Commonwealth OPEB Management Program

Transcription

1 Commonwealth OPEB Management Program October 17, 2007 Presented by: Nelson L. Bush, Senior Managing Consultant Jim Link, Senior Managing Consultant PFM Asset Management LLC 4350 N. Fairfax Drive, Suite 580 Arlington, VA

2 PFM Asset Management LLC SEC registered discretionary and non-discretionary manager of over $25.7 billion Provides investment consulting services on an additional $8.1 billion 20 years experience managing operating funds and bond proceeds in Virginia Investment Advisor/Administrator for Virginia SNAP Program 15 years experience managing public pension funds, endowment funds, and OPEB funds Investment Committee averages 17 years industry experience 2007 PFM Asset Management LLC 2

3 OPEB Decision Tree PLANNING Actuarial Valuation Analyze Funding Options Optimal Account Strategy Plan Redesign (if any) Establish Trust Establish Internal Fund IMPLEMENTATION Investment Policy & Asset Allocation Hire Managers Invest Assets ONGOING MANAGEMENT Portfolio Trading and Rebalancing Manager Oversight Ongoing Review and Modification 2007 PFM Asset Management LLC 3

4 COMP Comprehensive Services PLANNING Funding Scenario Analysis Account Strategies ONGOING MANAGEMENT IMPLEMENTATION Periodic Rebalancing Investment Policy Manager Oversight Asset Allocation Ongoing Review Manager Selection 2007 PFM Asset Management LLC 4

5 COMP OPEB Management Plan Cost/Benefit of Funding Scenarios Description of Account Asset Allocation Analysis Investment Policy Statement Implementation Timeline Periodic Re-evaluation of Strategies t and Policies i 2007 PFM Asset Management LLC 5

6 Funding Scenario Analysis OPEB Funding Comparison Model Inputs unique to each entity Benefits growth Payroll growth ARC Multiple scenario comparison PAYGO 100% ARC Pre-funding Ongoing analysis 2007 PFM Asset Management LLC 6

7 Detailed Forecasts Millions % 160% 140% 120% Millions % % 60% 40% 20% 0% Contributions Annual Required Contribution Percentage of ARC Funded Balance in Trust Unfunded Benefits Cumulative Benefit Withdrawals Future Value of Benefits Scenario 1: Funding the ARC Fiscal Year Starting: July 1, 2007 July 1, 2009 July 1, 2016 July 1, 2026 July 1, 2036 TOTAL Annual (ARC) 2,216,000 2,396,826 3,154,059 4,668,778 6,910, ,284,222 Estimated Actual Cost 2,120,000 2,292,992 3,017,421 4,466,520 6,611, ,900,068 Cost Differential 96, , , , ,391 5,384,154 Estimated NOO (11,200) (37,757) (190,031) (691,554) (1,909,393) (1,909,393) 2007 PFM Asset Management LLC 7

8 Funding Strategies PAYGO Dedicated Fund Balance Trust Current Internal Service Fund Assets in Funding Strategy Expenditure Irrevocable Trust Budgetary Flexibility Yes Yes Sometimes Provides Balance Sheet Offset to OPEB Liability No No Yes Allows for Relatively High Discount Rate No No Yes Addresses Concerns of External Financial Statement No? Yes Users 2007 PFM Asset Management LLC 8

9 COMP Asset Management Discretionary Management for Internal Service Funds and Trusts Investment Strategy Implementation Manager Selection Portfolio Rebalancing and Trading Performance Benchmarking Ongoing Re-evaluation of Asset Allocation and Managers 2007 PFM Asset Management LLC 9

10 Internal Service Funds PFM Manages fixed income portfolios nationwide Statewide Pools & Individual Portfolios Individual Portfolio Clients 2007 PFM Asset Management LLC 10

