Report on a Possible New Plan Design for the Shelby County Retirement System

Transcription

1 The experience and dedication you deserve Report on a Possible New Plan Design for the Shelby County Retirement System Prepared as of June 30,

2 TABLE OF CONTENTS Section Item Page No. I Executive Summary 1 II Basic Projection Results 4 III Impact of Benefit Changes on Baseline Projections 9 IV Investment Return Analysis 18 Appendix A Base Actuarial Assumptions and Methods 21 B Capital Market Assumptions and Asset Allocation 25

3 May 7, 2010 Mr. James Martin Shelby County Retirement System 160 North Main Street, Suite 950 Memphis, TN Dear Jim: Presented in this report are the results of a 30 year projection of the Shelby County Retirement System (SCRS). The purpose of the projection was to determine the impact a new Plan Design or new Plan Assumptions would have on the System s financial status. The starting point for the projection was the June 30, 2009 valuation of the SCRS. Membership was projected over a 30 year period from that date and actuarial valuations were performed annually for each of the 30 years to measure the System s funding progress. Progress over intervening years was interpolated from the valuation results. The Executive Summary that immediately follows provides a synopsis of the main projection results. Respectfully submitted, Edward J. Koebel, FCA, EA, MAAA Principal and Senior Actuary EJK:kc S:\Shelby County\Valuation\2009\Plan D and E Study\Shelby New Plan Projection Report Version 3.doc

4 Section I - Executive Summary Due to the June 30, 2009 valuation results and the anticipated employer rate increases expected, the Board of Trustees and the Retirement Task Force committee requested this projection study to determine the long term financial status of SCRS and to ascertain the impact a new plan would have on that status. The current Plan C and the proposed Plan D (General Employees) and Plan E (Public Safety) benefit provisions we analyzed are as follows: Current Plan C Proposed Plan D (General Ees Only) Proposed Plan E (Public Safety Only) Employee Contribution 6% 6% 6% Vesting 7.5 years 7.5 years 7.5 years Retirement Eligibility Normal Early 25 years Age 55 with 7.5 years SSRA (Assumed 67 and Vested) SSRA (Assumed 62 and Vested) Age 55 Age 50 Benefit Multiplier 2.35% 2.00% 2.00% Final Average Earnings 3 years 5 years 5 years (FAE) Maximum Benefit of 82.25% 70.00% 70.00% FAE Survivor Benefit Based on FAE3 Based on FAE5 Based on FAE5 Cost-of-Living Adjustment (COLA) CPI - up to 4% after age 65 CPI - up to 2% after age 65 CPI - up to 2% after age 65 The Retirement Task Force requested the following eight studies to be performed by the actuary and determine the savings that could be expected if the recommendations were implemented: 1. All new members will enter Plans D and E. 2. All current non-vested employees and new employees will enter Plans D and E. 3. All new members continue to enter Plan C with an additional 2% employee contribution from Plan A and Plan C active participants. 4. All new members continue to enter Plan C and the investment rate assumption is decreased from 8.25% to 7.50%. 5. Compare Plans D and E to a Social Security type Defined Benefit Plan. 6. All current non-vested employees and new employees will enter Plans D and E. In addition, all active members (other than Plan B actives) will pay an additional 2% employee contribution and the investment rate assumption is decreased from 8.25% to 7.50%. Page 1

5 Section I Executive Summary 7. All current non-vested employees and new employees will enter a Social Security type Defined Benefit Plan. In addition, all active members (other than Plan B actives) will pay an additional 2% employee contribution and the investment rate assumption is decreased from 8.25% to 7.50%. 8. All current non-vested employees and new employees will enter Plans D and E. In addition, all active members (other than Plan B actives) will pay an additional 2% employee contribution and the investment rate assumption is decreased from 8.25% to 8.00%. Since these new Plans would only be applicable to new members entering SCRS after the change was effective, the impact on System finances takes a long time to develop. The results of this projection study bear that out. The projection of System finances over 30 years requires an assumption regarding future new entrants to SCRS as well as the regular valuation assumptions used to estimate the timing of future events for existing members. As members are assumed to terminate service for any reason, they were replaced with a sufficient number of new entrants to maintain a level active population. Valuations were then performed on the projected active and retired membership for each of thirty years of the study. It should be noted that in our projection and as provided by your office, we used the most updated market value of assets estimate as of March 31, 2010 of around $880 million to estimate the assumed market value of assets for the end of the 2010 fiscal year. This represents an estimated annual investment return of 23% for the period from July 1, 2009 to June 30, The main results from the study (details can be found in the following sections of this report) are noted below. If the Annual Required Contribution (ARC) is made each year according to our projections, SCRS current financial situation will decline initially until all current asset losses are fully recognized in the smoothing period. But once that occurs, the funding ratio will begin to increase and the required contributions will gradually decrease. The new Plan designs have a significant impact on the System s finances. For example if Plans D and E were instituted, the ultimate normal cost rate of the SCRS would decrease from 6.98% to 3.90% and the savings from annual required employer contributions near the end of the projection period would be more than $20 million when compared to the baseline projection results. Increasing the employee contribution by 2% for all Plan A and Plan C active participants will decrease the employer normal cost each year by about 1.84% of pay. Page 2

