Mcera Investment Retirement Board Meeting Agenda - Amended Thursday, March 23, 2017 Merced County Employees’ Retirement Association 3199 “M” Street, Merced, Ca 95348

MCERA INVESTMENT RETIREMENT BOARD MEETING AGENDA - AMENDED THURSDAY, MARCH 23, 2017 MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION 3199 “M” STREET, MERCED, CA 95348

Please turn your cell phone, beeper or other electronic device to non audible mode and please refrain from using them during the Board meeting.

CALL TO ORDER: 8:15 A.M.

● ROLL CALL. ● APPROVAL OF MINUTES – March 9, 2017.

PUBLIC COMMENT

Members of the public may comment on any item under the Board’s jurisdiction. Matters presented under this item will not be discussed or acted upon by the Board at this time. For agenda items, the public may make comments at the time the item comes up for Board consideration. Persons addressing the Board will be limited to a maximum of five (5) minutes in total. Please state your name for the record.

REGULAR CALENDAR

BOARD ACTION1/DISCUSSION Pursuant to Govt. Code § 31594 and MCERA’s Investment Objectives & Policy Statement due diligence analysis requirement (unless noted otherwise):

1. Presentation and possible action on Auditing of Actuarial Valuation Report as of June 30, 2016 and Audit of Actuarial Experience Study for period July 1, 2013 through June 30, 2016 – Segal. 2. Approval of Actuarial Valuation Report as of June 30, 2016 and Experience Study for period July 1, 2013 through June 30, 2016 which establishes new employer and employee contribution rates and new demographic and economic assumptions for Fiscal Year 2017/2018 (effective July 1, 2017) – Staff. 3. Presentation and discussion of hedge fund – AQR. 4. Presentation and discussion of hedge fund - JPMorgan. 5. Discussion and possible action of hedge fund selection - Verus. 6. Presentation and discussion of the February 2017 Monthly and Quarterly Flash Investment Performance Report with possible board action on any underperforming funds - Verus. 7. Discussion and possible approval to negotiate contract including fees and scope of services with Cliffwater LLC for Private Equity and Hedge Fund Consulting Services - Staff. 8. Discussion and possible authorization to terminate the existing custodial banking services contract with Bank of New York Mellon and approve custodial banking services contract with Northern Trust conditioned on upon legal approval by MCERA’s County Counsel and outside counsel - Staff.

1 “Action” means that the Board may dispose of any item by any action, including but not limited to the following acts: approve, disapprove, authorize, modify, defer, table, take no action, or receive and file.

9. Discussion and possible action regarding nomination of officers for SACRS Board of Director election slate for 2017/2018. 10. Review calendar of any training sessions and authorize expenditures for trustees and plan administrator. Examples of upcoming training and educational sessions: a. Raven Annual Meeting, April 20, 2017, New York, NY. b. Dimensional Fund Advisor (DFA) Institutional Investment Symposium: April 24– 26, Austin, TX. c. SACRS Spring Conference, May 16 – 19, 2017, Napa, CA. d. Global Future of Retirement Training, June 25 – 27, 2017, New York, NY. e. Verus 2017 Client Summit, August 28-29, 2017, San Francisco, CA. f. Dimensional Fund Advisor (DFA) Institutional Investment Forum, July 27, 2017, Santa Monica, CA. g. Dimensional Fund Advisor (DFA) Institutional Investment Forum, October 12, 2017, New York, NY. h. Dimensional Fund Advisor (DFA) Institutional Investment Forum City), October 19, 2017, Chicago, IL. Pursuant to Govt. Code § 31522.8 and MCERA’s Trustees Education and Training Policy requirements.

INFORMATION ONLY

ADJOURNMENT

All supporting documentation is available for public review in the office of the Merced County Employees’ Retirement Association, 3199 “M” Street, Merced, California, 95348 during regular business hours, 8:00 a.m. – 5:00 p.m., Monday through Friday.

The Agenda is available online at www.co.merced.ca.us/retirement

Any material related to an item on this Agenda submitted to the Merced County Employees’ Retirement Association, after distribution of the Agenda packet is available for public inspection in the office of the Merced County Employees’ Retirement Association.

Persons who require accommodation for a disability in order to review an agenda, or to participate in a meeting of the Merced County Employees’ Retirement Association per the American Disabilities Act (ADA), may obtain assistance by requesting such accommodation in writing addressed to Merced County Employees’ Association, 3199 “M” Street, Merced, CA 95348 or telephonically by calling (209) 726-2724. Any such request for accommodation should be made at least 48 hours prior to the scheduled meeting for which assistance is requested.

MCERA RETIREMENT BOARD MEETING MINUTES THURSDAY, MARCH 09, 2017 MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION 3199 “M” STREET, MERCED, CA 95348

ROLL CALL: 8:15 A.M.

Board Members Present: Darlene Ingersoll3, Michael Rhodes234, Scott Johnston2346, Ronald Kinchloe1234, David Ness16, Karen Adams56, Jerald O’Banion, Al Peterson, Ryan Paskin46, Jason Goins and Samuel Spangler. Counsel: Forrest Hansen. Staff: Kristie Santos, Angelo Lamas, Bren Horrocks, Michelle Lee and Sheri Villagrana.

Absent: None.

1 Member of the Audit Committee 2 Member of the Budget Committee 3 Member of the Ad Hoc Special Assignment Committee 4 Member of the Investment Policy Ad Hoc Committee 5 Member of the Technology Ad Hoc Committee 6 Member of the Legislative Committee

APPROVAL OF MINUTES: February 23, 2017 Motion to approve the February 23, 2017 minutes with noted correction Paskin/O’Banion U/A (9-0)

PUBLIC COMMENT

Leslie Howard provided a brief statement. CLOSED SESSION

The meeting went into closed session. Trustee Ingersoll (Chair) recused herself from Jaclyn Valenzuela hearing. RETURN TO OPEN SESSION

Motion to deny a service connected disability and deny a non-service connected disability for Jaclyn Valenzuela. Kinchloe/Paskin U/A (9-0) Trustee Spangler (Safety Alternate) voted in absence of Trustee Ingersoll.

Motion to approve a service connected disability and deny a non-service connected disability for Leslie Howard. Ness/Paskin U/A (9-0) Trustee Spangler (Safety Alternate voted in absence of Trustee Rhodes.

Trustee Rhodes (Vice-Chair) chaired Jaclyn Valenzuela hearing. Trustee Rhodes recused himself from Leslie Howard hearing. Trustee Ingersoll (Chair) chaired Leslie Howard hearing.

No other action taken during closed session.

MCERA Retirement Board Meeting Minutes – March 09, 2017 Page 2

CONSENT CALENDAR

RETIREMENTS: All items of earnable compensation for service or disability retirements listed below are in compliance with the pay code schedule approved by the Board of Retirement. The retirement is authorized; however, administrative adjustments may be necessary to alter the amount due to: audit, late arrival of data, court order, etc.

a. Martinez, Amparo H.S.A. 14 Yrs. Svc. Eff. 02/21/2017 b. Harvey, Marcia Env. Health 10 Yrs. Svc. Eff. 02/18/2017 c. Willems, Curtis Mental Health 4 Yrs. Svc. Eff. 02/19/2017 d. Palm, Frances H.S.A. 17 Yrs. Svc. Eff. 02/18/2017 e. Rough, Steven Public Works 32 Yrs. Svc. Eff. 03/02/2017 f. Fister, Janice (SCD) Probation 7 Yrs. Svc. Eff. 06/29/2015 * g. Guzman-Hernandez, Rosa Sheriff 10 Yrs. Svc. Eff. 02/18/2017

*Effective date per CERL section 31724

YTD fiscal year 2016/2017 retirees: 050 YTD fiscal year 2015/2016 retirees: 064 YTD fiscal year 2014/2015 retirees: 088

REFUND OF SERVICE PURCHASE: None.

DEATH BENEFIT: a. Benne, John DOD 01/14/2017

Motion to approve Consent Calendar. O’Banion/Peterson U/A (9-0)

REGULAR CALENDAR

BOARD ACTION1/DISCUSSION

1. Monthly Budget Report for January 2017 (per Govt. Code § 31580.2 as part of the annual budget process and expenditure limitation) – Staff. Bren Horrocks, Fiscal Supervisor, provided an overview of the January 2017 Budget Report. No action taken.

2. Discussion and approval of Comprehensive Annual Financial Report (CAFR) for year ending June 30, 2016 - Staff. 1“Action” means that the Board may dispose of any item by any action, including but not limited to the following acts: approve, disapprove, authorize, modify, defer, table, take no action, or receive and file.

MCERA Retirement Board Meeting Minutes – March 09, 2017 Page 3

Motion to approve the MCERA Comprehensive Annual Financial Report (CAFR) for fiscal years ending June 30, 2016 and 2015. Adams/Kinchloe U/A (9-0)

3. Discussion and possible action on contract renewal for pension software CPAS – Staff. Plan Administrator discussed the renewal contracts for the pension administration software system. Motion to approve the renewal of contracts for CPAS pension administration software system. O’Banion/Adams U/A (9-0)

4. Discussion and possible action on legislation update – Staff. Plan Administrator provided an update on upcoming legislation. No action taken.

5. Review calendar of any training sessions and authorize expenditures for trustees and plan administrator. Examples of upcoming training and educational sessions: a. CALAPRS Advanced Principles of Pension Management for Trustees, March 29- 31, 2017, Los Angeles, CA. b. Raven Annual Meeting, April 20, 2017, New York, NY. c. Dimensional Fund Advisor (DFA) Institutional Investment Symposium: April 24- 26, Austin, TX. d. SACRS Spring Conference, May 16-19, 2017, Napa, CA. e. Global Future of Retirement Training, June 25-27, 2017, New York, NY. f. Verus 2017 Client Summit, August 28-29, 2017, San Francisco, CA. g. Dimensional Fund Advisor (DFA) Institutional Investment Forum, July 27, 2017, Santa Monica, CA. h. Dimensional Fund Advisor (DFA) Institutional Investment Forum, October 12, 2017, New York, NY. i. Dimensional Fund Advisor (DFA) Institutional Investment Forum City), October 19, 2017, Chicago, IL. Pursuant to Govt. Code § 31522.8 and MCERA’s Trustees Education and Training Policy requirements. No action taken.

INFORMATION ONLY

Trustee Johnston reported that this year’s SACRS elections may be very eventful especially regarding the regarding the Secretary elections.

County Counsel Forrest Hansen mentioned that MCERA Trustees may contact him as a legal resource for any MCERA related questions.

Plan Administrator provided a reminder that SACRS, as well as other organizations, credit educational hours based on the evaluations completed by attendees, so please be sure to complete evaluation to receive proper educational hour credit and to provide valued feedback regarding educational programs.

Retirement Officer Angelo Lamas stated that the 700 Form is due by April 3, 2017, and records indicate only 6 trustees have submitted the required form to date. MCERA Retirement Board Meeting Minutes – March 09, 2017 Page 4

ADJOURNMENT

The meeting adjourned at 10:24 a.m.

Respectfully submitted,

______Darlene Ingersoll, Chair

______Al Peterson, Secretary

______Date

1“Action” means that the Board may dispose of any item by any action, including but not limited to the following acts: approve, disapprove, authorize, modify, defer, table, take no action, or receive and file.

Item 1

Merced County Employees’ Retirement Association

Actuarial Audit of the June 30, 2016 Actuarial Valuation and Review of the 2013 – 2016 Experience Study

March 23, 2017

Presented by: John Monroe, ASA, MAAA, EA

Copyright © 2017 by The Segal Group, Inc. All rights reserved. 5478573v2 Project Outline The purpose of a “full scope” actuarial audit is to determine if results and conclusions determined by the valuation actuary are valid, appropriate and reasonable The audit of MCERA includes: • Review of 2013 – 2016 experience study • Reasonableness review of actuarial assumptions • Determination of validity of the data • Independent replication of liabilities valued in the 2016 actuarial valuation • Comparison of testlives • Peer review of June 30, 2016 actuarial valuation report for clarity and completeness We acknowledge and appreciate the helpful assistance from the MCERA staff and Cheiron on this project

1 Census Data

2 Census Data Overall, the data files provided are comprehensive enough to perform actuarial valuations and develop conclusions from the results Segal received the MCERA data file that was provided to Cheiron, and also the final data file that Cheiron used to complete the valuation We received the questions regarding the data that Cheiron asked MCERA along with a copy of the responses from MCERA • Verified that Cheiron correctly made edits to the data based on responses from MCERA

3 Census Data continued Segal was able to generally match the participant counts, annual compensation, average age and service, and average retirement benefits shown in Cheiron’s valuation report: • Minor differences are explainable and a result of either: – Adjustments made to the data based on responses to the data questions – Classification of members who have service accrued in multiple membership class/tier Minor observations regarding the data: • Cheiron should include the COLA contribution balance when valuing Tier 1 members (minimal impact) • Cheiron should review with MCERA to ensure that part-time members (if any) are flagged so that their compensation can be properly annualized • Cheiron should review with MCERA to ensure that proper compensation information is being used for terminated vested members – If possible, the data provided by MCERA each year should contain an estimate of final average compensation at termination

4 Actuarial Assumptions

5 Assumptions and Methods Demographic Assumptions Overall, we found the demographic assumptions (mortality, retirement, turnover, disability, etc.) to be reasonable, and we agreed with the methodology used Concur with change to a generational mortality table • Emerging practice within actuarial profession We recommend that Cheiron consider developing separate retirement rates for the PEPRA tiers • Benefit factors in PEPRA tiers differ significantly at many ages as compared to the non-PEPRA tiers (mainly for General members) For the service retirement assumption, Cheiron should consider extending the analysis to include Safety members at ages 40 to 49 with 20 or more years of service Other minor recommendations to consider are found in our report

6 Assumptions and Methods Economic Assumptions Overall, we also found the economic assumptions (investment return, inflation, salary increases) to be reasonable, and agreed with most of the methodology used Inflation Assumption Based on recommendations, Board directed Cheiron to use a 2.50% inflation assumption • Decrease from 3.00% assumption used in previous valuation The 2.50% assumption is within the reasonable range for this assumption: • At the low end of the range used for comparable retirement plans • Segal clients typically use 2.75% to 3.00%

7 Assumptions and Methods Economic Assumptions continued Investment Expenses Total about 42 basis points on an annual basis Cheiron does not make an explicit reduction for these expenses • They believe the returns provided are for portfolio benchmark indices, which are expected to have minimal expenses For various reasons, Segal would generally subtract some portion of the expenses • May be considered to be more conservative than that required under Actuarial Standards of Practice (ASOPs) Could depend on whether or not those expenses are reasonably expected to be covered by additional returns under an active management strategy

8 Assumptions and Methods Economic Assumptions continued Investment Return Assumption Based on recommendations, Board directed Cheiron to use a 7.25% return assumption • Decrease from 7.75% assumption used in prior valuation There are technical differences between the model Cheiron uses to set the return assumption as compared to the model Segal uses Real rate of return component is 4.75% • Based on the 7.25% assumption along with 2.50% inflation • Higher than comparable real rate of return assumptions used by other California public retirement systems • Implies that the target asset allocation is more aggressive than other systems • Reduction in real rate of return component should be considered during next review

9 Assumptions and Methods Economic Assumptions continued

Investment Return Assumption continued We believe that the 7.25% investment return assumption in combination with the 2.50% price inflation assumption is reasonable • Level of risk implicit in assumption is comparable to recommendations we have made to other retirement systems Salary increase assumption • Assumptions are reasonable – Consider an increase in real wage growth assumption of 0.25% in next review » Especially if there is a recommendation to further decrease inflation assumption – Ultimate merit salary increase assumption after 20 years of 0.50% is lower than recent actual experience » Monitor and consider an increase in next review

10 Replication of Results

11 Testlife Comparison Compared results with Cheiron on 28 individual test lives • 8 active members • 8 terminated vested or reciprocal transfers • 12 retired members or beneficiaries Overall, we matched the calculation of the present value of future benefits (PVB) within a reasonable tolerance • Ratio of Segal’s PVB to Cheiron’s PVB is as follows – 98% to 101% for active test lives – 94% to 103% for terminated vested test lives – 100% for all retired test lives Entry age method separates the PVB into two components • Actuarial Accrued Liability (AAL) • Present Value of Future Normal Costs (PVFNC) • Method used to separate into components by valuation systems can vary – Slightly larger differences occur when matching AAL and PVFNC

12 Total MCERA Results Comparison PVB

Present Value of Future Benefits (PVB) $ in Thousands Cheiron Segal Actives $493,837 $495,877 Retirees 804,658 803,926 Inactive Vesteds 47,561 47,425 Total $1,346,056 $1,347,228 Ratio of Segal/Cheiron Actives 100% Retirees 100% Inactive Vesteds 100% Total 100%

Results match extremely close for total MCERA PVB • Some generally minor differences by Tier as shown in our report

13 Total MCERA Results Comparison AAL, PVFNC and UAAL

$ in Thousands Cheiron Segal Present Value of Future Benefits (PVB) $1,346,056 $1,347,228 Present Value Future Normal Cost (PVFNC) (144,861) (145,760) Actuarial Accrued Liability $1,201,195 $1,201,468 Market Value of Assets $670,016 $670,016 Unfunded Actuarial Accrued Liability (UAAL) $531,180 $531,452 Ratio of Segal/Cheiron Present Value of Future Benefits (PVB) 100% Present Value Future Normal Cost (PVFNC) 101% Actuarial Accrued Liability 100% Market Value of Assets 100% Unfunded Actuarial Accrued Liability (UAAL) 100%

Results match extremely close for total MCERA • Some generally minor differences by Tier as shown in our report

14 Total MCERA Results Comparison Contribution Rates

Cheiron Segal 1. Total Normal Cost Rate 17.29% 17.60% 2. Member Contribution Rate1 (7.98%) (7.95%) 3. Employer Normal Cost Rate (#1 – #2) 9.31% 9.65% 4. Employer UAAL Amortization Rate 39.73% 39.77% 5. Administrative Expense Rate 1.54% 1.56% 6. Total Employer Contribution Rate (#3 + #4 + #5) 50.58% 50.98% Ratio of Segal/Cheiron 1. Total Normal Cost Rate 102% 2. Member Contribution Rate1 100% 3. Employer Normal Cost Rate (#1 – #2) 104% 4. Employer UAAL Amortization Rate 100% 5. Administrative Expense Rate 101% 6. Total Employer Contribution Rate (#3 + #4 + #5) 101% Results match extremely close for total MCERA • Some generally minor differences by Tier as shown in our report

1 Not including member’s share of administrative expense. 15 Valuation Report

16 Comments on Valuation Report Cheiron’s valuation report complies with the ASOP recommendations for actuarial communications • Also contains most of the model disclosures recommended by the California Actuarial Advisory Panel (CAAP) We have provided detailed comments for possible consideration in our audit report Highlights include: • Consider showing estimated annual contributions in dollars (not just rates) • More explicitly identify liability volatility ratio – Can be used to identify contribution volatility associated with not only investment volatility but also future assumption changes • Consider reviewing method to allocate assets to General and Safety cost groups – Allocation is based on liabilities for each group – Results in a significant amount of pooling of experience between those cost groups

17 Summary

18 Summary Overall, we found the audit to be clean • MCERA should feel confident that the results of the valuation are reasonable Actuarial assumptions recommended by Cheiron, as well as those that the Board of Retirement directed Cheiron to use are reasonable for use in MCERA’s actuarial valuation Audit confirms that the actuarial calculations as of June 30, 2016 are reasonable and based on generally accepted actuarial practices and principles

19 Thank you!

John W. Monroe Vice President and Actuary [email protected] 415-263-8260 www.segalco.com

20 Item 1a

MERCED COUNTY EMPLOYEES' RETIREMENT ASSOCIATION

Audit of June 30, 2016 Actuarial Valuation

* Segal Consulting 100 Montgomery Street, Suite 500 San Francisco, CA 94104

THIS REPORT HAS BEEN PREPARED AT THE REQUEST OF THE BOARD OF RETIREMENT TO ASSIST IN ADMINISTERING THE FUND. THIS REPORT MAY NOT OTHERWISE BE COPIED OR REPRODUCED IN ANY FORM WITHOUT THE CONSENT OF THE BOARD OF RETIREMENT AND MAY ONLY BE PROVIDED TO OTHER PARTIES IN ITS ENTIRETY. THE MEASUREMENTS SHOWN IN THIS REPORT MAY NOT BE APPLICABLE FOR OTHER PURPOSES.

Item 1b

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION

Review of July 1, 2013 through June 30, 2016 Actuarial Experience Study

100 Montgomery Street, Suite 500 San Francisco, CA 94104

100 Montgomery Street Suite 500 San Francisco, CA 94104-4308 T 415.263.8200 www.segalco.com

March 1, 2017

Ms. Kristie Santos Plan Administrator Merced County Employees’ Retirement Association 3199 ‘M’ Street Merced, CA 95348

Re: Review of July 1, 2013 through June 30, 2016 Actuarial Experience Study

Dear Ms. Santos:

We are pleased to present the results of this review of the July 1, 2013 through June 30, 2016 Actuarial Experience Study for the Merced County Employees’ Retirement Association (MCERA). The purpose of this review was to verify the recommendations of Cheiron and to offer comments on the methodology and the results of their experience study.

This review was conducted by Paul Angelo, a Fellow of the Society of Actuaries, Member of the American Academy of Actuaries, and an Enrolled Actuary under ERISA, and John Monroe, an Associate of the Society of Actuaries, Member of the American Academy of Actuaries, and an Enrolled Actuary under ERISA. This review was conducted in accordance with the standards of practice prescribed by the Actuarial Standards Board.

We are members of the American Academy of Actuaries and we meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion herein.

The assistance of Cheiron and MCERA is gratefully acknowledged. We appreciate the opportunity to be of service to MCERA’s Board of Retirement and we are available to answer any questions you may have on this report.

Sincerely,

Paul Angelo, FSA, MAAA, FCA, EA John Monroe, ASA, MAAA, EA Senior Vice President and Actuary Vice President and Actuary

JB/gxk

cc: Graham A. Schmidt, ASA, EA, FCA, MAAA

5472616v8/14392.001

Benefits, Compensation and HR Consulting. Member of The Segal Group. Offices throughout the United States and Canada

Table Of Contents

EXECUTIVE SUMMARY Page 1

SECTION I

PURPOSE AND SCOPE OF THE ACTUARIAL REVIEW Page 5

SECTION II

RESULTS OF THE ACTUARIAL REVIEW Page 6 Review of Economic Assumptions Page 6 Review of Demographic Assumptions Page 15 Overall Conclusion Page 20 Summary of Suggestions for Future Experience Studies Page 20

Executive Summary

This report has been prepared by Segal Consulting to present a review of the July 1, 2013 through June 30, 2016 experience study performed by Cheiron for MCERA.

Our overall assessment of Cheiron’s actuarial work for MCERA is that all major actuarial functions are being appropriately addressed. Cheiron has employed generally accepted actuarial practices and principles in studying plan experience, selecting assumptions and presenting the results of their work. We believe that the actuarial assumptions as recommended by Cheiron, as well as those that the Board of Retirement directed Cheiron to use are reasonable for use in MCERA’s actuarial valuation. The focus of our review is to comment on those items which, in our opinion, are subject to improvement, so as to contribute to the improvement of the experience study process.

Our observations and recommendations are summarized as follows:

 For the investment rate of return assumption, Cheiron recommended reducing the current assumption of 7.75% to either 7.50% or 7.25%, net of investment related expenses. All of their recommendations are mainly driven by the level of assumed price inflation. The Board directed Cheiron to use a 7.25% investment return assumption along with a 2.50% price inflation assumption, which resulted in no change to the current assumed real rate of return at 4.75%.

As an independent check, we have applied the model that we use for other California public retirement systems to review the investment return assumption. Based on the application of our model, we believe that the level of risk implicit in the 7.25% investment return assumption, along with a 2.50% price inflation assumption is comparable to recommendations we have made to other retirement systems and is a reasonable assumption. However, the real rate of return of 4.75% is higher than that used by other California public retirement systems. We believe that a reduction in the real rate of return should be considered during the next review.

Individual actuarial firms use different models with different criteria and parameters to determine the investment return assumption, and the model used by Segal is different from that used by Cheiron. We believe that the most significant difference between our

Executive Summary

model and Cheiron’s model is that we develop a discount rate based on expected or mean arithmetic average returns, which correspond to an expected or mean level of future assets. In contrast, Cheiron is developing a discount rate based on median geometric average returns, which correspond to a median level of future assets. It turns out that, if you want to be at least 50% sure of having sufficient future assets to match your future liabilities, you need to use a lower discount rate than if you instead want to “expect” to have sufficient future assets to match those liabilities. We discuss this admittedly counter-intuitive result in more detail in our report. The difference in these two discount rates depends on the volatility of the asset portfolio, and for MCERA would be estimated to be approximately 1%. This is generally consistent with a significant portion of the difference in results between the Segal and Cheiron models.

Historically, Cheiron’s recommendations and the Board’s assumptions have been based on median geometric average returns and so on a median (50/50 chance) level of future assets. While both approaches are allowed under ASOP 27, we note that adoption of an investment return assumption under another basis, such as Segal’s model, would be inconsistent with MCERA’s past practice.

 We note that Cheiron assumes that there are no investment expenses in their analysis of the investment return assumption as they believe that Verus has effectively accounted for most of the investment fees in their capital market assumptions. Cheiron has based this on the fact that Verus’ capital market assumptions are for index funds where available, and where index funds are not available (such as private equity) the expected returns are net of fees.

As noted above, individual actuarial firms use different models with different criteria and parameters to determine the investment return assumption, and the model used by Segal is different from that used by Cheiron. With regard to investment expenses, we would subtract the investment expenses1 from the indexed (or passively managed) returns in developing the investment return assumption which would lower the expected investment

1 For MCERA, the investment expense (including management, consulting and custodian fees) has been about 0.42%.

Executive Summary

return assumption. Note that in the development of the investment return assumption we generally would not recommend an explicit assumption that there would be additional returns (“alpha”) from active management.2 We recommend that Cheiron review their methodology in consideration of ASOP 27 guidance on active and passive investment expenses. We believe that ASOP 27 could, in fact, be interpreted as allowing for not subtracting active investment expenses, which is consistent with part of Cheiron’s methodology. However, it may be appropriate to subtract passive investment expenses.

 MCERA’s investment return assumption is currently developed net of investment expenses but not net of administrative expenses. There is a separate explicit administrative expense loading that is added to contribution rates. We believe that this is the preferable way to handle these expenses. It is also consistent with financial reporting requirements under Governmental Accounting Standards Board (GASB) Statements 67 and 68. The assumption for administrative expenses of $2.2 million for the fiscal year ending June 30, 2017 was developed based on input from Retirement Association staff and appears to be reasonable.

 Cheiron recommended the introduction of a real wage growth assumption of 0.25% per year. We agree with the introduction of a real wage growth assumption, but we believe a 0.50% real wage growth assumption should be considered in part due to the 0.50% decrease in the price inflation assumption.

 Cheiron is recommending higher merit salary increases in the first few years of service for both General and Safety members and increases in the ultimate merit salary rate for General members. Decreases in the assumption were recommended for the middle years of service categories for both General and Safety. Overall, we believe that Cheiron’s merit salary increase recommendations are reasonable. Note that the ultimate merit

2 Our practice may be considered by some to be more conservative than that required under Actuarial Standard of Practice (ASOP) No. 27, which states in part in Section 3.8.3.d, “Investment Manager Performance - Anticipating superior (or inferior) investment manager performance may be unduly optimistic (pessimistic). The actuary should not assume that superior or inferior returns will be achieved, net of investment expenses, from an active investment management strategy compared to a passive investment management strategy unless the actuary believe, based on relevant supporting data, that such superior or inferior returns represent a reasonable expectation over the measurement period.” (emphasis added). We believe that this means that assuming only enough superior return to cover related investment expenses would not require the relevant supporting data referenced in ASOP No. 27.

Executive Summary

increase for General and Safety members with 20 or more years of service of 0.50% appears to be lower than recent actual experience. We recommend that Cheiron consider increasing the ultimate rate of merit increase if this trend continues in the next experience study.

 We are recommending that Cheiron consider developing separate retirement rates for the PEPRA tiers. This is because the benefit factors differ significantly at many ages between the PEPRA and non-PEPRA tiers (mainly for General members). This could have an impact on the contribution rates for the PEPRA tiers.

 Cheiron is also recommending a change to use a generational mortality table. This is the emerging practice within the actuarial profession and we concur with this recommendation.

 Other recommended changes to demographic assumptions appear to be reasonable overall. In many cases, there is not a significant amount of data available for certain decrements due to the size of the retirement system membership. Sometimes, Cheiron includes data from the three to six years prior to this experience study period in order to help set the assumption and we agree with this approach.

Section I

PURPOSE AND SCOPE OF THE ACTUARIAL REVIEW

Purpose of the Review

The purpose of this review is to provide MCERA’s Board of Retirement an independent opinion as to the reasonableness of the methods, analysis and recommendations of Cheiron in developing the actuarial assumptions presented in their experience study. The independent review of the reasonableness of Cheiron’s calculation of employer and member contribution rates based on the new assumptions will be covered in the audit of the June 30, 2016 actuarial valuation. Toward these purposes, we used the guidelines of the relevant Actuarial Standards of Practice established by the Actuarial Standards Board as well as comparisons to recognized and accepted methods and principles as the gauge of reasonableness.

Scope of the Actuarial Review

The scope of the Actuarial Review, as described in MCERA’s Actuarial Auditing Services Agreement with Segal, includes the following:

 Evaluation of the available data for the performance of the experience study, the degree to which such data is sufficient to support the conclusions of the study, and the use and appropriateness of any assumptions made regarding such data.

 Evaluation of the results and reconciliation of any discrepancies between the findings, assumptions, methodology, rates, and or adjustments with MCERA’s consulting actuary.

 Evaluation of recommended economic and demographic assumptions as presented in MCERA’s consulting actuary’s experience study report.

Section II

RESULTS OF THE ACTUARIAL REVIEW

Review of Economic Assumptions

The economic assumptions reviewed by Cheiron during the 2016 experience study are the price inflation, investment rate of return, expenses, wage growth (price inflation and real wage inflation), payroll growth and post-retirement Cost-of-Living Adjustment (COLA) increases. Actuarial Standard of Practice No. 27 (ASOP 27) provides the actuary guidance in developing these assumptions. Among these guidelines is the consistency of the economic assumptions selected by the actuary.

Results

Cheiron has recommended various sets of economic assumptions in their presentation to the Board. While each set of economic assumptions is internally consistent, various sets of assumption appear to have been developed independently and so are not always consistent with each other. We believe that the set of economic assumptions that the Boardultimately directed Cheiron to use is internally consistent and reasonable for use in the June 30, 2016 valuation.

Details of Review

In order to demonstrate the interconnection and the consistency among the investment return, price inflation and wage growth assumptions, Segal utilizes a “building block” approach in developing and documenting our review of these three assumptions. Under this approach, the investment rate of return assumption is the combination of the inflation component and the real rate of return component (used by the investment consultants), less an expense component. Similarly, the wage growth assumption is the combination of the inflation component and the real wage increase component. (It should be noted that the salary increase assumption is developed using the wage growth assumption and the merit salary increase assumption.) In our experience, this is generally the preferred approach for documenting and developing these assumptions.

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Inflation Assumption

The first “building block” to consider is the price inflation component assumption. This assumption underlies all other economic assumptions, including both the investment return and the projection of benefit liabilities (i.e., salary increase for actives and COLAs for retirees in Tier 1). In their analysis, Cheiron cited the inflation expectations from the Federal Reserve Survey of Professional Economic Forecasters and those inflation assumptions used by different California public retirement plans in their valuations. They also included the inflation expectation of Verus, the investment consultant for the Association along with the expectation from three other investment consultants and from the survey conducted by Horizon Actuarial Services.

There was a wide disparity between the 50th percentile assumptions of 2.12% from the economic forecasters and 3.00% from the retirement plan valuations. While we would find the 2.50% assumption used by Cheiron to be within the reasonable range for this assumption, it is important to acknowledge the different time horizons used by the economic forecasters (10 years as provided in the Cheiron experience study) and the much longer time period used by the California public retirement plans in their valuations. For example, the benefits for some members currently in their 30’s and 40’s will not commence until they retire at 60’s and 70’s and then be paid for 20 to 30 years after their retirement. Due to the difference in the time horizon, the inflation assumption adopted by Segal’s California public retirement system clients (that have recently reviewed these assumptions) have been in the range of 2.75% to 3.00%.

After reviewing Cheiron’s recommendations, the Board directed Cheiron to use the 2.50% price inflation assumption. We believe that this assumption is reasonable, but note it is in the low end of the range used by comparable retirement plans.

Investment Expenses

The actual amount of investment expenses paid out of the Plan during fiscal year 2015 was around $3 million. (Of that amount, about 80% was paid out as investment manager fees and the remaining 20% was paid out for investment consulting, custodian banking, and other expenses.)

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We note that Cheiron assumes that there will be no investment expenses in their analysis of the investment return assumption. They believe that the returns provided to them are modeled based on expected returns for portfolio benchmark indices, which are expected to have minimal expenses.

Because Cheiron made no provision to collect those investment expenses as an additional contribution rate, these investment expenses came out of investment returns. Cheiron did not make an explicit reduction for these expenses, as there was no implicit investment expense assumption used by Cheiron in their development of the investment return assumption. While we have not audited the capital market assumptions, it has been our experience working with the investment consultants retained by our California public retirement system clients that their capital market assumptions are generally gross of (i.e. not reduced for) investment expenses.

