higher termination

rates reduce normal costs. Employment termination can vary considerably between public agencies. The service requirement reflects years of service required to earn full or partial retiree benefits.

While a longer service requirement reduces costs, cost reductions are not usually substantial unless the service period exceeds 20 years of service.

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Retirement rates determine what proportion of employees retire at each age (assuming employees reach the requisite length of service). Retirement rates often vary by employee classification and implicitly reflect the minimum retirement age required for eligibility. Retirement rates also depend on the amount of pension benefits available. Higher retirement rates increase normal costs but, except for differences in minimum retirement age, retirement rates tend to be consistent between public agencies for each employee type.

Participation rates indicate what proportion of retirees are expected to elect retiree cash benefits

versus any other benefits available in lieu of cash benefits. Higher participation rates increase costs. The discount rate estimates investment earnings for assets earmarked to cover retiree cash benefit

liabilities. The discount rate depends on the nature of underlying assets. For example, employer funds earning money market rates in the county treasury are likely to earn far less than an irrevocable trust containing a diversified asset portfolio including stocks, bonds, etc. A higher discount rate can dramatically lower normal costs. GASB 25 and 27 require the interest assumption to reflect likely long term investment return.

The assumptions listed above are not exhaustive, but are the most common assumptions used in actuarial cost calculations. The actuary selects the assumptions which - taken together - will yield reasonable results. It's not necessary (or even possible) to predict individual assumptions with complete accuracy. If all actuarial assumptions are exactly met and an employer expensed the normal cost every year for all past and current employees and retirees, a sizeable liability would have accumulated (after adding interest and subtracting retiree benefit costs). The liability that would have accumulated is called the actuarial accrued liability or AAL. The excess of AAL over the actuarial value of plan assets is called the unfunded actuarial accrued liability (or UAAL). Under GASB 25 and 27, in order for assets to count toward offsetting the AAL, the assets have to be held in an irrevocable trust that is safe from creditors and can only be used to provide OPEB benefits to eligible participants. The actuarial accrued liability (AAL) can arise in several ways. At inception of GASB 25 and 27, there is usually a substantial UAAL. Some portion of this amount can be established as the "transition obligation" subject to certain constraints. UAAL can also increase as the result of operation of a retiree cash benefit plan - e.g., as a result of plan changes or changes in actuarial assumptions. Finally, AAL can arise from actuarial gains and losses. Actuarial gains and losses result from differences between actuarial assumptions and actual plan experience. Under GASB 25 and 27, employers have several options on how the UAAL can be amortized as follows:

The employer can select an amortization period of 1 to 30 years. (For certain situations that result in a reduction of the AAL, the amortization period must be at least 10 years.)

The employer may apply the same amortization period to the total combined UAAL or can apply different periods to different components of the UAAL.

The employer may elect a “closed” or “open” amortization period.

The employer may choose to amortize on a level dollar or level percentage of payroll method.

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PART III: LIABILITIES AND COSTS FOR RETIREE BENEFITS

A. Introduction. We calculated the actuarial present value of projected benefits (APVPB) separately for each employee. We determined eligibility for retiree benefits based on information supplied by Contra Costa CCD. We then selected assumptions for the factors discussed in the above Section that, based on plan experience and our training and experience, represent our best prediction of future plan experience. For each employee, we applied the appropriate factors based on the employee's age, sex and length of service. We summarized actuarial assumptions used for this study in Appendix C.

B. Liability for Retiree Benefits. For each employee, we projected future benefit costs using an assumed trend rate (see Appendix C). We multiplied each year's projected cost by the probability that benefit will be paid; i.e. based on the probability that the employee is living, has not terminated employment, has retired and has elected the benefit. The probability that benefit will be paid is zero if the employee is not eligible. The employee is not eligible if s/he has not met minimum service, minimum age or, if applicable, maximum age requirements. The product of each year's benefit cost and the probability that benefit will be paid equals the expected cost for that year. We discounted the expected cost for each year to the valuation date February 1, 2011 at 6.65% interest. For any current retirees, the approach used was similar. The major difference is that the probability of payment for current retirees depends only on mortality and age restrictions (i.e. for retired employees the probability of being retired and of not being terminated are always both 1.0000). We added the APVPB for all employees to get the actuarial present value of total projected benefits (APVTPB). The APVTPB is the estimated present value of all future retiree cash benefits for all current employees and retirees. The APVTPB is the amount on February 1, 2011 that, if all actuarial assumptions are exactly right, would be sufficient to expense all promised benefits until the last current employee or retiree dies or reaches the maximum eligibility age. Actuarial Present Value of Total Projected Benefits February 1, 2011 Total Faculty Classified Management