6 Section I Executive Summary Lowering the investment rate assumption from 8.25% to 7.50% or 8.00% will increase liabilities, normal costs and annual short-term required contributions. See Section IV for an investment return analysis we performed. The Social Security Option Type Plan has a dramatic impact on the System s finances. However, it should be cautioned against having a Plan that develops a negative normal cost. A negative normal cost means that the employee is contributing a higher percentage of his payroll than his benefit will provide in retirement. It must be kept in mind that projections do not purport to show exact numerical results over the entire period under study. They do however provide a good basis for drawing conclusions about the likely position of the System and the relative impact changes over the years will have on System finances. Page 3

7 Section II Baseline Projection Results BACKGROUND Regular actuarial valuations measure SCRS present financial position and contribution adequacy by calculating and financing the liabilities created by the present benefit program. This process involves discounting to present values the future benefit payments on behalf of present active and retired members and their survivors. However, valuations do not produce information regarding future changes in the makeup of the covered group or the amounts of benefits to be paid or investment income to be received actuarial projections do. Whereas valuations provide a snapshot of SCRS as of a given date, projections provide a moving picture. Projected active and retired groups are developed from year to year by the application of assumptions regarding pre-retirement withdrawal from service, retirements, deaths, disabilities, and the addition of new members. Projected information regarding the retired life group leads to assumed future benefit payouts. Performing actuarial valuations every year during the projection period generates expected contribution rates and unfunded accrued liability (UAL) amortization periods. Combining future benefit payments with assumed contributions based on periodic valuations of the projected membership and expected investment earnings produces the net cash flow of the System each year, and thus end of year asset levels. Finally, the valuation results permit the development of the funding ratio trend line for the entire projection period. Projections are used for many purposes. Among them are (i) developing cash flow patterns for investment policy and asset mix consideration, (ii) exploring the effect of alternative assumptions about future experience, (iii) analyzing the impact on plan funding progress of changes in the workforce, and (iv) examining the potential effect of changes in benefits on plan financial activity. The latter is the subject of this study. Projection results are useful in demonstrating changing relationships among key elements affecting plan financial activity (e.g., how benefits payable and plan assets will grow in future decades). Projections are not predictions of specific future events and do not provide numeric precision in absolute terms. For instance, cash flow projected to occur 10 years in the future will not be exact (except by coincidence), but understanding the changed relationship between future benefit payout and future investment income can be very useful. SPECIAL ASSUMPTIONS In addition to the regular valuation assumptions used in performing the annual actuarial valuations of SCRS (all assumptions utilized in the projection study are outlined in Appendix A), additional assumptions must be made that are unique to projections. The first of these is what, if any, change in the overall active membership will be anticipated. For this projection study it was assumed that the number of active members would remain static over the 30 year projection period. Page 4

8 Section II Baseline Projection Results But since we assume active members will leave the system through termination, death, disability or retirement, we need to make some assumptions as to the composition of new hires that will replace departing members in order to maintain the membership at a constant number. The new entrant profile we developed was based on the new hires over the 2 year period prior to the projection start date of June 30, 2009 and is split by General Employees and Public Safety Employees. That profile is summarized in the table below. General Employees Age Average Pay Percent Male Weight 24 $30,000 35% 4% 28 31,000 25% 19% 33 35,000 25% 12% 37 35,000 25% 14% 43 32,000 25% 17% 47 38,000 30% 12% 52 38,000 30% 9% 57 41,000 40% 9% 65 40,000 50% 4% Public Safety Employees Age Average Pay Percent Male Weight 24 $30,000 75% 23% 28 30,000 75% 34% 33 30,000 75% 16% 38 30,000 75% 13% 42 30,000 75% 4% 48 30,000 75% 8% 52 30,000 75% 2% For the baseline projection results presented in this section of the report, it was further assumed that the benefit structure as it existed on June 30, 2009 would remain in place for the following 30 years, and that the SCRS assets (with the exception of the gains and losses already scheduled to be recognized in the next 4 years) would earn the assumed return of 8.25% annually, thus generating no further gains or losses over the projection period. Page 5

