HomeMy WebLinkAboutApprove FY 2021/22 Year-End Budget Adjustment for the City's 2000 Main Street,
' Huntington Beach, CA
92648
City of Huntington Beach
File #: 22-852 MEETING DATE: 10/18/2022
REQUEST FOR CITY COUNCIL ACTION
SUBMITTED TO: Honorable Mayor and City Council Members
SUBMITTED BY: Al Zelinka, City Manager
VIA: Dahle Bulosan, Chief Financial Officer
PREPARED BY: Serena Bubenheim, Finance Manager - Budget
Subject:
Approve FY 2021/22 Year-End Budget Adjustment for the City's Various Unfunded Liabilities
Statement of Issue:
The Finance Department is completing the year-end closing process for Fiscal Year 2021/22, which
began on July 1, 2021, and ended on June 30, 2022. Certain budgetary transfers are needed to
reconcile the budget with liabilities incurred; to comply with auditing, actuarial, accounting, and legal
requirements; and to align with the City Council's strategic goal of fiscal sustainability. City Council
authorization is requested to appropriate and transfer $13,102,696 from the General Fund to the
Workers' Compensation, General Liability, Retiree Medical, Retirement Supplemental and the
Section 115 Trust Funds.
Financial Impact:
This action will result in the transfer of$13,102,696 from the General Fund as follows:
• Transfer of$3,000,000 to the Workers' Compensation Fund;
• Transfer of$1,488,467 to the General Liability Fund;
• Transfer of$1,037,740 to the Retiree Medical Fund;
• Transfer of$4,576,489 to the Retirement Supplemental Fund; and
• Transfer of $3,000,000 to the Section 115 Trust.
There is sufficient General Fund year-end fund balance available to cover these transfers primarily
due to higher than anticipated Sales Tax and Transient Occupancy Tax revenues received during FY
2021/22.
Recommended Action:
Approve the appropriation and transfer of $13,102,696 into the Workers' Compensation, General
Liability, Retiree Medical, Retirement Supplemental and Section 115 Trust Funds from the General
Fund year-end balances. (See Attachment 1).
City of Huntington Beach Page 1 of 4 Printed on 10/12/2022
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File #: 22-852 MEETING DATE: 10/18/2022
Alternative Action(s):
Do not approve the recommended action, and direct staff accordingly.
Analysis:
The U.S. economy faced significant challenges in the first half of 2022 due to rising interest rates,
unprecedented inflation and ongoing threats of recession. Inflation as of June 2022 was 9.1%, the
Federal Funds rates increased five times in 2022 to 3%-3.25%, and GDP for the first and second
quarter of 2022 were -1.6% and -0.6%, respectively. In order to align with the City Council's Strategic
Goal of Fiscal Sustainability, staff is recommending additional funding to the City's various unfunded
liabilities. The City's workers' compensation and general liability costs increased in FY 2021/22. In
addition, the City's retirement plan assets declined in value due to unfavorable market conditions.
Sufficient funding in the City's General Fund in FY2021/22 is available, primarily due to higher than
anticipated Sales Tax and Transient Occupancy Tax revenues, for the recommended funding detailed
below.
Workers' Compensation:
California Workers' Compensation Law provides state mandated benefits to employees for work-
related illness or injury. Benefits may include payments for medical treatment, salary continuation,
Total Temporary Disability (TTD) benefits, and permanent disability benefits. The City is self-insured
for its workers' compensation program and is liable for all costs up to $1 million dollars per claim.
The costs related to claims are paid for by the City as the Employer.
As of the most recent actuarial valuation for the period ending June 30, 2022, the City's total workers'
compensation liability is $40.7 million, or $7.6 million higher than the previous year. The increase is
primarily due to 38 claims that had increases of at least $100,000 during FY 2021/22. Together,
these 38 claims contributed to approximately $6.7 million in incurred losses. The increase was
driven by rising medical costs and an expanded list of injuries that are presumed to be work related
under California law, including cancer and post-traumatic stress. The requested appropriation and
transfer of $3 million will partially fund the increase in the City's liability identified in the June 30, 2022
actuarial valuation and increase the funded status from 35% to 42%.