Active: Pre-65 $1,553,172 $734,371 $653,204 $165,597Post-65 $4,405,892 $2,065,942 $1,821,714 $518,236

Subtotal $5,959,064 $2,800,313 $2,474,918 $683,833

Retiree: Pre-65 $222,812 $0 $179,069 $43,743Post-65 $3,822,585 $1,965,725 $1,212,648 $644,212

Subtotal $4,045,397 $1,965,725 $1,391,717 $687,955

Grand Total $10,004,460 $4,766,038 $3,866,634 $1,371,788

Subtotal Pre-65 $1,775,984 $734,371 $832,273 $209,340Subtotal Post-65 $8,228,477 $4,031,667 $3,034,362 $1,162,448

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The APVTPB should be accrued over the working lifetime of employees. At any time much of it has not been “earned” by employees. The APVTPB is used to develop expense and liability figures. To do so, the APVTFB is divided into two parts: the portions attributable to service rendered prior to the valuation date (the past service liability or actuarial accrued liability under GASB 25 and 27) and to service after the valuation date but prior to retirement (the future service liability). The past service and future service liabilities are each accrued in a different way. We will start with the future service liability which is accrued via the normal cost.

C. Cost to Prefund Retiree Benefits

1. Normal Cost The average hire age for eligible employees is 39. To accrue the liability by retirement, the College would accrue the retiree liability over a period of about 21 years (assuming an average retirement age of 60). We applied an "entry age normal" actuarial cost method to determine funding rates for active employees. The table below summarizes the calculated normal cost. Normal Cost Year Beginning February 1, 2011 Total Faculty Classified Management # of Employees 1069 449 500 120 Per Capita Normal Cost

Pre-65 Benefit N/A $104 $106 $91 Post-65 Benefit N/A $198 $169 $215

First Year Normal Cost

Pre-65 Benefit $110,616 $46,696 $53,000 $10,920 Post-65 Benefit $199,202 $88,902 $84,500 $25,800

Total $309,818 $135,598 $137,500 $36,720 Accruing retiree cash benefit costs using normal costs levels out the cost of retiree benefits over time and more fairly reflects the value of benefits "earned" each year by employees. This normal cost would increase each year based on covered payroll.

2. Amortization of Unfunded Actuarial Accrued Liability (UAAL) If actuarial assumptions are borne out by experience, the College will fully accrue retiree benefits by expensing an amount each year that equals the normal cost. If no accruals had taken place in the past, there would be a shortfall of many years' accruals, accumulated interest and forfeitures for terminated or deceased employees. This shortfall is called the actuarial accrued liability (AAL). We calculated the AAL as the APVTPB minus the present value of future normal costs. The initial UAAL was amortized using a closed amortization period of 30 years. The College can amortize the remaining or residual UAAL over many years. The table below shows the annual amount necessary to amortize the UAAL over a period of 27 years at 6.65% interest. (Thirty years is the longest amortization period allowable under GASB 25 and 27.) GASB 25 and 27 allow amortizing the UAAL using either payments that stay the same as a dollar amount, or payments that are a flat percentage of covered payroll over time. The figures below reflect the flat

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dollar amount method. Actuarial Accrued Liability as of February 1, 2011 Total Faculty Classified Management Active: Pre-65 $874,298 $462,671 $304,889 $106,738 Post-65 $3,194,220 $1,548,666 $1,266,381 $379,173 Subtotal $4,068,518 $2,011,337 $1,571,270 $485,911 Retiree: Pre-65 $222,812 $0 $179,069 $43,743 Post-65 $3,822,585 $1,965,725 $1,212,648 $644,212 Subtotal $4,045,397 $1,965,725 $1,391,717 $687,955 Subtot Pre-65 $1,097,109 $462,671 $483,957 $150,481 Subtot Post-65 $7,016,805 $3,514,391 $2,479,029 $1,023,385 Grand Total $8,113,913 $3,977,061 $2,962,986 $1,173,866 Actuarial Value of Plan Assets $0 $0 $0 $0 Unfunded AAL (UAAL) $8,113,913 $3,977,061 $2,962,986 $1,173,866 UAAL Amortization at 6.65% over 27 Years