9 Section II Baseline Projection Results FUTURE MEMBERSHIP The following chart and graph show the headcounts of active participants and retired members over the projection period. The actives are broken down into those existing as of June 30, 2009 and those who are hired after June 30, By the end of a 20-year projection period, we estimate that about 89% of those active employees will have been hired after June 30, And by the end of the 30-year projection period we estimate that about 99% of those active employees will have been hired after June 30, It is estimated that in the year 2022, the number of retirees will begin to outpace the number of active participants. Member Active Existing Employees 6,332 3,917 2, Active New Entrants 0 2,415 3,987 5,664 6,256 Retired 2,749 4,475 5,787 7,337 7,706 Total 9,081 10,807 12,119 13,669 14,038 Page 6

10 Section II Baseline Projection Results CONTRIBUTION PATTERN AND UAL AMORTIZATION PERIOD We have also projected the contribution pattern for the next 30 years. The results below are based on a decreasing amortization period beginning with the maximum allowed under GASB, 30 years, in 2010 and decreasing to 0 in the year At that point the Unfunded Accrued Liability will be paid off and the ultimate contribution pattern will be normal cost only. Contribution Rate Pattern ARC Employer Rate Normal Rate 8.09% 7.56% 7.15% 7.00% 6.98% Unfunded Rate (1.26)% 5.31% 7.21% 4.00% 2.52% Total Employer Rate 6.83% 12.87% 14.36% 11.00% 9.50% Amortization Period 15 years 26 years 21 years 11 years 1 year Page 7

11 Section II Baseline Projection Results Assets, Liabilities and Funding Ratio The summary of assets, liabilities and funding ratios follows for each of the employer contribution rates. ($ in thousands) ARC Basis Actuarial Value $1,052,640 $1,173,159 $1,451,699 $2,433,217 $3,691,882 of Assets Accrued Liability $1,025,867 $1,352,467 $1,715,561 $2,586,990 $3,708,989 Unfunded $(26,773) $179,328 $263,862 $153,773 $17,107 Accrued Liability Funding Ratio 102.6% 86.7% 84.6% 94.1% 99.5% Page 8

12 Section III Impact of Benefit Changes on Baseline Projections INTRODUCTION This section of the report will demonstrate the impact of the new Plan Design structure on SCRS financial position. The new Plans, which are detailed below, were assumed to only apply to new members after June 30, As a result it takes quite a few years for each change to have a meaningful impact on System liabilities and contributions. The New Plan Design analyzed in this section is as follows: Current Plan C Proposed Plan D (General Ees Only) Proposed Plan E (Public Safety Only) Employee Contribution 6% 6% 6% Vesting 7.5 years 7.5 years 7.5 years Retirement Eligibility Normal Early 25 years Age 55 with 7.5 years SSRA (Assumed 67 and Vested) SSRA (Assumed 62 and Vested) Age 55 Age 50 Benefit Multiplier 2.35% 2.00% 2.00% Final Average Earnings 3 years 5 years 5 years (FAE) Maximum Benefit of 82.25% 70.00% 70.00% FAE Survivor Benefit Based on FAE3 Based on FAE5 Based on FAE5 Cost-of-Living Adjustment (COLA) CPI - up to 4% after age 65 CPI - up to 2% after age 65 CPI - up to 2% after age 65 SS Option Plan Employee Contribution 6.20% Vesting 10 years Retirement Eligibility Normal Early SSRA (Assumed 67 and Vested) SSRA (Assumed 62 and Vested) Benefit Maximum 25-50% Survivor Benefit 50% of SS Benefit Cost-of-Living Based on CPI Adjustment (COLA) DC Portion Up to 3% Match in 457 Plan Page 9