11 Internal Service Fund Asset Allocation Sample Asset Allocation Mortgage Backed Securities 25% Corporate Notes 25% Treasury Notes 15% Federal Agency Notes 35% Sector Sector Limit Issuer Limit Maximum Maturity* Minimum Credit* Treasury Notes X% Y% Z Years n/a Federal Agency Notes X% Y% Z Years AAA/Aaa Corporate Notes X% Y% 5 Years AAA/Aaa Mortgage Backed Securities X% Y% Z Years AAA/Aaa 2007 PFM Asset Management LLC 11

12 OPEB Trust Approaches Possible Trust Approaches COMP VEBA, 401(h), or Section 115 Stand-alone Model VEBA, 401(h), or Section 115 Association Model Fiduciary Relationship Yes?? Customized Asset Allocation Yes?? Unlimited Manager Selection Yes?? Independence Yes?? No Soft Dollars (12b-1 fees,etc.) No Minimum Investment Term Yes?? Yes?? Termination Options Yes?? VEBA or Section PFM Asset Management LLC 12

13 Attribution Analysis 12.00% Contribution to Average Annualized Return January 1972 December % 8.00% 6.00% 4.00% Cash Fixed Income Equity 2.00% 0.00% 20 / 30 / / 30 / / 30 / / 35 / / 30 / / 25 / 5 Source: Ibbotson Data from 1/1972 through 12/2006 Equity / Fixed Income / Cash 2007 PFM Asset Management LLC 13

14 Diversification: There is no substitute Russell MSCI MSCI Russell NAREIT Russell Russell Russell NAREIT Russell Lehman Russell NAREIT MSCI NAREIT 2000 EAFE EAFE 1000 Equity Equity 2000 Brothers 2000 Equity EAFE Equity Value Value Value Growth Growth Value Aggregate Growth 29.15% 32.57% 7.78% 38.36% 35.27% 35.18% 38.71% 43.09% 26.36% 14.03% 10.27% 48.54% 30.69% 13.54% 35.06% NAREIT HFRI NAREIT S&P 500 Russell S&P 500 S&P 500 Russell Russell NAREIT NAREIT Russell Russell NAREIT MSCI Equity Fund of Equity Index 1000 Index Index Equity Equity Equity EAFE Funds Growth Growth Value Value Value 14.59% 26.32% 3.17% 37.58% 23.12% 33.36% 28.58% 33.16% 22.83% 13.93% 3.81% 46.03% 22.25% 12.17% 26.34% Russell Russell Russell Russell S&P 500 Russell MSCI MSCI Lehman Lehman HFRI MSCI MSCI HFRI Russell Index 2000 EAFE EAFE Brothers Brothers Fund of EAFE EAFE Fund of 2000 Value Value Growth Growth Value Aggregate Aggregate Funds Funds Value 13.58% 23.86% 2.62% 37.18% 22.96% 31.78% 20.00% 26.96% 11.63% 8.42% 1.02% 38.59% 20.25% 7.49% 23.48% HFRI NAREIT S&P 500 Russell Russell Russell Russell HFRI Russell HFRI Russell NAREIT Russell Russell Russell Fund of Equity Index Fund of 1000 Fund of 2000 Equity Funds Growth Value Growth Value Funds Value Funds Value Value Value Value 12.33% 19.65% 1.32% 31.04% 21.64% 30.49% 15.63% 26.47% 7.02% 2.80% % 38.47% 16.49% 7.05% 22.21% Russell Russell Russell Russell Russell NAREIT Lehman S&P 500 HFRI Russell Russell Russell Russell Russell S&P Equity Brothers Index Fund of Index Growth Value Value Value Value Aggregate Funds Value Value Value Growth Growth 7.77% 77% 18.07% -1.55% 25.75% 21.37% 20.26% 26% 8.67% 21.04% 4.07% -5.59% 59% % 52% 30.02% 02% 14.31% 5.27% 15.79% S&P 500 Russell Russell Lehman HFRI HFRI Russell Russell S&P 500 Russell MSCI Russell S&P 500 S&P 500 Russell Index Brothers Fund of Fund of Index 2000 EAFE 1000 Index Index 2000 Growth Value Aggregate Funds Funds Growth Value Growth Growth Growth 7.62% 13.37% -1.98% 18.48% 14.39% 16.20% 1.23% 7.35% -9.10% -9.23% % 29.75% 10.88% 4.91% 13.35% Lehman S&P 500 Russell NAREIT Russell Russell HFRI Lehman MSCI S&P 500 S&P 500 S&P 500 HFRI Russell HFRI Brothers Index 2000 Equity Fund of Brothers EAFE Index Index Index Fund of 2000 Fund of Aggregate Growth Growth Growth Funds Aggregate Funds Value Funds 7.40% 10.08% -2.44% 15.27% 11.32% 12.93% -5.11% -0.83% % % % 28.69% 6.86% 4.70% 10.44% Russell Lehman Lehman MSCI MSCI Lehman Russell Russell Russell Russell Russell HFRI Russell Russell Russell 1000 Brothers Brothers EAFE EAFE Brothers Fund of Growth Aggregate Aggregate Aggregate Value Value Growth Growth Growth Funds Growth Growth Growth 4.99% 9.75% -2.92% 11.21% 6.05% 9.68% -6.46% -1.48% % % % 11.61% 6.30% 4.14% 9.09% MSCI Russell HFRI HFRI Lehman MSCI NAREIT NAREIT Russell MSCI Russell Lehman Lehman Lehman Lehman EAFE 1000 Fund of Fund of Brothers EAFE Equity Equity 2000 EAFE 2000 Brothers Brothers Brothers Brothers Growth Funds Funds Aggregate Growth Growth Aggregate Aggregate Aggregate Aggregate % 2.87% -3.48% 11.10% 3.61% 1.78% % -4.62% % % % 4.10% 4.34% 2.53% 4.33% Source: lbboston Associates 2007 PFM Asset Management LLC 14