$654,677 $320,892 $239,071 $94,714

3. Annual Required Contributions (ARC) If the College determines retiree cash benefit plan expenses in accordance with GASB 25 and 27, costs will include both normal cost and one or more components of UAAL amortization costs. The sum of normal cost and UAAL amortization costs is called the Annual Required Contribution (ARC) and is shown below. Annual Required Contribution (ARC) Year Beginning February 1, 2011 Total Faculty Classified Management Normal Cost $309,818 $135,598 $137,500 $36,720 UAAL Amortization $654,677 $320,892 $239,071 $94,714

ARC $964,495 $456,490 $376,571 $131,434

Pay-As-You-Go Cost $339,903 $187,523 $99,447 $52,933 Added Cost of GASB 25/27 $624,592 $268,967 $277,124 $78,501

The normal cost remains as long as there are active employees who may some day qualify for College-paid retiree cash benefits. This normal cost would increase each year based on covered payroll.

4. Other Components of Annual OPEB Cost (AOC) Expense and liability amounts may include more components of cost than the normal cost plus amortization of the UAAL. This will apply to employers that don’t fully fund the Annual Required Cost (ARC) through an

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irrevocable trust. The annual pension cost (APC) will include assumed interest on the net pension obligation

(NPO). The APC also includes an amortization adjustment for the NPO. (It should be noted that there is no NPO if the ARC is fully funded through a qualifying “plan”.)

The NPO equals the accumulated differences between the AOC and qualifying “plan”

contributions.

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PART IV: "PAY AS YOU GO" FUNDING OF RETIREE BENEFITS We used the actuarial assumptions shown in Appendix C to project ten year cash flow under the retiree cash benefit program. Because these cash flow estimates reflect average assumptions applied to a relatively small number of employees, estimates for individual years are certain to be inaccurate. However, these estimates show the size of cash outflow. The following table shows a projection of annual amounts needed to pay the College share of retiree cash benefits. Year Beginning February 1 Total Faculty Classified Management

2011 $339,903 $187,523 $99,447 $52,933 2012 $359,581 $198,073 $105,016 $56,492 2013 $395,915 $217,877 $116,266 $61,772 2014 $431,882 $237,018 $127,755 $67,109 2015 $467,854 $254,415 $141,519 $71,920 2016 $502,139 $271,531 $155,141 $75,467 2017 $542,170 $288,604 $172,373 $81,193 2018 $590,388 $313,525 $191,033 $85,830 2019 $621,085 $325,355 $206,104 $89,626 2020 $647,358 $332,948 $220,777 $93,633

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PART V: RECOMMENDATIONS FOR FUTURE VALUATIONS To effectively manage benefit costs, an employer must periodically examine the existing liability for retiree benefits as well as future annual expected benefit costs. GASB 25/27 require biennial valuations. In addition, a valuation should be conducted whenever plan changes, changes in actuarial assumptions or other employer actions are likely to cause a material change in accrual costs and/or liabilities. Following are examples of actions that could trigger a new valuation. An employer should perform a valuation whenever the employer considers or implements

changes to retiree benefit provisions or eligibility requirements. We recommend Contra Costa CCD take the following actions to ease future valuations. We have used our training, experience and information available to us to establish the

actuarial assumptions used in this valuation. We have no information to indicate that any of the assumptions do not reasonably reflect future plan experience. However, the College should review the actuarial assumptions in Appendix C carefully. If the College has any reason to believe that any of these assumptions do not reasonably represent the expected future experience of the retiree cash benefit plan, the College should engage in discussions or perform analyses to determine the best estimate of the assumption in question.

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PART VI: APPENDICES

APPENDIX A: MATERIALS USED FOR THIS STUDY We relied on the following materials to complete this study. We used paper reports and digital files containing employee demographic data from the

College personnel records. We used relevant sections of collective bargaining agreements provided by the College.