It should be noted that individual actuarial firms use different models with different criteria and parameters to develop the investment return assumption, and the model used by Segal is different from that used by Cheiron. Segal would generally subtract some portion of the investment expenses (total investment expenses were about 42 basis points or bps) from the indexed (or passively managed) returns in developing the investment return assumption, which would lower the expected investment return assumption3. Furthermore, in the case of MCERA, it appears based on information provided in the Fiscal Year 2015 CAFR that the average market return net of manager fees was lower than the policy benchmark by about 40 bps during a 10-year period. While this may be a coincidence (42 bps vs 40 bps), this observation could be used to support some reduction in the investment return assumption for payment of those expenses.

We also note that about 20% of the total investment expense paid in Fiscal Year 2015 was for investment consulting, custodian banking, and other expenses that either were not directly in pursuit of “alpha” returns or were expenses that had not been netted out of the capital market

3 Our practice may be considered by some to be more conservative than that required under the Actuarial Standard of Practice (ASOP) No. 27, which states in part in Section 3.8.3.d, “Investment Manager Performance - Anticipating superior (or inferior) investment manager performance may be unduly optimistic (pessimistic). The actuary should not assume that superior or inferior returns will be achieved, net of investment expenses, from an active investment management strategy compared to a passive investment management strategy unless the actuary believe, based on relevant supporting data, that such superior or inferior returns represent a reasonable expectation over the measurement period.” (emphasis added). We believe this means that assuming only enough superior return to cover related investment expenses would not require the relevant supporting data referenced in ASOP No. 27.

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assumptions. For all these reasons, we recommend that Cheiron review their methodology in conjunction with ASOP 27 to consider making some provisions for payment of future investment expenses when they next review the investment return assumption.

Cheiron also compares Verus’ capital market assumptions to those from three other investment consultants and the Horizon survey. It would be appropriate for Cheiron to ensure that investment expenses are appropriately accounted for in this comparison as the information from the other investment consultants may not already be net of investment expenses. However, we do concur that what was done by Cheiron with the additional capital market assumption information was reasonable based on its use for comparison purposes only.

Administrative Expense Assumption

Cheiron recommended an explicit administrative expense assumption of $2.2 million for the June 30, 2016 valuation with increases in future years based on the Consumer Price Index (CPI). We believe that an explicit administrative expense loading is the preferable way to handle these expenses. Actual administrative expense were $2.2 million in fiscal year 2015 and $2.5 million in fiscal year 2016. Cheiron’s recommendation incorporates input from MCERA staff. We agree that this assumption is reasonable based on the most recent data and the input from MCERA staff.

Investment Rate of Return Assumption

For the investment rate of return assumption, based on alternatives presented by Cheiron to the Board in late 2016, the Board directed Cheiron to reduce the current assumption of 7.75% to 7.25%, net of investment related expenses. Cheiron derived the 7.25% investment return assumption by applying the Association’s target asset allocation in a stochastic model developed using the capital market assumptions provided by Verus, the Plan’s investment consultants. Cheiron also compares the results based on Verus’ capital market assumptions to those from three other investment consultants. A comparison to the Horizon survey is also shown.

We observe the following:

 Cheiron used Verus’ capital market assumptions in deriving the expected rate of investment return, but also analyzed capital market assumptions from three other

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investment consultants along with the Horizon Survey. They found Verus’ capital market assumptions for nominal returns to be reasonably comparable to the other consultants.

We have also found that Verus-’ capital market assumptions for nominal returns to be relatively close to the average from a sample of investment consultants that we maintain. However, the real return assumptions from Verus are roughly 50 bps higher than the average from our survey. We concur with Cheiron’s use of a reasonability check as otherwise relying on only one investment consultant’s capital market assumptions without a check for consistency against other investment consultants may lead to the undesired result of expected investment returns that vary significantly depending on which investment consultant is employed by the retirement plan.

 Cheiron discusses that the 10-year median return from their modeling (without adjusting for investment expenses) is 7.25% (based on Verus’ capital market assumption and an underlying 1.90% inflation assumption). If the analysis is based on the other three investment consultants, the 10-year median return from their stochastic modeling (without adjusting for investment expenses) is 6.98% (based on an underlying 2.14% inflation assumption). Cheiron also noted that the median real return under Verus is 5.35% and the median real return under the three other consultants is 4.84%. Cheiron concluded that the 7.25% investment return assumption (with an assumed real rate of return of 4.75%) is very close to the expectation under the capital market assumption of Verus and the other three consultants.

 As an independent check, Segal has applied the model that we use for other California public retirement systems to review the 7.25% investment return assumption. While, especially when first applied, our model does not generally produce an absolute investment return recommendation, it is very useful for comparing the level of risk inherent in the investment return assumptions adopted by a given retirement system at a different points in time or with other retirement systems that have previously been analyzed using that model.

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Based on the application of our model, we believe that the level of risk implicit in the 7.25% investment return assumption, along with a 2.50% price inflation assumption, is generally comparable to recommendations we have made to other retirement systems.

However, we observe that the real rate of return assumption of 4.75% (based on the 7.25% investment return assumption along with a 2.50% price inflation assumption), is higher than the comparable real rate of return assumption used by other California public retirement systems4. This generally implies that the target asset allocation of the Association appears to be more aggressive than other systems. We believe that a reduction in the real rate of return should be considered during the next review of this assumption.

 We believe that the most significant difference between our model and Cheiron’s model is that we develop a discount rate based on expected or mean arithmetic average returns, which correspond to an expected or mean level of future assets. In contrast, Cheiron is developing a discount rate based on median geometric average returns, which correspond to a median level of future assets.

What is not commonly understood is that both of these approaches recognize that when returns are volatile, the compound or “geometric” historical returns will be less than the simple arithmetic average of the year-by-year historical returns. The difference is best understood by focusing on the assets that are expected to accumulate to fund the system’s liabilities, rather than the average future investment returns. Because of the (small) possibility of very high returns, the expected value (probability weighted outcome) of future assets is higher than the median value (50/50 chance) of future assets. This means, somewhat counter-intuitively, that “expecting” to have future assets that match your future liabilities is not the same as there being a 50/50 chance of having future assets higher or lower than those liabilities.

Put another way, if you (only) want to “expect” to have sufficient future assets to match your future liabilities you can use a higher discount rate than if you want to be at least 50% sure of having such sufficient future assets. The difference in these two discount rates

4 This is consistent with our earlier observation that the 2.50% inflation assumption is lower than that used by most systems.

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depends on the volatility of the asset portfolio, and for MCERA would be estimated to be approximately 1%. When offset by the difference in the treatment of investment expenses discussed earlier, the remaining amount is consistent with the difference in results between the Segal and Cheiron models.

 Another test of the recommended investment return assumption is to compare it against those used by other public retirement systems, both in California and nationwide. We note that an investment return assumption of 7.25%, is within the most common range for this assumption among most California public sector retirement systems. That range, with a few exceptions, is from 7.00% to 7.50%.

Taking into account the above discussion and based on our own independent analysis, we believe that the 7.25% investment return assumption in combination with the 2.50% price inflation assumption is reasonable. However, we believe Cheiron should consider making an adjustment in their model to address the issues related to investment expenses discussed above. In addition, because the assumption entails a comparatively higher expected real rate of return it potentially carries a greater risk of future actuarial losses (resulting in increasing future contributions). We believe that a reduction in the real rate of return assumption should be considered the next time this assumption is reviewed.

Salary Increase Assumption

In contrast to their development of the investment return assumption, Cheiron did use a “building block” approach in developing the recommended salary increase assumption. Under this approach, the salary increase assumption is the combination of the price inflation component, the productivity or real wage increase component, and the merit and promotion increase component. We believe this is the preferred approach for developing this assumption.

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Inflation Component

The price inflation component was discussed earlier where we agreed with Cheiron’s recommendation.

Productivity or Real Wage Increase Component

Real “across the board” pay increases are sometimes termed productivity increases since they are considered to be derived from the ability of an organization or an economy to produce goods or services in an efficient manner. As that occurs, some portion of the value of these improvements can provide a source for pay increases greater than price inflation. These increases are typically assumed to extend to all employees “across the board.” When these increases are combined with the price inflation component the result is the wage growth component, which reflects the average rate of increase in salaries regardless of the years of service or age of the member.

The State and Local Government Workers Employment Cost Index produced by the Department of Labor provides evidence that real “across the board” pay increases have averaged about 0.6% - 0.9% annually during the last ten to twenty years. We also referred to the annual report on the financial status of the Social Security program published in June 2016. In that report, real “across the board” pay increases are forecast to be 1.2% per year under the intermediate assumptions.

The real pay increase assumption is generally considered a more “macroeconomic” assumption, that is not necessarily based on individual plan experience. However, recent salary experience with public systems in California as well as anecdotal discussions with plans and plan sponsors indicate lower future real wage growth expectations for public sector employees. For these reasons, we would generally recommend an across the board pay increase assumption of 0.50%.

Cheiron recommended a real wage increase component of 0.25% (there was no real wage increase assumption prior to this experience study), based on a review of national wage data over the last 25 years and information from the Social Security Administration. Note that historical real wage increases are generally lower in periods of higher price inflation and vice versa.

Based on this information we believe that it could have been appropriate for Cheiron to recommend a real wage increase assumption of 0.50% in order to be more consistent with their

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recommendations to decrease the price inflation assumption by 0.50% valuation. We note that the 0.25% assumed real wage increase is one of the lowest that we have seen for California retirement systems. We recommend that Cheiron monitor this assumption and consider an increase in the next review of this assumption. This is especially true if there is a recommendation to further decrease the assumption for price inflation.

Merit Increase Component

The last step or building block needed to complete the salary increase assumption is the merit increase component, which was reviewed by Cheiron as part of the demographic assumptions. Merit increases are the salary increases above the general wage increases due to the combination of promotions, longevity increases, bonuses and merit pay increases as applicable. We agree with Cheiron’s findings concerning the correlation of service and merit increases. The methodology used by Cheiron is reasonable and develops reasonable results overall based upon the data.

Cheiron is recommending higher merit salary increases for both General and Safety members in the first few years of service and in the ultimate rate for General members. Decreases in the assumption were also recommended for the middle years of service categories for both General and Safety. Overall, we believe that Cheiron’s recommendations are reasonable, but note that the ultimate merit increase for General and Safety members with 20 or more years of service of 0.50% appears to be lower than recent actual experience. We recommend that Cheiron consider increasing the ultimate rate of merit increase if this trend continues in the next experience study.

Payroll Growth Assumptions

The current payroll growth assumption used by Cheiron for the purposes of amortizing the Unfunded Actuarial Accrued Liability (UAAL) as a level percent of payroll is 3.00% and is directly tied to the wage growth component discussed above. Cheiron is recommending decreasing this assumption to 2.75% to reflect the decrease in the price inflation assumption from 3.00% to 2.50% along with the introduction of a real wage growth assumption of 0.25%. We concur that this assumption should be equal to the combination of the price inflation and real wage growth components discussed earlier. Ultimately, the Board directed Cheiron to use the 2.75% payroll

Section II growth assumption, consistent with the component assumptions, and we believe that this is reasonable.

Post-retirement Cost-of-Living Adjustment (COLA) Increases

Tier 1 retired members and beneficiaries, are entitled to receive annual cost-of-living adjustments (COLA) of up to 3%, based on the annual increase in the Consumer Price Index (CPI) and the availability of individually accumulated COLA banks. The current assumption is that all eligible members will receive a COLA each year of 2.60%.

Cheiron performed stochastic simulations on inflation and based on their modeling, they developed results that show that for the General and Safety Tier 1 there will be years when inflation falls below the maximum 3.00% COLA level and this shortfall will not be made up in future years with the accumulated COLA banks. Cheiron recommended that the COLA increases assumptions be at 2.40% (based on an inflation assumption of 2.50%).

We believe that the results of the stochastic modeling of the inflation assumption are significantly dependent on assuming that the lower levels of inflation will persist in the early years of the projections. If this is not assumed, then the stochastic modeling will produce results closer to the inflation assumption of 2.50%.

Since the difference between the inflation assumption (2.50%) and the COLA increase assumption (2.40%) is small, we concur with Cheiron’s recommendations. However, we note that in years when the CPI increase matches exactly to the inflation assumption of 2.50%, there would be actuarial losses equal to the difference between the inflation assumption and the COLA increase assumption.

Review of Demographic Assumptions

The Actuarial Standards Board has adopted an Actuarial Standard of Practice (No. 35) which provides actuaries guidance in selecting demographic and other noneconomic assumptions. Reasonableness of each assumption and consistency among the assumptions are primary among the considerations for selecting assumptions in accordance with the ASOP. The Standard of Practice bases the evaluation of an assumption’s reasonableness on two criteria. First, the

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“assumption is expected to appropriately model the contingency being measured.” Second, the “assumption is not anticipated to produce significant cumulative actuarial gains or losses over the measurement period.”

The primary demographic assumptions reviewed by Cheiron during the 2016 experience study are retiree mortality, termination, and service retirement. Secondary assumptions reviewed include pre-retirement mortality, disability retirement (service and non-service related), probability of refund election, family composition, age of beneficiaries, retirement age for vested terminated members, reciprocity and terminal pay load.

For many demographic assumptions, the actuary must consider the factors affecting the variation in the rates of decrement. Often, the rate of terminations by active members will be highly correlated to their years of service. Alternatively, the variation in the rate of retirements may be better correlated to the participant’s age. The type of assumption utilized determines how the data is to be grouped for analysis. Many large systems have analyzed the correlation of the variation in certain decrements to age and service simultaneously, which can result in a “select and ultimate” type of assumption. In some cases, this additional complexity does not affect results materially.

The prevalent method used to determine the appropriateness of a demographic assumption is to analyze the actual to expected ratios (AE ratios). An AE ratio is found by dividing, for any single contingency, the actual number to occur in the data by the number expected to occur based upon current assumptions. These ratios display how well the current assumptions anticipated actual experience. An AE ratio of 100% results when actual experience equals that expected under the assumption.

In reviewing the analysis of demographic assumptions completed by Cheiron, we reviewed the counts of actual occurrences by decrement type from the change in the Plan membership as reported in the last six valuation reports with those shown by Cheiron for that same file. (For the experience study, Cheiron utilized three to six years of experience in order to improve the credibility of the data for the analysis of most decrement.) We found that the counts are comparable.

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For each contingency, the actuary determines a reasonable range for the AE ratio. This reasonable range is based upon the materiality of the assumption, the effect of future trends, and the degree of conservatism or margin the actuary considers necessary. An AE ratio falling into this range would indicate the current assumption may still be appropriate. AE ratios not in the reasonable range may indicate the need to modify the assumption. In our opinion, Cheiron has performed accurate analyses overall of the reasonableness of the current assumptions through the use of AE ratios.

Overall, we believe Cheiron’s recommendations for changes to the demographic assumptions are reasonable, but make the following observations for certain assumptions.

Service Retirement Rates

The data used for the analysis of the service retirement rates includes General and Safety counts for ages over 50. We recommend that Cheiron consider extending their analysis for Safety members to includes ages 40 to 49 with 20 or more years of service since Cheiron has assumed retirement rates for those ages.

The retirement rates are broken down into three separate service groups, and by males and females for General members. Cheiron combined the experience of the past six years for the analysis and there are still some groups that have very little actual experience for credible analysis. We recommend that Cheiron consider combining the General males and females with over 30 years of service into one rate group to improve the credibility of the data.

Cheiron’s report indicates that there is insufficient data to separately analyze experience for the PEPRA members (General Tier 4 and Safety Tier 4) and they recommended that these plans use the same assumptions as non-PEPRA General and Safety members, respectively. The experience used for the retirement analysis is almost exclusively members who retired from General and Safety Tiers 1 and 2. We believe that the benefit formula for General Tier 4 is different enough at ages below 65 as compared to General Tiers 1 and 2 that it could affect retirement patterns. In some instances such as ages below 55, there are significant differences in the benefit formulas. Based on these differences, we believe that the service retirement rates for General Tier 4 could be decreased at ages below 65. The same comment applies for Safety members, but to a lesser extent

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since there is not as significant a difference between the PEPRA and non-PEPRA benefit formulas.

Disability Retirement Rates

Since the amount of disability experience is fairly limited, Cheiron combined six years of experience for the analysis. Cheiron also combined the service-connected disability and non-service connected disability for the analysis. We believe that Cheiron’s recommended assumptions are reasonable.

Due to the size of the Plan, Cheiron could consider developing combined (service and non- service) disability rates (broken down by males and females) for General and develop an assumed percentage of service-connected versus non-service connected for those who become disabled. For Safety members, based on the actual disabilities in the last six years, there was only one who is non-service connected (as shown in the changes in plan membership based on actuarial valuation of the last six years). We recommend that Cheiron consider assuming that all Safety disabilities are service connected in order to simplify the assumption.

Mortality Rates

The mortality assumptions recommended by Cheiron are based on mortality tables that were recently developed by CalPERS. Cheiron’s experience study shows that MCERA’s experience over the last nine years matches pretty well with the CalPERS base mortality tables. We believe that the use of the CalPERS base mortality table is reasonable based on MCERA’s size and historical experience.

Cheiron is also recommending a change to generational mortality. Under this approach mortality rates are expected to decline each year in the future. This approach is the emerging practice in the actuarial profession. We concur with this approach and the recommendation to project future mortality improvement using the MP-2016 mortality improvement scale.

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Family Composition

Based on the Safety members who retired in the last three years, Cheiron recommended maintaining the current assumption that 90% of future Safety retirees are married. Cheiron also recommended an assumption that 70% of male General members and 50% of female General members are married. Due to the relatively small number of Safety retirements, we recommend that Cheiron consider including all Safety retirees or at least those who retired over the last six to nine years in developing this assumption in order to have more credible experience. However, we do not believe this assumption will have a material impact to the valuation.

Other Demographic Assumptions

All other demographic assumptions recommended by Cheiron appear reasonable to us and we do not have any specific comments on them.

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Overall Conclusion

Our overall assessment of Cheiron’s actuarial work for MCERA is that all major actuarial functions are being appropriately addressed. Cheiron has employed generally accepted actuarial practices and principles in studying plan experience, selecting assumptions and presenting the results of their work. We believe that the actuarial assumptions as recommended by Cheiron, as well as those that the Board directed Cheiron to use are reasonable for use in MCERA’s actuarial valuation.

Summary of Suggestions for Future Experience Studies

It is our opinion that in future experience studies, Cheiron should consider the following:

 For the investment return assumption, review the methodology regarding the treatment of investment expenses in conjunction with ASOP 27 and also consider a reduction in the real rate of return.

 For the real wage growth assumption, consider increases in this assumption especially if future recommendations are made to decrease the price inflation assumption.

 For the merit and promotional salary assumption, consider increasing the ultimate rate that applies after 20 years of service for both General and Safety members.

 For the service retirement assumption, consider extending the analysis shown in the report to include Safety members at ages 40 to 49 with 20 or more years of service. In addition, consider combining the General males and females retirement rates for those with over 30 years of service. Also, consider reducing the General Tier 4 retirement rates below age 65 to reflect significant differences between the General Tier 4 benefit formula as compared to Tiers 1 and 2.

 For the disability retirement rates, consider combining the service-connected disability and non-service connected disability rates into one disability rate for General members along with developing a separate assumption for assumed percentage of service-connected and

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non-service connected. Also, consider assuming that all disabilities for Safety members as service-connected.

 For the percent married assumption for Safety members, consider including all Safety retirees in the development of that assumption.

5472616v8/14392.001

21 Item 2 Merced County Employees’ Retirement Association (MCERA) RETIREMENT BOARD AGENDA ITEM

DATE: March 23, 2017

TO: MCERA Board of Retirement FROM: Kristie Santos, Plan Administrator

SUBJECT: Approval of Actuarial Valuation Report as of June 30, 2016 and Experience Study for period July 1, 2013 through June 30, 2016 which establishes new employer and employee contribution rates and new demographic and economic assumptions for Fiscal Year 2017/2018 effective July 1, 2017.

ITEM NUMBER: 2

ITEM TYPE: Action

STAFF RECOMMENDATION: 1. Approval of Actuarial Valuation Report as of June 30, 2016 and Experience Study for period July 1, 2013 through June 30, 2016 which established the new employer and employee contribution rates effective July 1, 2017. 2. Adopt new economic and demographic assumptions effective July 1, 2017.

DISCUSSION:

In accordance with Section 31453 of the County Employees’ Retirement Law of 1937, the Merced County Employees’ Retirement Association (MCERA) contracted with Cheiron to provide an Actuarial Valuation Report as of June 30, 2016 and an Experience Study as of July 1, 2013 through June 30, 2016. The MCERA Board of Retirement gave direction to Cheiron to produce an Actuarial Valuation Report with new employer and employee contribution rates as well as new economic and demographic assumptions. On February 23, 2017, Cheiron presented the June 30, 2016 Actuarial Valuation Report and Experience Study as of July 1, 2103 through June 30, 2016 with the new assumptions and contributions rates for FY 2017/2018 effective July 1, 2017.

Merced County Employees Retirement Association (MCERA) Summary of Employer Contribution Rates Valuation Date June 30, 2016 June 30, 2015 Fiscal Year 2017/2018 2016/2017 Net Employer Contribution Rate 50.58% 50.02% Employee contribution rates vary by member, tier and entry age, as well as those members covered under PEPRA. Employee contribution rates can be found starting on p. 59 of the Actuarial Valuation Report as of June 30, 2016. A summary of new demographic and economic assumptions, as well as employer contribution rates can be found starting on p. 2 of the Actuarial Valuation Report as of June 30, 2016.

The new employer and employee contribution rates are effective July 1, 2017. Page 1

Item 2a

Merced County Employees’ Retirement Association Actuarial Valuation as of June 30, 2016

Produced by Cheiron

February 2017

TABLE OF CONTENTS

Section Page

Letter of Transmittal ...... i

Foreword ...... ii

Section I Executive Summary ...... 1

Section II Assets ...... 13

Section III Liabilities ...... 17

Section IV Contributions...... 20

Section V Comprehensive Annual Financial Reporting Information ...... 25

Appendices

Appendix A Membership Information ...... 28

Appendix B Statement of Current Actuarial Assumptions and Methods ...... 40

Appendix C Summary of Plan Provisions ...... 46

Appendix D Member Contribution Rates ...... 58

Appendix E Glossary ...... 64

February 15, 2017

Retirement Board of Merced County Employees’ Retirement Association 3199 M Street Merced, CA 95348

Dear Members of the Board:

At your request, we have conducted an actuarial valuation of the Merced County Employees’ Retirement Association (MCERA, the Fund, the Plan) as of June 30, 2016. This report contains information on the Plan’s assets, liabilities, and discloses employer contribution levels. Your attention is called to the Foreword in which we refer to the general approach employed in the preparation of this report.

The purpose of this report is to present the results of the annual actuarial valuation of MCERA. This report is for the use of the Retirement Board of MCERA and its auditors in preparing financial reports in accordance with applicable law and accounting requirements. Any other user of this report is not an intended user and is considered a third party.

Cheiron’s report was prepared solely for the Retirement Board of MCERA for the purposes described herein, except that the plan auditor may rely on this report solely for the purpose of completing an audit related to the matters herein. It is not intended to benefit any third party, and Cheiron assumes no duty or liability to any such party.

To the best of our knowledge, this report and its contents have been prepared in accordance with generally recognized and accepted actuarial principles and practices which are consistent with the Code of Professional Conduct and applicable Actuarial Standards of Practice set out by the Actuarial Standards Board. Furthermore, as credentialed actuaries, we meet the Qualification Standards of the American Academy of Actuaries to render the opinion contained in this report. This report does not address any contractual or legal issues. We are not attorneys and our firm does not provide any legal services or advice.

Sincerely, Cheiron

Graham A. Schmidt, ASA, EA, FCA, MAAA David Holland, FSA, FCA, MAAA, EA Consulting Actuary Consulting Actuary

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

FOREWORD

Cheiron has performed the actuarial valuation of the Merced County Employees’ Retirement Association as of June 30, 2016. The valuation is organized as follows:

• In Section I, the Executive Summary, we describe the purpose of an actuarial valuation, summarize the key results found in this valuation, and disclose important trends.

• The Main Body of the report presents details on the Plan’s

o Section II - Assets o Section III - Liabilities o Section IV - Contributions o Section V - Comprehensive Annual Financial Reporting Information

• In the Appendices we conclude our report with detailed information describing plan membership (Appendix A), actuarial assumptions and methods employed in the valuation (Appendix B), a summary of pertinent plan provisions (Appendix C), tables containing member contribution rates (Appendix D), and a glossary of key actuarial terms (Appendix E).

The results of this report rely on future Plan experience conforming to the underlying assumptions and methods outlined in this report. To the extent that the actual plan experience deviates from the underlying assumptions and methods, or there are any changes in plan provisions or applicable laws, the results would vary accordingly.

In preparing our report, we relied on information (some oral and written) supplied by the MCERA staff. This information includes, but is not limited to, plan provisions, employee data, and financial information. We performed an informal examination of the obvious characteristics of the data for reasonableness and consistency in accordance with Actuarial Standard of Practice #23.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION I – EXECUTIVE SUMMARY

The primary purpose of the actuarial valuation and this report is to measure, describe, and identify the following as of the valuation date:

• The financial condition of the Plan, • Past and expected trends in the financial progress of the Plan, • Employer and employee contribution rates for Fiscal Year 2018, and, • Information required by the GFOA for the Comprehensive Annual Financial Report.

In the balance of this Executive Summary, we present (A) the basis upon which this year’s valuation was completed, (B) the key findings of this valuation including a summary of all key financial results, (C) an examination of the historical trends, and (D) the projected financial outlook for the Plan.

A. Valuation Basis

This valuation determines the employer contributions for the fiscal year ending June 30, 2018. The Plan’s funding policy is to collect contributions from the employers and employees equal to the sum of:

• The normal cost under the Entry Age Normal Cost Method, • Amortization of the Unfunded Actuarial Liability, and • The Plan’s expected administrative expenses.

The Unfunded Actuarial Liability payment is determined as the amount needed to fund the outstanding Unfunded Actuarial Liability (UAL). Effective with the June 30, 2013 valuation, the UAL as of June 30, 2013 is amortized over a closed 16-year period. At the meeting held on January 22, 2015, the Board of Retirement adopted a new funding policy for any subsequent unexpected change in the UAL after June 30, 2013. Effective with the June 30, 2014 valuation, any new sources of UAL due to actuarial gains and losses or method changes are amortized over a closed 24-year period, with a five-year ramp up period at the beginning of the period, a four- year ramp down at the end of the period, and 15 years of level payments as a percentage of payroll between the ramping periods. Assumption changes will be amortized over a closed 22- year period, with a three-year ramp up period, two-year ramp down period, and 17 years of level payments as a percentage of payroll. This amortization method is similar to a traditional five or three year asset smoothing and a 20-year amortization period with level payments as a percentage of payroll. The Board also adopted a policy to replace the smoothed Actuarial Value of Assets with the Market Value of Assets for valuation purposes. These new amortization and funding policies in conjunction are a type of policy known as direct rate smoothing.

Experience studies are performed every three years. This valuation was performed on the basis of the economic and demographic assumptions and methods that were determined in the Actuarial Experience Study dated February 15, 2017. A summary of the assumptions and methods used in the current valuation is shown in Appendix B.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION I – EXECUTIVE SUMMARY

This valuation was prepared based on the Plan provisions shown in Appendix C. Employee contribution rates are shown in Appendix D. The rates for PEPRA members will be recomputed each year to be one-half of the total normal cost rate.

Key Findings of this Valuation

The following discussion summarizes the key results of the June 30, 2016 valuation and how they compare to the results from the June 30, 2015 valuation.

Summary of Key Valuation Results

Table I-1 summarizes the key results of the valuation with respect to assets, liabilities, and contributions.

Table I-1 Merced County Employees' Retirement Association Summary of Key Valuation Results (in millions) Valuation Date June 30, 2016 June 30, 2015 Fiscal Year End 2018 2017 Actuarial Liability $ 1,201.2 $ 1,131.2 Market Value of Assets 670.0 672.3 Unfunded Actuarial Liability $ 531.2 $ 458.9 Funded Ratio 55.8% 59.4%

Net Employer Contribution Rate 50.58% 50.02%

More discussion of the factors that affected these results can be found in the remainder of this section, but some key points are as follows:

• The employer contribution rate increased from 50.02% to 50.58%.

• The Unfunded Actuarial Liability (UAL) is the excess of the Plan’s Actuarial Liability over the Market Value of Assets. The Plan’s UAL increased from $458.9 to $531.2 million. This increase in UAL was primarily due to experience losses from assets and liability increases from assumption changes.

• The Plan’s funded ratio, the ratio of market assets over Actuarial Liability, decreased from 59.4% last year to 55.8% as of June 30, 2016.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION I – EXECUTIVE SUMMARY

Plan Membership

Table I-2 summarizes Plan membership as of June 30, 2016 and June 30, 2015. More detailed membership statistics are shown in Appendix A.

Table I-2 Membership Total Item June 30, 2016 June 30, 2015 % Change Actives 2,040 1,962 4.0% Deferred Members 735 677 8.6% Retired Members 2,234 2,200 1.5% Total Members 5,009 4,839 3.5%

Active Member Payroll $ 123,018,313 $ 117,822,103 4.4% Average Pay per Active 60,303 60,052 0.4%

Some key points are as follows:

• Total Plan membership increased by 3.5%, mostly driven by the increase in active and deferred members. The active membership count increased by 4.0%.

• The pay figures reflect the annualized rate as of June 30, plus expected increases for the upcoming year. The average pay per active member increased slightly by 0.4%.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION I – EXECUTIVE SUMMARY

Components of UAL Change between June 30, 2015 and June 30, 2016

Table I-3 is a detailed reconciliation of the components that affected the UAL between June 30, 2015 and June 30, 2016.

Table I-3 Change in Unfunded Actuarial Liability Experience in millions 1. Unfunded actuarial liability, 6/30/2015 458.9$

2. Expected change in unfunded actuarial liability $ (13.3) 3. Unfunded increase due to investment loss 52.4 4. Unfunded increase due to contributions less than expected (including impact of 12-month rate delay) 2.7 5. Unfunded increase due to expenses greater than expected 0.7 6. Unfunded decrease due to liability gain (8.3) 7. Unfunded increase due to assumption changes 38.1 8. Total change in unfunded actuarial liability 72.3

9. Unfunded actuarial liability, 6/30/2016 531.2$

The Plan’s UAL increased from $458.9 million as of June 30, 2015 to $531.2 million as of June 30, 2016. As shown above, thelargest contributing factors were investment losses and the changes in assumptions from the experience study. Contributions less than expected increased the UAL by $2.7 million, largely resulting from lower than expected payroll. There were gains on actuarial liabilities of $8.3 million, most of whichere w from salary increases less than expected, more retiree deaths than expected, and fewer retirements than expected, offset by cost- of-living adjustments for retirees that were slightly higher than assumed.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION I – EXECUTIVE SUMMARY

Employer Contribution Reconciliation

Table I-4 is a detailed reconciliation between the Fiscal Year 2017 and Fiscal Year 2018 employer contribution rates, in total and by component.

Table I-4 Employer Contribution Reconciliation Item Total Normal Cost Amortization Expenses FYE 2017 Net Employer Contribution Rate 50.02% 8.78% 39.92% 1.32% Expected Change due to phase-in -0.56% 0.00% -0.56% 0.00% Change due to investment loss 0.73% 0.00% 0.73% 0.00% Change due to contributions less than expected (including impact of 12-month rate delay) 0.04% 0.00% 0.04% 0.00% Change due to expenses greater than expected 0.01% 0.00% 0.01% 0.00% Change due to PEPRA new hires -0.27% -0.27% 0.00% 0.00% Change due to liability gain -0.18% -0.06% -0.12% 0.00% Change due to effect of payroll on amort / expense -0.39% 0.00% -0.37% -0.02% Change due to change in expense assumption 0.24% 0.00% 0.00% 0.24% Change due to change in other assumptions 0.94% 0.86% 0.08% 0.00% Total change 0.56% 0.53% -0.19% 0.22%

FYE 2018 Net Employer Contribution Rate 50.58% 9.31% 39.73% 1.54%

The employer contribution rate increased from 50.02% for Fiscal Year 2017 to 50.58% for Fiscal Year 2018:

• The phase-in of the net UAL experience gains from the two years since the adoption of direct rates smoothing (based on a net gain in FYE 2014 and a smaller net loss in FYE 2015) decreased the contribution rate by 0.56%. These net experience gains will continue to be phased-in over the next two years, resulting in similar reductions in the employer contribution rates, after which there will be a small one-year expected increase in the contribution rate from the last portion of the FYE 2015 loss to be phased-in.

• The investment loss for the current fiscal year increased the current year contribution rate by 0.73% of pay. The assets of the Plan returned -0.06% (net of investment expenses) on a market basis, lower than the assumed rate of 7.75%. The amortization payment for the current year investment losses will continue to be phased-in over the next four years.

• Contributions less than expected increased the employer contribution rate by 0.04% of pay, largely due to lower than expected payroll.

• Demographic experience was favorable for a net decrease in cost of about 0.18% of pay, 0.06% of which was for changes in the employer normal cost, and 0.12% of which was

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION I – EXECUTIVE SUMMARY

for changes in the UAL amortization payment. As with the investment losses, the changes in the UAL payment will continue to be phased-in over the next four years. The replacement of legacy members by PEPRA members further decreased the normal cost by about 0.27% of pay.

• An increase in the projected payroll more than expected decreased the employer contribution rate by 0.39% of pay, since it results in the Plan’s Unfunded Actuarial Liability and administrative expenses being spread over a larger-than-anticipated payroll base.

• The administrative expense assumption was increased to $2.2 million for the next fiscal year, based on a recommendation from Staff, which increased the contribution rate by 0.24% of payroll.

