Fairfax County School Board September 17, 2018 Presenter ELI - PowerPoint PPT Presentation

Presentation to the Fairfax County School Board September 17, 2018

Presenter ELI MARTINEZ Executive Director/CIO 2

Agenda • Executive Summary • Membership Characteristics • Financial Strength • Cost Efficiencies • Strategic Initiatives • Summary • Questions 3

Executive Summary

2017 returns were above expectations and the funded ratio remains stable Fund Expenses 2001 Tier 2 Fund Performance Funded Ratio 16% 1,700+ 75.7% Competitive vs. Peers December 31, 2017 2017 After Fees Sustainability | Marketing | Messaging | Education 5 Executive Summary Our Members Performance Expenses Initiatives Summary Q&A

Membership Characteristics

ERFC serves members within three benefit plan structures; only the 2001 Tier 2 is open ERFC Membership by Plan Type December 31, 2017 1,072 Retired 10,657 15,629 Active 4,488 1,724 Legacy 2001 Tier 1 2001 Tier 2 Closed 1973 to 7/1/2001 7/1/01 - 6/30/17 7/1/2017 - Beyond Are there any trends? 7 Executive Summary Our Members Performance Expenses Initiatives Summary Q&A

Legacy and 2001 Tier 1 members are driving retirements ERFC Membership by Plan Type Year Ending December 31 Plan Closed 16.9K 16.3K 15.6K 15.6K 15.4K 2001 Tier 1 14.7K 13.6K 12.2K 11.5K 10.9K 10.2K 8.8K 9.4K 6.8K 6.2K 5.8K 8.4K 5.3K 7.9K 7.4K 4.9K 4.5K Legacy 2001 Tier 2 Plan Opened 2007 2009 2011 2013 2015 2017 What if we drill down on the trends? 8 Executive Summary Our Members Performance Expenses Initiatives Summary Q&A

Retirements from the 2001 Tier 1 plan will outweigh Legacy plan retirements in the future 2001 Tier 1 retirements Annual Retirements by Plan Type expected to outweigh Year Ending December 31 Legacy by 2029 164 208 115 186 61 143 90 49 28 2001 Tier 1 27 547 520 517 506 490 479 446 442 435 Legacy 379 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 How much are we paying retirees? 9 Executive Summary Our Members Performance Expenses Initiatives Summary Q&A

Benefit payments to retirees as a percent of payroll have trended downward since 2010 Retiree Benefits Paid as Percent of Payroll Year Ending December 31 11.95% 5% Decrease 11.92% 11.76% 11.69% 11.69% 11.67% 11.40% 11.37% 11.36% 11.09% 2010 2017 2008 2009 2011 2012 2013 2014 2015 2016 How much does the average retiree receive? 10 Executive Summary Our Members Performance Expenses Initiatives Summary Q&A

Working longer for FCPS increases retirement benefits Average Retiree Profile December 31, 2017 Legacy Retiree 2001 Tier 1 Retiree 64 Years Old 62 Years Old 12 Years of Service 24 Years of Service $6K Annual ERFC Benefit $20K Annual ERFC Benefit $19K Annual Including VRS $48K Annual Including VRS 54% of Final 25% of Final Not Including Social Security Average Salary Average Salary * Assumes VRS service credit equals ERFC for calculating VRS benefit * ERFC benefit amount may decrease at Social Security age depending on payment type selected * ERFC benefit amounts may be reduced due to selection of spousal/lump-sum options How does this compare to FCERS? * The 2001 Tier 2 plan is a new plan, opened on July 1, 2017 and does not have retirements 11 Executive Summary Our Members Performance Expenses Initiatives Summary Q&A

Fairfax County employees receive higher retirement benefits; FCPS employees paying more into retirement Differences Between FCPS & FCERS Possible Plan Changes VRS Hybrid + FCERS Plan D* ERFC 2001 Tier 2 60 Min. Retirement Age Social Security with 5 yrs. Rule 90 Rule 90 Retirement Eligible 5 Years 5 Years Salary Averaging Total Employee Contributions 5.33% 8-12%** Multiplier 2% 1.8% * Changes under consideration by the Fairfax County Board of Supervisors to the FCERS Plan D would be effective July 1, 2019 ** 12% contribution assumes employee contributes 5% into VRS, 3% into ERFC, and maximizes into the Hybrid Plan at 4% What about current employees? 12 Executive Summary Our Members Performance Expenses Initiatives Summary Q&A

Average Legacy plan members are only 4 years from full benefit status Average Active Member Profile December 31, 2017 Legacy 2001 Tier 1 2001 Tier 2 • • • 54 Years Old 42 Years Old 35 Years Old • • • 21 Years of Service 7 Years of Service 0.4 Years of Service • • • $88K Current Annual Salary $64K Current Annual Salary $50K Current Annual Salary Newest Plan What about the portfolio? 13 Executive Summary Our Members Performance Expenses Initiatives Summary Q&A