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APPENDIX B: EFFECT OF ASSUMPTIONS USED IN CALCULATIONS While we believe the estimates in this study are reasonable overall, it was necessary for us to use assumptions which inevitably introduce errors. We believe that the errors caused by our assumptions will not materially affect study results. If the College wants more refined estimates for decision-making, we recommend additional investigation. Following is a brief summary of the impact of some of the more critical assumptions. 1. Where actuarial assumptions differ from expected experience, our estimates could be

overstated or understated. One of the most critical assumptions is the medical trend rate. The College may want to commission further study to assess the sensitivity of liability estimates to our medical trend assumptions. For example, it may be helpful to know how liabilities would be affected by using a trend factor 1% higher than what was used in this study. There is an additional fee required to calculate the impact of alternative trend assumptions.

2. We used an "entry age normal" actuarial cost method to estimate the actuarial accrued

liability and normal cost. GASB will allow this as one of several permissible methods under its upcoming accounting standard. Using a different cost method could result in a somewhat different recognition pattern of costs and liabilities.

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APPENDIX C: ACTUARIAL ASSUMPTIONS AND METHODS Following is a summary of actuarial assumptions and methods used in this study. The College should carefully review these assumptions and methods to make sure they reflect the College's assessment of its underlying experience. It is important for Contra Costa CCD to understand that the appropriateness of all selected actuarial assumptions and methods are Contra Costa CCD’s responsibility. Unless otherwise disclosed in this report, TCS believes that all methods and assumptions are within a reasonable range based on the provisions of GASB 25 and 27, applicable actuarial standards of practice, Contra Costa CCD’s actual historical experience, and TCS’s judgment based on experience and training. ACTUARIAL METHODS AND ASSUMPTIONS: ACTUARIAL COST METHOD: Entry age normal. The allocation of OPEB cost is based on years of

service. We used the level percentage of payroll method to allocate OPEB cost over years of service.

Entry age is based on the age at hire for eligible employees. The attribution period is determined as the difference between the expected retirement age and the age at hire. The present value of future benefits and present value of future normal costs are determined on an employee by employee basis and then aggregated.

To the extent that different benefit formulas apply to different employees of the same class, the normal cost is based on the benefit plan applicable to the most recently hired employees (including future hires if a new benefit formula has been agreed to and communicated to employees).

AMORTIZATION METHODS: We used the flat dollar amount method to allocate amortization cost by

year. We used a closed 30 year amortization period for the initial UAAL. We used a closed 27 year amortization period for any residual UAAL.

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ECONOMIC ASSUMPTIONS: Economic assumptions are set under the guidance of Actuarial Standard of Practice 27 (ASOP 27). Among other things, ASOP 27 provides that economic assumptions should reflect a consistent underlying rate of general inflation. For that reason, we show our assumed long-term inflation rate below. INFLATION: We assumed 3% per year. INVESTMENT RETURN / DISCOUNT RATE: We assumed 6.65% per year. This is based on assumed long-

term return on plan assets assuming 100% funding. We used the “Building Block Method” as described in ASOP 27 Paragraph 3.6.2.

TREND: We assumed 4% per year. Our long-term trend assumption is based on the conclusion that,

while medical trend will continue to be cyclical, the average increase over time cannot continue to outstrip general inflation by a wide margin. Trend increases in excess of general inflation result in dramatic increases in unemployment, the number of uninsured and the number of underinsured. These effects are nearing a tipping point which will inevitably result in fundamental changes in health care finance and/or delivery which will bring increases in health care costs more closely in line with general inflation. We do not believe it is reasonable to project historical trend vs. inflation differences several decades into the future.

PAYROLL INCREASE: We assumed 3% per year. This assumption applies only to the extent that either or

both of the normal cost and/or UAAL amortization use the level percentage of payroll method. For purposes of applying the level percentage of payroll method, payroll increase must not assume any increases in staff or merit increases.

ACTUARIAL ASSET VALUATION: There were no plan assets on the valuation date.

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NON-ECONOMIC ASSUMPTIONS: Economic assumptions are set under the guidance of Actuarial Standard of Practice 35 (ASOP 35). MORTALITY: CalSTRS mortality for faculty employees. CalPERS mortality for Miscellaneous employees for other employees. RETIREMENT RATES: CalSTRS retirement rates for faculty employees. CalPERS retirement rates for the school employees for other employees. VESTING RATES: See table page 5 RETIREE BENEFIT COSTS First Year costs are as shown below. Subsequent years’ costs are based on first year costs adjusted for trend.