General Liability:
The City is self-insured for combined liability and cost of defense up to $1 million per claim. Costs up
to that amount are paid from the General Liability Fund Budget. The City purchased liability
insurance in the open marketplace, which provides insurance for claims costs exceeding the City's
self-insured retention of $1 million. The maximum coverage limit is $30 million, which is inclusive of
the self-insured retention. Claims that exceed the maximum limit of liability are covered by the City's
Self-Insurance General Liability Internal Service Fund.
As of the period ending June 30, 2022, the City's total general liability is $13.7 million, or $1.5 million
higher than the previous year. The increase is primarily due to three large claims incurred during FY
2021/22. The requested appropriation and transfer of $1,488,467 will fund the increase in the City's
liability and increase the funded status from 89% to 100%.
City of Huntington Beach Page 2 of 4 Printed on 10/12/2022
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File #: 22-852 MEETING DATE: 10/18/2022
Retiree Medical:
The City administers two retiree medical or other post-employment benefit (OPEB) plans. Safety
employees are eligible for a retirement health plan through CaIPERS under the California Public
Employees Medical and Hospital Care Act (PEMHCA), commonly referred to as PERS Health. Non-
safety employees hired prior to October 1, 2014 are entitled to a retiree medical subsidy based on
years of service. The City utilizes the California Employers' Retiree Benefit Trust (CERBT) to
manage the plans. The CERBT plan has a discount rate of 5.5%. Investment return in the CERBT
plan for FY 2021/22, 5 years, and since plan inception (October 2011) were -12.54%, 4.66%, 6.29%,
respectively. Benchmark rates were -12.66%, 4.43%, and 6.02%, respectively.
The City's actuary assists City staff in determining the annual contributions or planned use of funds to
ensure long-term sustainability of the program. A transfer of $1,037,740 is needed from the General
Fund to the Retiree Medical Fund to align with actual retiree medical benefit payments made during
FY 2021/22 and to avoid drawing from the trust during a market low. Due to the unfavorable returns
in the CalPERS Employers' Retiree Benefit Trust (CERBT) Fund in FY 2021/22, the funded status is
estimated to decrease from 107% as of June 30, 2021 to 94% as of June 30, 2022. The funded
status is estimated to increase from 94% to 97% with the recommended transfer.
Retirement Supplemental:
The City administers a supplemental single-employer defined benefit retirement plan for all
employees hired prior to 1997. The plan pays a supplemental retirement benefit in addition to
benefits from CalPERS. Investments of the Supplemental Plan are held separately from those of
other City funds by investment custodians. The Supplemental Plan has a discount rate of 5.5%.
Investment return in the Supplemental Plan for FY 2021/22, 5 years, and since plan inception
(October 2009) were -15.98%, 4.84%, 6.20%, respectively. Benchmark rates were -12.44%, 4.51%,
and 6.64%, respectively.
The City's actuary assists City staff in determining the annual contributions or planned use of funds to
ensure long-term sustainability of the program. A transfer of $4,576,489 is needed from the General
Fund to the Retirement Supplemental Fund to align with actual required retirement supplemental
benefit payments and to avoid drawing from the trust during a market low. Due to the unfavorable
returns in the Supplemental Plan in FY 2021/22, the funded status is estimated to decrease from
92% as of June 30, 2021 to 77% as of June 30, 2022. The funded status is estimated to increase
from 77% to 83% with the recommended transfer.
Section 115 Trust:
On December 21, 2015, City Council authorized the creation of a tax-exempt, Internal Revenue Code
Section 115 Trust to help address the City's unfunded liabilities. Since that time, the City has
prudently incorporated contributions to the trust within the annual operating budget and from General
Fund year-end savings. On March 1, 2021, City Council took advantage of historically low interest
rates and approved the issuance of $363.6 million in Pension Obligation Bonds (POBs) to allow the
City of Huntington Beach Page 3 of 4 Printed on 10/12/2022
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File #: 22-852 MEETING DATE: 10/18/2022
City to prepay 85% of projected pension unfunded accrued liabilities (UAL), saving taxpayers
approximately $166.7 million over a 23 year bond repayment schedule. With the approval of the
POBs, City Council also adopted an Unfunded Accrued Liability Pension Funding Policy to augment
contributions to the Section 115 Trust and further protect the City from volatility and unexpected
pension rate increases. As of June 30, 2022, the Section 115 Trust Balance is approximately $12.4
million.
