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DISCUSSION Staff is recommending an initial investment of$28 million that is comprised of$6.7 million which is the City's FY 2018/19 PERS Normal Cost contribution (FY 2018/19 PERS Contribution) and $21.3 million in Retiree Medical Reserve Funds and FY 2017/18 year-end surplus that was ear marked to prefund pension liabilities. PARS Section 115 Trust program has five investment portfolios: Capital Appreciation, Balanced, Moderate, Moderately Conservative, and Conservative. Each portfolio has different risk profiles and different amounts invested in equities and other instruments. The Capital Appreciation portfolio has 75 percent invested in equities while the Conservative portfolio has 25 percent invested in equities. The amount of equities in an investment portfolio increases risk and volatility. Conversely, as the amount of equities in an investment portfolio decreases, risk and volatility decreases. With that in mind, staff recommends the following investment strategies: Annual Normal Pension Contributions Invest the City's FY 2018/19 PERS Contribution of $6.7 million in the PARS Conservative passive portfolio. Rather than withdraw the principle after one year, staff proposes to keep it in the PARS account for up to three years with annual reviews to determine whether the City's cash flow requires a withdrawal. The Conservative passive portfolio earned 3.39 percent annualized over five years and 3.75 percent annualized over ten years, gross of fees. Initial $21.3 Million Investment Staff recommends investing the $21.3 million initial investment in a custom portfolio that comprises 70 percent equities and 30 percent fixed income2. This is between the PARS Balanced and Capital Appreciation portfolios. The mid-point 5-year annualized returns for those two portfolios is 9.3 percent gross of fees. The ten year annualized return for the Balanced active portfolio is 5.74 percent gross of fees. PARS created the Capital Appreciation portfolio five years ago so there isn't a ten year investment return history. The rationale for recommending this option includes: • Staff anticipates not drawing on this fund for at least ten years. Thus, the City will not require short term liquidity that would lead to investing in a more conservative portfolio. In other words, the City's funds can stay in the account during market downturns and not lose its principal since the markets have historically rebounded after downturns. • The $21.3 million initial investment will be part of the City's existing $200 million investment portfolio. Investing 70 percent of the $21.3 million in equities will result in approximately $15 million in equities which means 7.5 percent of the City's investments would be in higher risk investments. The remaining 92.5 percent of the City's investment portfolio will remain in conservative fixed income investments. Fixed income investments include high grade securities i.e. BBB+ or higher. Page 3 of 4