Faculty Classified Management Current Retirees: based on actual costs

Current Plan:

Future Retirees Pre-65 $6,345 $6,345 $6,345 Future Retirees Post-65 $6,345 $6,345 $6,345

PARTICIPATION RATES: 7% TURNOVER: CalSTRS turnover for faculty employees. CalPERS turnover for Miscellaneous employees for other employees. SPOUSE PREVALENCE: To the extent not provided and when needed to calculate benefit liabilities, 80%

of retirees assumed to be married at retirement. After retirement, the percentage married is adjusted to reflect mortality.

SPOUSE AGES: To the extent spouse dates of birth are not provided and when needed to calculate benefit

liabilities, female spouse assumed to be three years younger than male.

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APPENDIX D: DISTRIBUTION OF ELIGIBLE PARTICIPANTS BY AGE ELIGIBLE ACTIVE EMPLOYEES:


25-29 33 5 28 0 30-34 80 25 52 3 35-39 87 35 41 11 40-44 115 49 55 11 45-49 162 62 82 18 50-54 187 73 90 24 55-59 190 87 75 28 60-64 144 69 57 18 65 and older

70 44 19 7

Total 1069 449 500 120 ELIGIBLE RETIREES:


50-54 1 0 1 0 55-59 1 1 0 0 60-64 7 0 5 2 65-69 9 6 2 1 70-74 9 3 4 2 75-79 5 4 0 1 80-84 12 10 0 2 85-89 4 2 2 0 90 and older

3 2 1 0

Total 51 28 15 8

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APPENDIX E: CALCULATION OF GASB 25/27 ACCOUNTING ENTRIES This report is to be used to calculate accounting entries rather than to provide the dollar amount of accounting entries. How the report is to be used to calculate accounting entries depends on several factors. Among them are:

1) The amount of prior accounting entries;

2) Whether individual components of the ARC are calculated as a level dollar amount or as a level percentage of payroll;

3) Whether the employer using a level percentage of payroll method elects to use for this purpose projected payroll, budgeted payroll or actual payroll;

4) Whether the employer chooses to adjust the numbers in the report to reflect the difference between the valuation date and the first fiscal year for which the numbers will be used.

To the extent the level percentage of payroll method is used, the employer should adjust the numbers in this report as appropriate to reflect the change in covered payroll. It should be noted that covered payroll should only reflect types of pay generating pension credits for plan participants. Please note that plan participants do not necessarily include all active employees for several reasons. Following are examples.

1) The number of hours worked or other eligibility criteria may differ for these benefits compared to active benefits;

2) Employees hired at an age where they will exceed the maximum age for benefits when the service requirement is met are also not plan participants.

Finally, GASB 25 and 27 require reporting covered payroll in RSI schedules regardless of whether any ARC component is based on the level percentage of payroll method. This report does not provide, nor should the actuary be relied on to report covered payroll. We believe the proper approach is to report the ARC components as a dollar amount. It is the client's responsibility to turn this number into a percentage of payroll factor by using the dollar amount of the ARC (adjusted, if desired) as a numerator and then calculating the appropriate amount of the denominator based on the payroll determination method elected by the client for the appropriate fiscal year. If we have been provided with payroll information, we are happy to use that information to help the employer develop an estimate of covered payroll for reporting purposes. However, the validity of the covered payroll remains the employer’s responsibility even if TCS assists the employer in calculating it.

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APPENDIX F: GLOSSARY OF RETIREE CASH BENEFIT VALUATION TERMS Note: The following definitions are intended to help a non-actuary understand concepts related to retiree cash

benefit valuations. Therefore, the definitions may not be actuarially accurate. Actuarial Accrued Liability: The amount of the actuarial present value of total projected benefits attributable to

employees’ past service based on the actuarial cost method used. Actuarial Cost Method: A mathematical model for allocating retiree costs by year of service. Actuarial Present Value of Total Projected Benefits: The projected amount of all retiree benefits to be paid to current and future retirees

discounted back to the valuation date. Actuarial Value of Assets: Market-related value of assets which may include an unbiased formula for

smoothing cyclical fluctuations in asset values. Annual Pension Cost: This is the amount employers must recognize as an expense each year. The annual

pension expense is equal to the Annual Required Contribution plus interest on the Net Pension Obligation minus an adjustment to reflect the amortization of the Net Pension Obligation.