As a result of negative 6.1% returns experienced by CalPERS as of June 30, 2022, staff is
recommending the appropriation and transfer of $3 million from the General Fund to the Section 115
Trust. The additional funding will help to mitigate the impacts of future increases in the annual
CalPERS Unfunded Accrued Liability (UAL) payment resulting from the FY 2021/22 market losses.
As of June 30, 2021, the City's CalPERS plan was 103% funded or 83% funded with the POBs
based on the latest CalPERS actuary report. Due to the unfavorable returns, the City's CalPERS
plan is estimated to be 90% funded or 73% funded with the POBs as of June 30, 2022. Prior to the
issuance of the POBs on June 30, 2020, the plan was 68% funded. The POB remains a favorable
financial decision as long as CalPERS' long-term investment return is over the 2.925% refinance
rate. As of June 30, 2022, CalPERS' plan returns for 10, 20, and 30 years were 7.7%, 6.9% and
7.7%, respectively.
Environmental Status:
Not applicable
Strategic Plan Goal:
Financial Sustainability, Public Safety or Other
Attachment(s):
1. FY 2021/22 Year-End Liabilities Transfers
2. Year-End Budget Adjustments for City's Unfunded Liabilities Presentation
City of Huntington Beach Page 4 of 4 Printed on 10/12/2022
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ATTACHMENT 1
Fiscal Year 2021/22 Unfunded Liability Transfers
APPROPRIATION AND TRANSFER INCREASE:
Dept From Name Amount To Fund Name
Non-Departmental 100 General Fund 3,000,000 551 Workers'Compensation Fund
Non-Departmental 100 General Fund 1,488,467 552 General Liability Fund
Non-Departmental 100 General Fund 1,037,740 702 Retiree Medical Fund
Non-Departmental 100 General Fund 4,576,489 703 Retirement Supplemental Fund
Non-Departmental 100 General Fund 3,000,000 716 Section 115 Trust
TOTAL 13,102,696
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Year-End Budget Adjustments
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City Council Meeting
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252
Presentation Overview
• Background & Economy
• Workers' Compensation
• General Liability
• Retiree Medical
• Retirement Supplemental
• Section 115 Trust
,�OIN6To
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Cl UNTY
253
Background & Economy
y Finance Department is working on the year-end closing process
✓ Preliminary year-end numbers will be presented to City Council on November 15th
Y Year-End Budget Adjustment for FY2021/22 required to close FY 2021/22
y US economy faced significant challenges in the first half of 2022
✓ Rising interest rates — Feds raised rates 5X in 2022 to 3%-3.5%
✓ Inflation — 9.1 % in June 2022
✓ GDP: 1 Q2022 -1 .6% and 2Q2022 -0.6%
City's retirement plan assets declined in value due to unfavorable market conditions
Estimated Surplus FY2021/22 $17M primarily due to Sales Tax and Transient
Occupancy Tax revenues better than anticipated
y Opportunity to fund the City's unfunded liabilities — aligning with the City Council's
Strategic goal of Fiscal Sustainability
254
Workers ' Compensation
y California Workers' Compensation law provides state mandated benefits to employees for work-related
illness or injury
r City is self-insured up to $1 million per claim for a maximum of $30 million
y $7.6 million increase in WC liability primarily due to 38 claims that had increases of at least $100K in
FY2021/22
Factors include rising medical costs and an expanded list of injuries that are presumed to be work
related under California law, including cancer and post-traumatic stress
.scription WC Claims 2018-2022
D Amount
Total WC Liability 6/30/2022 $40.7M
Increase in Liability FY 2021/22 $7.6M 4Police
Fire
Funded Status Without 35% Fire
Public Works
Transfer Police
All Others
Funded Status With Transfer 42%
Recommended Transfer $3M
255
General Liability
City is self-insured up to $1 million per claim for a maximum of $30 million
$1 .5 million increase in General Liability primarily due to 3 large claims incurred in FY 2021/22
y $2.1 million total legal claims expense in FY21/22
74T Amount / Percentage
Total General Liability 6/30/2022 $13.7M
Increase in Liability FY 2021/22 $1.5M
Funded Status Without Transfer 89%
Funded Status With Transfer 100%
Recommended Transfer $1.5M
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256
Retiree Medical
r The City administers 2 retiree medical or other post-employment benefit (OPEB) plans
✓ Safety employees — Contributions to CalPERS Health Plan for retirement
✓ Non-safety employees hired prior to 10/1/2014 — Retiree Medical Subsidy based on years of
service
y The City utilizes CalPERS' California Employers' Retiree Benefit Trust (CERBT) to manage the plan
y CERBT discount rate: 5.5%
Recommended Transfer: $1 M — minimum required to avoid drawing funds from Trust during market low
Funded ! Benchmark
.