13 Section III Impact of Benefit Changes on Baseline Projections BENEFIT CHANGES The following table shows the projected Normal Cost Rates for the employer Normal Cost Rate Baseline Plan 7.56% 7.15% 7.00% 6.98% 1. Plan D&E for New Members 2. Plan D&E for Current Non Vested and New Members 3. Increase Plan A and Plan C Employee Contribution Percentages by 2%* 4. Change Investment Return Assumption to 7.50% 5. Hybrid Social Security Plan** 6. Combine Plan D&E 7.5% (2, 3 and 4) 7. Combine Hybrid SS Plan (3, 4 and 5)** 8. Combine Plan D&E 8.0% (2 and 3) 6.97% 5.90% 4.62% 3.90% 6.06% 5.12% 4.03% 3.73% 5.74% 5.33% 5.17% 5.14% 9.35% 8.99% 8.91% 8.91% 6.10% 4.05% 1.11% 0.00%*** 5.81% 4.81% 3.67% 3.36% 3.56% 1.59% 0.00%*** 0.00%*** 4.72% 3.76% 2.65% 2.35% * Increase in employee contributions would be implemented over 4 years at 0.5% a year. ** In addition, an employer match of up to 3% shall be made to a 457 Plan. *** The Employee Contribution Rate exceeds the total normal rate for this Plan at this year resulting in a negative Employer Normal Cost Rate. However, we are showing a 0% normal cost rate since the employer shall not get a credit from the employee contributing more than the benefit is worth each year. The employer and employee contribution rate could be adjusted periodically to ensure that the contribution would continue to be shared equally and prevent the normal cost from going negative. Page 10

14 Section III Impact of Benefit Changes on Baseline Projections The following tables and graph shows the projected total Annual Required Contribution Rates for each of the scenarios. We have assumed a decreasing amortization period beginning at 30 years in the 2010 fiscal year Annual Required Contribution as a Percentage of Pay Baseline Plan 12.87% 14.36% 11.00% 9.50% 1. Plan D&E for New Members 2. Plan D&E for Current Non Vested and New Members 3. Increase Plan A and Plan C Employee Contribution Percentages by 2%* 4. Change Investment Return Assumption to 7.50% 5. Hybrid Social Security Plan** 6. Combine Plan D&E 7.5% (2, 3 and 4) 7. Combine Hybrid SS Plan (3, 4 and 5)** 8. Combine Plan D&E 8.0% (2 and 3) 12.28% 13.11% 8.62% 6.42% 11.37% 12.33% 8.03% 6.25% 11.05% 12.54% 9.17% 7.66% 16.89% 18.08% 14.18% 12.07% 11.41% 11.26% 5.11% 2.52% 13.76% 13.90% 8.94% 6.52% 11.51% 10.68% 5.27% 3.16% 10.91% 11.58% 7.05% 5.07% * Increase in employee contributions would be implemented over 4 years at 0.5% a year. ** In addition, an employer match of up to 3% shall be made to a 457 Plan. Page 11

15 Section III Impact of Benefit Changes on Baseline Projections Annual Required Contributions ($ in 000 s) Baseline Plan $40,512 $52,781 $55,353 $64, Plan D&E for New Members 2. Plan D&E for Current Non Vested and New Members 3. Increase Plan A and Plan C Employee Contribution Percentages by 2%* 4. Change Investment Return Assumption to 7.50% 5. Hybrid Social Security Plan** 6. Combine Plan D&E 7.5% (2, 3 and 4) 7. Combine Hybrid SS Plan (3, 4 and 5)** 8. Combine Plan D&E 8.0% (2 and 3) $38,655 $48,187 $43,377 $43,641 $35,790 $45,320 $40,408 $42,486 $34,783 $46,091 $46,144 $52,070 $53,166 $66,454 $71,355 $82,048 $35,916 $41,387 $25,714 $17,130 $43,314 $51,090 $44,987 $44,327 $36,231 $39,255 $26,519 $21,481 $34,342 $42,563 $35,476 $34,464 * Increase in employee contributions would be implemented over 4 years at 0.5% a year. ** In addition, an employer match of up to 3% shall be made to a 457 Plan. Page 12

16 Section III Impact of Benefit Changes on Baseline Projections 20.00% Projection of Employer Contribution Rates 18.00% 16.00% 14.00% Employer Rate 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Year Baseline Plan Plan D&E for New Members Plan D&E for Current Non Vested Members Increase Plan A and Plan C Ee Cont 2% Change Investment Return to 7.50% Hybrid Social Security Plan Page 13

17 Section III Impact of Benefit Changes on Baseline Projections 20.00% Projection of Employer Contribution Rates 18.00% 16.00% 14.00% Employer Rate 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Year Baseline Plan Combine Plan D&E (7.5% Investment Return) Combine SS Plan (7.5% Investment Return) Page 14