• The other assumption changes from the experience study increased the employers’ contribution rate by 0.94%, 0.86% of which was for changes in the employer normal cost rate and 0.08% of which was for current year changes in the UAL rate. The UAL rate increased by approximately 0.81% of pay as a result of the first year of the phase-in of the $38.1 million UAL layer for the assumption changes, and these changes will continue to be phased-in over the next two years. This was offset by the fact that the payments necessary to amortize the other layers of the UAL decreased by approximately 0.73% of pay as a result of the adoption of new economic assumptions.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION I – EXECUTIVE SUMMARY

Plan Risk

Table I-5 Asset to Payroll Ratio as of June 30, 2016

Active Member Payroll $ 123,018,313 Assets (Market Value) 670,015,824 Ratio of Assets to Payroll 5.45 Ratio with 100% Funding 9.76

One of the most important measures of a plan’s risk is the ratio of plan assets to payroll. The table above shows MCERA’s assets as a percentage of active member payroll. This ratio indicates the sensitivity of the Plan to the returns earned on Plan assets. We note in the table that assets currently are more than five times covered payroll for the Plan; as funding improves and the Plan reaches 100% funding, the ratio of assets to payroll will increase to over nine times payroll, perhaps higher depending on the Plan’s future demographic makeup.

To appreciate the impact of the ratio of assets to payroll on contributions rates, consider the situation for a new plan with almost no assets. Even if the assets suffer a bad year of investment returns, the impact on the contribution rate is nil, because the assets are so small.

On the other hand, consider the situation for MCERA. Suppose MCERA’s assets lose 10% of their value in a year. Since they were assumed to earn 7.25%, there is an actuarial loss of 17.25% of plan assets. Based on the current ratio of assets to payroll (545%), that means the loss in assets is about 94% of active payroll (545% of the 17.25% loss). There is only one source of funding to make up for this loss: the employers. Consequently, barring future offsetting investment gains, the employers must make up the asset loss in future contributions. In this example of a one-year loss of 10%, this shortfall will eventually require an additional amortization payment in the vicinity of 7.8% of payroll once fully phased-in, if amortized over the Plan’s 24-year schedule for gains and losses.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION I – EXECUTIVE SUMMARY

Historical Trends

Despite the fact that for most retirement plans the greatest attention is given to the current valuation results and in particular, the size of the current Unfunded Actuarial Liability and the employer contribution, it is important to remember that each valuation is merely a snapshot in the long-term progress of a pension fund. It is more important to judge a current year’s valuation result relative to historical trends, as well as trends expected into the future.

Assets and Liabilities

The chart below compares the Market Value of Assets (MVA) and Actuarial Value of Assets (AVA) to the Actuarial Liabilities. The percentage shown at the top of each bar is the ratio of the Actuarial Value of Assets to the Actuarial Liability (the funded ratio). Beginning June 30, 2014, the Actuarial Value of Assets is equal to the Market Value, and thus the funded ratios shown in 2014 and after will be based on the Market Value of Assets. The funded ratio has declined from 70.5% in 2008 to 55.8% as of June 30, 2016.

70.5% 59.7% 54.7% 56.1% 54.2% 51.4% 60.0% 59.4% 55.8% $1,400

$1,200

$1,000

$800

$600 $ Millions

$400

$200

$0 2008 2009 2010 2011 2012 2013 2014 2015 2016

Actuarial Liability MVA AVA

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION I – EXECUTIVE SUMMARY

The extraordinary asset loss of 2008 adversely affected the funded ratio from 2009 to 2013. The 2014 funded ratio increased as a result of asset and liability gains in 2014, and as a result of resetting the Actuarial Value of Assets to the Market Value. The 2016 funded ratio decreased as a result of investment losses and losses from assumption changes.

Participant Trends

6,000

0.7 5,000 0.7 0.7 1.0 0.9 0.8 0.8 0.7 0.7

4,000

3,000

2,000

1,000

0 2008 2009 2010 2011 2012 2013 2014 2015 2016

Retirees Deferred Members Actives

The chart above provides a measure for Plan maturity by comparing the ratio of active members to inactive members (retirees anddeferred members). These ratios are given at the top of each bar. The active-to-inactive ratio has decreased from 2008 to 2016, indicating the ongoing maturation of the Plan. While this is neither good nor bad in itself, it does have implications for the risk profile of the Plan, as discussed under Table I-5 earlier in this section.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION I – EXECUTIVE SUMMARY

Cash Flows

The chart shows the Plan’s cash flow (contribution less benefit payments). This is a critical measure, as it reflects the ability to have funds available to meet benefit payments without having to make difficult investment decisions, especially during volatile markets.

$150

$100

$50

$ Millions 2007 2008 2009 2010 2011 2012 2013 2014 2015

($50)

($100)

($150) Contributions Benefits & Expenses Investment Return NCF

In the chart above, the contributions, benefit payments, and investment returns are shown as bars and the Plan’s net cash flow (NCF) is shown as a black line. The NCF, which is equal to contributions less benefit payments,has been close to zerofor the entire period shownA. negative cash flow magnifies the losses during a market decline hinderingthe Plan in its ability to absorb market fluctuations. The implications of a plan in negative cash flow are that the impact of market fluctuations can be more severe. As assets are being depleted to pay benefits in down markets, there is less principal available to be reinvested during favorable return periods.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION I – EXECUTIVE SUMMARY

Future Expected Financial Trends

The analysis of projected financial trends is perhaps the most important component of this valuation. In this Section, we present our assessment of the implications of the June 30, 2016 valuation results in terms of benefit security (assets compared to liabilities). All the projections in this section are based on the current interest rate assumption of 7.25%. We have assumed increases in future pensionable payroll of 2.75% per year.

Contribution Projections:

The following graph shows the expected employer and member contribution rates based on actually achieving the 7.25% assumption each year for the next 20 years, which is clearly impossible.

Projection of Employer and Member Contributions, 7.25% return each year

The graph above shows employer contributions peaking at 53.4% in the June 30, 2020 valuation (for Fiscal Year 2022), decreasing slightly in the subsequent years, and then dropping off significantly in 2028 once the amortization of the bulk of the Unfunded Actuarial Liability is complete.

Note that the graph above does not forecast any actuarial gains or losses. Even relatively modest losses relative to the 7.25% assumed return could push the employer contribution rate further above 50% in the next few years.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION I – EXECUTIVE SUMMARY

Asset and Liability Projections:

The graph shows the projection of assets and liabilities assuming that assets will earn the 7.25% assumption each year during the projection period. The percentages along the graph represent the funded ratio or status of the System.

Projection of Assets and Liabilities, 7.25% return each year

The graph shows that the projected funded status increases over the next 20 years to nearly 100%, assuming the actuarial assumptions are achieved. However, as above, it is the actual return on plan assets that will determine the future funded status and contribution rates.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION II – ASSETS

Pension Plan assets play a key role in the financial operation of the Plan and in the decisions the Board may make with respect to future deployment of those assets. The level of assets, the allocation of assets among asset classes, and the methodology used to measure assets will likely impact benefit levels, employer contributions, and the ultimate security of participants’ benefits.

In this section, we present detailed information on Plan assets including:

• Disclosure of Plan assets as of June 30, 2015 and June 30, 2016, • Statement of the changes in market values during the year, and • Historical investment performance.

As of June 30, 2014, an Actuarial Value of Assets distinct from the Market Value of Assets is no longer used in the calculations of the Unfunded Actuarial Liability or funded status due to the implementation of the new funding policy adopted by the Board on January 22, 2015. This policy change was made in conjunction with the new 24-year layered amortization of any unexpected changes in the Unfunded Actuarial Liability starting with the June 30, 2014 valuation. The calculation of the Actuarial Value of Assets is no longer shown in the valuation report, except to show the history of returns on the actuarial assets in Table II-3.

Also in prior valuations, a distinction was made between actuarial assets and valuation assets, with the latter reduced for non-valuation reserves, such as the Contingency Reserve. Since there are no such reserves as of June 30, 2015 and June 30, 2016, the two asset values are equal, and throughout this report we have used the term Market Value of Assets exclusively, except to show the history of returns on the valuation assets in Table II-3.

Disclosure

The market value represents “snap-shot” or “cash-out” values that provide the principal basis for measuring financial performance from one year to the next.

Table II-1 on the next page discloses and compares each asset value as of June 30, 2015 and June 30, 2016.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION II – ASSETS

Table II-1 Statement of Assets at Market Value Assets June 30, 2016 June 30, 2015 Cash and Short-Term Investments: Cash invested with Merced County Treasurer $ $1,293,296 $ 1,577,066 Cash invested with BNY Mellon 5,960,492 5,379,699 Other cash and cash equivalents with BNY Mellon 3,576,091 3,803,346 Securities lending collateral 4,972,033 2,638,976 Total Cash and Short-Term Investments $ 15,801,912 $ 13,399,087

Receivables: Bond interest $ 640,636 $ 645,358 Dividends 235,304 235,575 Contributions 3,557,195 2,951,115 Distributions 255,139 594,498 Securities sold 921,498 2,186,877 Other 6,450 1,574 Total Receivables $ 5,616,222 $ 6,614,997

Investments at Market Value: U.S. government and agency obligations $ 63,790,914 $ 53,798,734 Domestic fixed income 108,687,312 90,975,193 Common stocks (domestic) 39,432,005 40,995,445 Common stocks (index funds) 160,011,327 169,455,988 Common stocks (international) 138,263,801 154,854,029 Common stocks (international index funds) 18,259,912 0 Real estate 58,116,070 53,867,884 Alternative investments 70,181,549 92,061,348 Total Investments at Market Value $ 656,742,890 $ 656,008,621

Other Assets: Prepaid expense $ 0 $ 16,681 Capital assets, net of accumulated depreciation of $610,802 and $214,320 respectively 2,336,218 2,271,829 Total Assets 680,497,242 678,311,215 Liabilities Accounts payable $ 606,906 $ 692,498 Securities lending obligation 4,972,033 2,638,976 Securities purchased 4,817,076 2,649,013 Unclaimed contributions 85,403 11,359 Total Liabilities 10,481,418 5,991,846 Market Value of Assets $ 670,015,824 $ 672,319,369

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION II – ASSETS

Changes in Market Value

The components of asset change are:

• Contributions (employer and employee) • Benefit payments • Expenses (investment and administrative) • Investment income (realized and unrealized)

Table II-2 shows the components of change in the Market Value of Assets during 2015 and 2016.

Table II-2 Changes in Market Values Fiscal Year ending Fiscal Year ending Additions June 30, 2016 June 30, 2015 Contributions: Employer $ 56,617,088 $ 52,005,656 Plan members 9,042,663 8,945,316 Total Contributions $ 65,659,751 $ 60,950,972

Investment Income/(Loss) from Investment Activities: Net appreciation/(depreciation) in fair value of investments $ (7,297,000) $ 12,647,924 Investment income 9,240,309 9,642,717 Other revenue 12,834 13,018 Less investment expenses (2,361,966) (3,007,179) Total Investment Income/(Loss) from Investment Activities $ (405,823) $ 19,296,480

Securities Lending Income: Securities lending income $ 4,893 $ 11,990 Securities lending rebates 12,721 10,380 Total Securities Lending Income $ 17,614 $ 22,370

Total Investment Income/(Loss) $ (388,209) $ 19,318,850 Total Additions 65,271,542 80,269,822 Deductions Benefits paid $ 63,928,672 $ 61,780,089 Refunds of contributions 1,153,731 1,171,835 Administrative expense 2,416,563 2,197,281 Actuarial expense 76,121 126,165 401(h) distribution to County 0 0 Total Deductions 67,575,087 65,275,370

Net Increase/(Decrease) $ (2,303,545) $ 14,994,452 Market Value of Assets, Beginning of Year 672,319,369 657,324,917 Market Value of Assets, End of Year $ 670,015,824 $ 672,319,369

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION II – ASSETS

Investment Performance

The following table shows the historical annual asset returns on a market value and actuarial value basis, as well in the increase in the Consumer Price Index (CPI) since 1995. Beginning June 30, 2014, the Actuarial Value of Assets is equal to the Market Value of Assets, so the net returns are the same for FY 2015 and FY 2016.

Table II-3 Net Return on Assets vs. Increase in Consumer Price Index

Increase in Year Ended Net Return at Net Return at Net Return at Consumer June 30 Market Value Actuarial Value Valuation Assets Price Index1 1995 4.4% 3.0% 1996 9.8% 9.8% 2.8% 1997 16.7% 11.6% 2.3% 1998 13.9% 12.7% 1.7% 1999 10.0% 12.3% 2.0% 2000 9.1% 11.5% 3.7% 2001 -3.6% 8.6% 3.2% 2002 -5.6% 4.9% 1.1% 2003 4.6% 3.3% 2.1% 2004 12.6% 3.3% 3.3% 2005 8.7% 2.5% 2.5% 2006 7.6% 4.7% 4.3% 2007 16.3% 8.9% 2.7% 2008 -6.7% 1.2% 5.0% 2009 -22.1% -4.9% 2.7% -1.4% 2010 12.7% 7.0% 6.0% 1.1% 2011 22.6% 2.6% 2.7% 3.6% 2012 -1.6% 0.6% 1.0% 1.7% 2013 11.8% 3.8% 3.8% 1.8% 2014 17.1% 11.8% 11.8% 2.1% 2015 2.9% 2.9% 2.9% 0.1% 2016 -0.1% -0.1% -0.1% 1.0%

15-Year Compound Average 4.8% 3.4% N/A 2.1% 10-Year Compound Average 4.5% 3.3% N/A 1.8% 5-Year Compound Average 5.8% 3.7% 3.8% 1.3% 1 Based on All Urban Consumers - U.S. City Average, June indices.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION III – LIABILITIES

In this section, we present detailed information on Plan liabilities including:

• Disclosure of Plan liabilities at June 30, 2015 and June 30, 2016, and • Plan liabilities by tier as of June 30, 2016.

Disclosure

Several types of liabilities are calculated and presented in this report. Each type is distinguished by the people ultimately using the figures and the purpose for which they are using them. Note that these liabilities are not applicable for settlement purposes, including the purchase of annuities and the payment of lump sums.

• Present Value of Future Benefits: Used for measuring all future Plan obligations, represents the amount of money needed today to fully fund all benefits of the Plan both earned as of the valuation date and those to be earned in the future by current plan participants, under the current Plan provisions.

• Actuarial Liability: Used for funding calculations, this liability is calculated taking the Present Value of Future Benefits and subtracting the present value of future Member Contributions and future Employer Normal Costs under an acceptable actuarial funding method. The method used for this Plan is called the Entry Age Normal (EAN) funding method.

• Unfunded Actuarial Liability: The excess of the Actuarial Liability over the Actuarial Value of Assets.

Table III-1 on the following page discloses each of these liabilities for the current and prior valuations. With respect to each disclosure, a subtraction of the appropriate value of Plan assets yields, for each respective type, a net surplus, or an Unfunded Actuarial Liability.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION III – LIABILITIES

Table III-1 Present Value of Future Benefits and Actuarial Liability (in thousands) Item June 30, 2016 June 30, 2015 Present Value of Future Benefits Actives $ 493,837 $ 449,558 Deferred Members 47,561 44,037 Retirees 688,324 658,382 Disabled 64,872 60,369 Beneficiaries 51,461 46,987 Total MCERA $ 1,346,056 $ 1,259,334

Actuarial Liability Total Present Value of Benefits $ 1,346,056 $ 1,259,334 Present Value of Future Normal Costs Employer Portion 75,422 66,921 Employee Portion 69,439 61,232 Actuarial Liability $ 1,201,195 $ 1,131,181

Market Value of Assets $ 670,016 $ 672,319

Unfunded Actuarial Liability/(Surplus) $ 531,180 $ 458,862

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION III – LIABILITIES

Table III-2 discloses the liabilities of the Plan as of June 30, 2016, split by tier.

Table III-2 Liabilities by Group as of June 30, 2016 (in thousands) General Safety All Present Value of Future Benefits Tier 1 Tier 2 Tier 3 Tier 4 Total Tier 1 Tier 2 Tier 3 Tier 4 Total Total Actives 104,226$ $ 252,341 4,548$ 30,810$ $ 391,925 30,651$ 62,498$ 549$ 8,214$ 101,912$ $ 493,837 Deferred Members 15,072 24,052 122 159 39,405 2,261 5,819 3 73 8,156 47,561 Retirees 518,549 58,701 5 - 577,255 106,911 4,158 - - 111,069 688,324 Disabled 18,440 5,763 - - 24,203 35,423 5,247 - - 40,669 64,872 Beneficiaries 31,552 1,789 - - 33,340 17,527 594 - - 18,121 51,461 Total 687,838$ $ 342,646 4,675$ 30,969$ $ 1,066,128 192,773$ 78,317$ 552$ 8,287$ 279,928$ $ 1,346,056

Actuarial Liability Actives 94,900$ $ 178,813 1,024$ 4,312$ $ 279,050 28,296$ 40,535$ 112$ 984$ 69,926$ $ 348,976 Deferred Members 15,072 24,052 122 159 39,405 2,261 5,819 3 73 8,156 47,561 Retirees 518,549 58,701 5 - 577,255 106,911 4,158 - - 111,069 688,324 Disabled 18,440 5,763 - - 24,203 35,423 5,247 - - 40,669 64,872 Beneficiaries 31,552 1,789 - - 33,340 17,527 594 - - 18,121 51,461 Total 678,513$ $ 269,118 1,152$ 4,471$ $ 953,253 190,418$ 56,354$ 114$ 1,056$ 247,942$ $ 1,201,195

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION IV – CONTRIBUTIONS

In the process of evaluating the financial condition of any pension plan, the actuary analyzes the assets and liabilities to determine what level (if any) of contributions is needed to properly maintain the funding status of the Plan. Typically, the actuarial process will use a funding technique that will result in a pattern of contributions that are both stable and predictable.

For this Plan, the actuarial funding method used to determine the normal cost and the Unfunded Actuarial Liability is the Entry Age Normal (EAN) cost method. There are three primary components to the total contribution: the normal cost rate (employee and employer), the Unfunded Actuarial Liability rate (UAL rate), and the administrative expense rate.

The normal cost rate is determined in the following steps. First, an individual normal cost rate is determined by taking the value, as of entry age into the Plan, of each member’s projected future benefits. This value is then divided by the value, also at entry age, of the member’s expected future salary producing a normal cost rate that should remain relatively constant over a member’s career.

The total normal cost is computed by adding the expected dollar amount of each active member’s normal cost for the current year- known as the Individual Entry Age Method. The total normal cost is adjusted with interest to the middle of the year, to reflect the fact that the normal cost contributions are paid throughout the year as member payroll payments are made. Finally, the total normal cost rate, calculated by dividing the total normal cost by expected payroll of the closed group, is reduced by the member contribution rate to produce the employer normal cost rate.

Starting with the June 30, 2014 valuation, the Unfunded Actuarial Liability (UAL) is the difference between the EAN Actuarial Liability and the Market Value of Assets. The Unfunded Actuarial Liability payment is determined as the amount needed to fund the outstanding Unfunded Actuarial Liability as of June 30, 2013 over a closed period with 16 years remaining, as a level percentage of pay. Any subsequent unexpected change in the Unfunded Actuarial Liability after June 30, 2013 is amortized over 24 years (22 years for assumption changes) that includes a five-year phase-in/out (three years for assumption changes) of the payments/credits for each annual layer.

The administrative expenses are assumed to be $2.20 million for the current Plan year, and are expected to increase by the inflation rate in future years.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION IV – CONTRIBUTIONS

The tables below present the employer contribution rates for the Plan for this valuation.

Table IV-1 Development of the Net Employer Contribution Rate as of June 30, 2016 for FYE 2018

June 30, 2016 June 30, 2015 1. Total Normal Cost Rate 17.29% 16.45% 2. Member Contribution Rate1 7.98% 7.67% 3. Employer Normal Cost Rate (1-2) 9.31% 8.78% 4. UAL Amortization Rate 39.73% 39.92% 5. Administrative Expense Rate 1.54% 1.32% 6. Net Employer Contribution Rate (3+4+5) 50.58% 50.02% 1 Not including member's share of administrative expenses.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION IV – CONTRIBUTIONS

Table IV-2 FYE 2018 Net Employer Contribution Rate by Group

General Safety All Tier 1 Tier 2 Tier 3 Tier 4 Total Tier 1 Tier 2 Tier 3 Tier 4 Total Total County 1. Total Normal Cost Rate 21.79% 17.33% 13.35% 11.49% 16.23% 29.82% 22.27% 19.18% 18.88% 22.57% 17.29% 1 2. Member Contribution Rate 10.39% 8.34% 5.65% 5.75% 7.83% 10.68% 8.20% 7.99% 9.44% 8.76% 7.98% 3. Employer Normal Cost Rate (1-2) 11.40% 8.99% 7.70% 5.74% 8.40% 19.14% 14.07% 11.19% 9.44% 13.81% 9.31% 4. UAL Amortization Rate 37.94% 37.94% 37.94% 37.94% 37.94% 48.76% 48.76% 48.76% 48.76% 48.76% 39.73% 5. Administrative Expense Rate 1.55% 1.47% 1.43% 1.37% 1.46% 2.13% 1.97% 1.88% 1.83% 1.96% 1.54% 6. Net Employer Contribution Rate (3+4+5) 50.89% 48.40% 47.07% 45.05% 47.80% 70.03% 64.80% 61.83% 60.03% 64.53% 50.58%

Cemetery District 1. Total Normal Cost Rate 13.93% 1 2. Member Contribution Rate 7.48% 3. Employer Normal Cost Rate (1-2) 6.45% 4. UAL Amortization Rate 37.94% 5. Administrative Expense Rate 1.39% 6. Net Employer Contribution Rate (3+4+5) 45.78% 1 Not including member's share of administrative expenses.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION IV – CONTRIBUTIONS

The assets of the Plan are allocated between the General and Safety groups based on their share of the liability for non-active members. If the assets of the Plan exceed the liabilities of the non-active members, the remaining assets are allocated between the General and Safety groups based on their share of the liabilities for active members.

Table IV-3 Development of UAL Amortization Rates for FYE 2018

General Safety Total 1. Unfunded Actuarial Liability (UAL) $ 423,193,711 $ 107,985,821 $ 531,179,532 2. UAL Amortization (see table IV-4) $ 38,941,598 $ 9,936,680 $ 48,878,278 3. Total Payroll 102,637,672 20,380,641 123,018,313 4. UAL Amortization Rate (2 divided by 3) 37.94% 48.76% 39.73%

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION IV – CONTRIBUTIONS

The table presents the calculation of the UAL payments for the System.

Table IV-4 Development of Amortization Payment For the June 30, 2016 Actuarial Valuation

Initial June 30, 2016 Remaining Current % of Pay Date Initial Amortization Outstanding Amortization Phase In/Out Amortization % of After Type of Base Established Amount Years Balance Years Percentage Amount Pay Phase-In

1. Initial UAL 6/30/2013 $ 518,034,325 16 $ 488,524,613 13 100% $ 49,689,376 40.39% 40.39% 2. (Gain)/Loss Base 6/30/2014 (71,384,203) 24 (78,966,272) 22 60% (3,742,664) -3.04% -5.07% 3. (Gain)/Loss Base 6/30/2015 34,000,650 24 36,041,934 23 40% 1,152,010 0.94% 2.34% 4. (Gain)/Loss Base 6/30/2016 47,466,429 24 47,466,429 24 20% 779,257 0.63% 3.17% 5. (Gain)/Loss Assumption 6/30/2016 38,112,827 22 38,112,827 22 33% 1,000,299 0.81% 2.44%

Total $ 531,179,532 $ 48,878,278 39.73% 43.27%

The single period equivalent amortization period – i.e. the length of time required to amortize the overall UAL as a level percentage of payroll based on the total current amortization payment – is approximately 15 years.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION V – COMPREHENSIVE ANNUAL FINANCIAL REPORTING INFORMATION

The GASB adopted Statement Nos. 67 and 68 replaced GASB Statement Nos. 25 and 27. GASB 67 is effective for periods beginning after June 15, 2013 (first effective for the fiscal year ending June 30, 2014 for the Plan) and GASB 68 is effective for fiscal years beginning after June 15, 2014 (first effective for the fiscal year ending June 30, 2015 for the Employer). The disclosures needed to satisfy the new GASB requirements can be found in the MCERA GASB 67/68 Report as of June 30, 2016.

In accordance with Governmental Finance Officers Association (GFOA) and their recommended checklist for Comprehensive Annual Financial Reports (CAFRSs), we continue to prepare the following disclosures:

Analysis of Financial Experience

This schedule shows the history of gains or losses arising from investment and liability sources, as well as non-recurring items.

Solvency Test

The solvency test shows the portion of actuarial liabilities for active member contributions, inactive members, and the employer financed portion of the active members that are covered by the Actuarial Value of Assets.

Actuarial Balance Sheet

The actuarial balance sheet shows the components of the actuarial liabilities of the Plan and the actuarial assets that are intended to satisfy those liabilities.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION V – COMPREHENSIVE ANNUAL FINANCIAL REPORTING INFORMATION

Table V-1 ANALYSIS OF FINANCIAL EXPERIENCE Gain (or Loss) in Actuarial Liability During Years Ended June 30 Resulting from Differences Between Assumed Experience and Actual Experience (in thousands) Gain (or Loss) for Year Ending June 30 Type of Activity 2016 2015 2014 2013 2012 2011 2010 2009 2008

Investment Income and Expenses $ (52,420) $ (31,459) $ 22,058 $ (20,749) $ (40,054) $ (30,955) $ (16,151) $ (66,987) $ (48,840) Combined Liability Experience 8,327 5,096 12,533 (4,199) (11,401) 13,824 (8,100) (23,892) 14,186 Gain (or Loss) During Year from Financial Experience $ (44,093) $ (26,363) $ 34,591 $ (24,948) $ (51,455) $ (17,131) $ (24,251) $ (90,879) $ (34,654) Non-Recurring Gain (or Loss) Items (41,488) (7,636) 36,803 (49,294) 16,069 12,918 (63,410) - - Composite Gain (or Loss) During Year $ (85,581) $ (33,999) $ 71,394 $ (74,242) $ (35,386) $ (4,213) $ (87,661) $ (90,879) $ (34,654)

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

SECTION V – COMPREHENSIVE ANNUAL FINANCIAL REPORTING INFORMATION

Table V-2 SOLVENCY TEST (dollars in thousands) (A) (B) (C) Remaining Portion of Actuarial Valuation Active Retirees Active Liabilities Covered Date Member And Members' Reported by Reported Assets 1 2 June 30, Contributions Beneficiaries Liabilities Assets (A) (B) (C) 2016 3 $ 81,880 $ 804,658 $ 314,657 $ 670,016 100% 73% 0% 2015 78,078 765,738 287,365 672,319 100% 78% 0% 2014 75,582 739,428 281,231 657,325 100% 79% 0% 2013 4 73,311 694,137 297,850 547,264 100% 68% 0% 2012 5 66,407 632,319 276,882 528,728 100% 73% 0% 2011 6 65,723 558,483 309,711 523,980 100% 82% 0% 2010 7 64,917 532,695 333,220 509,561 100% 83% 0% 2009 65,126 448,231 296,324 483,145 100% 93% 0% 1 Includes deferred members. 2 Actuarial Value of Assets. As of June 30, 2014, the Market Value of Assets is used. 3 Reflects revised economic and demographic assumptions. 4 Reflects revised economic and demographic assumptions. 5 Reflects revised demographic assumptions. 6 Reflects revised EAN methodology and economic assumptions. 7 Reflects revised economic and demographic assumptions.

Table V-3 Actuarial Balance Sheet as of June 30, 2016 Assets 1. Market value of assets $ 670,015,824 2. Present value of future contributions by members 69,438,728 3. Present value of future employer contributions for normal cost 75,421,676 4. Present value of other future employer contributions (UAL) 531,179,532 5. Total actuarial assets $ 1,346,055,760

Liabilities 6. Present value of retirement allowances payable to retired/disabled members and their survivors $ 804,657,805 7. Present value of service retirement allowances payable to presently active members and their survivors 431,405,600 8. Present value of allowances payable to current and future vested terminated and their survivors 81,835,632 9. Present value of disability retirement allowances payable to presently active members and their survivors 17,228,318 10. Present value of death benefits payable on behalf of presently active members 3,475,114 11. Present value of members' contributions to be returned upon withdrawal 7,453,291 12. Special Reserves - 13. Total actuarial liabilities $ 1,346,055,760

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX A – MEMBERSHIP INFORMATION

Summary of Participant Data (By Group) as of June 30, 2016 General Safety Total Active Participants Number 1,729 311 2,040 Average Age 43.90 38.43 43.06 Average Service 10.02 10.12 10.03 Average Pay $56,297 $62,363 $57,222 Service Retired Number 1,531 189 1,720 Average Age 70.16 65.18 69.61 Average Annual Total Benefit $30,738 $42,107 $31,988 Beneficiaries & QDROs Number 260 67 327 Average Age 75.97 68.96 74.53 Average Annual Total Benefit $14,933 $27,116 $17,429 Duty Disabled Number 54 82 136 Average Age 68.87 62.49 65.02 Average Annual Total Benefit $25,237 $32,251 $29,466 Non-Duty Disabled Number 48 3 51 Average Age 67.79 61.72 67.43 Average Annual Total Benefit $14,928 $21,221 $15,299 Total Receiving Benefits Number 1,893 341 2,234 Average Age 70.86 65.24 70.00 Average Annual Total Benefit $28,010 $36,608 $29,322 Terminated Vested Number 244 31 275 Average Age 50.62 39.52 49.37 Average Service 10.14 9.12 10.03 Transfers Number 202 56 258 Average Age 50.40 42.94 48.78 Average Service 17.83 16.96 17.64 Funds on Account Number 173 29 202 Average Age 42.78 31.57 41.17 Average Service 1.57 1.35 1.54 Total Deferred Number 619 116 735 Average Age 48.36 39.18 46.91 Average Service 10.25 10.97 10.37

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX A – MEMBERSHIP INFORMATION

Summary of Participant Data (General) as of June 30, 2016 General General General General General Tier 1 Tier 2 Tier 3 Tier 4 Total Active Participants Number 141 1,014 49 525 1,729 Average Age 54.91 46.64 39.45 36.06 43.90 Average Service 24.84 12.46 7.82 1.53 10.02 Average Pay $79,373 $58,653 $62,404 $44,980 $56,297 Service Retired Number 1,248 282 1 N/A 1,531 Average Age 71.11 65.99 57.10 N/A 70.16 Average Annual Total Benefit $33,473 $18,744 $356 N/A $30,738 Beneficiaries & QDROs Number 242 18 N/A N/A 260 Average Age 77.23 58.91 N/A N/A 75.97 Average Annual Total Benefit $15,364 $9,141 N/A N/A $14,933 Duty Disabled Number 42 12 N/A N/A 54 Average Age 71.84 58.45 N/A N/A 68.87 Average Annual Total Benefit $24,906 $26,393 N/A N/A $25,237 Non-Duty Disabled Number 34 14 N/A N/A 48 Average Age 71.48 58.82 N/A N/A 67.79 Average Annual Total Benefit $16,089 $12,109 N/A N/A $14,928 Total Receiving Benefits Number 1,566 326 1 N/A 1,893 Average Age 72.09 65.01 57.10 N/A 70.86 Average Annual Total Benefit $30,067 $18,211 $356 N/A $28,010 Terminated Vested Number 72 163 8 1 244 Average Age 57.80 47.65 46.30 53.01 50.62 Average Service 11.01 9.64 12.80 8.65 10.14 Transfers Number 54 146 N/A 2 202 Average Age 56.87 48.09 N/A 45.12 50.40 Average Service 27.23 14.56 N/A 3.01 17.83 Funds on Account Number 11 94 8 60 173 Average Age 62.19 44.31 31.77 38.28 42.78 Average Service 3.10 1.82 1.89 0.84 1.57 Total Deferred Number 137 403 16 63 619 Average Age 57.78 47.03 39.03 38.73 48.36 Average Service 16.77 9.60 7.35 1.03 10.25

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX A – MEMBERSHIP INFORMATION

Summary of Participant Data (Safety) as of June 30, 2016 Safety Safety Safety Safety Safety Tier 1 Tier 2 Tier 3 Tier 4 Total Active Participants Number 32 198 4 77 311 Average Age 50.01 39.87 33.45 30.20 38.43 Average Service 23.37 11.39 6.28 1.54 10.12 Average Pay $84,624 $64,854 $57,483 $46,959 $62,363 Service Retired Number 174 15 N/A N/A 189 Average Age 65.70 59.10 N/A N/A 65.18 Average Annual Total Benefit $43,776 $22,752 N/A N/A $42,107 Beneficiaries & QDROs Number 65 2 N/A N/A 67 Average Age 69.83 40.37 N/A N/A 68.96 Average Annual Total Benefit $27,268 $22,169 N/A N/A $27,116 Duty Disabled Number 67 15 N/A N/A 82 Average Age 64.62 52.97 N/A N/A 62.49 Average Annual Total Benefit $33,602 $26,218 N/A N/A $32,251 Non-Duty Disabled Number 2 1 N/A N/A 3 Average Age 58.19 68.78 N/A N/A 61.72 Average Annual Total Benefit $22,253 $19,156 N/A N/A $21,221 Total Receiving Benefits Number 308 33 N/A N/A 341 Average Age 66.29 55.47 N/A N/A 65.24 Average Annual Total Benefit $37,939 $24,183 N/A N/A $36,608 Terminated Vested Number 2 29 N/A N/A 31 Average Age 55.60 38.41 N/A N/A 39.52 Average Service 12.67 8.88 N/A N/A 9.12 Transfers Number 12 43 N/A 1 56 Average Age 51.91 40.83 N/A 26.10 42.94 Average Service 26.53 14.62 N/A 3.02 16.96 Funds on Account Number N/A 9 2 18 29 Average Age N/A 36.67 27.60 29.46 31.57 Average Service N/A 2.55 0.39 0.86 1.35 Total Deferred Number 14 81 2 19 116 Average Age 52.44 39.50 27.60 29.29 39.18 Average Service 24.55 11.22 0.39 0.98 10.97