15 Trust 60/40 Asset Allocation Domestic Equity - Active Management Fund 1 Fund 2 Fund 3 Domestic Equity - Passive Management Fund 4 International Equity - Active Management Fund 5 International Equity - Passive Management Fund 6 Other Equity Fund 7 Fixed Income - Active Management Fund 8 Fixed Income - Passive Management Fund 9 Cash Equivalent Investment of Public Funds Compliant Money Market Fund Fund 9 12% Fund 8 12% Cash 14% Fund 7 4% Fund 5 9% Fund 1 8% Fund 6 9% Fund 2 8% Fund 3 8% Allocation 58% Equity 4% Other Equity 24% Fixed Income 14% Cash Fund 4 16% 2007 PFM Asset Management LLC 15

16 COMP Reporting Services Performance Reporting Trustee Education 2007 PFM Asset Management LLC 16

17 Sample Monthly Statement 2007 PFM Asset Management LLC 17

18 Sample Performance Report 2007 PFM Asset Management LLC 18

19 COMP Custody Services Provided by US Bank, N.A. Independent, Third-Party Custody Monthly Statements Online Access Benefit Administration Services (Optional) 2007 PFM Asset Management LLC 19

20 COMP Implementation Process Task Responsible Party City PFM Designate Finance Board/Trustees (Trust Only) Execute Investment Advisory Agreement Prepare Funding Cost/Benefit Analysis Prepare OPEB Management Plan Establish Investment Account/Trust Conduct Portfolio Planning Survey Recommend Asset Allocation and Investment Policy Approve Asset Allocation and Investment Policy Establish Custodial Accounts Make OPEB Investment Deposits Hire, Fire, and Monitor Investment Managers Allocate and Rebalance Assets Quarterly Reporting of Investment Performance Period Review of Actuarial and Financial Data 2007 PFM Asset Management LLC 20

21 Disclaimers Any investment advice in this document is provided solely by PFM Asset Management LLC. PFM Asset Management LLC is an investment advisor registered under the Investment Advisors Act of PFM Asset Management LLC 21