Annual Required Contribution: The sum of the normal cost and an amount to amortize the unfunded actuarial

accrued liability. This is the basis of the annual pension cost and net pension obligation.

Closed Amortization Period: An amortization approach where the original ending date for the amortization

period remains the same. This would be similar to a conventional, 30-year mortgage, for example.

Discount Rate: Assumed investment return net of all investment expenses. Generally, a higher

assumed interest rate leads to lower normal costs and actuarial accrued liability. Mortality Rate: Assumed proportion of people who die each year. Mortality rates always vary by

age and often by sex. A mortality table should always be selected that is based on a similar “population” to the one being studied.

Net Pension Obligation: The accumulated difference between the annual pension cost and amounts

contributed to an irrevocable trust exclusively providing retiree benefits and protected from creditors.

Normal Cost: The dollar value of the “earned” portion of retiree cash benefits if retiree benefits

are to be fully accrued at retirement. Open Amortization Period: Under an open amortization period, the remaining unamortized balance is subject to

a new amortization schedule each valuation. This would be similar, for example, to a homeowner refinancing a mortgage with a new 30-year conventional mortgage

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22

every two or three years. Participation Rate: The proportion of retirees who elect to receive retiree benefits. A lower

participation rate results in lower normal cost and actuarial accrued liability. The participation rate often is related to retiree contributions.

Retirement Rate: The proportion of active employees who retire each year. Retirement rates are

usually based on age and/or length of service. (Retirement rates can be used in conjunction with vesting rates to reflect both age and length of service). The more likely employees are to retire early, the higher normal costs and actuarial accrued liability will be.

Transition Obligation: The amount of the unfunded actuarial accrued liability at the time actuarial accrual

begins in accordance with an applicable accounting standard. Trend Rate: The rate at which the cost of retiree benefits is expected to increase over time. A

higher trend rate results in higher normal costs and actuarial accrued liability. Turnover Rate: The rate at which employees cease employment due to reasons other than death,

disability or retirement. Turnover rates usually vary based on length of service and may vary by other factors. Higher turnover rates reduce normal costs and actuarial accrued liability.

Unfunded Actuarial Accrued Liability: This is the excess of the actuarial accrued liability over assets irrevocably

committed to provide retiree benefits. Valuation Date: The date as of which the obligation is determined. Under GASB 25 and 27, the

valuation date does not have to coincide with the statement date. Vesting Rate: The proportion of retiree benefits earned, based on length of service and,

sometimes, age. (Vesting rates are often set in conjunction with retirement rates.) More rapid vesting increases normal costs and actuarial accrued liability.

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PRESENTED TO:

DATE:

11/10/2011


ITEM #:

2011/2012-014

Education Enclosure: Yes



Requested by:


BACKGROUND: The investment of public funds carries with it certain fiduciary duties and therefore also potential liability for fiduciaries. The Futuris program has been designed to help the Retirement Board of Authority to mitigate its potential fiduciary liability. STATUS: Cary Allison of Morgan Stanley Smith Barney will provide investment education perspectives applicable to the Retirement Board of Authority. RECOMMENDATION: The Retirement Board of Authority shall hear and receive the information presented by Cary Allison of Morgan Stanley Smith Barney (MSSB).

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1

Behavioral FinanceBeware of Potentially Irrational Investment Decisions

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2

Theory of Behavioral Finance

• The study of how psychology affects financial decision making and its impact on financial markets

• Two building blocks of behavioral finance:– Cognitive psychology (how people think)– Limits to arbitrage (when markets will be inefficient)1

1 Behavioral Finance, Jay R. Ritter, University of Florida 91 of 116

3

Agenda• Market Psychology• Behavioral Finance• Strategies for Foundation Trustees

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4

Note: The percentages indicated above are hypothetical only and reflect the personal views of the author and do not necessarily reflect those of Morgan Stanley Smith Barney LLC.Source: Morgan Stanley Private Wealth Management Asset Allocation Group (David M Darst)