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX A – MEMBERSHIP INFORMATION

Change in Plan Membership: Total

Non-Vested Vested Non - Duty Beneficiaries & Actives Transfers Terminations Terminations Disabled Duty Disabled Retired QDROs Total

July 1, 2015 1,962 265 154 258 49 134 1,703 314 4,839

New Entrants 247 0 0 0 0 0 0 0 247 Rehires 9 (1) (4) (3) 0 0 (1) 0 0 Duty Disabilities (3) 0 0 (1) 0 4 0 0 0 Non-Duty Disabilities (1) 0 0 (1) 2 0 0 0 0 Retirements (37) (13) (1) (10) 0 0 61 0 0 Dual Service Retirements 0 0 0 0 0 0 0 0 0 Vested Terminations (42) 0 0 42 0 0 0 0 0 Transfers (8) 9 (1) 0 0 0 0 0 0 Non-Vested Terminations with Funds on Account (40) (2) 63 0 0 0 0 0 21 Withdrawals Paid (46) 0 (13) (8) 0 0 0 0 (67) Died, With Beneficiary 0 0 0 0 0 (1) (14) 15 0 Died, Without Beneficiary (1) 0 0 0 0 (1) (29) 0 (31) Beneficiary Deaths 0 0 0 0 0 0 0 (3) (3) Domestic Relations Orders 0 0 0 0 0 0 0 1 1 Data Corrections 0 0 4 (2) 0 0 0 0 2

July 1, 2016 2,040 258 202 275 51 136 1,720 327 5,009

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX A – MEMBERSHIP INFORMATION

Change in Plan Membership: General

Non-Vested Vested Non - Duty Beneficiaries & Actives Transfers Terminations Terminations Disabled Duty Disabled Retired QDROs Total

July 1, 2015 1,664 204 134 231 46 53 1,518 252 4,102

New Entrants 208 0 0 0 0 0 0 0 208 Rehires 8 (1) (3) (3) 0 0 (1) 0 0 Duty Disabilities (1) 0 0 (1) 0 2 0 0 0 Non-Duty Disabilities (1) 0 0 (1) 2 0 0 0 0 Retirements (33) (9) (1) (10) 0 0 53 0 0 Dual Service Retirements 0 0 0 0 0 0 0 0 0 Vested Terminations (34) 0 0 34 0 0 0 0 0 Transfers (8) 9 (1) 0 0 0 0 0 0 Non-Vested Terminations with Funds on Account (34) (1) 53 0 0 0 0 0 18 Withdrawals Paid (39) 0 (12) (5) 0 0 0 0 (56) Died, With Beneficiary 0 0 0 0 0 0 (11) 11 0 Died, Without Beneficiary (1) 0 0 0 0 (1) (28) 0 (30) Beneficiary Deaths 0 0 0 0 0 0 0 (3) (3) Domestic Relations Orders 0 0 0 0 0 0 0 0 0 Data Corrections 0 0 3 (1) 0 0 0 0 2

July 1, 2016 1,729 202 173 244 48 54 1,531 260 4,241

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX A – MEMBERSHIP INFORMATION

Change in Plan Membership: Safety

Non-Vested Vested Non - Duty Beneficiaries & Actives Transfers Terminations Terminations Disabled Duty Disabled Retired QDROs Total

July 1, 2015 298 61 20 27 3 81 185 62 737

New Entrants 39 0 0 0 0 0 0 0 39 Rehires 1 0 (1) 0 0 0 0 0 0 Duty Disabilities (2) 0 0 0 0 2 0 0 0 Non-Duty Disabilities 0 0 0 0 0 0 0 0 0 Retirements (4) (4) 0 0 0 0 8 0 0 Dual Service Retirements 0 0 0 0 0 0 0 0 0 Vested Terminations (8) 0 0 8 0 0 0 0 0 Transfers 0 0 0 0 0 0 0 0 0 Non-Vested Terminations with Funds on Account (6) (1) 10 0 0 0 0 0 3 Withdrawals Paid (7) 0 (1) (3) 0 0 0 0 (11) Died, With Beneficiary 0 0 0 0 0 (1) (3) 4 0 Died, Without Beneficiary 0 0 0 0 0 0 (1) 0 (1) Beneficiary Deaths 0 0 0 0 0 0 0 0 0 Domestic Relations Orders 0 0 0 0 0 0 0 1 1 Data Corrections 0 0 1 (1) 0 0 0 0 0

July 1, 2016 311 56 29 31 3 82 189 67 768

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX A – MEMBERSHIP INFORMATION

Active Member Data by Plan Average Average Valuation at Member Plan Type Annual Payroll Annual Salary Year End Count Salary Increase 2007 General 1,917 $85,308,000 $44,501 -0.54% Safety 318 $15,281,000 $48,053 -2.47% Total 2,235 $100,589,000 $45,006 -0.81%

2008 General 1,921 $92,116,000 $47,952 7.75% Safety 339 $17,137,000 $50,552 5.20% Total 2,260 $109,253,000 $48,342 7.41%

2009 General 1,848 $99,266,589 $53,716 12.02% Safety 342 $19,363,697 $56,619 12.00% Total 2,190 $118,630,286 $54,169 12.05%

2010 General 1,708 $94,915,436 $55,571 3.45% Safety 330 $19,692,515 $59,674 5.40% Total 2,038 $114,607,951 $56,235 3.81%

2011 General 1,659 $94,976,978 $57,250 3.02% Safety 321 $19,768,859 $61,585 3.20% Total 1,980 $114,745,837 $57,954 3.05%

2012 General 1,596 $90,706,280 $56,834 -0.73% Safety 305 $19,145,091 $62,771 1.93% Total 1,901 $109,851,371 $57,786 -0.29%

2013 General 1,604 $91,737,348 $57,193 0.63% Safety 295 $18,699,145 $63,387 0.98% Total 1,899 $110,436,493 $58,154 0.64%

2014 General 1,624 $91,704,083 $56,468 -1.27% Safety 300 $18,620,870 $62,070 -2.08% Total 1,924 $110,324,953 $57,341 -1.40%

2015 General 1,664 $93,938,857 $56,454 -0.02% Safety 298 $18,397,233 $61,736 -0.54% Total 1,962 $112,336,090 $57,256 -0.15%

2016 General 1,729 $97,337,917 $56,297 -0.28% Safety 311 $19,394,922 $62,363 1.02% Total 2,040 $116,732,839 $57,222 -0.06%

Payroll figures represent active members’ annualized pay rates on June 30.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX A – MEMBERSHIP INFORMATION

Retirants and Beneficiaries Added to and Removed from Retiree Payroll Annual Total Average Added Removed Average Fiscal Beginning Allowances Allowances End of Retirement Allowance Allowance During During Annual Year of Year Added Removed Year Payroll Percentage Percentage Year Year Allowance (in 000s) Increase Increase 2005 1,441 109 2,445,000 49 450,000 1,501 24,867,000 9.16% 16,567 4.80% 2006 1,477 98 2,007,000 53 785,000 1,522 27,297,000 9.77% 16,836 1.62% 2007 1,521 136 4,419,000 38 560,000 1,619 31,823,000 16.58% 17,947 6.60% 2008 1,620 105 2,757,000 67 902,000 1,658 34,603,000 8.74% 19,644 9.46% 2009 1,658 105 3,402,523 52 812,828 1,711 37,747,525 9.09% 22,062 12.31% 2010 1,711 171 6,097,956 56 981,465 1,826 43,653,374 15.65% 23,907 8.36% 2011 1,826 103 2,627,234 44 781,283 1,885 46,116,686 5.64% 24,465 2.34% 2012 1,885 175 6,484,652 64 960,185 1,996 52,887,845 14.68% 26,497 8.31% 2013 1,996 103 3,028,612 49 855,980 2,050 56,048,022 5.98% 27,340 3.18% 2014 2,050 116 3,950,045 31 590,636 2,135 60,297,112 7.58% 28,242 3.30% 2015 2,135 100 2,508,828 35 720,242 2,200 63,254,229 4.90% 28,752 1.80% 2016 2,200 68 1,716,361 34 946,189 2,234 65,505,679 3.56% 29,322 1.98%

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX A – MEMBERSHIP INFORMATION

GENERAL Count Service Age Under 1 1 to 4 5 to 9 10 to 14 15 to 19 20 to 24 25 to 29 30 to 34 35 to 39 40 & up Total Under 20 0 0 0 0 0 0 0 0 0 0 0 20 to 25 14 11 0 0 0 0 0 0 0 0 25 25 to 29 69 84 11 0 0 0 0 0 0 0 164 30 to 34 39 117 58 25 1 0 0 0 0 0 240 35 to 39 37 80 59 80 22 0 0 0 0 0 278 40 to 44 18 56 62 56 53 10 0 0 0 0 255 45 to 49 13 26 28 40 55 26 11 0 0 0 199 50 to 54 9 18 32 54 54 32 19 11 0 0 229 55 to 59 6 17 21 42 58 31 23 9 1 0 208 60 to 64 2 10 17 22 34 12 4 3 0 0 104 65 to 69 0 2 6 3 7 1 1 0 0 1 21 70 & up 0 1 1 3 0 0 1 0 0 0 6 Total 207 422 295 325 284 112 59 23 1 1 1,729

Compensation Service Age Under 1 1 to 4 5 to 9 10 to 14 15 to 19 20 to 24 25 to 29 30 to 34 35 to 39 40 & up Total Under 20 0 0 0 0 0 0 0 0 0 0 0 20 to 25 35,109 39,239 0 0 0 0 0 0 0 0 36,926 25 to 29 40,507 44,045 47,009 0 0 0 0 0 0 0 42,755 30 to 34 42,884 46,851 49,500 55,534 45,985 0 0 0 0 0 47,747 35 to 39 42,542 48,198 59,588 59,610 58,869 0 0 0 0 0 53,991 40 to 44 40,199 48,470 61,613 60,358 62,217 67,302 0 0 0 0 57,288 45 to 49 48,899 54,986 57,190 66,393 67,155 63,605 59,032 0 0 0 61,905 50 to 54 47,140 59,770 50,168 54,698 64,142 60,209 73,870 68,048 0 0 59,396 55 to 59 39,238 59,405 65,387 61,243 63,760 78,817 78,027 88,789 46,987 0 67,177 60 to 64 64,074 88,132 54,818 51,528 60,382 64,728 93,430 80,985 0 0 62,706 65 to 69 0 62,650 67,569 46,271 89,058 164,036 51,008 0 0 100,728 76,605 70 & up 0 43,243 30,313 42,796 0 0 100,058 0 0 0 50,334 Total 41,933 49,167 56,513 58,830 63,980 68,192 74,107 77,851 46,987 100,728 56,297

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX A – MEMBERSHIP INFORMATION

SAFETY Count Service Age Under 1 1 to 4 5 to 9 10 to 14 15 to 19 20 to 24 25 to 29 30 to 34 35 to 39 40 & up Total Under 20 0 0 0 0 0 0 0 0 0 0 0 20 to 25 8 7 0 0 0 0 0 0 0 0 15 25 to 29 10 21 6 0 0 0 0 0 0 0 37 30 to 34 9 10 34 13 0 0 0 0 0 0 66 35 to 39 6 5 25 30 2 0 0 0 0 0 68 40 to 44 1 4 9 17 14 3 0 0 0 0 48 45 to 49 2 0 4 9 15 9 10 0 0 0 49 50 to 54 0 0 4 2 6 5 2 1 0 0 20 55 to 59 1 0 3 0 0 1 1 1 0 0 7 60 to 64 0 0 0 0 0 0 0 0 0 0 0 65 to 69 0 0 1 0 0 0 0 0 0 0 1 70 & up 0 0 0 0 0 0 0 0 0 0 0 Total 37 47 86 71 37 18 13 2 0 0 311

Compensation Service Age Under 1 1 to 4 5 to 9 10 to 14 15 to 19 20 to 24 25 to 29 30 to 34 35 to 39 40 & up Total Under 20 0 0 0 0 0 0 0 0 0 0 0 20 to 25 41,324 40,005 0 0 0 0 0 0 0 0 40,709 25 to 29 44,638 47,108 65,232 0 0 0 0 0 0 0 49,379 30 to 34 46,527 51,318 65,523 57,569 0 0 0 0 0 0 59,214 35 to 39 53,224 47,018 61,472 62,714 66,770 0 0 0 0 0 60,385 40 to 44 58,864 60,275 62,570 64,838 74,966 87,437 0 0 0 0 68,274 45 to 49 60,195 0 59,838 60,745 71,693 70,768 87,426 0 0 0 71,286 50 to 54 0 0 53,947 85,282 66,756 78,647 72,370 70,564 0 0 69,771 55 to 59 93,725 0 76,015 0 0 93,187 67,171 181,247 0 0 94,768 60 to 64 0 0 0 0 0 0 0 0 0 0 0 65 to 69 0 0 113,942 0 0 0 0 0 0 0 113,942 70 & up 0 0 0 0 0 0 0 0 0 0 0 Total 48,325 48,057 64,142 62,667 71,865 76,980 83,551 125,906 0 0 62,363

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX A – MEMBERSHIP INFORMATION

Service Retired Benefits General Safety Total Annual Annual Annual Current Age Number Average Number Average Number Average Benefit Benefit Benefit 0-24 0 $0 0 $0 0 $0 25-29 0 $0 0 $0 0 $0 30-34 0 $0 0 $0 0 $0 35-39 0 $0 0 $0 0 $0 40-44 0 $0 1 $49,356 1 $49,356 45-49 0 $0 1 $23,089 1 $23,089 50-54 29 $28,629 22 $46,163 51 $36,192 55-59 140 $30,585 39 $46,018 179 $33,947 60-64 290 $34,806 30 $35,921 320 $34,911 65-69 383 $36,771 49 $47,107 432 $37,944 70-74 303 $29,077 23 $32,048 326 $29,287 75-79 170 $23,890 12 $40,381 182 $24,977 80-84 117 $23,338 5 $45,375 122 $24,241 85-89 57 $24,031 4 $31,334 61 $24,510 90-94 29 $19,443 1 $56,517 30 $20,679 95+ 13 $18,096 2 $29,605 15 $19,630 All Ages 1,531 $30,738 189 $42,107 1,720 $31,988

Duty Disabled Benefits General Safety Total Annual Annual Annual Current Age Number Average Number Average Number Average Benefit Benefit Benefit 0-24 0 $0 0 $0 0 $0 25-29 0 $0 0 $0 0 $0 30-34 0 $0 0 $0 0 $0 35-39 0 $0 3 $20,630 3 $20,630 40-44 1 $41,533 4 $33,832 5 $35,372 45-49 2 $26,593 1 $49,908 3 $34,365 50-54 2 $39,090 12 $38,603 14 $38,673 55-59 8 $24,648 6 $20,706 14 $22,959 60-64 3 $26,791 19 $28,908 22 $28,619 65-69 13 $26,232 19 $35,201 32 $31,557 70-74 10 $21,494 9 $32,032 19 $26,486 75-79 7 $22,783 9 $33,736 16 $28,944 80-84 4 $17,076 0 $0 4 $17,076 85-89 4 $32,149 0 $0 4 $32,149 90-94 0 $0 0 $0 0 $0 95+ 0 $0 0 $0 0 $0 All Ages 54 $25,237 82 $32,251 136 $29,466

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX A – MEMBERSHIP INFORMATION

Non-Duty Disabled Benefits General Safety Total Annual Annual Annual Current Age Number Average Number Average Number Average Benefit Benefit Benefit 0-24 0 $0 0 $0 0 $0 25-20 0 $0 0 $0 0 $0 30-34 0 $0 0 $0 0 $0 35-39 0 $0 0 $0 0 $0 40-44 2 $15,004 0 $0 2 $15,004 45-49 1 $15,021 1 $27,963 2 $21,492 50-54 3 $15,626 0 $0 3 $15,626 55-59 6 $15,859 0 $0 6 $15,859 60-64 8 $15,028 0 $0 8 $15,028 65-69 6 $14,320 2 $17,850 8 $15,203 70-74 9 $12,252 0 $0 9 $12,252 75-79 7 $19,906 0 $0 7 $19,906 80-84 4 $12,926 0 $0 4 $12,926 85-89 2 $11,018 0 $0 2 $11,018 90-94 0 $0 0 $0 0 $0 95+ 0 $0 0 $0 0 $0 All Ages 48 $14,928 3 $21,221 51 $15,299

Surviving Beneficiary & QDRO Benefits (all benefit types) General Safety Total Annual Annual Annual Current Age Number Average Number Average Number Average Benefit Benefit Benefit 0-24 0 $0 0 $0 0 $0 25-29 1 $1,309 0 $0 1 $1,309 30-34 1 $12,809 0 $0 1 $12,809 35-39 0 $0 1 $36,028 1 $36,028 40-44 5 $6,646 2 $29,916 7 $13,295 45-49 3 $6,786 2 $9,853 5 $8,013 50-54 6 $12,721 5 $12,436 11 $12,592 55-59 20 $10,795 4 $26,915 24 $13,482 60-64 13 $16,500 5 $24,691 18 $18,776 65-69 28 $21,649 14 $35,745 42 $26,348 70-74 27 $18,321 13 $22,971 40 $19,832 75-79 41 $13,573 10 $30,170 51 $16,828 80-84 45 $14,797 5 $31,742 50 $16,491 85-89 33 $13,398 5 $24,458 38 $14,853 90-94 30 $14,415 1 $26,170 31 $14,794 95+ 7 $15,764 0 $0 7 $15,764 All Ages 260 $14,933 67 $27,116 327 $17,429

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX B -- STATEMENT OF CURRENT ACTUARIAL ASSUMPTIONS AND METHODS

The assumptions and methods used in the actuarial valuation reflect the results of an Experience Study performed by Cheiron covering the period from July 1, 2013 through June 30, 2016 and adopted by the Board. More details on the rationale for the demographic and economic assumptions can be found in the Experience Analysis dated February 15, 2016.

A. Actuarial Assumptions

1. Rate of Return

Assets are assumed to earn 7.25% net of investment expenses.

2. Administrative Expenses

Administrative expenses are assumed to be $2.20 million for the next year to be allocated between the employer and employees based on each group’s share of the non-expense related contributions. Administrative expenses in future years are expected to increase with the Consumer Price Index (CPI).

3. Cost of Living

The cost of living as measured by the Consumer Price Index (CPI) will increase at the rate of 2.50% per year.

4. Post Retirement COLA

Benefits are assumed to increase after retirement at the rate of 2.40% per year for Tier 1 members.

5. Increases in Pay

Wage inflation component: 2.75% Additional longevity and promotion component:

Years of Service General Safety 0-1 7.00% 7.50% 2-3 5.00% 5.00% 4 5.00% 3.00% 5 3.00% 1.50% 6-9 2.00% 1.50% 10-14 1.50% 1.00% 15-19 1.00% 1.00% 20+ 0.50% 0.50%

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX B -- STATEMENT OF CURRENT ACTUARIAL ASSUMPTIONS AND METHODS

6. Final Average Compensation Load

None

7. Family Composition

50% of female General members, 70% of male General members and 90% of Safety members are assumed to be married at retirement. Male members are assumed to be three years older than their spouses and female members are assumed to be three years younger than their spouses.

8. Rates of Mortality

Mortality rates for actives, retirees, disabled members, beneficiaries, terminated vesteds, and reciprocal transfers are based on the sex-distinct employee and annuitant CalPERS mortality tables as described below. Future mortality improvements are reflected by applying the SOA MP-2016 projection scale on a generational basis from the base year of 2009.

Category Base Mortality Table Healthy Annuitant CalPERS 2009 Healthy Annuitant Mortality Table Disabled Annuitant CalPERS 2009 Industrial Disability Mortality Table Healthy Non-Annuitant CalPERS 2009 Non-Industrial Employees Mortality Table Actives, Line of Duty CalPERS 2009 Industrial Employees Mortality Table (Safety only)

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX B -- STATEMENT OF CURRENT ACTUARIAL ASSUMPTIONS AND METHODS

9. Rates of Termination

Sample rates of termination1 are shown in the following table.

Years of Service General Male General Female Safety 0 22.5% 12.0% 20.8% 5 8.2% 7.5% 4.6% 10 4.5% 3.6% 4.6% 15 4.5% 3.0% 2.5% 20 4.5% 3.0% 0.0% 25 4.5% 3.0% 0.0% 30 0.0% 0.0% 0.0% 1 Termination rates do not apply once a member is eligible for retirement.

There are three types of terminations: withdrawals, reciprocal transfers, and vested terminations. Rates of withdrawal apply to active Members who terminate their employment and withdraw their member contributions, forfeiting entitlement to future Plan benefits. Rates of reciprocal transfer are for members who leave their member contributions on deposit and engage in employment covered by a pension plan with a reciprocal relationship with MCERA. Finally, rates of vested termination apply to active Members who terminate their employment and leave their member contributions on deposit with the Plan.

The table below shows the percentages of total terminations falling into these categories.

Years of Service General Safety 0 – 4 5 – 14 15+ 0 – 4 5+ Withdrawals 90.0% 40.0% 10.0% 90.0% 30.0% Transfers 10.0% 10.0% 10.0% 10.0% 25.0% Vested Terminations 0.0% 50.0% 80.0% 0% 45.0%

Vested terminated General Members are assumed to begin receiving benefits at age 59; vested terminated Safety Members are assumed to begin receiving benefits at age 53. Future reciprocal transfer General members are assumed to begin receiving benefits at age 61; future reciprocal transfer safety members are assumed to begin receiving benefits at age 55. Current reciprocal transfer members are assumed to begin receiving benefits based on the probabilities of retirement applied to the active members.

Future reciprocal transfers’ pay growth is assumed to be 3.25% while employed by a reciprocal employer. Current reciprocal transfers’ pay growth is assumed to increase according to the assumptions applied to the active members until the assumed retirement age.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX B -- STATEMENT OF CURRENT ACTUARIAL ASSUMPTIONS AND METHODS

10. Rates of Service-Connected Disability Sample service-connected disability rates of active participants are provided in the table.

Safety General Age All Male Female 20 0.0000% 0.0027% 0.0040% 25 0.0825% 0.0053% 0.0075% 30 0.2380% 0.0133% 0.0115% 35 0.3940% 0.0240% 0.0150% 40 0.5500% 0.0320% 0.0190% 45 0.7060% 0.0480% 0.0340% 50 0.9230% 0.0640% 0.0600% 55 2.3925% 0.0800% 0.1050% 60 3.0120% 0.1120% 0.1575% 65 3.6385% 0.0000% 0.0000%

11. Rates of Non Service-Connected Disability Sample non service-connected disability rates of active participants are provided in the table. Rates are applied once members have at least five years of service.

Safety General Age All Male Female 20 0.0050% 0.0000% 0.0000% 25 0.0050% 0.0267% 0.0033% 30 0.0100% 0.0533% 0.0067% 35 0.0150% 0.0533% 0.0100% 40 0.0200% 0.0867% 0.0133% 45 0.0250% 0.1267% 0.0300% 50 0.0400% 0.1600% 0.0600% 55 0.0650% 0.2133% 0.0933% 60 0.1000% 0.2800% 0.1533% 65 0.1000% 0.0000% 0.0000%

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX B -- STATEMENT OF CURRENT ACTUARIAL ASSUMPTIONS AND METHODS

12. Rates of Retirement

Rates of retirement are based on age and service according to the following table.

General Male General Female Safety Years of Service Years of Service Years of Service Age 10 – 19 20 – 29 30+ 10 – 19 20 – 29 30+ Age 10 – 19 20+ 50 5.00% 10.00% 7.50% 2.50% 7.50% 25.00% 40 0.00% 3.10% 51 5.00% 10.00% 7.50% 2.50% 7.50% 25.00% 41 0.00% 3.10% 52 5.00% 10.00% 15.00% 5.00% 12.50% 25.00% 42 0.00% 3.10% 53 5.00% 10.00% 15.00% 5.00% 12.50% 25.00% 43 0.00% 3.10% 54 5.00% 10.00% 15.00% 5.00% 12.50% 25.00% 44 0.00% 3.10% 55 10.00% 12.50% 27.00% 12.00% 25.00% 35.00% 45 0.00% 7.60% 56 10.00% 12.50% 22.50% 8.50% 25.00% 35.00% 46 0.00% 7.60% 57 10.00% 12.50% 22.50% 8.50% 25.00% 35.00% 47 0.00% 7.60% 58 10.00% 12.50% 22.50% 8.50% 25.00% 35.00% 48 0.00% 7.60% 59 10.00% 12.50% 22.50% 10.00% 30.00% 35.00% 49 0.00% 7.60% 60 20.00% 25.00% 37.50% 15.00% 30.00% 35.00% 50 15.00% 32.90% 61 20.00% 25.00% 37.50% 27.50% 40.00% 45.00% 51 12.80% 32.90% 62 20.00% 25.00% 37.50% 27.50% 40.00% 45.00% 52 12.80% 32.90% 63 20.00% 25.00% 37.50% 27.50% 40.00% 45.00% 53 12.80% 32.90% 64 20.00% 25.00% 37.50% 27.50% 40.00% 45.00% 54 12.80% 32.90% 65 35.00% 50.00% 40.00% 40.00% 50.00% 50.00% 55 25.00% 32.90% 66 35.00% 50.00% 45.00% 45.00% 50.00% 50.00% 56 25.00% 32.90% 67 35.00% 50.00% 50.00% 50.00% 50.00% 50.00% 57 25.00% 32.90% 68 35.00% 50.00% 60.00% 60.00% 60.00% 60.00% 58 25.00% 32.90% 69 35.00% 50.00% 80.00% 80.00% 80.00% 80.00% 59 25.00% 32.90% 70+ 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 60 100.00% 100.00%

13. Changes Since Last Valuation

All demographic assumptions were updated based on the most recent experience study covering the period from July 1, 2013 through June 30, 2016. Please refer to the full experience study report for detail on the specific changes.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX B -- STATEMENT OF CURRENT ACTUARIAL ASSUMPTIONS AND METHODS

B. Actuarial Methods 1. Actuarial Funding Method

The Entry Age Normal actuarial funding method was used for active employees, whereby the normal cost is computed as the level annual percentage of pay required to fund the retirement benefits between each Member’s date of hire and assumed retirement. The Actuarial Liability is the difference between the present value of future benefits and the present value of future normal cost. The Unfunded Actuarial Liability is the difference between the Actuarial Liability and the Actuarial Value of Assets.

The UAL (or Surplus Funding) is amortized as a percentage of the projected salaries of present and future members of MCERA. Effective with the June 30, 2013 valuation, the UAL as of June 30, 2013 is amortized over a closed 16-year period. Effective with the June 30, 2014 valuation, any new sources of UAL due to actuarial gains and losses or method changes is amortized over a closed 24-year period, with five-year ramp up period at the beginning of the period, a four-year ramp down at the end of the period, and 15 years of level payments as a percentage of payroll. Assumption changes will be amortized over a closed 22-year period, with a three-year ramp up period, two-year ramp down period, and 17 years of level payments as a percentage of payroll. This method is a type of direct rate smoothing method.

2. Asset Valuation Method

As of June 30, 2014, the Market Value of Assets is used to determine the System’s UAL.

3. Changes Since Last Valuation

None

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX C – SUMMARY OF PLAN PROVISIONS

A. Definitions

Compensation: Compensation means the cash remuneration for services paid by the employer. It includes base pay and certain differential, incentive, and special pay allowances defined by the Board of Retirement. Overtime is excluded, with the exception of overtime paid under the Fair Labor Standards Act that is regular and recurring.

PEPRA: For members joining the Plan on and after January 1, 2013 (Tier 4 Members), only pensionable compensation up to the Social Security Taxable Wage Base ($113,700 for 2013) will count for computing Plan benefits and employee contributions and employer contributions for those participating in Social Security. For those not participating in Social Security, the compensation cap is 120% of the Taxable Wage Base ($136,440 for 2013.) In future years, the cap on pensionable compensation will increase with the increase in the CPI-U, rather than the increase in the Taxable Wage Base. In addition, it is possible that some sources of compensation, such as any payments deemed to be terminal or special pays, may be excluded from benefit and contribution computations for Tier 4 Members.

Credited Service: In general, Credited Service is earned for the period during which Member Contributions are paid. One year of service credit is earned for each 2,080 hours worked (not including overtime), not to exceed one year of service per year.

Temporary service for which the Member was not credited, or service for which the Member withdrew his or her Member Contributions, may be purchased by paying or repaying the Member Contributions with interest. The categories of services for which credit may be purchased are listed below:

Prior Part-Time Service: If a Member worked for an employer within the Association on a part-time or ‘extra help’ basis before his membership in the Retirement Association, the Member may buyback this service.

Intermittent Part-Time Service.

Prior Full-Time Service: Member may buyback full-time service that may have been cashed out upon termination.

Leave of Absence (Including Absence with State Disability or Worker’s Compensation): No unpaid leave of absence can be bought back except for absence due to medical reasons up to one year.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX C – SUMMARY OF PLAN PROVISIONS

Public Service: Members may purchase service credit for prior service in the following public agencies: Federal Civil Service, Military Service, and some public employers in California. This service is only eligible for purchase when the Board of Supervisors opens the window for purchase.

Military Time: Members who resign or obtain a leave of absence to enter the military may purchase service credit for the period of military service. Members must re-enter employment within one year of terminating military service to be eligible to purchase service.

At retirement, Members have the option to convert 100% of sick leave time into retirement years of service credit. Unrepresented Management and Unit 7 will instead have some or all of their sick leave contributed to the Post Employment Health Plan.

Final Compensation: For Tier 1 Members, Final Compensation means the highest average Compensation earned during any 26 consecutive pay periods of the Member’s employment. For Tier 2 and Tier 3 Members, Final Compensation means the highest average Compensation earned during any 78 consecutive pay periods of the Member’s employment.

The following compensation may be included in the Final Compensation computation:

- Loyalty Bonus - Up to 160 hours of vacation payoff - Sick Leave sold back during 25th pay period - Vacation sold back during 25th pay period (management only)

PEPRA: For Tier 4 Members, highest average Compensation will be based on the highest 36 consecutive months of the Member’s employment.

General Member: Any Member who is not a Safety Member is a General Member.

Public Service: During designated periods of time authorized by the County Board of Supervisors, Members may elect to purchase Public Service for time spent while employed in another recognized public agency. The public agency must have a reciprocal agreement with the Plan or be one of several specified municipalities, counties, special districts, or State and Federal agencies. Public Service cannot be purchased if it is used for eligibility for another pension.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX C – SUMMARY OF PLAN PROVISIONS

The cost to purchase Public Service is twice the Member Contributions and interest applicable for the period of time purchased. Public Service is used to compute benefits, but does not count toward eligibility for benefits or vesting.

Safety Member: Any sworn Member engaged in law enforcement or as a probation officer is a Safety Member.

B. Membership

Eligibility: All full-time and variable-shift permanent employees of Merced County and other participating employers become Members on their first date of service. Membership is mandatory; only elected officials and those entering employment at age 60 or older who are not reciprocal members of another system may choose not to participate.

PEPRA: A New Member is any Member joining the Plan for the first time on or after January 1, 2013. Employees who transfer from and are eligible for reciprocity with another public employer will not be Tier 4 Members if their service in the reciprocal system was under a pre-PEPRA tier. Employees who were Members of MCERA prior to January 1, 2013, experienced a break in service of more than six months, and then were re- employed by a different MCERA-participating employer on or after January 1, 2013 will be considered Tier 4 Members for all subsequent service.

Member Contributions: Each Member contributes a percentage of Compensation to the Plan through a pre-tax payroll deduction. The percentage contributed depends on the Member’s age upon joining the Plan. Complete Rates are shown in Appendix D.

Members covered by Social Security have their contributions reduced by one-third on the first $161.54 of biweekly Compensation. General Members who joined the Plan prior to March 7, 1973, and who have earned 30 years of Credited Service do not contribute; Safety Members do not contribute after earning 30 years of Credited Service.

PEPRA: Tier 4 Members must contribute half of the normal cost of the Plan. Contributions for these Members will be based on the Normal Cost associated with their benefits; General and Safety members will pay different Rates.

Tier 4 Members will pay a single contribution rate, not a rate based on entry age. All Tier 4 Members are expected to continue contributing after earning 30 years of service.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX C – SUMMARY OF PLAN PROVISIONS

Interest is credited semi-annually to each Member’s accumulated contributions. The crediting rate is set by the Board, and will fluctuate between zero and two percent less than the assumed rate of return (currently 7.25% - 2.00% = 5.25%), based in part on the investment earnings during that period.

C. Service Retirement:

Eligibility: Tier 1 General Members are eligible to retire at age 50 if they have earned 10 years of Credited Service. Tier 1 General Members hired prior to December 31, 1978, may retire upon reaching age 65 with no service requirement.

Tier 2 and Tier 3 General Members are eligible to retire at age 55 if they have earned 10 years of Credited Service or upon reaching age 70 with no service requirement.

Alternatively, all Tier 1, 2 and 3 General Members are eligible to retire at any age after having earned 30 years of Credited Service, or upon reaching age 70 with no service requirement.

Safety Members are eligible to retire at age 50 if they have earned 10 years of Credited Service. Alternatively, Safety Members are eligible to retire at any age after having earned 20 years of Credited Service, or upon reaching age 70 with no service requirement. All Tier 1, 2, and 3 Safety Members hired prior to December 31, 1978, may retire upon reaching age 65 with no service requirement.

PEPRA: Tier 4 General Members are eligible to retire upon attaining age 52 and completing five or more years of service. Tier 4 Safety Members are eligible to retire upon attaining age 50 and completing five or more years of service. Tier 4 Members are eligible to retire, regardless of service, after attaining age 70.