18 Section III Impact of Benefit Changes on Baseline Projections 20.00% Projection of Employer Contribution Rates 18.00% 16.00% 14.00% Employer Rate 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Year Baseline Plan Combine Plan D&E (7.5% Investment Return) Combine Plan D&E (8% Investment Return) Page 15

19 Section III Impact of Benefit Changes on Baseline Projections Savings in Employer Required Contributions from Baseline Projection 60,000 50,000 40,000 Dollars (000's) 30,000 20,000 10,000 0 (10,000) (20,000) (30,000) Year Plan D&E for New Members Plan D&E for Current Non Vested Members Increase Plan A and Plan C Ee Cont 2% Change Investment Return to 7.50% Hybrid Social Security Plan Combine Plan D&E (7.5% Investment Return) Combine SS Plan (7.5% Investment Return) Page 16

20 Section III Impact of Benefit Changes on Baseline Projections Savings in Employer Required Contributions from Baseline Projection 35,000 30,000 25,000 Dollars (000's) 20,000 15,000 10,000 5,000 0 (5,000) (10,000) Year Combine Plan D&E (7.5% Investment Return) Combine Plan D&E (8% Investment Return) Page 17

21 Section IV Investment Return Analysis Background: The assumed investment return is one of the most significant assumptions in the annual actuarial valuation process as it is used to discount the expected benefit payments for all active, inactive and retired members of the divisions. Minor changes in this assumption can have a major impact on valuation results. The investment return assumption should reflect the asset allocation target for the funds set by the Board of Trustees. The current assumption is 8.25%, consisting of a price inflation assumption of 2.50% and a real rate of return assumption of 5.75%. The return is net of all administrative expenses. Past Experience: The assets for Shelby County are valued using a widely accepted assetsmoothing methodology that fully recognizes the expected investment income and also recognizes 20% of each year s investment gain or loss (the difference between actual and expected investment income). The recent experience over the last three years is shown in the table below. Year Ending Actuarial Value Market Value 6/ % 18.34% (5.18) (22.34) Because of the significant variability in past year-to-year results and the inter-play of inflation on those results in the short term, we prefer to base our investment return assumption on the capital market assumptions utilized by the Board in setting investment policy and the asset allocation established by the Board as a result of that policy. This approach is referred to as the building block method in ASOP No. 27. Page 18

22 Section IV Investment Return Analysis Analysis: The current capital market assumptions and asset allocation are shown in Appendix B. Using stochastic projection results provides an expected range of real rates of return over a 50 year time horizon. Looking at one year results produces an expected real return of 5.73% but also has a high standard deviation or measurement of volatility. By expanding the time horizon, the average return does not change much but the volatility declines significantly. The following table provides a summary of results. Time Span In Years Mean Real Return Standard Deviation Real Returns by Percentile 5 th 25 th 50 th 75 th 95 th % 10.99% % -1.26% 5.73% 13.50% 24.84% % 4.87% -1.82% 2.66% 5.89% 9.19% 14.24% % 3.46% 0.35% 3.58% 5.85% 8.21% 11.76% % 2.42% 2.05% 4.22% 5.90% 7.53% 9.95% % 2.01% 2.66% 4.55% 5.89% 7.27% 9.28% % 1.74% 3.09% 4.69% 5.90% 7.07% 8.76% % 1.55% 3.34% 4.83% 5.91% 6.94% 8.47% The percentile results are percentage of the 5,000 random series that produce returns over the time span shown of less than the amount indicated. Thus for the 10 year time span, 5% of the resulting real rates of return were below 0.35% and 95% were above that. As the time span increases, the results begin to merge. Over a 50 year time span, the results indicate there is a 25% chance that real returns will be below 4.83% and a 25% chance they will be above 6.94%. In other words there is a 50% chance the real returns will be between 4.83% and 6.94%. Administrative Expenses: The investment return is assumed to be net of administrative expenses. The table below compares, for the last three years, the expense levels during the fiscal year to the market value of assets SCRS at the end of the fiscal year (all $ in thousands). FY Ending June 30 Administrative Expenses Market Value of Assets Expense Ratio 2007 $1,289 $1,045, % , , % , , % The increase in expense ratio in 2009 reflects the market loss during that year. We would not expect the expense ratio long term to exceed 0.15% and are recommending that level in setting the net investment return assumption. Page 19