EB
Status • Asset Liab Plan Return
6/30/2021 107% $33.9M $36.3M -$2.4M 1 Year 12.54% -12.66%
6/30/2022 w/o Trsf 94% $33.9M $31.7M $2.11VI 5 Years 4.66% 4.43%
6/30/2022 w/Trsf 97% $33.9M $32.8M $1.1m ITDA 6.29% 6.02%
* OPEB Liability is estimated due to CaIPERS latest report is for 6/30/2020 (Oct 2011)
Inception to date
257
Retirement Supplemental
The City administers a supplemental single-employer defined benefit retirement plan for employees hired
prior to 1997
➢ The plan pays a supplemental retirement benefit in addition to benefits from CalPERS
Investment held separately in the Supplemental Retirement Trust (SRT) and is managed by the City's
Investment Custodian and subject to Investment Policy set by the SRT board.
➢ Supplemental Retirement discount rate: 5.5%
➢ Recommended Transfer: $4.6M — minimum required to avoid drawing funds from Trust during market low
Funded SRT Net SRT Benchmark
Status • Liab Years Plan Return6/30/2021 92% $76.8M $70.4M $6.4M 1 Year -15.98% -12.44%
6/30/2022 w/o Trsf 77% $76.8M $59.01M $17.8M 5 Years 4.84% 4.51%
6/30/2022 w/Trsf 83% $76.8M $63.6M $13.2M ITDA 6.20% 6.64%
* SRT Liability is estimated due to latest actuary report is for 6/30/2020 (Oct 2009)
Inception to date
258
Section 115 Trust
On December 21 , 2015, City Council authorized the creation of the Section 115 Trust to help address the City's
unfunded pension liabilities.
March 2021 , City Council adopted an Unfunded Accrued Liability Pension Funding Policy requiring annual Section