Benefit Amount: The Service Retirement Benefit payable to the Member is equal to the Member’s Final Compensation multiplied by credited service, the benefit factor from Table 1, and the age factor from Table 2 corresponding to the Member’s code section. The appropriate code sections for each group are listed in Table 1. For General Members in the Merced County Cemetery District and those in Deferred Inactive Reciprocity status prior to March 15, 2005, benefits are calculated using the formula in Government Code Section 31676.11 or 31676.1.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX C – SUMMARY OF PLAN PROVISIONS

For Tiers 1, 2 and 3, the percentage of Final Compensation may not exceed 100%. For those members integrated with Social Security, Retirement Benefits based on the first $350 of monthly Final Average Compensation are reduced by one-third.

Table 1:

Open Top or Max Code Retirement Benefit Group Closed FAP COLA Section Description Factor Age Factor General Tier 1 Closed 1 3 31676.17 3% at 60 60 2.00% General Tier 2 Closed 3 0 31676.17 3% at 60 60 2.00% General Tier 2 (Cemetery) Closed 3 0 31676.11 2% at 58 1/2 65 1.67% General Tier 3 Closed 3 0 31676.1 2.43% at 65 65 1.67% General Tier 4 Open 3 0 7522.20(a) PEPRA 67 1.00% Safety Tier 1 Closed 1 3 31664.1 3% at 50 50 3.00% Safety Tier 2 Closed 3 0 31664.1 3% at 50 50 3.00% Safety Tier 3 Closed 3 0 31664 2% at 50 55 2.00% Safety Tier 4 Open 3 0 7522.25(d) PEPRA 57 1.00%

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX C – SUMMARY OF PLAN PROVISIONS

Table 2: General General General 2% @ 58 2.43% @ General Safety Safety Safety 3% @ 60 1/2 65 PEPRA 3% @ 50 2% @ 50 PEPRA CERL: CERL: CERL: GC: CERL: CERL: GC: Age 31676.17 31676.11 31676.1 7522.20(a) 31664.1 31664 7522.25(d) 41 N/A N/A N/A N/A 0.6258 0.6258 N/A 42 N/A N/A N/A N/A 0.6625 0.6625 N/A 43 N/A N/A N/A N/A 0.7004 0.7004 N/A 44 N/A N/A N/A N/A 0.7397 0.7397 N/A 45 N/A N/A N/A N/A 0.7805 0.7805 N/A 46 N/A N/A N/A N/A 0.8226 0.8226 N/A 47 N/A N/A N/A N/A 0.8678 0.8678 N/A 48 N/A N/A N/A N/A 0.9085 0.9085 N/A 49 N/A N/A N/A N/A 0.9522 0.9522 N/A 50 1.0000 0.7454 0.7091 N/A 1.0000 1.0000 2.0000 51 1.0500 0.7882 0.7457 N/A 1.0000 1.0516 2.1000 52 1.1000 0.8346 0.7816 1.0000 1.0000 1.1078 2.2000 53 1.1500 0.8850 0.8181 1.1000 1.0000 1.1692 2.3000 54 1.2000 0.9399 0.8556 1.2000 1.0000 1.2366 2.4000 55 1.2500 1.0000 0.8954 1.3000 1.0000 1.3099 2.5000 56 1.3000 1.0447 0.9382 1.4000 1.0000 1.3099 2.6000 57 1.3500 1.1048 0.9846 1.5000 1.0000 1.3099 2.7000 58 1.4000 1.1686 1.0350 1.6000 1.0000 1.3099 2.7000 59 1.4500 1.2365 1.0899 1.7000 1.0000 1.3099 2.7000 60 1.5000 1.3093 1.1500 1.8000 1.0000 1.3099 2.7000 61 1.5000 1.3608 1.1947 1.9000 1.0000 1.3099 2.7000 62 1.5000 1.4123 1.2548 2.0000 1.0000 1.3099 2.7000 63 1.5000 1.4638 1.3186 2.1000 1.0000 1.3099 2.7000 64 1.5000 1.5153 1.3865 2.2000 1.0000 1.3099 2.7000 65 1.5000 1.5668 1.4593 2.3000 1.0000 1.3099 2.7000 66 1.5000 1.5668 1.4593 2.4000 1.0000 1.3099 2.7000 67 1.5000 1.5668 1.4593 2.5000 1.0000 1.3099 2.7000

Form of Benefit: The Service Retirement Benefit will be paid monthly beginning at retirement and for the life of the Member. If the member selects the unmodified benefit form, in the event of the Member’s death 60% of the benefit will continue for the life of the Member’s eligible spouse, domestic partner, or to the age of majority of dependent minor children if there is no eligible spouse or domestic partner. To be eligible to receive this benefit, a surviving spouse or domestic partner must be married or state-registered at least one year prior to retirement. In the event there is no eligible surviving spouse, domestic partner, or minor children, any unpaid remainder of the Member’s accumulated contributions will be paid to the Member’s designated beneficiary.

Actuarially equivalent optional benefit forms are also available.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX C – SUMMARY OF PLAN PROVISIONS

Annually on April 1, Tier 1 benefits are increased to reflect increases in the CPI for the San Francisco Bay Area. Annual increases may not exceed 3%, but CPI increases in excess of 3% are “banked” and used for future increases when the CPI increases by less than 3%.

A lump sum benefit of $3,000 will be payable upon the death of a retired member.

D. Service-Connected Disability

Eligibility: Members are eligible for Service-Connected Disability Retirement benefits at any age if they are permanently disabled as a result of injuries or illness sustained in the line of duty.

Benefit Amount: The Service-Connected Disability Retirement Benefit payable to Members is equal to the greater of 50% of their Final Compensation or – if the Member is eligible at disability for a Service Retirement Benefit – the Service Retirement Benefit accrued on the date of disability.

Members who return to work at a different position with lower pay may receive a Supplemental Disability Allowance that, when added to their new pay, may bring the Member’s total income up to the current pay for his or her position at the time of disability. The Supplemental Disability Allowance may not exceed the Service-Connected Disability Retirement benefit.

Form of Benefit: The Service-Connected Disability Retirement Benefit will be paid monthly beginning at the effective date of disability retirement and for the life of the Member; in the event of the Member’s death, 100% of the benefit will continue for the life of the Member’s eligible spouse, domestic partner, or to the age of majority of dependent minor children if there is no eligible spouse or domestic partner. In the event there is no eligible surviving spouse, domestic partner, or minor children, any unpaid remainder of the Member’s accumulated contributions will be paid to the Member’s designated beneficiary.

Actuarially equivalent optional benefit forms are also available.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX C – SUMMARY OF PLAN PROVISIONS

E. Non Service-Connected Disability

Eligibility: Members are eligible for Non Service-Connected Disability Retirement benefits if they are permanently disabled at any age after earning five years of Credited Service or after becoming eligible for a deferred vested benefit.

Benefit Amount: The Non Service-Connected Disability Retirement Benefit payable to General Members is equal to the greatest of:

• 1.5% of Final Compensation at disability multiplied by years of Credited Service at disability, • 1.5% of Final Compensation at disability multiplied by years of Credited Service projected to age 65, but not to exceed one-third of Final Compensation or, • If the Member is eligible at disability for a Service Retirement Benefit, the Service Retirement Benefit accrued on the date of disability.

The Non Service-Connected Disability Retirement Benefit payable to Safety Members is equal to the greatest of:

• 1.8% of Final Compensation at disability multiplied by years of Credited Service at disability, • 1.8% of Final Compensation at disability multiplied by years of Credited Service projected to age 55, but not to exceed one-third of Final Compensation or, • If the Member is eligible at disability for a Service Retirement Benefit, the Service Retirement Benefit accrued on the date of disability.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX C – SUMMARY OF PLAN PROVISIONS

Form of Benefit: The Non Service-Connected Disability Retirement Benefit will be paid monthly beginning at the effective date of disability retirement, and for the life of the Member; in the event of the Member’s death, 60% of the benefit will continue for the life of the Member’s eligible spouse, domestic partner, or to the age of majority of dependent minor children if there is no spouse. In the event there is no eligible surviving spouse, domestic partner, or minor children, any unpaid remainder of the Member’s accumulated contributions will be paid to the Member’s designated beneficiary.

Actuarially equivalent optional benefit forms are also available.

A lump sum benefit of $3,000 will be payable upon the death of a retired member.

F. Service-Connected Death

Eligibility: A Member’s survivors are eligible to receive Service-Connected Death benefits if the Member’s death resulted from injury or illness sustained in connection with the Member’s duties.

Benefit Amount: The Service-Connected Death benefit payable to an eligible surviving spouse, domestic partner, or minor children will be 50% of the Member’s Final Compensation.

Furthermore, for Safety Members only, there will be an additional lump sum benefit of 12 months of pay at the time of death. An additional benefit of 25% of the above basic benefit will be paid for the first minor child, 15% for the second, and 10% for the third.

Form of Benefit: The Service-Connected Death Benefit will be paid monthly beginning at the Member’s death and for the life of the eligible surviving spouse, domestic partner, or to the age of majority of dependent minor children if there is no eligible surviving spouse or domestic partner.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX C – SUMMARY OF PLAN PROVISIONS

G. Non Service-Connected Death

Eligibility: A Member’s survivors are eligible to receive Non Service-Connected Death benefits if the Member’s death arose from causes unrelated to the Member’s duties.

Benefit Amount: In the event the Member had earned fewer than five years of Credited Service and has no or insufficient reciprocity service from another system, the Non Service-Connected Death benefit will be a refund of the Member’s accumulated contributions with interest plus a payment of one month of Final Compensation for each year of Credited Service, not to exceed six months.

In the event the Member had earned five or more years of Credited Service, the Non Service-Connected Death benefit payable to an eligible surviving spouse, domestic partner, or minor children will be 60% of the amount the Member would have received as a Non Service-Connected Disability Retirement Benefit on the date of death.

Form of Benefit: For Members who had earned fewer than five years of Credited Service at death, the benefit will be paid as a lump sum.

For Members with five or more years of Credited Service, the Non Service-Connected Death Benefit will be paid monthly beginning at the Member’s death and for the life of the eligible surviving spouse, domestic partner, or to the age of majority of dependent minor children if there is no eligible spouse or domestic partner.

H. Withdrawal Benefit:

Eligibility: A Member is eligible for a Withdrawal Benefit upon termination of employment.

Benefit Amount: The Withdrawal Benefit is a refund of the Member’s accumulated Contributions with interest. Upon receipt of the Withdrawal Benefit, the Member forfeits all Credited Service.

Form of Benefit: The Withdrawal Benefit is paid in a lump sum upon election by the Member.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX C – SUMMARY OF PLAN PROVISIONS

I. Deferred Vested Benefit:

Eligibility: A Member is eligible for a Deferred Vested Benefit upon termination of employment after earning five years of Credited Service, including reciprocity service from another system. The Member must leave his or her Member Contributions with interest on deposit with the Plan.

Benefit Amount: The Deferred Vested Benefit is computed in the same manner as the Service Retirement Benefit, but it is based on Credited Service and Final Compensation on the date of termination.

Form of Benefit: The Deferred Vested Benefit will be paid monthly beginning at retirement and for the life of the Member; in the event of the Member’s death, 60% of the benefit will continue for the life of the Member’s eligible surviving spouse, domestic partner, or to the age of majority of dependent minor children if there is no eligible surviving spouse or domestic partner. In the event there is no eligible surviving spouse, domestic partner, or minor children, any unpaid remainder of the Member’s accumulated contributions will be paid to the Member’s designated beneficiary.

Actuarially equivalent optional benefit forms are also available.

A lump sum benefit of $3,000 will be payable upon the death of a retired member.

J. Reciprocal Benefit:

Eligibility: A Member is eligible for a Reciprocal Benefit upon termination of employment and entry, within a specified period of time, into another retirement system recognized as a reciprocal system by the Plan. In addition, the Member must leave his or her Member Contributions with interest on deposit with the Plan.

Benefit Amount: The Reciprocal Benefit is computed in the same manner as the Service Retirement Benefit, but it is based on Credited Service on the date of termination and Final Compensation on the date of retirement; Final Compensation is based on the highest of the Compensation earned under this Plan or the reciprocal plan.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX C – SUMMARY OF PLAN PROVISIONS

Form of Benefit: The Reciprocal Benefit will be paid monthly beginning at retirement and for the life of the Member; in the event of the Member’s death, 60% of the benefit will continue for the life of the Member’s eligible surviving spouse, domestic partner, or to the age of majority of dependent minor children if there is no eligible surviving spouse or domestic partner. In the event there is no eligible surviving spouse, domestic partner, or minor children, any unpaid remainder of the Member’s accumulated contributions will be paid to the Member’s designated beneficiary.

Actuarially equivalent optional benefit forms are also available.

A lump sum benefit may be payable upon the death of a retired Member by the last system under which the Member’s service was covered.

K. Changes Since Last Valuation

None

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX D – MEMBER CONTRIBUTION RATES

Contribution Rates

Employee contribution Rates vary by member Group and Tier. For non-PEPRA members, the Rates were updated this year, following an experience study covering the period July 1, 2013 – June 30, 2016. For PEPRA members, the Rates were also re-computed, in accordance with the requirement that employees pay half of the total normal cost rate from the actuarial valuation.

Non-PEPRA Members

• The basic Rates are determined based on Government Code Section 31621.8 for General Tier 1 and Tier 2 members (31621.1 for Tier 2 members under benefit section 31676.11), 31621 for General Tier 3 members, and Section 31639.25 for Safety members. The COLA Rates for members in Tier 1 are determined based on 50% of the normal cost associated with the expected COLA benefits, including joint and survivor benefits, determined for each individual entry age.

• The Rates are determined based on an interest rate of 7.25% per annum, an average salary increase of 2.75% per year (plus service-based increases for merit/longevity), and the CalPERS 2009 Healthy Annuitants & Employees, projected using Projection Scale MP-2016 to 2037. The Rates are blended based on a male/female weighting of 30% male / 70% female for General members, and 70% male / 30% female for Safety members.

• Effective with the June 30, 2013 valuation, an administrative expense load was added to the Rates. The expense load added this year is 3.13%. This load was determined to account for the employees’ share of the $2.20 million administrative expense assumption, assuming the employer and employees would share administrative expenses in proportion to their overall share of the contributions. The 3.13% load produces an average increase in the employee Rates of approximately 0.25% of payroll.

PEPRA Members

• Employee contribution Rates are equal to half of the total normal cost rate from the actuarial valuation, determined separately for General and Safety. Due to the passage of SB13, contribution Rates for PEPRA members are not rounded, and will be recomputed each year.

• The same 3.13% load for administrative expenses was applied to the PEPRA Rates.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX D – MEMBER CONTRIBUTION RATES

Current Year Contribution Rates (General Non-PEPRA):

Tier 1 Tier 2 Tier 2 (Cemetry) Tier 3 Basic COLA Total Basic Basic Basic Entry Age First $350 Over $350 First $350 Over $350 First $350 Over $350 First $350 Over $350 First $350 Over $350 First $350 Over $350 16 4.32% 6.49% 1.04% 1.57% 5.36% 8.06% 4.20% 6.29% 3.50% 5.24% 2.94% 4.40% 17 4.32% 6.49% 1.04% 1.57% 5.36% 8.06% 4.20% 6.29% 3.50% 5.24% 2.94% 4.40% 18 4.32% 6.49% 1.04% 1.57% 5.36% 8.06% 4.20% 6.29% 3.50% 5.24% 2.94% 4.40% 19 4.32% 6.49% 1.04% 1.57% 5.36% 8.06% 4.20% 6.29% 3.50% 5.24% 2.94% 4.40% 20 4.32% 6.49% 1.04% 1.57% 5.36% 8.06% 4.20% 6.29% 3.50% 5.24% 2.94% 4.40% 21 4.43% 6.65% 1.09% 1.64% 5.52% 8.29% 4.30% 6.45% 3.58% 5.38% 3.01% 4.52% 22 4.55% 6.82% 1.13% 1.70% 5.68% 8.52% 4.40% 6.60% 3.67% 5.50% 3.08% 4.63% 23 4.65% 6.98% 1.19% 1.77% 5.84% 8.75% 4.51% 6.77% 3.76% 5.64% 3.17% 4.74% 24 4.77% 7.16% 1.23% 1.84% 6.00% 9.00% 4.62% 6.93% 3.85% 5.78% 3.24% 4.86% 25 4.89% 7.33% 1.27% 1.91% 6.16% 9.24% 4.73% 7.11% 3.94% 5.93% 3.32% 4.98% 26 5.01% 7.52% 1.32% 1.98% 6.33% 9.50% 4.86% 7.28% 4.05% 6.07% 3.40% 5.10% 27 5.14% 7.70% 1.37% 2.05% 6.51% 9.75% 4.97% 7.46% 4.14% 6.22% 3.49% 5.23% 28 5.26% 7.89% 1.41% 2.12% 6.67% 10.01% 5.09% 7.64% 4.24% 6.37% 3.57% 5.35% 29 5.39% 8.09% 1.47% 2.21% 6.86% 10.30% 5.23% 7.84% 4.36% 6.53% 3.66% 5.49% 30 5.53% 8.29% 1.52% 2.28% 7.05% 10.57% 5.35% 8.03% 4.46% 6.69% 3.74% 5.62% 31 5.67% 8.51% 1.57% 2.35% 7.24% 10.86% 5.50% 8.24% 4.58% 6.87% 3.85% 5.76% 32 5.82% 8.72% 1.62% 2.43% 7.44% 11.15% 5.63% 8.45% 4.69% 7.04% 3.94% 5.91% 33 5.97% 8.95% 1.67% 2.51% 7.64% 11.46% 5.76% 8.65% 4.80% 7.21% 4.03% 6.05% 34 6.12% 9.18% 1.72% 2.58% 7.84% 11.76% 5.90% 8.85% 4.92% 7.38% 4.14% 6.21% 35 6.25% 9.37% 1.77% 2.66% 8.02% 12.03% 6.02% 9.03% 5.02% 7.53% 4.24% 6.36% 36 6.38% 9.58% 1.83% 2.74% 8.21% 12.32% 6.16% 9.23% 5.13% 7.69% 4.35% 6.53% 37 6.53% 9.79% 1.89% 2.83% 8.42% 12.62% 6.29% 9.44% 5.24% 7.87% 4.47% 6.69% 38 6.67% 10.00% 1.94% 2.91% 8.61% 12.91% 6.42% 9.63% 5.35% 8.03% 4.57% 6.86% 39 6.82% 10.23% 1.99% 2.99% 8.81% 13.22% 6.55% 9.82% 5.46% 8.18% 4.67% 7.01% 40 6.94% 10.42% 2.03% 3.05% 8.97% 13.47% 6.66% 9.99% 5.55% 8.33% 4.77% 7.16% 41 7.07% 10.61% 2.05% 3.08% 9.12% 13.69% 6.80% 10.19% 5.67% 8.49% 4.88% 7.31% 42 7.21% 10.82% 2.07% 3.11% 9.28% 13.93% 6.92% 10.37% 5.77% 8.64% 4.98% 7.48% 43 7.35% 11.03% 2.09% 3.15% 9.44% 14.18% 7.04% 10.57% 5.87% 8.81% 5.08% 7.63% 44 7.51% 11.26% 2.11% 3.18% 9.62% 14.44% 7.17% 10.76% 5.98% 8.97% 5.19% 7.78% 45 7.63% 11.45% 2.13% 3.21% 9.76% 14.66% 7.29% 10.93% 6.08% 9.11% 5.28% 7.92% 46 7.77% 11.65% 2.15% 3.22% 9.92% 14.87% 7.42% 11.13% 6.18% 9.28% 5.37% 8.06% 47 7.92% 11.88% 2.16% 3.24% 10.08% 15.12% 7.54% 11.31% 6.28% 9.43% 5.48% 8.22% 48 8.10% 12.14% 2.18% 3.26% 10.28% 15.40% 7.61% 11.42% 6.34% 9.52% 5.58% 8.37% 49 8.22% 12.32% 2.19% 3.28% 10.41% 15.60% 7.62% 11.44% 6.35% 9.53% 5.68% 8.52% 50 8.20% 12.30% 2.20% 3.29% 10.40% 15.59% 7.62% 11.43% 6.35% 9.53% 5.78% 8.66% 51 8.20% 12.30% 2.18% 3.27% 10.38% 15.57% 7.58% 11.36% 6.32% 9.47% 5.88% 8.82% 52 8.22% 12.32% 2.13% 3.21% 10.35% 15.53% 7.50% 11.24% 6.25% 9.37% 5.97% 8.96% 53 8.12% 12.18% 2.09% 3.15% 10.21% 15.33% 7.75% 11.62% 6.46% 9.68% 6.02% 9.03% 54 8.01% 12.02% 2.05% 3.08% 10.06% 15.10% 8.01% 12.02% 6.68% 10.02% 6.04% 9.07% 55 7.95% 11.92% 2.01% 3.02% 9.96% 14.94% 7.95% 11.92% 6.63% 9.93% 6.03% 9.05% 56 7.87% 11.81% 1.95% 2.93% 9.82% 14.74% 7.87% 11.81% 6.56% 9.84% 6.00% 9.00% 57 7.80% 11.69% 1.89% 2.84% 9.69% 14.53% 7.80% 11.69% 6.50% 9.74% 5.94% 8.91% 58 7.70% 11.56% 1.83% 2.74% 9.53% 14.30% 7.70% 11.56% 6.42% 9.63% 6.14% 9.21% 59+ 7.62% 11.43% 1.77% 2.66% 9.39% 14.09% 7.62% 11.43% 6.35% 9.53% 6.35% 9.53%

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX D – MEMBER CONTRIBUTION RATES

Current Year Contribution Rates (Safety Non-PEPRA): Tier 1 Tiers 2 and 3 Basic COLA Total Basic Entry Age First $350 Over $350 First $350 Over $350 First $350 Over $350 First $350 Over $350 20 4.88% 7.31% 1.99% 2.99% 6.87% 10.30% 4.72% 7.09% 21 5.00% 7.50% 2.05% 3.08% 7.05% 10.58% 4.84% 7.26% 22 5.12% 7.67% 2.12% 3.19% 7.24% 10.86% 4.96% 7.44% 23 5.24% 7.86% 2.19% 3.28% 7.43% 11.14% 5.08% 7.62% 24 5.37% 8.05% 2.26% 3.38% 7.63% 11.43% 5.20% 7.80% 25 5.50% 8.25% 2.32% 3.49% 7.82% 11.74% 5.33% 7.99% 26 5.63% 8.45% 2.38% 3.58% 8.01% 12.03% 5.46% 8.19% 27 5.78% 8.66% 2.44% 3.67% 8.22% 12.33% 5.59% 8.38% 28 5.91% 8.87% 2.51% 3.76% 8.42% 12.63% 5.72% 8.58% 29 6.06% 9.10% 2.57% 3.86% 8.63% 12.96% 5.85% 8.77% 30 6.18% 9.27% 2.63% 3.94% 8.81% 13.21% 5.96% 8.94% 31 6.31% 9.47% 2.66% 3.99% 8.97% 13.46% 6.08% 9.13% 32 6.44% 9.65% 2.69% 4.04% 9.13% 13.69% 6.20% 9.30% 33 6.57% 9.85% 2.73% 4.09% 9.30% 13.94% 6.33% 9.50% 34 6.70% 10.06% 2.78% 4.18% 9.48% 14.24% 6.47% 9.69% 35 6.84% 10.26% 2.85% 4.27% 9.69% 14.53% 6.59% 9.89% 36 6.98% 10.48% 2.93% 4.39% 9.91% 14.87% 6.73% 10.11% 37 7.14% 10.70% 3.02% 4.53% 10.16% 15.23% 6.88% 10.32% 38 7.29% 10.94% 3.10% 4.66% 10.39% 15.60% 7.02% 10.54% 39 7.47% 11.20% 3.21% 4.81% 10.68% 16.01% 7.17% 10.75% 40 7.60% 11.41% 3.31% 4.97% 10.91% 16.38% 7.29% 10.94% 41 7.76% 11.63% 3.33% 4.99% 11.09% 16.62% 7.44% 11.16% 42 7.92% 11.88% 3.36% 5.04% 11.28% 16.92% 7.60% 11.40% 43 8.10% 12.15% 3.41% 5.12% 11.51% 17.27% 7.73% 11.60% 44 8.31% 12.47% 3.47% 5.20% 11.78% 17.67% 7.82% 11.73% 45 8.45% 12.66% 3.54% 5.30% 11.99% 17.96% 7.84% 11.76% 46 8.45% 12.66% 3.58% 5.36% 12.03% 18.02% 7.79% 11.67% 47 8.47% 12.71% 3.63% 5.45% 12.10% 18.16% 7.69% 11.54% 48 8.34% 12.52% 3.70% 5.55% 12.04% 18.07% 7.95% 11.93% 49+ 8.23% 12.34% 3.80% 5.69% 12.03% 18.03% 8.23% 12.34%

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX D – MEMBER CONTRIBUTION RATES

Prior Year Contribution Rates (General Non-PEPRA):

Tier 1 Tier 2 Tier 2 (Cemetry) Tier 3 Basic COLA Total Basic Basic Basic Entry Age First $350 Over $350 First $350 Over $350 First $350 Over $350 First $350 Over $350 First $350 Over $350 First $350 Over $350 16 3.93% 5.90% 0.93% 1.41% 4.86% 7.31% 3.66% 5.49% 3.05% 4.58% 2.48% 3.72% 17 3.93% 5.90% 0.93% 1.41% 4.86% 7.31% 3.66% 5.49% 3.05% 4.58% 2.48% 3.72% 18 3.93% 5.90% 0.93% 1.41% 4.86% 7.31% 3.66% 5.49% 3.05% 4.58% 2.48% 3.72% 19 3.93% 5.90% 0.93% 1.41% 4.86% 7.31% 3.66% 5.49% 3.05% 4.58% 2.48% 3.72% 20 3.93% 5.90% 0.93% 1.41% 4.86% 7.31% 3.66% 5.49% 3.05% 4.58% 2.48% 3.72% 21 4.06% 6.08% 0.98% 1.47% 5.04% 7.55% 3.77% 5.65% 3.14% 4.71% 2.56% 3.83% 22 4.18% 6.27% 1.03% 1.54% 5.21% 7.81% 3.88% 5.83% 3.23% 4.86% 2.63% 3.95% 23 4.30% 6.46% 1.08% 1.61% 5.38% 8.07% 4.00% 6.00% 3.33% 5.00% 2.71% 4.07% 24 4.44% 6.66% 1.12% 1.68% 5.56% 8.34% 4.12% 6.18% 3.43% 5.15% 2.79% 4.19% 25 4.57% 6.85% 1.17% 1.76% 5.74% 8.61% 4.24% 6.37% 3.53% 5.31% 2.88% 4.32% 26 4.72% 7.07% 1.22% 1.84% 5.94% 8.91% 4.38% 6.57% 3.65% 5.48% 2.97% 4.45% 27 4.86% 7.28% 1.27% 1.91% 6.13% 9.19% 4.51% 6.77% 3.76% 5.64% 3.05% 4.58% 28 5.00% 7.51% 1.33% 1.99% 6.33% 9.50% 4.65% 6.98% 3.88% 5.82% 3.15% 4.73% 29 5.16% 7.74% 1.39% 2.08% 6.55% 9.82% 4.80% 7.19% 4.00% 5.99% 3.25% 4.87% 30 5.31% 7.97% 1.44% 2.16% 6.75% 10.13% 4.94% 7.42% 4.12% 6.18% 3.34% 5.01% 31 5.49% 8.23% 1.49% 2.24% 6.98% 10.47% 5.10% 7.64% 4.25% 6.37% 3.44% 5.17% 32 5.66% 8.49% 1.55% 2.33% 7.21% 10.82% 5.25% 7.88% 4.38% 6.57% 3.55% 5.33% 33 5.84% 8.75% 1.61% 2.41% 7.45% 11.16% 5.40% 8.11% 4.50% 6.76% 3.67% 5.50% 34 6.03% 9.04% 1.66% 2.50% 7.69% 11.54% 5.54% 8.31% 4.62% 6.93% 3.77% 5.66% 35 6.15% 9.24% 1.72% 2.58% 7.87% 11.82% 5.67% 8.51% 4.73% 7.09% 3.89% 5.84% 36 6.30% 9.45% 1.78% 2.66% 8.08% 12.11% 5.79% 8.69% 4.83% 7.24% 4.02% 6.02% 37 6.44% 9.67% 1.82% 2.73% 8.26% 12.40% 5.93% 8.90% 4.94% 7.42% 4.14% 6.21% 38 6.59% 9.88% 1.88% 2.82% 8.47% 12.70% 6.05% 9.07% 5.04% 7.56% 4.26% 6.39% 39 6.75% 10.12% 1.92% 2.89% 8.67% 13.01% 6.15% 9.23% 5.13% 7.69% 4.37% 6.54% 40 6.84% 10.26% 1.96% 2.95% 8.80% 13.21% 6.24% 9.35% 5.20% 7.79% 4.47% 6.70% 41 6.93% 10.41% 1.99% 2.99% 8.92% 13.40% 6.32% 9.48% 5.27% 7.90% 4.56% 6.84% 42 7.04% 10.55% 2.01% 3.02% 9.05% 13.57% 6.41% 9.62% 5.34% 8.02% 4.67% 7.01% 43 7.13% 10.70% 2.03% 3.05% 9.16% 13.75% 6.50% 9.75% 5.42% 8.13% 4.76% 7.14% 44 7.23% 10.85% 2.05% 3.08% 9.28% 13.93% 6.60% 9.89% 5.50% 8.24% 4.84% 7.26% 45 7.34% 11.00% 2.07% 3.10% 9.41% 14.10% 6.69% 10.03% 5.58% 8.36% 4.91% 7.37% 46 7.45% 11.17% 2.09% 3.12% 9.54% 14.29% 6.78% 10.17% 5.65% 8.48% 4.98% 7.47% 47 7.55% 11.32% 2.10% 3.14% 9.65% 14.46% 6.88% 10.33% 5.73% 8.61% 5.04% 7.57% 48 7.66% 11.50% 2.11% 3.16% 9.77% 14.66% 6.99% 10.48% 5.83% 8.73% 5.13% 7.68% 49 7.78% 11.67% 2.13% 3.18% 9.91% 14.85% 7.08% 10.62% 5.90% 8.85% 5.19% 7.79% 50 7.91% 11.87% 2.13% 3.20% 10.04% 15.07% 7.16% 10.75% 5.97% 8.96% 5.27% 7.90% 51 8.02% 12.03% 2.09% 3.13% 10.11% 15.16% 7.22% 10.83% 6.02% 9.03% 5.34% 8.01% 52 8.11% 12.15% 2.04% 3.06% 10.15% 15.21% 7.24% 10.87% 6.03% 9.06% 5.41% 8.13% 53 8.13% 12.18% 2.00% 3.00% 10.13% 15.18% 7.51% 11.27% 6.26% 9.39% 5.50% 8.25% 54 8.15% 12.23% 1.95% 2.93% 10.10% 15.16% 7.80% 11.69% 6.50% 9.74% 5.58% 8.37% 55 8.07% 12.10% 1.91% 2.87% 9.98% 14.97% 7.72% 11.58% 6.43% 9.65% 5.64% 8.47% 56 7.98% 11.97% 1.84% 2.76% 9.82% 14.73% 7.63% 11.46% 6.36% 9.55% 5.68% 8.53% 57 7.89% 11.84% 1.78% 2.67% 9.67% 14.51% 7.55% 11.33% 6.29% 9.44% 5.70% 8.56% 58 7.80% 11.70% 1.72% 2.58% 9.52% 14.28% 7.46% 11.19% 6.22% 9.33% 5.92% 8.88% 59+ 7.70% 11.55% 1.65% 2.49% 9.35% 14.04% 7.37% 11.05% 6.14% 9.21% 6.13% 9.21%

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX D – MEMBER CONTRIBUTION RATES

Prior Year Contribution Rates (Safety Non-PEPRA):

Tier 1 Tiers 2 and 3 Basic COLA Total Basic Entry Age First $350 Over $350 First $350 Over $350 First $350 Over $350 First $350 Over $350 20 4.90% 7.35% 2.23% 3.35% 7.13% 10.70% 4.53% 6.79% 21 5.02% 7.53% 2.30% 3.45% 7.32% 10.98% 4.64% 6.97% 22 5.16% 7.74% 2.36% 3.54% 7.52% 11.28% 4.77% 7.15% 23 5.29% 7.93% 2.43% 3.65% 7.72% 11.58% 4.89% 7.34% 24 5.42% 8.14% 2.50% 3.74% 7.92% 11.88% 5.02% 7.53% 25 5.57% 8.35% 2.56% 3.83% 8.13% 12.18% 5.15% 7.73% 26 5.72% 8.58% 2.62% 3.92% 8.34% 12.50% 5.29% 7.93% 27 5.87% 8.80% 2.67% 4.01% 8.54% 12.81% 5.43% 8.15% 28 6.03% 9.04% 2.73% 4.10% 8.76% 13.14% 5.58% 8.36% 29 6.20% 9.29% 2.78% 4.18% 8.98% 13.47% 5.72% 8.59% 30 6.36% 9.53% 2.85% 4.26% 9.21% 13.79% 5.88% 8.82% 31 6.53% 9.80% 2.88% 4.32% 9.41% 14.12% 6.04% 9.06% 32 6.72% 10.08% 2.91% 4.37% 9.63% 14.45% 6.22% 9.32% 33 6.91% 10.37% 2.95% 4.43% 9.86% 14.80% 6.36% 9.54% 34 7.12% 10.67% 3.01% 4.52% 10.13% 15.19% 6.48% 9.73% 35 7.22% 10.83% 3.07% 4.60% 10.29% 15.43% 6.59% 9.87% 36 7.33% 10.99% 3.13% 4.71% 10.46% 15.70% 6.69% 10.03% 37 7.45% 11.17% 3.20% 4.80% 10.65% 15.97% 6.79% 10.18% 38 7.56% 11.34% 3.27% 4.90% 10.83% 16.24% 6.89% 10.34% 39 7.68% 11.53% 3.34% 5.01% 11.02% 16.54% 7.00% 10.50% 40 7.81% 11.71% 3.42% 5.14% 11.23% 16.85% 7.12% 10.68% 41 7.94% 11.92% 3.42% 5.14% 11.36% 17.06% 7.22% 10.83% 42 8.10% 12.14% 3.43% 5.15% 11.53% 17.29% 7.30% 10.96% 43 8.17% 12.26% 3.45% 5.18% 11.62% 17.44% 7.39% 11.08% 44 8.26% 12.39% 3.47% 5.21% 11.73% 17.60% 7.46% 11.19% 45 8.35% 12.53% 3.48% 5.23% 11.83% 17.76% 7.50% 11.25% 46 8.48% 12.71% 3.50% 5.25% 11.98% 17.96% 7.51% 11.27% 47 8.46% 12.69% 3.51% 5.27% 11.97% 17.96% 7.49% 11.24% 48 8.43% 12.66% 3.52% 5.28% 11.95% 17.94% 7.78% 11.66% 49+ 8.42% 12.64% 3.54% 5.31% 11.96% 17.95% 8.07% 12.09%

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX D – MEMBER CONTRIBUTION RATES

Current Year Contribution Rates (PEPRA): PEPRA Rates General Safety 5.93% 9.74% Assumptions: Interest 7.25% Salary 2016 Valuation Scale (service-based, includes inflation at 2.5%) Mortality CalPERS 2009 tables, projected with MP-2016 Other Same as June 30, 2016 valuation (see Appendix B)

Prior Year Contribution Rates (PEPRA): PEPRA Rates General Safety 5.27% 8.85% Assumptions: Interest 7.75% Salary 2015 Valuation Scale (service-based, includes inflation at 3.00%) Mortality RP-2000 Combined Healthy, projected to 2027 using Scale BB Other Same as June 30, 2015 valuation (see Appendix B)

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX E – GLOSSARY

1. Actuarial Assumptions

Assumptions as to the occurrence of future events affecting pension costs such as mortality, withdrawal, disability, retirement, changes in compensation, and Rates of investment return.