The varying importance of factors driving asset prices across market phases

Market Psychology

BottomEarly StageRecovery

Mid-StageBull Market

Peak of BullMarket Bear Market

20%Improving but

ignored

30%Solid underlying

performance

40%Sweet summer of

growth

20%Optimistic, long-

duration projections

30%Overawareness of

deteriorating conditions

20%Shocked recognition of outlandish prices paid

20%Revised models justify

stretching

30%Willingness to pay up

50%Abundant bargains

20%Attractive, but no

takers

60%Exhaustion, disbelief,and demoralization

20%Doubt, reflection, and

conversion

30%Faith, hope, and

charity

60%Euphoria, greed, and

extrapolation

50%Fear, panic, and

loathing

Fundamentals

Valuation

Psychology/Technical

General verticaldirection (but not

horizontal direction)

of asset pricemovements

Market Phase

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5

Introduction to Behavioral Finance

Basic rules of prudent portfolio management:• Think and act strategically long-term• Adopt prudent diversification and asset allocation policies

• Align investments with foundation interests

• Focus on prudent fiduciary oversight responsibilities and process

On the other hand…

• The potentially irrational concerns of “behavioral finance” often lead investors to make poor financial decisions

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6

In Other Words: What You Want Isn’t Always What You Get

Common Investment Goals• Positive returns every quarter• Low volatility• Little to no risk

Common Subconscious Goals • Be a part of something special• Access to a “secret” successful

strategy• Be able to impress colleagues• Have someone else do the hard

work

Irrational Investment Strategies

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7

Theory vs. Reality

“In many important ways, real financial markets do not resemble the ones we would imagine if we only read finance textbooks.”

Richard Thaler, Professor of Behavioral Finance,University of Chicago

“Financial theory cannot always be reconciled with market reality. Behavior finance tries to find explanations for these apparent contradictions. It’s not that investors are irrational, but their thinking is often guided by subtle biases and mental blind spots. Researchers call these traits ‘cognitive illusions.’”

Consulting Group, “The Pitfalls of Investor Psychology”

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8

Behavioral Finance: Emotion-Driven Decisions

• Herding

• Over-confidence

• Loss Aversion / Future Regret

• Anchoring

• Mental Accounting

• Framing

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9

Herding

Herd Behavior:

• Mimic actions of a larger group when the individual would have not taken the action alone

• “Hardwired” trait stemming from the desire to be part of a group• Fear of being “unconventionally wrong”• Believe that being contrarian is risky behavior• Investment managers may succumb because:

– If strategy works, the client is happy– If it doesn’t, the “herd” can be blamed

Avoiding Herd Behavior: • Rely on independent advice based on fundamentals• Beware of excessive costs and frequent trades by following the herd• Beware of painless but sub-optimal results

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Over-confidence

Over-confidence:• Over-optimism

– Investors habitually assuming they know more than they actually do• Tendency to reinterpret past decisions to exaggerate foresight• Investor believes their prediction and choice is the most optimal one

Avoiding over-confidence:• Avoid systematic biases in individual decision-making• Seek counsel from professionals or other advisors (CPAs, financial advisors, etc.)

“I will tell you how to become rich. Be fearful when others are greedy. Be greedy when others are fearful.”

-Warren Buffett

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Loss Aversion / Future Regret

Loss Aversion:* • “Once burned, twice shy”• 85% of investors sell winners faster than losers• Investors are four times more likely to sell a winner than a loser• Investors are two times more likely to repurchase ex-winners than ex-losers

Avoiding Loss Aversion:• Establish a risk tolerance threshold for losses• Document risk tolerance in investment policy statement• Focus on portfolio diversification and overall asset allocation strategy

*Gender, Overconfidence and Common Stock Investment, Terrance Odean, Brad Barber, 2001 100 of 116

12

Anchoring

Anchoring:• Focusing on past performance and original investment• Unable to see potential benefits of selling at a loss• Tendency to focus on irrelevant factors

Avoiding Anchoring:• Base decisions on current prices and expectations• Recognize potential in other investments

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Mental Accounting or Framing

Mental Accounting or Framing: • Dividing investments into separate “mental” pools of assets • Reacting irrationally with different accounts—instead of focusing on total portfolio• Taking more potential risk on “house” accounts, i.e, where gain has been realized

Avoiding Mental Accounting:• Develop a long-term investment strategy based on entire wealth and entire portfolios• Focus on long-term asset allocation strategies that meet your time-frame and

objectives• Use investment gains to conduct rebalancing strategies

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14

How Does Your Organization Make Decisions?