115 Trust funding to protect the City from market volatility and unexpected pension rate increases.
➢ Section 115 Trust balance as of June 30, 2022: $12.4M
➢ CalPERS return FY2021/22: -6.1% (discount rate of 6.8%)
✓ Due to unfavorable return, UAL payments will increase by $3.4M each year from $0 in FY23/24 to $17.7M in
FY28/29 (assuming CalPERS hits their 6.8% target return going forward)
✓ CalPERS returns > 6.8% will reduce future UAL payments and lower returns will increase UAL payments
➢ Recommended Transfer: $31VI (in addition to $1 .8M required in FY21/22 per UAL Policy)
CaIPERS
CaIPERS . � ; ■ �' Return
Funded CaIPERS CAPERS Net CaIPERS Funded 1 Year -6.1%
10 . - • • :
Status
5 Years 6.7
6/30/2020 68% $1,428M $973M $455M N/A 68%
10 Years 7.7%
6/30/2021 104% $1,513M $1,558M -$46M $364M 83%
20Years 6.9%
6/30/2022* 90% $1,513M $1,363M $149M $352M 73%
30 Years 7.7%
* CaIPERS values as of 6/30/2022 are estimated due to latest actuary report is for 6/30/2021
259
Recommended Action
y Approve the appropriation and transfer of $13.1 million from the General Fund in
FY2021 /22 to fund the City's unfunded liabilities (as listed below) — aligning with the
City Council's Strategic goal of Fiscal Sustainability
y Estimated FY21 /22 surplus after appropriation $3.9 million (subject to change)
Workers' Compensation $3,000,000
General Liability 1,488,467
Retiree Medical 1,037,740
Retirement Supplemental 4,576,489
Section 115 Trust 3,000,000 ��N PORAre �
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Total $13,102,696
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Year-End Budget Adjustments
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City Council Meeting
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Presentation Overview
• Background & Economy
• Workers' Compensation
• General Liability
• Retiree Medical
• Retirement Supplemental
• Section 115 Trust
NT I N GTo
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Background & Economy
➢ Finance Department is working on the year-end closing process
✓ Preliminary year-end numbers will be presented to City Council on November 15th
➢ Year-End Budget Adjustment for FY2021/22 required to close FY 2021/22
➢ US economy faced significant challenges in the first half of 2022
✓ Rising interest rates — Feds raised rates 5X in 2022 to 3%-3.5%
✓ Inflation — 9.1 % in June 2022
✓ GDP: 1 Q2022 -1 .6% and 2Q2022 -0.6%
➢ City's retirement plan assets declined in value due to unfavorable market conditions
➢ Estimated Surplus FY2021/22 $17M primarily due to Sales Tax and Transient
Occupancy Tax revenues better than anticipated
➢ Opportunity to fund the City's unfunded liabilities — aligning with the City Council's
Strategic goal of Fiscal Sustainability
Workers' Compensation
➢ California Workers' Compensation law provides state mandated benefits to employees for work-related
illness or injury
➢ City is self-insured up to $1 million per claim for a maximum of $30 million
➢ $7.6 million increase in WC liability primarily due to 38 claims that had increases of at least $100K in
FY2021/22
➢ Factors include rising medical costs and an expanded list of injuries that are presumed to be work
related under California law, including cancer, post-traumatic stress and long-term impacts of COVID
.scription WC Claims 2018-2022
D Amount
Percentage . Others
Total WC Liability 6/30/2022 $40.7M
Increase in Liability FY 2021/22 $7.6M Police
Fire
Fire
Funded Status Without 35%
_Tra n sf e r '• Public Works
All Others
Funded Status With Transfer 42%
Recommended Transfer $3M
General Liability
➢ City is self-insured up to $1 million per claim for a maximum of $30 million
➢ $1 .5 million increase in General Liability primarily due to 3 large claims incurred in FY 2021/22
➢ $2.1 million total legal claims expense in FY21/22
-_ Percentage
Total General Liability 6/30/2022 $13.7M
Increase in Liability FY 2021/22 $1.5M
Funded Status Without Transfer 89%
Funded Status With Transfer 100%
Recommended Transfer $1.5M
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Retiree Medical
➢ The City administers 2 retiree medical or other post-employment benefit (OPEB) plans
✓ Safety employees — Contributions to CalPERS Health Plan for retirement
✓ Non-safety employees hired prior to 10/1/2014 — Retiree Medical Subsidy based on years of
service
➢ The City utilizes CalPERS' California Employers' Retiree Benefit Trust (CERBT) to manage the plan
➢ CERBT discount rate: 5.5%
➢ Recommended Transfer: $1 M — minimum required to avoid drawing funds from Trust during market low
Funded OPEB OPEB Net OPEB Benchmark
---Status Liab* Asset Liab (Asset) Plan Return Rate
6/30/2021 107% $33.9M $36.3M -$2.4M 1 Year -12.54% -12.66%
6/30/2022 w/o Trsf 94% $33.9M $31.7M $2.11VI 5 Years 4.66% 4.43%
6/30/2022 w/Trsf 97% $33.9M $32.8M $1.1M ITDA 6.29% 6.02%
* OPEB Liability is estimated due to CaIPERS latest report is for 6/30/2020 (Oct 2011)
^ Inception to date
Retirement Supplemental
➢ The City administers a supplemental single-employer defined benefit retirement plan for employees hired
prior to 1997
➢ The plan pays a supplemental retirement benefit in addition to benefits from CaIPERS
➢ Investment held separately in the Supplemental Retirement Trust (SRT) and is managed by the City's
Investment Custodian and subject to Investment Policy set by the SRT board.