2. Actuarial Cost Method

A procedure for determining the Actuarial Present Value of pension plan benefits and expenses and for developing an allocation of such value to each year of service, usually in the form of a Normal Cost and an Actuarial Liability.

3. Actuarial Gain (Loss)

The difference between actual experience and that expected based upon a set of Actuarial Assumptions during the period between two Actuarial Valuation dates, as determined in accordance with a particular Actuarial Cost Method.

4. Actuarial Liability

The portion of the Actuarial Present Value of Projected Benefits which will not be paid by future Normal Costs. It represents the value of the past Normal Costs with interest to the valuation date.

5. Actuarial Present Value (Present Value)

The value as of a given date of a future amount or series of payments. The Actuarial Present Value discounts the payments to the given date at the assumed investment return and includes the probability of the payment being made.

6. Actuarial Valuation

The determination, as of a specified date, of the Normal Cost, Actuarial Liability, Actuarial Value of Assets, and related Actuarial Present Values for a pension plan.

MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION ACTUARIAL VALUATION REPORT AS OF JUNE 30, 2016

APPENDIX E – GLOSSARY

7. Actuarial Value of Assets

The value of cash, investments, and other property belonging to a pension plan as used by the actuary for the purpose of an Actuarial Valuation. The purpose of an Actuarial Value of Assets is to smooth out fluctuations in market values. No longer applicable as of the June 30, 2014 actuarial valuation.

8. Actuarially Equivalent

Of equal Actuarial Present Value, determined as of a given date, with each value based on the same set of actuarial assumptions.

9. Amortization Payment

The portion of the pension plan contribution that is designed to pay interest and principal on the unfunded actuarial liability in order to pay for that liability in a given number of years.

10. Entry Age Normal Actuarial Cost Method

A method under which the Actuarial Present Value of the Projected Benefits of each individual included in an Actuarial Valuation is allocated on a level basis over the earnings of the individual between entry age and assumed exit ages.

11. Funded Ratio

The ratio of the Market Value of Assets to the Actuarial Liabilities.

12. Normal Cost

That portion of the Actuarial Present Value of pension plan benefits and expenses, which is allocated to a valuation year by the Actuarial Cost Method.

13. Projected Benefits

Those pension plan benefit amounts which are expected to be paid in the future under a particular set of Actuarial Assumptions, taking into account such items as increases in future compensation and service credits.

14. Unfunded Actuarial Liability

The excess of the Actuarial Liability over the Market Value of Assets.

Item 2b

Merced County Employees’ Retirement Association Actuarial Experience Study for July 1, 2013 through June 30, 2016

Produced by Cheiron

February 2016

TABLE OF CONTENTS

Section Page

Transmittal Letter...... i

Section I Executive Summary ...... 1

Section II Economic Assumptions ...... 3

A. Price Inflation...... 3 B. Wage Inflation ...... 6 C. COLA Growth ...... 7 D. Discount Rate ...... 8

Section III Demographic Assumptions ...... 13

A. Merit Salary Increases...... 13 B. Retirement Rates ...... 18 C. Termination Rates ...... 27 D. Disability Rates ...... 33 E. Mortality Rates...... 37 F. Other Demographic Assumptions ...... 43

Appendices

Appendix A Summary of Proposed Assumptions ...... 44

Appendix B Summary of Prior Assumptions ...... 48

February 15, 2017

Retirement Board of Merced County Employees’ Retirement Association 3199 M Street Merced, CA 95348

Dear Members of the Board:

The purpose of this report is to provide the results of an Actuarial Experience Study of the Merced County Employees’ Retirement Association (MCERA) covering actuarial experience from July 1, 2013 through June 30, 2016. This report is for the use of the MCERA Retirement Board in selecting assumptions to be used in actuarial valuations beginning June 30, 2016.

In preparing our report, we relied on information (some oral and some written) supplied by MCERA. This information includes, but is not limited to, the plan provisions, employee data, and financial information. We performed an informal examination of the obvious characteristics of the data for reasonableness and consistency in accordance with Actuarial Standard of Practice #23.

To the best of our knowledge, this report and its contents have been prepared in accordance with generally recognized and accepted actuarial principles and practices that are consistent with the Code of Professional Conduct and applicable Actuarial Standards of Practice set out by the Actuarial Standards Board. Furthermore, as credentialed actuaries, we meet the Qualification Standards of the American Academy of Actuaries to render the opinion contained in this report. This report does not address any contractual or legal issues. We are not attorneys and our firm does not provide any legal services or advice.

This report was prepared for the Retirement Board of MCERA for the purposes described herein. This report is not intended to benefit any other party, and Cheiron assumes no duty or liability to any such party.

If you have any questions about the report or would like additional information, please let us know. Sincerely, Cheiron

Graham A. Schmidt, ASA, EA, FCA, MAAA David Holland, FSA, FCA, MAAA, EA Consulting Actuary Consulting Actuary

MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION I – EXECUTIVE SUMMARY

Actuarial assumptions (economic and demographic) are intended to be long-term in nature, and should be both individually reasonable and consistent in the aggregate. The purpose of this experience study is to evaluate whether or not the current assumptions adequately reflect the long-term expectations for MCERA, and if not, to recommend adjustments. It is important to note that frequent and significant changes in the actuarial assumptions are not typically recommended, unless there are known fundamental changes in expectations of the economy, or with respect to MCERA’s membership or assets that would warrant such frequent or significant changes.

SUMMARY OF ECONOMIC ASSUMPTION ANALYSIS

The specific economic assumptions analyzed in this report are price inflation, wage inflation, COLA growth, and the discount rate. These assumptions have a significant impact on the contribution rates in the short-term and the risk of negative outcomes in the long-term.

The economic assumptions recently adopted by the Retirement Board include a 7.25% long-term rate of return on Plan assets, an annual increase in prices measured by the Consumer Price Index (CPI) of 2.50%, annual wage increase equal to 25 basis points greater than the price increase (2.75% in total), and a post-retirement COLA average growth rate of 2.40% for Tier 1 members.

The nominal discount rate assumption is very close to the geometric average long-term (10-year) return of 7.3% for the current target portfolio based on the capital market assumptions provided by Verus, the Plan’s investment consultant. Based on these capital market assumptions, the real return adopted by the Board (4.75%) has a greater than 50% chance of being achieved. We also reviewed the capital market assumptions from three other investment consultants (including the Verus assumptions for non-former SIS clients), and though they forecast a slightly lower than 50% chance of achieving the 7.25% nominal return, they all anticipate a 50% or greater chance of achieving the 4.75% real return over the next 7-10 years.

Other data presented in this report support the finding that the discount rate and other economic assumptions adopted by the Retirement Board are reasonable.

SUMMARY OF DEMOGRAPHIC ASSUMPTION ANALYSIS

This experience study specifically analyzes and makes the following recommendations for the demographic assumptions. • Retirement rates – Adjustments to General rates at all service levels. Increase Safety rates with less than 20 years of service. No change to the approach recommended for PEPRA tiers due to lack of experience • Termination rates – Modest adjustments to the General male rates. No adjustment to General female and Safety rates. • Disability rates – Adjustments to the Safety rates. No change for the General rates. • Mortality rates – CalPERS base tables, with generational improvement for all members.

1 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION I – EXECUTIVE SUMMARY

• Merit salary increases – Increase ultimate rate and the rates for lower service points. Reduce the rates for mid-service points. • Other assumptions – Adjustments to other assumptions, including the withdrawal and reciprocal transfer rates, deferred retirement commencement age, family composition and terminal pay load assumptions.

The body of this report provides additional detail and support for our conclusions and recommendations.

COST OF ECONOMIC AND DEMOGRAPHIC ASSUMPTION CHANGES

Among the demographic assumptions, the recommended changes to mortality and the terminal payload have the largest impact on contribution rates. This table summarizes the estimated cost impact – for the General, Safety, and combined membership – of the recommended changes to economic and demographic assumptions contained in this report.

Table I-1 Impact on Contribution Rates

General Safety Total Contribution Contribution Contribution Rate Rate Rate Mortality Rates 0.49% 0.19% 0.44% Retirement Rates -0.04% 0.04% -0.03% Termination Rates -0.09% 0.00% -0.08% Disability Rates 0.00% -0.35% -0.06% Withdrawal and Reciprocal Transfer Rates -0.01% -0.35% -0.07% Reciprocal Deferral Age -0.03% -0.08% -0.04% Spouse Age 0.02% 0.01% 0.02% Percent Married -0.08% 0.00% -0.06% Salary Merit Increases 0.21% -0.39% 0.09% FAC Load -0.51% -0.74% -0.55% COLA / Benefit Timing -0.19% -0.14% -0.18% Plan Expenses 0.26% 0.35% 0.27% Total Effect of Demographic Changes 0.02% -1.45% -0.25% Economic Assumption Changes 1.82% 2.57% 1.94%

All Assumption Changes 1.84% 1.11% 1.69%

Ultimate Effect after Phase-in 3.31%

2 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION II – ECONOMIC ASSUMPTIONS PRICE INFLATION

The economic assumptions used in actuarial valuations are intended to be long-term in nature, and should be both individually reasonable and consistent with each other. The specific assumptions analyzed in this report are:

• Price inflation – used indirectly as an underlying component of other economic assumptions. • Wage inflation – across the board wage growth used to project benefits and to amortize the unfunded liability as a level percentage of expected payroll. • COLA growth – rate at which inflation-linked post-retirement COLAs are expected to change. • Discount rate – used both to project long-term asset growth and to discount future cash flows in calculating the liabilities and costs of the Plan.

In order to develop recommendations for each of these assumptions, we considered historical data, both nationally and for the Plan, and expectations for the future, as expressed by the Plan’s and other external investment consultants and the Board.

PRICE INFLATION

Long-term price inflation rates are the foundation of other economic assumptions. In a growing economy, wages, and investments are expected to grow at the underlying inflation rate plus some additional real growth rate, whether it reflects productivity in terms of wages or risk premiums in terms of investments.

Historical Data

Chart II-1 below shows inflation for the U.S. by Plan year (ending June 30) since 1950.

Chart II-1

3 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION II – ECONOMIC ASSUMPTIONS PRICE INFLATION

Over the 50 years ending June 2016, the geometric average inflation rate for the U.S. has been about 4.1%, but this average is heavily influenced by the high inflation rates in the 1970s and early 1980s. Over the last 30 years, the geometric average inflation rate has been 2.7%, and only about 1.7% over the past 10 years.

Future Expectations

A measure of the market consensus of expected future inflation rates is the difference in yields between conventional treasury bonds and Treasury Inflation-Protected Securities (TIPS) at the same maturity. Table II-1 shows the yields on both types of bonds and the break-even inflation rate as of June 2016. Break-even inflation is the level of inflation needed for an investment in TIPS to “break even” with an investment in conventional treasury bonds of the same maturity.

Table II-1

Break-Even Inflation Based on Treasury Bond Yields

Time to Conventional TIPS Break Even Maturity Yield Yield Inflation

5 Years 1.2% -0.3% 1.5% 10 Years 1.6% 0.2% 1.4% 20 Years 2.0% 0.6% 1.4% 30 Years 2.5% 0.8% 1.7%

Data Source Federal Reserve, Constant Maturity Yields, Monthly Series

The Federal Reserve Bank of Cleveland publishes a forecast of inflation based primarily on this same data, as well as additional information such as inflation swaps and surveys of professional forecasters. Chart II-2 shows a summary of their published expectations as of the last three valuation dates (the 2014 and 2015 rates largely overlap).

Chart II-2

4 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION II – ECONOMIC ASSUMPTIONS PRICE INFLATION

The Federal Reserve Bank of Philadelphia publishes a quarterly survey of professional economic forecasters. Chart II-3 shows the distribution of the professionals forecasts for average inflation over the next 10 years compared to assumptions used by California public pension plans.

Chart II-3

Finally, Verus, the Board’s investment consultant, uses an inflation assumption of around 2%, similar but slightly lower than that of many other investment consultants.

Based on all of these considerations, we believe a reasonable range for long-term price inflation for use in the Plan’s actuarial valuations is between 2.00% and 3.00%. Therefore, we agree with the Board’s recent action to reduce the assumption from 3.00% to 2.50%. Although the comparison between the conventional Treasury bond and TIPS yields indicates a breakeven inflation rate below 2.50%, we note that this spread (as well as other market indicators of inflation) can be quite volatile; the spread between these securities increased by approximately 50 basis points during the second half of 2016 (from 1.4% to 1.9% for the 20 year security yields).

5 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION II – ECONOMIC ASSUMPTIONS WAGE INFLATION

WAGE INFLATION

Wage inflation can be thought of as the annual across-the-board increase in wages. Individuals often receive salary increases in excess of the wage inflation rate, and we study these increases as a part of the merit salary scale assumption. Wage inflation generally exceeds price inflation by some margin reflecting the history of increased purchasing power.

Wage inflation is used in the actuarial valuation as the minimum expected salary increase for an individual and, for purposes of amortizing the Unfunded Actuarial Liability, the rate at which payroll is expected to grow over the long term, assuming a stable active member population.

Over the past 25 years, mean real wage growth (as measured by the Social Security Administration) averaged 0.77% per year. However, over the same time period the increase in the median real wage was only 0.42% per year, as much of the growth in wages was clustered at the top end of the wage scale. Median real weekly non-farm wages have increased by only 0.21% from 1985-2015 and by 0.24% from 2005-2015, based on the Bureau of Labor Statistics (BLS) Current Population Survey.

It is acceptable to assume some additional level of base payroll increase beyond general inflation. Potential reasons contributing to the increase may include the presence of strong union representation in the collective bargaining process, competition in hiring among other similar employers, and regional factors – such as the local inflation index exceeding the national average, as has sometimes proven the case in parts of California. Also, historically the US as a whole witnessed 0.9% annual real growth in wages from 1970-2010, and the Social Security Administration projects real wage growth of 0.5% - 1.8% going forward in their Social Security solvency projections. Finally, local governments across the United States have experienced some positive real wage growth over the past 10 years (0.6% per year, based on the BLS Quarterly Census of Employment and Wages).

However, governmental entities remain under financial stress, and other areas of employee compensation – most notably health care costs and pension contributions – have continued to increase faster than the CPI. The Social Security Administration noted in a recent report that the real wage differential has actually been negative (-0.2%) over the most recent economic cycle (2007-2013).

Cheiron agrees with the Board’s recent action to implement a non-inflationary base payroll growth assumption of 0.25% annually. As a result of this increase and the 0.50% decrease in price inflation, the annual expected increase in base payroll would be 2.75%, reduced from 3.00% in the June 30, 2015 valuation. This increase will be applied to all continuing active members, and to starting pay for new entrants when projections of future populations are required. This increase will also be used in the calculation of the unfunded liability amortization payment as a level percentage of payroll.

6 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION II – ECONOMIC ASSUMPTIONS COLA GROWTH

COLA GROWTH

Tier 1 members of MCERA are eligible to receive automatic Cost-of-Living Adjustments (COLAs), based on the growth in the Bay Area Consumer Price Index (CPI) with a 3% cap on the annual COLA increase. Any increase in the CPI above the 3% maximum increase can be banked for future years in which the change in the CPI is below 3%.

It is necessary to determine an assumed rate of COLA growth, reflecting both inflation (i.e., the growth in the CPI), and the interaction of the CPI with the COLA cap and banking mechanism. Simulations of inflation show us that the average growth in the COLA is expected to be below the cap, even if the expected increase in the CPI is equal to or higher than the cap itself. This is because if there is not a significant bank already in existence (such as in the early years of retirement) and there are years in which inflation is below the cap, this shortfall will not be made up in future years.

We have produced statistical simulations of inflation and then modeled how the COLA maximum and the banking process interact with the changes in CPI. For a given long-term estimate of inflation, we used two sets of inputs and then blended the results: a 50% autocorrelation factor with 1.5% annual inflation volatility, and a 25% autocorrelation factor with 1.0% annual inflation volatility. A starting inflation level of 2.25% was used in all simulations, to reflect the low level of current inflation.

Based on a blending of the results under the two sets of inputs, and using the 2.50% inflation assumption adopted by the Board and found to be reasonable by Cheiron, we recommend decreasing the COLA growth assumption from 2.60% to 2.40%.

7 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION II – ECONOMIC ASSUMPTIONS DISCOUNT RATE

DISCOUNT RATE

The discount rate assumption is generally the most significant of all the assumptions employed in actuarial valuations. The discount rate is based on the long-term expected return on plan investments. In the short-term, a higher discount rate results in lower expected contributions. However, over the long term, actual contributions will depend on actual investment returns and not the discount rate (or expected investment returns). If actual investment returns are lower than expected, contribution rates will increase in the future. It is important to set a realistic discount rate so that projections of future contributions for budgeting purposes will not be significantly biased, particularly to be too low.

Other Large Public Retirement Plans

Based on the Public Fund Survey, developed by the National Association of State Retirement Administrators (NASRA) covering most of the largest public retirement systems in the country, there has been a general movement over at least the last decade to reduce the discount rate used in actuarial valuations. Chart II-4 below shows the change in the distribution of assumptions since 2001. The median assumption is now 7.50% and the number of plans using a discount rate of 7.5% or lower has increased significantly.

Chart II-4

8 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION II – ECONOMIC ASSUMPTIONS DISCOUNT RATE

In our survey of California retirement systems, the median assumption is the same at 7.50% with 19 of the 35 systems using the median rate as of 2015. Only one system used a rate as high as 7.75%, which has since been lowered. Chart II-5 below shows the change in discount rate assumptions for California systems from 2013 to 2015.

Chart II-5

Target Asset Allocation and Future Expectations

The discount rate assumption depends on the anticipated average level of inflation and the anticipated average real rate of return. The real rate of return is the investment return in excess of underlying inflation. The expected average real rate of return is heavily dependent on asset mix: the portion of assets in stocks, bonds, and other asset classes.

9 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION II – ECONOMIC ASSUMPTIONS DISCOUNT RATE

Table II-2 below shows the target allocation based on the Board’s current policy along with the capital market assumptions provided by the Plan’s investment consultant for 2016. We note that the assumptions provided by Verus were specific to their clients that were formerly serviced by Strategic Investment Solutions (SIS). Below we discuss our analysis of MCERA’s portfolio based on an alternative set of capital market assumptions provided by Verus. Based on these assumptions, we calculated an expected geometric return of 7.25%, which is very close to the geometric return expectation provided by Verus for this portfolio (14.3%). This correlates to a 5.35% real expected return based on the Verus-SIS inflation assumption of 1.9%.

Table II-2

Verus-SIS 10-year Assumptions

Target Arithmetic Geometric Standard Asset Category Allocation Return Return Deviation

US Large Cap 22.0% 8.3% 7.0% 16.5% US Small Cap 5.0% 9.4% 7.5% 20.5% Internation Stock 16.0% 9.9% 7.7% 22.0% Emerging Market Equity 7.0% 14.2% 8.7% 36.0% Private Equity 9.0% 13.9% 9.4% 33.0% US Fixed Income 17.0% 2.8% 2.7% 5.0% Bank Loans 5.0% 4.7% 4.4% 8.5% Absolute Return 5.0% 6.4% 6.0% 9.0% Infrastructure 3.0% 7.5% 5.5% 21.0% Natural Resources 3.0% 10.1% 7.5% 24.0% Real Estate 8.0% 7.0% 5.6% 17.0% Total 100.0% 8.24% 7.25% 12.23% Real Return 6.34% 5.35%

We also reran the results using three other sets of capital market assumptions from different investment consultants - who were chosen because their published expectations included similar asset classes to those included in the MCERA portfolio - and using a broader survey of capital market assumptions conducted by Horizon Actuarial Services using 10 and 20-year expectations. As mentioned above, this includes an alternative set of assumptions provided by Verus for clients not related to the SIS merger. The results are shown in Table II-3 on the next page.

10 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION II – ECONOMIC ASSUMPTIONS DISCOUNT RATE

Table II-3

MercedCERA Portfolio Return Expectations

Standard Consultant Nominal Inflation Real Deviation Verus (Merced) 7.25% 1.90% 5.35% 14.79%

Callan 7.00% 2.25% 4.75% 15.07% Marco 6.92% 2.20% 4.72% 11.51% Verus (Other) 7.04% 1.98% 5.06% 12.38% Average 6.98% 2.14% 4.84% 12.98%

Horizon (Survey, 10-year) 7.04% 2.16% 4.88% 12.64% Horizon (Survey, 20-year) 7.99% 2.31% 5.68% 12.64%

The average geometric return over a 10-year period based on the other consultants’ expectations was 6.98%, while the return from the Horizon surveys was even higher at 7.04% over 10 years and 7.99% over 20 years.

Based on each set of capital market assumptions, we also calculated the potential distribution of returns over 10-year periods as shown in Table II-4. The 50th percentile return under the Verus- SIS survey assumptions was 7.25%, which is the same as the 7.25% nominal return recently adopted by the Board. Using the Verus-SIS average inflation assumption (1.90%), this results in a 5.35% real return assumption.

In Table II-4, the median real return under the three other consultants of 4.84% is lower than that of Verus-SIS, but still higher than that recently adopted by the Board: 4.75%, based on a 7.25% nominal return and 2.50% price inflation. Table II-4

Expected Distribution of Average Annual Passive Investment Returns Verus (SIS-Merced) Avg: Callan, Marco, Verus (Non-SIS) Percentile Nominal Real Nominal Real 95th 15.11% 13.21% 13.88% 11.73% 75th 10.40% 8.50% 9.76% 7.61% 50th 7.25% 5.35% 6.98% 4.84% 25th 4.18% 2.28% 4.28% 2.14% 5th -0.08% -1.98% 0.51% -1.63%

11 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION II – ECONOMIC ASSUMPTIONS DISCOUNT RATE

As of the 2013 valuation, the expected rate of return is expressed net of investment, but not administrative expenses. The returns above were modeled based on the expected returns of the portfolio benchmark indices, which are expected to have minimal expenses. The actuarial standards on selecting a return assumption (ASOP 27) state that in general superior or inferior returns (net of fees) should not be assumed for active versus passive management; therefore, we do not recommend a significant adjustment to the modeled returns for the fees of the asset managers. However, a slight margin is appropriate to reflect the investment-related expenses other than those of the investment managers, which would include the investment advisor and custodian. The recently adopted discount rate of 7.25% is very close to the expectation under the long-term capital market assumptions of Verus-SIS (after adjustment for investment expenses), and the average expected real return for the MCERA target portfolio for the three other sets of capital market assumptions included in our analysis is also very close to the assumed real rate of 4.75% that was recently adopted. We therefore find the current discount rate to be a reasonable assumption. However, there are a number of factors that suggest that the near-term expected rate of return should be discussed.

• Many investment consultants expect poor rates of return in the immediate and near-term future. They reason that there is little in the way of yields on fixed income, and that the equity markets are fully valued.

• If much of the investment community is correct in their projections, we can expect returns below the 7.25% assumed rate for a number of years. This will result in actuarial losses and increases in employer contribution rates. However, these losses may be partially offset by gains on the liabilities from price and wage inflation below the assumed level (2.50% and 2.75%, respectively).

• We believe that near- and mid-term return projections should be considered along with long-term projections. Fund performance is usually measured over five to 10 years; longer measurement periods are often considered less relevant because of the potential for changes in the economy and in the investment markets. We recommend that the Board and staff continue to conduct at least a brief discussion of this assumption annually, in consultation with the Plan’s actuary and investment consultant, to determine if further changes are appropriate.

12 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS MERIT SALARY INCREASES

Demographic assumptions are used to predict membership behavior, including rates of retirement, termination, disability, and mortality. These assumptions are based primarily on the historical experience of MCERA, with some adjustments where future experience is expected to differ from historical experience and with deference to standard tables where MCERA experience is not fully credible and a standard table is available. For purposes of this study, merit salary increases are also considered a demographic assumption because the assumption is based primarily on MCERA’s historical experience.

MERIT SALARY INCREASES

Salary increases consist of three components: Increases due to cost-of-living maintenance (inflation), increases related to non-inflationary pressures on base pay (such as productivity increases), and increases in individual pay due to merit, promotion, and longevity. Increases due to cost-of-living and non-inflationary base pay factors were addressed in an earlier section of this report.

The merit salary increase assumption is analyzed by employee group and by service. Generally, newer employees are more likely to earn a longevity increase or receive a promotion, so their salary increases tend to be greater than those for longer service employees. Two different approaches were used to analyze the merit increases: a longitudinal study and a transverse study.

A longitudinal study reviews the average increase in pay for each level of service. To analyze the merit component, we subtracted the Plan’s real wage growth - as measured by the base wage increases reflected in the most recent collective bargaining agreements covering most employees - from the total pay increases experienced by each member during the experience study period. Longitudinal studies, which use changes in pay collected over several years need to consider the effects of inflation, collective bargaining, and management decisions during the term of the study in order to be reliable.

Charts III-1 and III-3 on the following pages analyze the pay patterns for General and Safety members, respectively. Our charts will generally show the current assumption (red line) compared to the actual experience (blue line) and the proposed assumption (green line).

In a transverse study, salaries are examined at one point in time (the valuation date), as opposed to being observed over a number of years under a longitudinal study. A transverse study serves as a reliable way to assess average increases in pay due to merit. With a homogeneous group of any size at all, the pattern of promotions and longevity increases during the career of an average employee is clearly visible in this analysis.

Charts III-2 and III-4 illustrate the results of the transverse study. It compares the current pay patterns for each group with current pay data. Only increases due to merit (longevity and promotion) are considered here. In the graphs, the average pay of the active General and Safety

13 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS MERIT SALARY INCREASES

members of June 30, 2016 is plotted against service. A curve is then fitted to the average pay data, and this curve is used to determine a pay increase due to merit.

In each chart, the current assumed pay increases due to merit are generally shown by the teal line and the proposed pay increases due to merit are shown by the purple line, while the blue diamonds represent the average pay at each year of service.

We recommend increasing the merit assumption for lower service points and the ultimate rate, and reducing the merit assumption for mid service points for both General and Safety.

Chart III-1: General

14 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS MERIT SALARY INCREASES

Chart III-2: General

Chart III-3: Safety

15 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS MERIT SALARY INCREASES

Chart III-4: Safety

TERMINAL (VENTURA) PAY LOAD

Under the Ventura Settlement, members have been able to cash out some or all of their leave time (up to 160 hours) in the year prior to retirement; the cashed out pay was then included in the members’ final average compensation.

The current actuarial assumptions include a load of 6.92% for Tier 1 members and 2.31% for Tier 2 members to Final Average Compensation to account for this cash out. This is equivalent to assuming that members will cash out 90% of the maximum allowable time in the year of retirement: 90% x 160 hours / 2080 hours worked per year = 6.92% for Tier 1. The load is divided by 3 for Tier 2 (6.92% / 3 = 2.31%) to account for the fact that these members use three year averaging for their final compensation.

MCERA staff informed Cheiron that the cash-outs are no longer included in the Final Average Compensation calculation starting July of 2014.

We performed an analysis of the retirement calculations which occurred between July 1, 2013 and June 30, 2016. Data showed that cash-outs averaged 6.2% for Tier 1 and 1.9% for Tier 2 for the fiscal year ending 2014. There were no cash-outs for the fiscal years ending 2015 and 2016.

We recommend eliminating the load on Final Average Compensation for all tiers.

16 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS

ANALYSIS OF OTHER DEMOGRAPHIC ASSUMPTIONS

For all of the remaining demographic assumptions, we determined the ratio of the actual number of decrements for each membership group compared to the expected number of decrements (A/E ratio or actual-to-expected ratio). If the assumption is perfect, this ratio will be 100%. Otherwise, any recommended assumption change should move from the current A/E ratio towards 100% unless future experience is expected to be different than the experience during the period of study.

We also calculate an r-squared statistic for each assumption. R-squared measures how well the assumption fits the actual data and can be thought of as the percentage of the variation in actual data explained by the assumption. Ideally, r-squared would equal 1.00 although this is never the case. Any recommended assumption change should increase the r-squared compared to the current assumption making it closer to 1.00 unless the pattern of future decrements is expected to be different from the pattern experienced during the period of study.

In addition, we calculated the 90% confidence interval, which represents the range within which the true decrement rate during the experience study period fell with 90% confidence. If there is insufficient data to calculate a confidence interval, the confidence interval is shown as the entire range of the graph. We generally propose assumption changes when the current assumption is outside the 90% confidence interval of the observed experience. However, adjustments are made to account for differences between future expectations and historical experience, to account for the past experience represented by the current assumption, and to maintain a neutral to slight conservative bias in the selection of the assumption. For mortality rates, we compare MCERA’s experience to that of a standard table and adjust the tables to bring the proposed assumption closer to an A/E ratio of 100%.

17 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS RETIREMENT RATES

RETIREMENT RATES

The current retirement rates vary by group, gender, age, and service and are applied to all members who are eligible to retire. We have combined the experience of the past three years with that of the prior three-year period in order to have a more robust dataset to review.

Generally, at any given age, members with more service are generally more likely to retire than members with fewer years of service. We reviewed the MCERA actual retirement rates based on service groupings since MCERA is not large enough to justify assumptions for each age and service combination.

We recommend separate assumptions by age for the following service groups for General members; 1) members with 10-19 years of service, 2) members with 20-29 years of service, and 3) members with 30 or more years of service. We continued to find that retirement rates are materially different between males and females for General members, so we recommend keeping separate rates by gender.

We recommend separate assumptions by age for the following two service groups for Safety members; 1) members with less than 20 years of service and 2) members with 20 or more years of service.

We recommend the continued use of the same assumptions for all PEPRA members as the other members since we do not yet have any plan experience to support a different set of assumptions. There is some expectation that PEPRA members may retire later than those in other tiers due to their lower benefit levels. However, there is no data yet that exists regarding these members’ retirement behavior and our initial analysis of the PEPRA normal cost rates showed little impact if the retirement rates were adjusted to assume later retirements.

18 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS RETIREMENT RATES

Table III-R1 shows the calculation of actual-to-expected ratios and the r-squared statistic for General male members with 10 to 19 years of service. Chart III-R1 shows the information graphically along with the 90% confidence interval.

The data shows lower actual retirement rates than expected under the current assumption. The proposed assumption decreases the aggregate assumed rate of retirement and increases the aggregate A/E ratio from 86% to 92%. The r-squared increases from 0.64 to 0.69.

See Appendices A and B for a full listing of the proposed and prior rates. The ultimate retirement age remains at 70.

Table III-R1 – General Male

Retirement Rates - General - Male, 10 to 19 Years of Service Retirements Actual to Expected Ratios Age Exposures Actual Current Recommended Current Recommended 50 - 54 119 3 5 6 61% 50% 55 - 59 196 20 15 20 130% 102% 60 - 64 118 24 30 24 81% 102% 65 - 69 32 10 15 11 65% 89% 70+ 5 3 5 5 60% 60% Total 470 60 70 65 86% 92% R-squared 0.6429 0.6930

Chart III-R1 – General Male

19 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS RETIREMENT RATES

Table III-R2 shows the calculation of actual-to-expected ratios and the r-squared statistic for General male members with 20 to 29 years of service. Chart III-R2 shows the information graphically along with the 90% confidence interval.

The data shows actual retirement rates that are close to expected in aggregate under the current assumption. We recommend only modest changes to these retirement rates at this time. The proposed assumption does not change the overall assumed rate of retirement and increases the aggregate A/E ratio from 97% to 99%. The r-squared increases from 0.39 to 0.56.

See Appendices A and B for a full listing of the proposed and prior rates. The ultimate retirement age remains at 70.