23 Section IV Investment Return Analysis Conclusion: Using the building block approach of ASOP No. 27 and the projection results outlined above, we are recommending a range for the investment return assumption of the 25 th to 75 th percentile real returns over the 50 year time span plus the recommended inflation assumption less the recommended expense ratio. The following table details the range. Item 25 th Percentile 50 th Percentile 75 th Percentile Real Rate of Return 4.83% 5.91% 6.94% Inflation 2.50% 2.50% 2.50% Expenses (0.15)% (0.15)% (0.15)% New Investment Return 7.18% 8.26% 9.29% There is a slightly more than 50% chance that the net return will be 8.25% or more over a 50- year period. A net return of 8.25% is at the 49th percentile. Although not in the center of the recommended range, in our opinion, a 7.50% investment return assumption is reasonable and very conservative. The current average of investment return assumption for all public sector plans is around 8.00%. Page 20

24 Appendix A BASE ACTUARIAL ASSUMPTIONS AND METHODS INVESTMENT RATE OF RETURN: 8.25% per year. SALARY INCREASES: Age Increase per year % EXPENSES: None. COST-OF-LIVING ADJUSTMENT: 2.50% per year, compounded for Plan A and Plan C. PERCENT MARRIED: 65% of active members are assumed to be married with the male three years older than his spouse. ASSETS: The actuarial value of assets recognizes a portion of the difference between the market value of assets and the expected market value of assets, based on the assumed valuation rate of return. The amount recognized each year is 10% of the difference between market value and expected market value. VALUATION METHOD: Projected Unit Credit actuarial cost method. Page 21

25 Appendix A SEPARATIONS FROM SERVICE: Representative values of the assumed rates of death, disability, withdrawal, service retirement and early retirement are as follows: Plan B Annual Rate of Death* Disability* Withdrawal** Age Male Female Male Female Male Female % 0.017% 0.029% 0.030% 17.95% 57.96% *75% of deaths and disabilities are assumed to be line-of-duty for deputy sheriffs. 10% of deaths and disabilities are assumed to be line-of-duty for general employees. **Assume early retirements occur according to withdrawal rates; ultimate retirements at age 65 for General Employees and age 60 for Deputy Sheriffs. Plan A Annual Rate of Death* Disability* Withdrawal Retirement Age Male Female Male Female % 0.017% 0.029% 0.030% 12.0% 0.0% *90% of deaths and disabilities are assumed to be non-hazardous duty. Page 22

26 Appendix A Plan C Annual Rate of Death* Disability* Withdrawal Retirement** Before 25 years of service After 25 years of service Non- Age Male Female Male Female Public Safety Public Safety % 0.017% 0.029% 0.030% 12.0% % 10.0% % *90% of deaths and disabilities are assumed to be non-hazardous duty. **Assume that the retirement rate for employees with at least 25 years of service increases by 50% in the year following the Transition Period. Page 23

27 Appendix A DEATHS AFTER RETIREMENT: The RP-2000 Mortality Table Projected to 2006 is used for the period after retirement and for dependent beneficiaries. Special rates are used for the period after disability retirement. Representative values of the assumed rates of death after service and disability retirement are as follows: Annual Rate of Death After Service Retirement Disability Retirement Age Male Female Male Female Page 24

28 Appendix B Capital Market Assumptions and Asset Allocation Geometric Rates of Return and Standard Deviations by Asset Class Asset Class Expected Geometric Standard Deviation Rates of Return U.S. Equity Large Cap 9.0% 15.0% U.S. Equity Small Cap 9.2% 20.0% International Equity Developed 9.5% 15.0% International Equity Emerging 12.5% 23.0% Domestic Fixed Income 2.9% 4.0% International Fixed - Developed 3.5% 7.0% International Fixed - Emerging 11.0% 12.0% High Yield/Distressed 8.0% 7.0% Public Real Estate 2.5% 16.0% Private Real Estate 12.5% 11.0% Private Equity 20.0% 23.0% Hedge Funds 10.5% 7.0% Timber 7.5% 11.5% Infrastructure 9.0% 14.0% Cash 0.2% 0.8% Proposed 2010 Long Term Asset Allocation Targets Asset Class Asset Allocation U.S. Equity Large Cap 27.0% U.S. Equity Small Cap 6.0% International Equity Developed 16.0% International Equity Emerging 4.0% Domestic Fixed Income 10.0% International Fixed - Developed 4.0% International Fixed - Emerging 4.0% High Yield/Distressed 6.0% Public Real Estate 0.0% Private Real Estate 0.0% Private Equity 4.0% Hedge Funds 16.0% Timber 2.0% Infrastructure 1.0% Cash 0.0% Page 25