➢ Supplemental Retirement discount rate: 5.5%
➢ Recommended Transfer: $4.6M — minimum required to avoid drawing funds from Trust during market low
.,_ . Funded SRT NetSRT
Benchmark
Status I=
• • ' Return
6/30/2021 92% $76.8M $70.4M $6.4M 1 Year -15.98% -12.44%
6/30/2022 w/o Trsf 77% $76.8M $59.OM $17.8M 5 Years 4.84% 4.51%
6/30/2022 w/Trsf 83% $76.8M $63.6M $13.2M ITDA 6.20% 6.64%
* SRT Liability is estimated due to latest actuary report is for 6/30/2020 (Oct 2009)
Inception to date
Section 115 Trust
➢ On December 21, 2015, City Council authorized the creation of the Section 115 Trust to help address the City's
unfunded pension liabilities.
➢ March 2021, City Council adopted an Unfunded Accrued Liability Pension Funding Policy requiring annual Section
115 Trust funding to protect the City from market volatility and unexpected pension rate increases.
➢ Section 115 Trust balance as of June 30, 2022: $12AM
➢ CalPERS return FY2021/22: -6.1% (discount rate of 6.8%)
✓ Due to unfavorable return, UAL payments will increase by $3.4M each year from $0 in FY23/24 to $17.7M in
FY28/29 (assuming CalPERS hits their 6.8% target return going forward)
✓ CalPERS returns > 6.8% will reduce future UAL payments and lower returns will increase UAL payments
➢ Recommended Transfer: $3M (in addition to $1.8M required in FY21/22 per UAL Policy)
CaIPERS Plan Return
CAPERS P• :
Funded CAPERS CAPERS Net CaIPERS Funded 1 Year -6.1%
Status
5 Years 6.7%
6/30/2020 68% $1,428M $973M $455M N/A 68%
10 Years 7.7%
6/30/2021 104% $1,513M $1,558M -$46M $364M 83%
20 Years 6.9%
6/30/2022* 90% $1,513M $1,363M $149M $352M 73%
30 Years 7.7%
* CaIPERS values as of 6/30/2022 are estimated due to latest actuary report is for 6/30/2021
Recommended Action
➢ Approve the appropriation and transfer of $13.1 million from the General Fund in
FY2021/22 to fund the City's unfunded liabilities (as listed below) — aligning with the
City Council's Strategic goal of Fiscal Sustainability
➢ Estimated FY21/22 surplus after appropriation $3.9 million (subject to change)
Amount
Workers' Compensation $3,000,000
General Liability 1,488,467
Retiree Medical 1,037,740
Retirement Supplemental 4,576,489
Section 115 Trust 3,000,000 tt,,��NTINGIO�,n
O` \N�OfiPORATFO V
Total $13,102,696 �9c�
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CaIPERS UAL Payment Projection
25 24 24 24 24
22
20
18 18 18 18 18 18
15 14 14
13 13 13 13 13
N 11
11
10 9
8
7
6
6 6 6
5 4 4 4
6/30/2023 6/30/2024 6/30/2025 6/30/2026 6/30/2027 6/30/2028 6/30/2029 6/30/2030 6/30/2031 6/30/2032 6/30/2033
3.4% Return 6.8% Return 10.2% Return
CaIPERS UAL Payments based on projected FY22/23 CaIPERS Returns scenarios
Section 115 Trust Projected Balance
$35 Use of Section 115
Trust per Policy
$30
$25
$20
$15
c
0
$10
$5
$0
- 5
-$10
■ with $31M without $3M
Note: Assumes CaIPERS hits their 6.8% target return going forward
12