Table III-R2 – General Male

Retirement Rates - General - Male, 20 to 29 Years of Service Retirements Actual to Expected Ratios Age Exposures Actual Current Recommended Current Recommended 50 - 54 126 14 10 13 140% 111% 55 - 59 110 13 17 14 75% 95% 60 - 64 47 13 12 12 111% 111% 65 - 69 11 3 5 6 57% 55% 70+ - - - - 0% 0% Total 294 43 44 44 97% 99% R-squared 0.3885 0.5589

Chart III-R2 – General

20 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS RETIREMENT RATES

Table III-R3 shows the calculation of actual-to-expected ratios and the r-squared statistic for General male members with 30 or more years of service. Chart III-R3 shows the information graphically along with the 90% confidence interval.

The data shows higher actual retirement rates than expected under the current assumption. However, there is not enough experience to justify a proposed change in assumption, especially given that a set of assumptions based on the actual data would imply a probability of retirement that declines with age, which doesn’t reflect the pattern anticipated for this assumption.

See Appendices A and B for a full listing of the proposed and prior rates. The ultimate retirement age remains at 70.

Table III-R3 – General Male

Retirement Rates - General - Male, 30+ Years of Service Retirements Actual to Expected Ratios Age Exposures Actual Current Recommended Current Recommended 50 - 54 11 5 2 2 317% 317% 55 - 59 24 12 6 6 210% 210% 60 - 64 20 8 8 8 107% 107% 65 - 69 1 - 0 0 0% 0% 70+ - - - - 0% 0% Total 56 25 15 15 165% 165% R-squared 0.5969 0.5969

Chart III-R3 – General Male

21 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS RETIREMENT RATES

Table III-R4 shows the calculation of actual-to-expected ratios and the r-squared statistic for General female members with 10 to 19 or more years of service. Chart III-R4 shows the information graphically along with the 90% confidence interval.

The data shows actual retirement rates that are close to expected in aggregate under the current assumption. We recommend only modest changes to these retirement rates at this time. The proposed assumption slightly increases the aggregate assumed rate of retirement and decreases the aggregate A/E ratio. The r-squared increases from 0.55 to 0.75.

See Appendices A and B for a full listing of the proposed and prior rates. The ultimate retirement age remains at 70. Table III-R4 – General Female

Retirement Rates - General - Female, 10 to 19 Years of Service Retirements Actual to Expected Ratios Age Exposures Actual Current Recommended Current Recommended 50 - 54 278 8 11 11 72% 72% 55 - 59 414 48 33 40 147% 121% 60 - 64 188 44 47 44 94% 99% 65 - 69 53 23 26 26 88% 88% 70+ 7 2 7 7 29% 29% Total 940 125 124 128 101% 97% R-squared 0.5481 0.7533

Chart III-R4 – General Female

22 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS RETIREMENT RATES

Table III-R5 shows the calculation of actual-to-expected ratios and the r-squared statistic for General female members with 20 to 29 years of service. Chart III-R5 shows the information graphically along with the 90% confidence interval.

The data shows lower actual retirement rates than expected under the current assumption. The proposed assumption decreases the aggregate assumed rate of retirement and increases the aggregate A/E ratio from 84% to 97%. The r-squared also increases from 0.59 to 0.69.

See Appendices A and B for a full listing of the proposed and prior rates. The ultimate retirement age remains at 70.

Table III-R5 – General Female

Retirement Rates - General - Female, 20 to 29 Years of Service Retirements Actual to Expected Ratios Age Exposures Actual Current Recommended Current Recommended 50 - 54 200 26 26 21 99% 123% 55 - 59 158 31 49 41 63% 76% 60 - 64 55 22 20 20 108% 108% 65 - 69 8 5 4 4 114% 114% 70+ - - - - 0% 0% Total 421 84 100 87 84% 97% R-squared 0.5923 0.6894

Chart III-R5 – General Female

23 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS RETIREMENT RATES

Table III-R6 shows the calculation of actual-to-expected ratios and the r-squared statistic for General female members with 30 or more years of service. Chart III-R6 shows the information graphically along with the 90% confidence interval.

The data shows higher actual retirement rates than expected under the current assumption. The proposed assumption increases the aggregate assumed rate of retirement for ages less than 55 and decreases the aggregate A/E ratio from 116% to 106%. The r-squared increases from 0.56 to 0.59.

See Appendices A and B for a full listing of the proposed and prior rates. The ultimate retirement age remains at 70.

Table III-R6 – General Female

Retirement Rates - General - Female, 30+ Years of Service Retirements Actual to Expected Ratios Age Exposures Actual Current Recommended Current Recommended 50 - 54 35 9 6 9 145% 103% 55 - 59 42 16 15 15 109% 109% 60 - 64 14 6 6 6 98% 98% 65 - 69 1 1 1 1 200% 200% 70+ - - - - 0% 0% Total 92 32 28 30 116% 106% R-squared 0.5563 0.5876

Chart III-R6 – General Female

24 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS RETIREMENT RATES

Table III-R7 shows the calculation of actual-to-expected ratios and the r-squared statistic for Safety members with 10 to 19 years of service. Chart III-R7 shows the information graphically along with the 90% confidence interval.

The data shows higher actual retirement rates than expected under the current assumption. The proposed assumption increases the aggregate assumed rate of retirement and decreases the aggregate A/E ratio from 151% to 123%. The r-squared increases from 0.52 to 0.63.

See Appendices A and B for a full listing of the proposed and prior rates. The ultimate retirement age remains at 60.

Table III-R7 – Safety

Retirement Rates - Safety, 10 to 19 Years of Service Retirements Actual to Expected Ratios Age Exposures Actual Current Recommended Current Recommended 50 - 54 46 8 6 6 136% 128% 55 - 59 16 5 2 4 244% 125% 60 - 64 2 2 2 2 100% 100% 65 - 69 - - - - 0% 0% 70+ - - - - 0% 0% Total 64 15 10 12 151% 123% R-squared 0.5244 0.6255

Chart III-R7 – Safety

25 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS RETIREMENT RATES

Table III-R8 shows the calculation of actual-to-expected ratios and the r-squared statistic for Safety members with 20+ years of service. Chart III-R8 shows the information graphically along with the 90% confidence interval.

The data shows actual retirement rates that are close to expected in aggregate under the current assumption. There is not enough experience to justify a proposed change in assumptions.

See Appendices A and B for a full listing of the proposed and prior rates. The ultimate retirement age remains at 60.

Table III-R8 – Safety

Retirement Rates - Safety, 20+ Years of Service Retirements Actual to Expected Ratios Age Exposures Actual Current Recommended Current Recommended 50 - 54 58 18 19 19 94% 94% 55 - 59 9 4 3 3 135% 135% 60 - 64 - - - - 0% 0% 65 - 69 - - - - 0% 0% 70+ - - - - 0% 0% Total 67 22 22 22 100% 100% R-squared 0.9444 0.9444

Chart III-R8 – Safety

26 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS TERMINATION RATES

Termination rates reflect the frequency at which active members leave employment for reasons other than retirement, death, or disability. Currently, the termination rates are based on service for both Safety and General members. We have found that the rate of termination is more related to years of service rather than age. This methodology also avoids under-weighting the liabilities that can occur if using age-based rates only. The termination rates do not apply once members are eligible for a service retirement benefit. Again, we have combined the experience of the past three years with that of the prior three-year period in order to have a more robust dataset to review.

To make the best use of the available member data, we study all terminations together – vested terminations, terminating members who withdraw their contributions, and members who transfer to a reciprocal pension plan – to determine an overall termination rate. We then analyze the percentages of terminating members who withdraw their contributions, transfer, or are eligible for a vested benefit.

27 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS TERMINATION RATES

Table III-T1 shows the calculation of actual-to-expected ratios and the r-squared statistic for General male members, and Chart III-T1 shows the information graphically along with the 90% confidence interval.

The data shows higher actual termination rates than expected under the current assumption. The proposed assumption increases the aggregate assumed rates of termination and decreases the aggregate A/E ratio from 102% to 99%. The r-squared increases from 0.94 to 0.96.

See Appendices A and B for a sample listing of the proposed and prior rates.

Table III-T1 – General Male

Termination Rates - General - Male Retirements Actual to Expected Ratios Service Exposures Actual Current Recommended Current Recommended <5 710 92 99 92 93% 101% 5 - 10 817 52 39 52 133% 100% 10 - 15 392 13 19 18 69% 74% 15 - 20 180 8 9 8 93% 99% 20 - 25 82 4 2 4 195% 108% 25 - 30 18 3 0 1 667% 370% 30+ - - - - 0% 0% Total 2,199 172 168 174 102% 99% R-squared 0.9362 0.9600

Chart III-T1 – General Male

28 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS TERMINATION RATES

Table III-T2 shows the calculation of actual-to-expected ratios and the r-squared statistic for General female members, and Chart III-T2 shows the information graphically along with the 90% confidence interval.

The data shows that actual termination rates are slightly higher in aggregate, but the r-squared is 0.96 and the A/E ratio is 105%, therefore we are comfortable recommending no change to the assumption.

See Appendices A and B for a sample listing of the proposed and prior rates.

Table III-T2 – General Female

Termination Rates - General - Female Retirements Actual to Expected Ratios Service Exposures Actual Current Recommended Current Recommended <5 1,680 197 167 167 118% 118% 5 - 10 1,839 119 129 129 93% 93% 10 - 15 1,104 42 40 40 106% 106% 15 - 20 516 12 15 15 78% 78% 20 - 25 173 6 5 5 116% 116% 25 - 30 49 - 1 1 0% 0% 30+ - - - - 0% 0% Total 5,361 376 357 357 105% 105% R-squared 0.9644 0.9644

Chart III-T2 – General Female

29 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS TERMINATION RATES

Table III-T3 shows the calculation of actual-to-expected ratios and the r-squared statistic for Safety members, and Chart III-T3 shows the information graphically along with the 90% confidence interval.

The data shows that actual termination rates are slightly higher in aggregate, but the r-squared is 0.89 and the A/E ratio is 106%, therefore we are comfortable recommending no change to the assumption.

See Appendices A and B for a sample listing of the proposed and prior rates.

Table III-T3 – Safety

Termination Rates - Safety Retirements Actual to Expected Ratios Service Exposures Actual Current Recommended Current Recommended <5 444 45 41 41 109% 109% 5 - 10 643 29 30 30 98% 98% 10 - 15 322 14 13 13 106% 106% 15 - 20 179 4 3 3 147% 147% 20+ - - - - 0% 0% Total 1,588 92 87 87 106% 106% R-squared 0.8911 0.8911

Chart III-T3 – Safety

30 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS TERMINATION RATES

TYPES OF TERMINATION

When a vested member terminates employment, the member has the option of receiving a refund of contributions with interest or a deferred annuity. If an employee terminates employment and works for a reciprocal employer (also referred to as a transfer), the employees’ retirement benefit is based on the employee’s service with MCERA and Final Compensation based on employment with the reciprocal employer.

Table III-T4 and III-T5 show the results of our analysis of terminations for General and Safety members, as well as our recommendations regarding rates of withdrawal, vested termination, and transfer.

Table III-T4 – General

Types of Termination for General Members

Service and Type Actual Expected Recommended 0-4 Years of Service Withdrawal 92.50% 90.00% 90.00% Transfer 6.07% 10.00% 10.00% Vested Termination 0.00% 0.00% 0.00% 5-14 Years of Service Withdrawal 38.58% 40.00% 40.00% Transfer 9.50% 12.00% 10.00% Vested Termination 51.93% 48.00% 50.00% 15+ Years of Service Withdrawal 10.87% 10.00% 10.00% Transfer 10.87% 10.00% 10.00% Vested Termination 78.26% 80.00% 80.00%

Table III-T5 – Safety

Types of Termination for Safety Members

Service and Type Actual Expected Recommended 0-4 Years of Service Withdrawal 90.43% 90.00% 90.00% Transfer 9.57% 10.00% 10.00% Vested Termination 0.00% 0.00% 0.00% 5+ Years of Service Withdrawal 29.69% 15.00% 30.00% Transfer 26.56% 42.50% 25.00% Vested Termination 43.75% 42.50% 45.00%

31 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS TERMINATION RATES

DEFERRED RETIREMENT COMMENCEMENT AGE

The current assumption is that all General terminated vested members and transfers will retire at age 59, and all Safety terminated vested members and transfers will retire at age 53. We recommend splitting the assumption between terminated vested members and transfers. The table below shows the results of our analysis and our recommendations regarding the expected retirement age.

Table III-T6

Deferred Retirement Commencement Age

Actual Average Expected Recommended

General Terminated Vested 58.89 59.00 59.00 Transfer 60.78 59.00 61.00

Safety Terminated Vested 53.80 53.00 53.00 Transfer 55.03 53.00 55.00

RECIPROCAL PAY INCREASE

If a member terminates employment and works for a reciprocal employer, the member’s retirement benefit is ultimately computed using the highest Final Compensation based on employment with the reciprocal employer. We recommend that the assumption used to project pay during employment with the reciprocal employer be based on the wage growth assumption, increased by the ultimate merit pay increase assumption described earlier in this report. Therefore, the recommended total pay growth assumption for members in reciprocal status is 3.25% for General and Safety members.

32 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS DISABILITY RATES

This section analyzes the incidence of disability by the age of the employee. All disabilities for members with less than five years of service are assumed to be service-related. The amount of disability experience is fairly limited; only 14 disabilities have occurred during the last three years for Safety and General members combined. To improve the credibility of the data, we have aggregated the experience of the past three years with that of the prior experience study (2010- 2013).

Table III-D1 shows the calculation of actual-to-expected ratios and the r-squared statistic for all disabilities for General male members, and Chart III-D1 shows the information graphically.

The data shows that actual disability rates are close to expected disability rates in aggregate. Cheiron recommends no changes to these termination rates due to a lack of credible experience.

See Appendix A or B for a sample listing of the rates.

Table III-D1 – General Male

Disability Rates - General - Male Retirements Actual to Expected Ratios Age Exposures Actual Current Recommended Current Recommended <20 - - - - 0% 0% 20 - 29 187 - 0 0 0% 0% 30 - 39 703 - 1 1 0% 0% 40 - 49 768 1 1 1 77% 77% 50 - 59 1,015 5 3 3 170% 170% 60 - 69 83 - 0 0 0% 0% 70+ - - - - 0% 0% Total 2,756 6 5 5 115% 115% R-squared 0.1074 0.1074

33 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS DISABILITY RATES

Chart III-D1 – General Male

Table III-D2 shows the calculation of actual-to-expected ratios and the r-squared statistic for all disabilities for General female members, and Chart III-D2 shows the information graphically.

The data shows that actual disability rates are higher than the expected disability rates in aggregate, Cheiron recommends no changes to these termination rates due to a lack of credible experience.

See Appendix A or B for a sample listing of the rates.

Table III-D2 – General Female

Disability Rates - General - Female Retirements Actual to Expected Ratios Age Exposures Actual Current Recommended Current Recommended <20 71 - 0 0 0% 0% 20 - 29 519 - 0 0 0% 0% 30 - 39 975 - 0 0 0% 0% 40 - 49 984 - 0 0 0% 0% 50 - 59 937 2 0 0 489% 489% 60 - 69 915 2 1 1 262% 262% 70+ 1,097 2 2 2 122% 122% Total 5,498 6 3 3 181% 181% R-squared 0.1375 0.1375

34 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS DISABILITY RATES

Chart III-D2 – General Female

Table III-D3 shows the calculation of actual-to-expected ratios and the r-squared statistic for Safety members, and Chart III-D3 shows the information graphically.

The data shows that the number of disabilities is slightly lower than the number expected under the current assumption. As with the General members, the amount of experience upon which to base credible assumptions is limited. However, we do expect that the underlying rate of disability should increase with age, which is not reflected in the current assumptions above age 59, and therefore we have proposed a set of alternative rates based on the most recent CalPERS experience study. We recommend changing the rates to be 50% of the CalPERS industrial disability rates for Police for duty-related disabilities and 50% of the CalPERS non-industrial disability rates for Police for non-duty related disabilities. In aggregate, the proposed assumptions decrease the assumed rates of disability and increases the aggregate A/E ratio from 80% to 93%. The r-squared also increases from 0.063 to 0.087.

See Appendix A or B for a sample listing of the rates.

35 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS DISABILITY RATES

Table III-D3 - Safety

Disability Rates - Safety Retirements Actual to Expected Ratios Age Exposures Actual Current Recommended Current Recommended <20 - - - - 0% 0% 20 - 29 327 - 1 0 0% 0% 30 - 39 801 2 4 3 46% 65% 40 - 49 535 5 5 4 109% 131% 50 - 59 162 2 2 3 95% 62% 60 - 69 6 1 - 0 0% 536% 70+ - - - - 0% 0% Total 1,831 10 12 11 80% 93% R-squared 0.0630 0.0868

Chart III-D2 - Safety

36 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS MORTALITY RATES

Post-retirement mortality assumptions are typically developed separately by gender for both healthy annuitants and disabled annuitants. Pre-retirement mortality assumptions are developed separately for males and females. Unlike most of the other demographic assumptions that rely exclusively on the experience of the plan, for mortality, standard mortality tables and projection scales serve as the primary basis for the assumption.

The Society of Actuaries recently completed an extensive mortality study and updated their mortality tables and mortality improvement projection scale, the most recent of which is named the MP-2016 scale. CalPERS also recently released a set of mortality tables based on California public plan experience. We used these tables as the basis for our analysis.

The steps in our analysis are as follows: 1. Select a standard mortality table that is, based on experience, most closely matching the anticipated experience of MCERA. 2. Compare actual MCERA experience to what would have been predicted by the selected standard table for the period of the experience study. 3. Adjust the standard table either fully or partially depending on the level of credibility for MCERA experience. This adjusted table is called the base table. 4. Select an appropriate standard mortality improvement projection scale and apply it to the base table.

As we have done in prior experience studies, we have combined the experience of the past three years with that of the two prior three-year periods in order to have a more robust dataset to review.

Historically we have proposed assumption changes when the Actual-to-Expected (A/E) ratio for the current assumption is less than 100%. However, beginning with the 2010-2013 Experience Study, we recommended a change in this approach going forward, where the proposed assumptions are intended to track closely to actual experience (i.e., an A/E ratio close to 100%, but with a ratio slightly less than 100% still being reasonable). However, as described below, this approach also includes an expectation that the assumed mortality rates will automatically become more conservative each year, since the actual mortality rates are also expected to decrease over time.

We also historically recommended the same or a related table for active employees and healthy annuitants, which has been the current practice for MCERA. However, recent mortality studies by the Society of Actuaries and others have shown significantly lower rates of mortality for active employees versus those of the same age who are no longer working, therefore this year we have suggested using separate tables for active versus retired members. In addition, we recommend continuing the current practice of using the same assumptions for General and Safety members, as the experience for the Safety members is quite limited.

37 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS MORTALITY RATES

In the prior study, MCERA elected to use the following assumptions:

Healthy active members, retirees, and beneficiaries • The sex distinct Retired Pensioners (RP) 2000 Combined Healthy Tables, published by the Society of Actuaries, projected to 2027 using Projection Scale BB.

Disabled members • The sex distinct Retired Pensioners (RP) 2000 Combined Healthy Tables, published by the Society of Actuaries, projected to 2027 using Projection Scale BB, set forward three years for males and females

Since the prior study, the Society of Actuaries' Retirement Plans Experience Committee (RPEC) has released a new mortality improvement scale, Scale MP-2016, which reflects more up-to-date data than was used in the development of Scale BB.

MP-2016 represents the Society of Actuaries’ most advanced actuarial methodology in incorporating mortality improvement trends with actual recent mortality rates, by using rates that vary not only by age but also by calendar year – known as a two-dimensional approach to projecting mortality improvements. Scale MP-2016 was designed with the intent of being applied to mortality on a generational basis. The effect of this is to build in an automatic expectation of future improvements in mortality.

This is a different approach from building in a margin for conservatism in the current rates to account for the expectation that the same rates will be applied in future years, when mortality experience has improved. Recent reports issued by RPEC suggest that using generational mortality is a preferable approach, as it allows for an explicit declaration of the amount of future mortality improvement included in the assumptions.

RPEC has also recently released a new set of base mortality rate tables – the RP-2014 tables, which are intended to replace the RP-2000 tables and are based on a recent study of US defined benefit plan mortality experience. However, RPEC excluded all public pension plan data in the construction of these tables – including a large amount of California public sector data – because there were significant differences between the private and public sector retirement experience, and the new tables are expected to be used by private sector plans to meet accounting and federal funding requirements specific to private plans.

Fortunately, there are alternative sets of assumptions that have been developed that may serve as a logical basis for developing mortality assumptions for MCERA. As part of an Experience Study completed in 2014, CalPERS adopted a new set of mortality tables for active, retired, and disabled members. MCERA’s experience over the past nine years matches well with the new CalPERS rates, after removing the improvement projections included by CalPERS and replacing them with the new MP-2016 mortality improvement projections through the mid-point of each of the three three-year periods (2007-2010, 2010-2013, and 2013-2016).

38 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS MORTALITY RATES

Even with the use of nine years of data (2007-2016), the MCERA experience is only partially credible, based on standard statistical theory. However, the CalPERS base tables provide a reasonable fit to MCERA’s data with a 97% actual-to-expected ratio for males and a 94% actual- to-expected ratio for females, so we are not recommending any adjustments to the CalPERS base tables.

Rather than weighting the experience based on the number of members living and dying, we have weighted the experience based on benefit size. This approach has been recommended by RPEC, since members with larger benefits are expected to live longer, and a benefit-weighted approach helps avoid underestimating the liabilities.

Based on this information, we are recommending the following base mortality table assumptions:

Active members • CalPERS 2009 Non-Industrial Employees Mortality Table, with no adjustment. • CalPERS 2009 Industrial Employee Mortality, with no adjustment (Line-of-Duty, Safety only).

Healthy retirees and beneficiaries • CalPERS 2009 Healthy Annuitant Mortality Table, with no adjustment.

Disabled members • CalPERS 2009 Industrial Disability Mortality Table.

We also recommend projecting these base tables generationally using the MP-2016 mortality improvement scale described above for all types of mortality.

As shown in Tables III-M1 and III-M2 on the following pages, our proposed mortality rates for healthy annuitants are slightly higher than recent experience (reflecting an A/E ratio of 97% and 94% respectively). We are comfortable that the ratio of actual to expected deaths is less than 100%, since the mortality tables recommended are consistent with the mortality experience for similar 1937 Act systems.

39 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS MORTALITY RATES

Table III-M1

Healthy Annuitant Mortality - Base Table for Males Age Actual Weighted Weighted Deaths Actual to Expected Ratios Band Exposures Deaths Exposures Actual Current Standard Recommended Current Standard Recommended 50 - 54 262 5 679,791 10,423 1,573 3,761 3,761 663% 277% 277% 55 - 59 690 4 2,005,855 6,433 7,811 13,732 13,732 82% 47% 47% 60 - 64 1,274 8 4,363,316 26,930 30,136 39,691 39,691 89% 68% 68% 65 - 69 1,286 14 4,018,745 43,760 47,416 50,115 50,115 92% 87% 87% 70 - 74 1,029 28 2,611,689 75,641 53,324 55,771 55,771 142% 136% 136% 75 - 79 767 39 1,437,464 71,573 49,802 51,063 51,063 144% 140% 140% 80 - 84 580 34 976,838 46,970 59,491 64,649 64,649 79% 73% 73% 85 - 89 382 34 664,432 58,667 69,021 75,498 75,498 85% 78% 78% 90 - 94 171 34 307,579 58,978 54,415 58,947 58,947 108% 100% 100% 95 - 99 46 14 73,600 20,195 19,160 20,365 20,365 105% 99% 99% 100 + 2 - 424 - 135 139 139 0% 0% 0% Total 6,489 214 17,139,734 419,570 392,284 433,732 433,732 107% 97% 97%

Chart III-M1

40 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS MORTALITY RATES

Table III-M2

Healthy Annuitant Mortality - Base Table for Females Age Actual Weighted Weighted Deaths Actual to Expected Ratios Band Exposures Deaths Exposures Actual Current Standard Recommended Current Standard Recommended 50 - 54 305 - 505,799 - 1,018 2,529 2,529 0% 0% 0% 55 - 59 997 5 2,158,290 9,954 7,055 10,145 10,145 141% 98% 98% 60 - 64 1,733 13 3,633,956 20,070 21,565 21,607 21,607 93% 93% 93% 65 - 69 1,921 16 3,492,916 35,704 36,719 31,079 31,079 97% 115% 115% 70 - 74 1,461 18 2,218,296 22,402 39,860 33,425 33,425 56% 67% 67% 75 - 79 1,029 36 1,536,139 53,638 46,283 40,348 40,348 116% 133% 133% 80 - 84 733 32 968,784 40,627 46,887 43,366 43,366 87% 94% 94% 85 - 89 556 41 599,637 46,706 51,286 50,875 50,875 91% 92% 92% 90 - 94 307 38 290,051 32,659 41,100 43,413 43,413 79% 75% 75% 95 - 99 80 23 110,170 25,587 22,603 26,614 26,614 113% 96% 96% 100 + 4 1 6,470 1,026 1,417 1,980 1,980 72% 52% 52% Total 9,126 223 15,520,508 288,372 315,792 305,381 305,381 91% 94% 94%

Chart III-M2

41 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS MORTALITY RATES

We have not shown the data for the disabled and active member mortality experience, as the number of deaths is very low – 13 total disabled deaths and six total active deaths – over the nine-year period, which is not enough data to produce sufficiently credible assumptions. We have used our professional judgement to recommend appropriate base tables based on the CalPERS rates, and applied the same generational improvement scales as recommended for the service-retired members.

Mortality Assumptions for Employee Contribution Rates

For purposes of determining employee contribution rates, the use of generational mortality improvements is impractical from an administrative perspective. Therefore, we recommend using the base mortality tables described above (various CalPERS tables) projected using Scale MP-2016 from 2009 to 2037. These static projections are intended to approximate generational mortality improvements.

The projection periods are based upon the duration of active liabilities for the respective impacted groups, and the period during which the associated employee contribution rates will be in use. The employee contribution rates are also blended using a male/female weighting of 30%/70% for General Members and 70%/30% for Safety members.

We anticipate that these mortality assumptions will be used to determine the employee contribution rates in effect for the period of July 1, 2017 through June 30, 2020. We also anticipate that the mortality assumptions for this purpose will be updated again after the next experience study covering the period from July 1, 2016 through June 30, 2019.

42 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

SECTION III – DEMOGRAPHIC ASSUMPTIONS OTHER DEMOGRAPHIC ASSUMPTIONS

FAMILY COMPOSITION

Members who are married at the time of retirement are entitled to an unreduced 60% joint and survivor annuity.

An analysis of all retired General members showed that 73% of males are married and 49% of females are married. We recommend reducing the assumption for future male General retires from 80% to 70% and maintaining the assumption of 50% for future female General retirees.

An analysis of all retired Safety members showed that 79% are married, but 94% of members that retired in the last three years were married. We recommend maintaining the assumption that 90% of future Safety retirees are married.

An analysis of all retired General and Safety members showed that male members are 3.3 years older than their spouses are and female members are 1.8 years younger than their spouses are. We recommend maintaining the current assumption that male members are three years older than their spouses are, but reducing the assumption from three to two years for the number of years that female members are younger than their spouses are.

PLAN EXPENSES

An allowance of $1,800,000 for Plan administrative expenses was included in the annual cost calculation in the prior valuation, and was expected to increase with the old assumed price inflation of 3.00% to $1,854,000. The actual Plan administrative expenses for FYE 2016 were $2,492,684. Based on a recommendation from Staff, we propose assumed Plan administrative expenses of $2,200,000 for FYE 2017. These expenses are split between employees and employers based on their share of the overall contributions. Expenses are expected to grow with the new price inflation assumption (2.50% per year) in future years.

COLA / BENEFIT TIMING

Finally, we note that the actuarial valuation software (ProVal) used by Cheiron has been updated to allow for the specification of an exact date on which COLA increases will be applied, which in MCERA's case will be April 1 of each year. In prior valuations, the COLA (payable only to Tier 1 retirees) was applied based on an assumption that the next COLA increase would occur at the end of the valuation year.

However, we have also confirmed with Staff that an adjustment to the assumed timing of the monthly benefit payments is appropriate. We have confirmed that the asset value used in the annual actuarial valuation (as of June 30) is net of the June 30 benefit payments, therefore the next set of benefit payments can be expected to be drawn from the assets at the end of July. Previously, our valuation software was programmed to assume that the next set of benefit payments would be withdrawn from the assets immediately (i.e. at the beginning of the month). Therefore, we believe it is appropriate to update our valuation software to reflect end of month payment, which will offset the impact of the change in the COLA timing item identified above.

43 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY REPORT AS OF JUNE 30, 2016

APPENDIX A – SUMMARY OF PROPOSED ASSUMPTIONS

The recommended assumptions were adopted by the Board at their November 17, 2016 meeting. The assumptions are based on an experience study covering the period from July 1, 2013 through June 30, 2016.

1. Rate of Return

Assets are assumed to earn 7.25% net of investment expenses.

2. Administrative Expenses

Administrative expenses are assumed to be $2.20 million for the next year, to be allocated between the employer and employees based on each group’s share of the non- expense related contributions. Administrative expenses in future years are expected to increase with the Consumer Price Index (CPI).

3. Cost of Living

The cost of living as measured by the Consumer Price Index (CPI) will increase at the rate of 2.50% per year.

4. Post Retirement COLA

Benefits are assumed to increase after retirement at the rate of 2.40% per year for Tier 1 members.

5. Increases in Pay

Wage inflation component: 2.75% Additional longevity and promotion component:

Years of Service General Safety 0-1 7.00% 7.50% 2-3 5.00% 5.00% 4 5.00% 3.00% 5 3.00% 1.50% 6-9 2.00% 1.50% 10-14 1.50% 1.00% 15-19 1.00% 1.00% 20+ 0.50% 0.50%

6. Final Average Compensation Load

None

44 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY REPORT AS OF JUNE 30, 2016

APPENDIX A – SUMMARY OF PROPOSED ASSUMPTIONS

7. Family Composition

50% of female General members, 70% of male General members and 90% of Safety members are assumed to be married at retirement. Male members are assumed to be three years older than their spouses are and female members are assumed to be two years younger than their spouses are.

8. Rates of Termination

Sample rates of termination1 are shown in the following table.

The table below shows the percentages of total terminations falling into these categories.

Years of Service General Safety 0 – 4 5 – 14 15+ 0 – 4 5+ Withdrawals 90.0% 40.0% 10.0% 90.0% 30.0% Transfers 10.0% 10.0% 10.0% 10.0% 25.0% Vested Terminations 0.0% 50.0% 80.0% 0% 45.0%

Vested terminated General Members are assumed to begin receiving benefits at age 59; vested terminated Safety Members are assumed to begin receiving benefits at age 53. Reciprocal transfer General members are assumed to begin receiving benefits at age 61; reciprocal transfer safety members are assumed to begin receiving benefits at age 55.

Reciprocal transfers’ pay growth is assumed to be 3.25% while employed by a reciprocal employer.

45 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY REPORT AS OF JUNE 30, 2016

APPENDIX A – SUMMARY OF PROPOSED ASSUMPTIONS

9. Rates of Service-Connected Disability

Sample service-connected disability rates of active participants are provided in the table below.

10. Rates of Non Service-Connected Disability

Sample non service-connected disability rates of active participants are provided in the table below. Rates are applied once members have at least five years of service.

46 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY REPORT AS OF JUNE 30, 2016

APPENDIX A – SUMMARY OF PROPOSED ASSUMPTIONS

11. Rates of Mortality

12. Rates of Retirement

Rates of retirement are based on age according to the following table.

47 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

APPENDIX B – SUMMARY OF PRIOR ASSUMPTIONS

The assumptions and methods used in the June 30, 2015 actuarial valuation reflect the results of an Experience Study performed by Cheiron covering the period from July 1, 2010 through June 30, 2013 and adopted by the Board.

1. Rate of Return

Assets are assumed to earn 7.75% net of investment expenses.

2. Administrative Expenses

Administrative expenses are assumed to be $1.80 million for the next year, to be allocated between the employer and employees based on each group’s share of the non- expense related contributions. Administrative expenses in future years are expected to increase with the Consumer Price Index (CPI).

3. Cost of Living

The cost of living as measured by the Consumer Price Index (CPI) will increase at the rate of 3.00% per year.

4. Post Retirement COLA

Benefits are assumed to increase after retirement at the rate of 2.60% per year for Tier 1 members.

5. Increases in Pay

Wage inflation component: 3.00% Additional longevity and promotion component:

Years of Service General Safety 0-1 4.00% 5.00% 2 3.00% 5.00% 3 2.50% 3.00% 4-6 2.00% 3.00% 7-14 2.00% 2.00% 15-19 1.00% 0.50% 20+ 0.00% 0.50%

48 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

APPENDIX B – SUMMARY OF PRIOR ASSUMPTIONS

6. Family Composition

50% of female General members, 80% of male General members and 90% of Safety members are assumed to be married at retirement. Male members are assumed to be three years older than their spouses are and female members are assumed to be three years younger than their spouses are.

7. Rates of Termination

Sample rates of termination1 are shown in the following table.

Years of Service General Male General Female Safety 0 25.0% 12.0% 20.8% 5 4.8% 7.5% 4.6% 10 4.8% 3.6% 4.6% 15 4.8% 3.0% 2.5% 20 2.5% 3.0% 0.0% 25 2.5% 3.0% 0.0% 30 0.0% 0.0% 0.0% 1 Termination rates do not apply once a member is eligible for retirement.

The table below shows the percentages of total terminations falling into these categories.

Years of Service General Safety 0 – 4 5 – 14 15+ 0 – 4 5+ Withdrawals 90.0% 40.0% 10.0% 90.0% 15.0% Transfers 10.0% 12.0% 10.0% 10.0% 42.5% Vested Terminations 0.0% 48.0% 80.0% 0% 42.5%

Vested terminated General Members are assumed to begin receiving benefits at age 59; vested terminated Safety Members are assumed to begin receiving benefits at age 53.