• By consensus

• By majority vote

• A dominant voice

• By delegation to a third party representative

• Delegation to a sub-committee

• By advisor or other professional recommendation

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Avoiding Behavioral Finance Theory in Investment Decisions

• Understand risk tolerance levels

• Be aware that subconscious desires can often impact decision making

• Maintain focus on long-term investment strategy

“You don’t need extraordinary intelligence to succeed as an investor. You need a philosophy and the ability to think independently. It doesn’t matter what people think of a stock.

“What matters is whether you know enough to evaluate the business.”Warren Buffett

CNNMoney.com

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Strategies to Help Ensure Rational Investment Decisions

• Carefully crafted and documented investment policy statements

• Focus on asset allocation strategy

• Properly staffed board and investment committees: – Good judgment, not expertise– Focus on prudent fiduciary process, not short-term results – Seek professional investment management and advice – Concentrate on a global perspective– Maintain meticulous records and minutes

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Important Disclosures

Although the statements of fact and data in this presentation have been obtained from, and are based upon, sources that the Firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this presentation constitute the Firm’s judgment as of the date of this presentation and are subject to change without notice. This presentation is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

©2011 Morgan Stanley Smith Barney LLC. Member SIPC. Consulting Group is a business of Morgan Stanley Smith Barney LLC.

2010-PS-2477/11

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A Case for Waiting Out the Storm

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2

Value of $100,000 Invested in the S&P 500 January 1, 1973

$0

$50,000

$100,000

$150,000

$200,000

$250,000In

itial I

nvestm

ent

$100

,000

3 Mon

ths L

ater

$95,1

20

6 Mon

ths L

ater

$89,6

31

9 Mon

ths L

ater

$93,9

51

12 M

onths

Late

r

$85,3

45 1 Yea

r,

9 Mon

ths L

ater

$57,3

78

Source: Consulting Group 108 of 116

3

At What Point do You Think Investors Would Have Given Up and Thrown in the Towel?

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4

$57,378 Removed from the Market and Reinvested in an Interest Bearing CD at 5%

$0

$50,000

$100,000

$150,000

$200,000

$250,000In

itial I

nvestm

ent

$57,3

78

6 Mon

ths L

ater

$58,8

13

12 M

onths

Late

r

$60,2

47

2 Yea

rs Late

r

$63,2

59

5 Yea

rs Late

r

$73,2

30

10 Y

ears

Later

$93,4

62


5

$0

$50,000

$100,000

$150,000

$200,000

$250,000In

itial I

nvestm

ent

$57,3

78

6 Mon

ths L

ater

$77,1

57

12 M

onths

Late

r

$79,2

62

2 Yea

rs Late

r

$103

,404

5 Yea

rs Late

r

$124

,768

10 Y

ears

Later

$244

,437

What if You had Kept Your $57,378 Invested in the S&P 500 Instead of Going to Cash?


6

Although the statements of fact and data in this presentation have been obtained from, and are based upon, sources that the firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this presentation constitute the firm’s judgment as of the date of this presentation and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Past performance cannot guarantee future results.

The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. The data do not reflect the material differences between stocks, bonds, bills and inflation, such as fees (including sales and management fees), expenses or tax consequences. Common stocks generally provide an opportunity for more capital appreciation than fixed income investments but are also subject to greater market fluctuations. Corporate bonds, US Treasury bills and US government bonds fluctuate in value but, if held to maturity, offer a fixed rate of return and a fixed principal value. Government securities are guaranteed as to the timely payment of interest and provide a guaranteed return of principal. The principal value and interest on treasury securities are guaranteed by the US government if held to maturity. The Standard & Poor’s 500 Index is a market capitalization-weighted index of 500 widely held common stocks. Investors cannot directly invest in an index. Actual results may vary based on an investor’s investment objectives and portfolio holdings. Investors may need to seek guidance from their legal and/or tax advisor before investing.

© 2010 Morgan Stanley Smith Barney LLC. Member SIPC. Consulting Group is a business of Morgan Stanley Smith Barney LLC.

Important Morgan Stanley Smith Barney Disclosures

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