Financial Strength

ERFC’s portfolio is well diversified ERFC Policy Asset Allocation Private Equity, 3.5% Hedge Funds, 5% Alternatives 16.5% Real Estate, 8% Domestic Equity, 22.5% Emerging Market Debt, 3% Unconstrained Bonds, 6% Stocks Bonds 39.5% 29% International Equity, 14% Domestic Fixed Income, 20% Emerging Market Equity, 3% Global Asset Allocation/Better Beta, 15% …and performance? 15 Executive Summary Performance Our Members Expenses Initiatives Summary Q&A

Above average performance over longer periods compared to defined benefit plans >$1B ERFC Performance and Ranking Fiscal Year Ended June 30, 2017 15 Year 1 Year 12.1 % 7.2 % After Fees After Fees Rank 64* Rank 32* * Universe of 60 Defined Benefit pension plans greater than $1B in assets, shown in percentiles (lower number is better). How do we compare vs. large plans? 16 Executive Summary Performance Our Members Expenses Initiatives Summary Q&A

ERFC outperformed some of the largest pension funds in the nation ERFC Performance vs. Large Public Pension Funds Year Ending June 30, 2017 (After Fees) 13.4% 12.1% 12.1% 11.2% 209B AUM* 2.4B AUM* 78B AUM* 326B AUM* 1,700 Staff 30 Staff 370 Staff 2,875 Staff 64% Funded 75.2% Funded 72.9% Funded 68.3% Funded CalSTRS ERFC VRS CalPERS * Assets under management (AUM) How do we compare vs. local funds? 17 Executive Summary Performance Our Members Expenses Initiatives Summary Q&A

ERFC’s portfolio also performed well compared to Fairfax County Funds ERFC vs. Fairfax County Investment Performance Year Ending June 30, 2017 (After Fees) 12.1% 10.9% 9.3% 8.3% 6.9% 2.4B AUM AUM 6.8B 30 Staff Staff 26 75.2% Funded Funded 80.3%* FC Police Officers’ ERFC FC Employees’ FC Uniformed FC Weighted Retirement System Retirement System Average Return Retirement System * Average funded status How does this impact our funding? 18 Executive Summary Performance Our Members Expenses Initiatives Summary Q&A

ERFC has maintained a stable funded ratio Funded Ratio vs. Unfunded Liabilities Year Ending December 31 (Millions) 900000 77.7% 800000 76.9% 76.7% 76.0% 76.5% 75.6% 75.6% 75.4% 75.7% 700000 Funded Ratio 75.2% 600000 500000 $769 $753 400000 $693 $631 $616 $610 $604 $570 $561 Unfunded 300000 $521 Liability 200000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 100000 0 What does a 75.7% funded ratio mean? 19 Executive Summary Performance Our Members Expenses Initiatives Summary Q&A

The current funded status would allow ERFC to pay benefits for the next 25 years! Normal Scenario: Pessimistic Doomsday Assumptions Zero Investment Return Zero Investment Return ∞ 25 9 Years Years Benefit Current No Payments Contributions Contributions Less Likely Impact on contributions? 20 Executive Summary Performance Our Members Expenses Initiatives Summary Q&A

Recognition of prior year losses contributed to increased employer contribution rates Fiscal Year Contribution Rates Future Years 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 4.00% 3.00% 4.00% Employee 4.04% 4.34% 5.34% 5.60% 5.60% 5.60% 5.60% 6.24% 6.26% 6.44% Employer 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 …But when will we be fully funded? 21 Executive Summary Performance Our Members Expenses Initiatives Summary Q&A

Over time normal costs will decrease, and we’re gradually moving towards 100% funded Normal Cost Funded Status Funded 2040 2001 Tier 2 100% 100% Gradual Movement How do we compare in costs? 22 Executive Summary Performance Our Members Expenses Initiatives Summary Q&A

Cost Efficiencies

ERFC’s overall costs are relatively low Expense Comparison Year Ending June 30, 2017 (Basis Points) Average Cost 84.2 Basis Points Investment & 106.9 Administrative 94.0 Expenses 76.2 75.4 68.4 FC Police Officers’ FC Employees’ FC Uniformed ERFC VRS Retirement System Retirement System Retirement System Source: Fairfax County Comprehensive Annual Financial Report for the Fiscal Year ended June 30, 2017 What drives investment expenses? 24 Executive Summary Performance Expenses Our Members Initiatives Summary Q&A

Investment expenses are in line with expected costs for a plan of our size Linear Regression R 2 of 43%, P-Value of 0.003 $13.5M ERFC Investment Expenses Key Drivers of Investment Expense • Scale • Allocation • Internal vs. external management • Managed vs. unmanaged $13.2M 1 Expected Investment Expenses 1 Expected ERFC Investment Fees = 0.0056(2,304,281,654)+274,534 = $13,237,270 What drives administrative expenses? Link 25 Executive Summary Performance Expenses Our Members Initiatives Summary Q&A