49 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

APPENDIX B – SUMMARY OF PRIOR ASSUMPTIONS

8. Rates of Service-Connected Disability Sample service-connected disability rates of active participants are provided in the table below.

Safety General Age All Female Male 20 0.3250% 0.0040% 0.0027% 25 0.3625% 0.0075% 0.0053% 30 0.4190% 0.0115% 0.0133% 35 0.5063% 0.0150% 0.0240% 40 0.6375% 0.0190% 0.0320% 45 0.7815% 0.0340% 0.0480% 50 0.9940% 0.0600% 0.0640% 55 1.2625% 0.1050% 0.0800% 60 0.0000% 0.1575% 0.1120% 65 0.0000% 0.0000% 0.0000%

9. Rates of Non Service-Connected Disability Sample non service-connected disability rates of active participants are provided in the table below. Rates are applied once members have at least five years of service.

Safety General Age All Female Male 20 0.0000% 0.0000% 0.0000% 25 0.0200% 0.0033% 0.0267% 30 0.0300% 0.0067% 0.0533% 35 0.0400% 0.0100% 0.0533% 40 0.0600% 0.0133% 0.0867% 45 0.0900% 0.0300% 0.1267% 50 0.1200% 0.0600% 0.1600% 55 0.1600% 0.0933% 0.2133% 60 0.0000% 0.1533% 0.2800% 65 0.0000% 0.0000% 0.0000%

50 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

APPENDIX B – SUMMARY OF PRIOR ASSUMPTIONS

10. Rates of Mortality for Healthy Lives

Mortality rates for active members, retirees, beneficiaries, and deferred members are based on the sex distinct Retired Pensioner (RP) 2000 Combined Healthy Tables, published by the Society of Actuaries, projected to 2027 using Projection Scale BB. This is intended to approximate a generational approach.

11. Rates of Mortality for Disabled Retirees

Mortality rates for disabled members are based on the sex distinct Retired Pensioner (RP) 2000 Combined Healthy Tables, published by the Society of Actuaries, projected to 2027 using Projection Scale BB, set forward three years for males and females.

12. Rates of Retirement

Rates of retirement are based on age according to the following table.

General Male General Female Safety Years of Service Years of Service Years of Service Age 10 – 19 20 – 29 30+ 10 – 19 20 – 29 30+ Age 10 – 19 20+ 50 2.50% 5.00% 7.50% 2.50% 10.00% 10.00% 40 0.00% 3.10% 51 2.50% 5.00% 7.50% 2.50% 10.00% 10.00% 41 0.00% 3.10% 52 5.00% 10.00% 15.00% 5.00% 15.00% 20.00% 42 0.00% 3.10% 53 5.00% 10.00% 15.00% 5.00% 15.00% 20.00% 43 0.00% 3.10% 54 5.00% 10.00% 15.00% 5.00% 15.00% 20.00% 44 0.00% 3.10% 55 9.00% 18.00% 27.00% 9.00% 35.00% 35.00% 45 0.00% 7.60% 56 7.50% 15.00% 22.50% 7.50% 30.00% 35.00% 46 0.00% 7.60% 57 7.50% 15.00% 22.50% 7.50% 30.00% 35.00% 47 0.00% 7.60% 58 7.50% 15.00% 22.50% 7.50% 30.00% 35.00% 48 0.00% 7.60% 59 7.50% 15.00% 22.50% 7.50% 30.00% 35.00% 49 0.00% 7.60% 60 25.00% 25.00% 37.50% 25.00% 30.00% 35.00% 50 12.80% 32.90% 61 25.00% 25.00% 37.50% 25.00% 40.00% 45.00% 51 12.80% 32.90% 62 25.00% 25.00% 37.50% 25.00% 40.00% 45.00% 52 12.80% 32.90% 63 25.00% 25.00% 37.50% 25.00% 40.00% 45.00% 53 12.80% 32.90% 64 25.00% 25.00% 37.50% 25.00% 40.00% 45.00% 54 12.80% 32.90% 65 40.00% 40.00% 40.00% 40.00% 50.00% 50.00% 55 12.80% 32.90% 66 45.00% 45.00% 45.00% 45.00% 50.00% 50.00% 56 12.80% 32.90% 67 50.00% 50.00% 50.00% 50.00% 50.00% 50.00% 57 12.80% 32.90% 68 60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 58 12.80% 32.90% 69 80.00% 80.00% 80.00% 80.00% 80.00% 80.00% 59 12.80% 32.90% 70+ 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 60 100.00% 100.00%

51 MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION EXPERIENCE STUDY AS OF JUNE 30, 2016

APPENDIX B – SUMMARY OF PRIOR ASSUMPTIONS

13. Final Average Compensation Load

The final average compensation (FAC) for members projected to receive a service retirement benefit has been increased based on the assumption that members will have elements of pay included in their FAC which are not included in the annual pay provided to the Actuary (Ventura decision pays). The FAC for Tier 1 members has been increased by 6.92% and the FAC for Tier 2 and Tier 3 members by 2.31%.

Item 3

AQR DELTA Strategy Prepared Exclusively for Merced County Employees’ Retirement Association

Private and Confidential March 20, 2017

FOR INVESTMENT PROFESSIONAL USE ONLY

AQR Capital Management, LLC Two Greenwich Plaza Greenwich, CT 06830 p: +1.203.742.3600 | w: aqr.com Disclosures

The information set forth herein has been obtained or derived from sources believed by AQR Capital Management, LLC (“AQR”) to be reliable. However, AQR does not make any representation or warranty, express or implied, as to the information’s accuracy or completeness, nor does AQR recommend that the attached information serve as the basis of any investment decision. This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such. This document is intended exclusively for the use of the person to whom it has been delivered by AQR and it is not to be reproduced or redistributed to any other person. Please refer to the Appendix for more information on general terms, risks and fees. Past performance is not a guarantee of future performance. This presentation is not research and should not be treated as research. This presentation does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR.

The views expressed reflect the current views as of the date hereof and neither the speaker nor AQR undertakes to advise you of any changes in the views expressed herein. It should not be assumed that the speaker or AQR will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein in managing client accounts. AQR and its affiliates may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this presentation. The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the speaker guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Target allocations contained herein are subject to change. There is no assurance that the target allocations will be achieved, and actual allocations may be significantly different than that shown here. This presentation should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. The information in this presentation may contain projections or other forward‐looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. The information in this presentation, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Performance of all cited indices is calculated on a total return basis with dividends reinvested. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Please note that changes in the rate of exchange of a currency may affect the value, price or income of an investment adversely. Neither AQR nor the speaker assumes any duty to, nor undertakes to update forward looking statements. No representation or warranty, express or implied, is made or given by or on behalf of AQR, the speaker or any other person as to the accuracy and completeness or fairness of the information contained in this presentation, and no responsibility or liability is accepted for any such information. By accepting this presentation in its entirety, the recipient acknowledges its understanding and acceptance of the foregoing statement.

2 AQR Presenters

Jeremy Getson, CFA Principal, Client Strategies Jeremy leads AQR’s North America institutional team within Business Development, working with and advising clients throughout the United States and Canada. Prior to AQR, Jeremy was a vice president of Allstate Financial and a consultant with Mercer Investment Consulting, advising pension plans on asset allocation and investment- manager selection. He earned an A.B. in politics from Princeton University, graduating cum laude, and an M.B.A. with high honors from the University of Chicago’s Graduate School of Business, where he was named a Siebel Scholar as one of the top 25 M.B.A. students annually. He is a CFA charterholder.

Elizabeth Yan, CFA Associate, Consultant Relations Elizabeth is an associate on the consultant relations team within AQR’s Business Development group. In this role, she supports senior members of the team whose objective is to build and deepen relationships with global institutional investment consultants. Prior to AQR, Elizabeth was a graduate associate in the investment banking debt capital markets group at HSBC. Elizabeth earned a B.S. in finance and accounting from Boston College and an M.B.A. from the University of Chicago Booth School of Business. Elizabeth is a CFA charterholder and a member of the New York Society of Security Analysts.

3 Outline

AQR Overview

AQR DELTA Strategy

Appendices

4 AQR Overview Our Firm

AQR is a global investment management firm built at the intersection of financial theory and practical application. We strive to deliver superior, long-term results for our clients by looking past market noise to identify and isolate what matters most, and by developing ideas that stand up to rigorous testing. Our focus on practical insights and analysis has made us leaders in alternative and traditional strategies since 1998.

At a Glance • AQR takes a systematic, research-driven approach to managing alternative and traditional strategies • We apply quantitative tools to process fundamental information and manage risk • Our clients include institutional investors, such as pension funds, defined contribution plans, insurance companies, endowments, foundations, family offices and sovereign wealth funds, as well as RIAs, private banks and financial advisors • The firm has 30 principals and 764 employees; nearly half of employees hold advanced degrees • AQR is based in Greenwich, Connecticut, with offices in Boston, Chicago, Hong Kong, London, Los Angeles, and Sydney • Approximately $175.2 billion in assets under management as of December 31, 2016*

* Approximate as of 12/31/2016, includes assets managed by CNH Partners, an affiliate of AQR.

6 Assets Under Management

Total Assets AlternativeAlternative Investment Investment Strategies Assets $96.0B $175.2B* $96.0B* Total Assets $175.2B*

Equity-Related Total Return Real Assets $4.6B $0.8B

Alternative: Total Return Multi-Strategy $32.3B Absolute Return Risk Parity $39.3B $26.2B Traditional: Equities $79.2B

Alternative: Absolute Return Multi-Strategy $63.7B Total Return $0.6B

Event Driven $1.1B Equity Market Neutral Managed Futures $2.4B $19.6B Global Asset Allocation $1.2B

* Approximate as of 12/31/2016, includes assets managed by CNH Partners, an affiliate of AQR.

7 AQR Who We Are Color Palette

Cliff Asness, Ph.D.* Managing and Founding Principal

Portfolio Management, Research, Business Corporate Compliance Risk Management and Trading Development Infrastructure and Legal (Total Team: 286) (Total Team: 146) (Total Team: 277) (Total Team: 55) John Liew, Ph.D.* David Kabiller, CFA* Founding Principal Founding Principal Portfolio Management and Research Risk Management Client Solutions Portfolio Solutions Finance Compliance

Michele Aghassi, Ph.D. Michael Mendelson* Lars Nielsen* Gregor Andrade, Ph.D.* Antti Ilmanen, Ph.D. John Howard* H.J. Willcox Principal Principal Principal Principal Principal Principal Principal Chief Risk Officer Chief Finance Officer and Chief Compliance Andrea Frazzini, Ph.D. Tobias Moskowitz, Ph.D. Bill Cashel Chief Operating Officer Officer Principal Principal Principal AQR Jacques Friedman* Yao Hua Ooi Jeff Dunn Accounting, Operations Principal Principal Trading Principal Strategy and Client Administration Legal Cyan Brian Hurst* Lasse Pedersen, Ph.D. Isaac Chang Jeremy Getson, CFA* Ted Pyne, Ph.D. Steve Mellas Bradley Asness Principal Principal Managing Director Principal Managing Director Principal Principal Chief Strategy Officer Chief Legal Officer Ronen Israel* Scott Richardson, Ph.D. Brian Hurst* Marco Hanig, Ph.D. Principal Principal Principal Principal Systems Development Michael Katz, Ph.D. Mark Mitchell, Ph.D. Chris Palazzolo, CFA Marketing and IT Principal Principal (CNH) Principal Auxiliary Suzanne Escousse Neal Pawar Palette Hoon Kim, Ph.D., CFA Todd Pulvino, Ph.D. Managing Director Principal Principal Principal (CNH) Chief Marketing Officer Chief Technology Officer Oktay Kurbanov Rocky Bryant Principal Principal (CNH) Human Resources Ari Levine Jen Frost Principal Managing Director Chief Human Resources Officer

Personnel as of 1/1/2017 = 764 *Member of Strategic Planning Committee (SPC) 8 AQR DELTA Strategy Management Color Palette

DELTA Investment Committee Portfolio Management & Research

Michele Aghassi, CFA, Ph.D. Ronen Israel Principal Principal

Gregor Andrade, Ph.D. Lasse Pedersen, Ph.D. Scott Richardson, Ph.D. Sarah Jiang Principal Principal Principal Managing Director

Scott Metchick Attakrit Asvanunt, Ph.D. Arthur Fischer-Zernin, CFA Jeremy Getson, CFA Managing Director Vice President Vice President Principal

Carlos Ontaneda, CFA Jonathan Peress Rafael Silveira, Ph.D. Ronen Israel Vice President Vice President Vice President Principal

Total Portfolio Management and Research Team: 21 Michael Katz, Ph.D. AQR Principal Cyan Asset Allocation Research Equity Research Arbitrage Research Yao Hua Ooi (Total Team: 73) (Total Team: 43) (Total Team: 14) Principal John Liew, Ph.D. Jacques Friedman Mark Mitchell, Ph.D. Founding Principal Principal CNH Principal Mark Mitchell, Ph.D. CNH Principal Michael Katz, Ph.D. Michele Aghassi, Ph.D., CFA Todd Pulvino, Ph.D. Principal Principal CNH Principal

Auxiliary Scott Carter Yao Hua Ooi Andrea Frazzini, Ph.D. Rocky Bryant Palette Managing Director Principal Principal CNH Principal

Lasse Pedersen, Ph.D. Hoon Kim, Ph.D., CFA Sarah Jiang Principal Principal Managing Director Risk Management (Total Team: 13) Scott Metchick Managing Director Lars Nielsen Lauralyn Pestritto Principal Managing Director

Personnel as of 1/1/2017

AQR DELTA Strategy Is Alpha Just Beta Waiting to Be Discovered?

Hedge Fund Risk Premia seeks to capture the fundamental insights of a class of hedge fund strategies — along with a meaningful portion of the expected returns those strategies earn — using a dynamic but clearly defined trading process Time

Alpha Alpha Alpha Hedge Fund Risk Premia Other Market Alpha Risk Premia Other Market Risk Premia Equity Risk Premium Equity Risk Premium Equity Risk Premium

Prior to Cap-Weighted Equity Risk Premium Other Market Risk Hedge Fund Risk Equity Indices Introduced Premia Introduced Premia Introduced

– Returns viewed as Examples: Examples: Examples: “alpha” – S&P 500 Index – BarCap Aggregate – Merger Arbitrage – MSCI World – Commodity Indices – Convertible Arbitrage – Real Estate

Source: AQR. For illustrative purposes only. BarCap Aggregate is the Barclays Capital Aggregate Bond Index. 11

Hedge Fund Risk Premia: Mergers & Converts

Merger Arbitrage Convertible Arbitrage • Merger arbitrageurs go long the target and, where • Convertible arbitrageurs buy convertible bonds, which are appropriate, short the acquirer sold at a discount due to their illiquidity, short the underlying • In doing so, managers offer insurance and provide liquidity to equity and also often seek to hedge out the specific interest those who held the target’s stock prior to deal announcement rate and credit risk of each issue • AQR/CNH built a proprietary dataset of 16,000 mergers • At maturity, convertible bonds converge to their theoretical (going back to 1962) and has been actively managing a value, providing excess returns to owners merger arbitrage strategy since 2001 • AQR built a proprietary dataset of over 4.0 million • A portfolio can be created by holding some exposure to each convertible prices (going back to 1984) and has been actively announced merger deal managing a convertible arbitrage strategy since 2003 • A portfolio can be created by holding a broad cross-section of well-hedged convertible issues

Hypothetical Net Returns to Mergers and Converts Using AQR Proprietary Datasets*

Correlations

Annualized Annualized Sharpe Max S&P 500 MSCI World HFRI Converts HFRI Mergers Net Return Volatility Ratio Drawdown Merger Arbitrage 9.8% 5.8% 1.0 -11.7% 0.4 0.4 0.3 0.7 Convertible Arbitrage 10.0% 5.2% 1.1 -7.8% 0.0 -0.1 0.6 0.2

*The above Merger Arbitrage and Convertible Arbitrage backtests use AQR/CNH proprietary datasets on merger arbitrage and convertible arbitrage and assumes constant leverage of 1.5:1 and 2:1, respectively. Annual fees for both backtests are 2.0% management fee and 0% performance fee. Annualized returns, annualized volatilities and correlations are calculated using rolling, quarterly observations from January 1990‒December 2007. HFRI Converts is the HFRI RV: Fixed Income-Convertible Arbitrage Index and HFRI Mergers is the HFRI ED: Merger Arbitrage Index. Hypothetical data has certain inherent limitations, some of which are disclosed in the Appendix hereto. Broad- 12 based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Net total return indices reinvest dividends after the deduction of withholding taxes. Investments cannot be made directly in an index. Example: Merger Arbitrage The Impetus for the Hedge Fund Risk Premia Concept

Merger Arbitrage • Merger arbitrageurs go long the target and, where appropriate, short the acquirer • In doing so, managers may offer insurance and provide liquidity to those who held the target’s stock prior to deal announcement • AQR/CNH built a proprietary dataset of 16,000 mergers (going back to 1962) and has been actively managing a merger arbitrage strategy since 2001 • A portfolio can be created by holding some exposure to each announced merger deal

Offer Price $40 Deal Spread {

$30

Announcement Time Completion

Source: AQR. Example above is for illustrative purposes only and is not representative of an actual trading scenario. Nor is the example above likely to occur as described. Please read important disclosures in the Appendix. Past performance is not a guarantee of future performance. 13 Characteristics of Hedge Fund Risk Premia

Dynamic Bottom-up construction of dynamic trading strategies

Economically Intuitive Economic explanation of why the premium is likely to persist

Liquid Can be captured by trading liquid instruments

Transparent “Lifts the veil” on the drivers of hedge fund returns

Alternative Not correlated with traditional asset classes

Source: AQR. Past performance is not a guarantee of future performance. Please read important disclosures in the Appendix.

14 Objectives of the AQR DELTA Strategy

The AQR DELTA Strategy seeks to deliver efficient exposure to a well-diversified portfolio of Hedge Fund Risk Premia. We believe we can:

Achieve a net Sharpe ratio of 0.8 over a complete market cycle

Realize low correlation to traditional asset class returns

Maintain attractive liquidity and leverage characteristics

In addition, we believe the strategy offers meaningful transparency and investor-friendly terms

Objectives may be subject to change and there is no guarantee, express or implied, that long-term return and/or volatility targets will be achieved. Please read important disclosures in the Appendix.

15 AQR DELTA Is Correlated to Hedge Fund Strategies …Not Equities

Hypothetical DELTA Strategy*

Weak Correlation Strong Correlation 0.1 DELTA to S&P 500 0.5 DELTA to CS HF Index 0.1 DELTA to MSCI World 0.5 DELTA to HFRI FOFs

Equity Hedge Fund Indices Indices Strong Correlation 0.5 CS HF Index to MSCI World; 0.5 to S&P 500 0.6 HFRI FOFs to MSCI World; 0.6 to S&P 500

Source: AQR, Bloomberg. *Hypothetical DELTA Strategy correlations are based on hypothetical net returns and targets 12% annualized volatility. Annual fees used to compute the hypothetical returns are using a 2% management fee. Correlations are based on hypothetical monthly data from January 1994 through September 2008. Importantly, this backtest does not include tactical strategy allocation. Hypothetical data has certain inherent limitations, some of which are disclosed in the Appendix hereto. HFRI FOF is HFRI Fund of Funds 16 Composite Index and is a non-investable index and returns are net of underlying manager fees. Strategies Diversified Across Nine Broad Strategy Classes

Event Arbitrage Strategies Driven • Convertible Arbitrage Fixed Income Convertible • Event Driven Arbitrage • Fixed Income Relative Value Relative Value

Equity Managed Market Futures Neutral Macro Strategies Equity Strategies • Global Macro • Dedicated Short Bias • Managed Futures • Equity Market Neutral Emerging Markets Long/Short Equity • • Global Dedicated (Macro) • Emerging Markets Macro Short Bias • Fixed Income Relative (Equity) Value

Emerging Long/Short Markets Equity

Arbitrage Strategies Equity Oriented Strategies Macro Strategies

Seek to capture relative mispricing between Seek to take advantage of market Seek to profit from dislocations in global two related assets. inefficiencies that cause specific stocks to be equity, bond, currency and commodity under- or overpriced. markets, including those driven by investors’ behavioral biases.

Strategies are subject to change at any time without notice. Please read important disclosures in the Appendix.

17 Long-Term Strategic Risk Allocation

The AQR DELTA Strategy Strategic Risk Allocation The AQR DELTA Strategy’s portfolio construction leans toward equal risk Fixed Event weighting but makes adjustments to Income Driven Relative reflect the leverage, liquidity and 13% Value expected efficacy of each substrategy 9% Global Macro We believe this provides a beneficial, Convertible • 14% Arbitrage contrarian approach that helps avoid 10% overcrowded strategies

This should also decrease exposure to Dedicated • Managed Short Bias strategies more prone to left-tail Futures 11% 14% events

Equity Market Emerging Neutral Markets 11% 8% Long/Short Equity 10%

Source: AQR. Risk allocation is complex and subject to change. There is no assurance that the target risk allocations will be achieved, and actual allocations may be significantly different than that shown here. The illustrative allocation above does not represent the actual allocation of any AQR client account, fund or strategy and does not include all substrategies that are or may be employed in the Strategy. Each client account is individually managed; actual risk allocations will vary for each client and there is no guarantee that a particular client’s account will have the same characteristics as described above. Diversification does not eliminate the risk of experiencing investment losses. 18 The information presented herein is supplemental to the GIPS® compliant presentation for the DELTA Composite included in the Appendix.

Tactical Risk Allocation

Hard to differentiate the long-term expected performance of strategies

Strategies can be conditionally attractive/unattractive as the opportunity set changes

Model Driven Qualitative Information • Estimating expected returns • Market conditions • Assessing conviction of views • Industry trends and flows • Ability to diversify bets • External factors influencing returns

Tactical Tilts

Modest tilts relative to strategic allocation

AQR’s DELTA Investment Committee provides experienced oversight of our tactical risk weighting

Source: AQR. Objectives may be subject to change. Please read important disclosures in the Appendix.

19 Performance AQR DELTA Composite Performance — Annual Returns

AQR DELTA Composite (Net) AQR DELTA Composite (Net) Period 2% Mgmt. Fee 1% Mgmt. 10% Perf. Fee 2008 (starting 10/1) 6.6% 6.2% 2009 18.5% 17.7% 2010 12.6% 12.3% 2011 -2.8% -1.9% 2012 3.9% 4.6% 2013 5.7% 6.1% 2014 8.4% 8.5% 2015 9.7% 9.7% 2016 0.7% 1.6%

Summary (since October 1, 2008) 1 Year 0.7% 1.6% 3 Year (Ann.) 6.2% 6.5% 5 Year (Ann.) 5.6% 6.1% 7 Year (Ann.) 5.3% 5.8%

Since Inception (Annl.) 7.5% 7.7% Realized Volatility 5.8% 5.4% Sharpe Ratio 1.3 1.4 Beta to MSCI World 0.1 0.1

Source: AQR. Performance from October 1, 2008, through December 31, 2016, of the AQR DELTA Composite in USD. Performance for the month ending December 31, 2016, is estimated and subject to change. Net performance is net of a 2.0% annual management fee or net of a 1.0% management fee with a 10.0% performance fee. Beta is calculated against MSCI World Index. Please note, as we have varying fee arrangements, the net performance numbers above are not representative of all investors or achievable by all investors. This performance 20 data is supplemental to the GIPS® compliant presentation for the DELTA Composite included in the Appendix. Past performance is not a guarantee of future performance. Please read important disclosures in the Appendix.

Strong Relative Performance Since Inception

The AQR DELTA Composite returned 0.7% net of fees in 2016 and +7.5% annualized since inception (realizing 5.8% vol.)*

AQR DELTA Composite, HFRI FOFs, HFRI Fund Weighted and MSCI World October 2008‒December 2016 $210

AQR DELTA $180 +82%

MSCI World +76% $150 HFRI Fund Weighted +44%

$120 HFRI FoF +19%

$90

$60 2008 2009 2010 2011 2012 2013 2014 2015 2016

MSCI World Index AQR DELTA Composite - Full Vol (Net) HFRI FOFs Composite Index HFRI Fund Weighted Composite Index

Correlation to 0.19 0.81 0.91 MSCI World:

Source: AQR, Bloomberg. *The AQR DELTA Composite net performance from October 2008 through December 2016 and is calculated using a 2% management fee in USD. Performance for the month ending December 31, 2016, is estimated and subject to change. Please note, as we have varying fee arrangements, the net performance numbers above are not representative of all investors or achievable by all investors. This information is supplemental to the GIPS® compliant presentation for the DELTA Composite included in the Appendix. Past performance is not a guarantee of future performance. Please read important disclosures in the Appendix. 21 Conclusion: Key Advantages of AQR DELTA Strategy

The DELTA Strategy Seeks to Be:

• High risk-adjusted expected return A True Alternative • Relatively low volatility Investment • Low correlation to traditional assets

• Greater transparency An Alternative to • Better diversified, more-efficient capital allocations and flexibility to be Alternatives opportunistic • Position netting, lower cost to investors

• More than a decade of experience managing complex hedge funds Leveraging the • Practical application of research to better capture market anomalies Best of AQR • Low-cost trading capabilities, efficient portfolio construction and thoughtful risk management

Objectives may be subject to change. Please read important disclosures in the Appendix.

22 Appendices Arbitrage Strategies

• Seeks to capture spread between current value of merger targets and value when deal is completed • Diversifies exposure to single names, sectors and deal types (e.g., deals with greater systematic risks); hedges by shorting Event shares of acquirer in mergers with a stock payment component and, when appropriate, using a broad market hedge Driven • Generally holds 50 to 150 mergers, depending on market conditions • In addition to mergers, includes other event driven strategies, such as split-offs, spin-offs and other capital-structure transactions, with a partial hedge of the associated market exposure

• Seeks to capture discount between current price of convertible bonds and their fundamental value as a bond plus an equity Convertible call option Arbitrage • Hedges direct stock exposure, as well as residual interest rate and credit risk across the portfolio • Generally holds 100 to 300 bonds that are broadly diversified across more-liquid names trading in-the-money, at-the- money or near at-the-money

• Seeks to exploit price differentials in a range of global fixed income securities, with a focus on strategies that can be implemented with relatively low leverage and generally liquid securities • Identifies opportunities based on valuation, economic conditions and expectations, performance trends and current income Fixed (carry) Income • Includes long/short relative value positions in developed market bonds, interest rates, currencies and corporate credit, as well as a tactical credit market timing strategy • Generally holds 100 to 200 positions

Strategies are subject to change at any time without notice. Please read important disclosures in the Appendix.

24 Equity Strategies

• Seeks to take advantage of short- and medium-term relative value opportunities by making peer-to-peer comparisons within industries and using both shorter and longer time horizons Equity Market • Identifies opportunities based on differences in fundamentals, including valuation, earnings quality, financial stability, and Neutral performance trends • Targets market neutrality at all times by balancing long and short positions across a global developed stock portfolio • Generally holds 1,000 to 2,000 securities

• Seeks to take advantage of a range of relative value and timing opportunities in global equity markets • Combines individual stock selection based on GARP-like characteristics (growth at a reasonable price), industry rotation Long/Short based on valuation and performance trends, and an equity market timing strategy Equity • Takes long and short positions across a global developed stock portfolio; may take tactical views on exposure to specific industries and overall market • Generally holds 1,000 to 2,000 securities

• Seeks to capture market inefficiencies due in part to a general long-bias orientation and structural limitations in shorting • Makes shorting decisions based on sentiment indicators (e.g., using shorting data and options pricing) as well as risk Dedicated indicators (e.g., high risk/beta, poor earnings quality and negative management signaling), balanced by a long portfolio that Short Bias hedges aggregate characteristics of the short portfolio • Global developed market stock portfolio with long and short positions • Generally 1,000 to 2,000 securities are held to implement this strategy

Emerging • Trades emerging equities using equity strategies described above Targets market neutrality by balancing long and short positions Markets • • Generally holds 300 to 400 securities

Strategies are subject to change at any time without notice. Please read important disclosures in the Appendix.

25 Macro Strategies

• Seeks to exploit price differentials in a range of global asset classes and markets Identifies opportunities based on valuations, market fundamentals, performance trends and current income (carry) Global • • Includes long/short relative value positions in developed equity markets, developed currencies and commodity markets, as Macro well as tactical allocation strategies in global stock and bond markets • Generally holds 40 to 50 securities

• Pursues trend-following strategies in equities, interest rates, currencies and commodities • Seeks to take advantage of short-, medium- and long-term trends, while limiting exposure to trends that may have become Managed overextended Futures • Takes long and short positions, but should average a beta of zero over time • Generally trades more than 120 different assets

• Trades emerging equity markets, government bonds and currencies using similar macro strategies to those described Emerging above Markets • Includes both tactical allocation and relative value strategies applied to emerging markets • Generally holds 30 to 40 securities

Strategies are subject to change at any time without notice. Please read important disclosures in the Appendix.

26 We Believe Many Investors Hold Suboptimal Portfolios

• Many investors in aggregate (and many indices) hold a cap-weighted hedge fund portfolio • Cap weighting may lead investors to allocate a disproportionate amount toward “crowded strategies” • The chart below compares market cap-weighted to equal-weighted indices of nine hedge fund substrategies • As expected, the equal-risk portfolio outperforms — we believe many investors hold suboptimal portfolio

Hypothetical Performance of Multi-Strategy Hedge Fund Beta Portfolios* (Using three different portfolio construction methodologies) $550

$450

$350

$250

$150

$50 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Equal Risk Weighted Equal Capital Weighted Market Cap Weighted

* Source: AQR. These hypothetical portfolios are based on nine hedge fund beta strategies included in the AQR DELTA Strategy: Convertible Arbitrage, Dedicated Short Bias, Emerging Markets, Equity Market Neutral, Event Driven, Fixed Income Relative Value, Global Macro, Long/Short Equity and Managed Futures. All three hypothetical portfolios are based on 2% net of fee returns and scaled to the same ex post 6.5% annual volatility. Hypothetical data has certain inherent limitations, some of which are disclosed in the Appendix. This analysis is for illustrative purposes only and is not based on an actual portfolio AQR manages. Past performance is not a guarantee of future performance. 27 Transparent Investment Process

• Economic justification for the portfolio’s underlying strategies Strategy Level • Security selection criteria employed in each strategy • Ability to provide investors with detailed holdings-level data

• Portfolio construction and rebalancing methodology Portfolio Level • Tactical weights on underlying strategies and rationale for our views • Details on methodology and inputs used in our risk management process

• All relevant details surrounding the portfolio’s service providers Operational Level • Preference for investors to have a full understanding of our operational processes, including trade settlement and valuation policies

AQR’s investment process described above is subject to change at any time. Please read important disclosures in the Appendix.

28 Performance Attribution — Since Inception

The AQR DELTA Composite has benefited from its passive low equity and credit market exposure as well as its balanced strategic risk allocations and tactical over/underweights across strategies Annualized Since Inception AQR DELTA Composite Substrategy Attribution October 2008–December 2016

2.5% 2.4%

2.0% 1.8%

1.5% 1.5% 1.2%

1.0% 0.8% 0.8% 0.6%

0.5% 0.4% 0.2%

0.0% Event Convertible Equity Dedicated Managed Long/Short Global Fixed Emerging Driven Arbitrage Market Short Bias Futures Equity Macro Income Markets Neutral Relative Value

AQR DELTA Composite substrategy estimated gross performance in USD. Gross performance does not reflect the deduction of investment advisory fees. This information is supplemental to the GIPS® compliant presentation for the DELTA Composite included in the Appendix. Past performance is not a guarantee of future performance. Please read important disclosures in the Appendix. 29 Performance Review — Since Inception

Since Inception Performance Comparisons Explanations for the AQR DELTA October 2008–December 2016 Composite’s Outperformance Since Inception (10/1/2008) 100% 81.8% 76.1% 80% • Balanced strategy allocations 60% 42.2% 38.5% 40% 18.8% • No highly leveraged trades 20% -67.9% 0% • No passive equity market exposure -20% -40% • No passive credit exposure -60% -80% • Contrarian tactical tilts that paid off AQR DELTA MSCI World Barclays CS Hedge HFRI FOFs GSCI Composite - Index Aggregate Fund Index Composite Commodity Smaller distressed exposures Full Vol (Net) Bond Index Index Index •

Correlations to MSCI World

Monthly 0.19 1.00 0.08 0.81 0.81 0.65

Daily 0.01

Source: AQR. Performance from October 1, 2008 through December 31, 2016, of the AQR DELTA Composite in USD. Performance for the month ending December 31, 2016, is estimated and subject to change. The AQR DELTA Composite net returns are calculated using a 2% management fee. Please read important disclosures in the Appendix. This information is supplemental to the GIPS® compliant presentation for the DELTA Composite included in the Appendix. Past performance is not a guarantee of future performance. Net total return indices 30 reinvest dividends after the deduction of withholding taxes. Investments cannot be made directly in an index.

Summary of DELTA XN Fund Terms

Subscriptions First business day, and first business day after the 15th of each month

Redemptions 15th calendar day and last business day of each month — full or partial redemptions allowed & Withdrawals • 75 calendar days’ notice → No gate

Investment Minimum $5 million

Fee Options 0.90% fixed and 9% performance OR 1.8% fixed* at 12% Volatility

Transparency Robust monthly reporting of risks and exposures

Fund Administrator: HedgeServ Auditor: Pricewaterhouse Coopers Service Providers Prime Brokers: JPMorgan, Citi, Deutsche Bank, Merrill Lynch FCMs: Barclays, Goldman, JPMorgan

Source: AQR. General Fund terms and counterparties are subject to change. Please see the Fund’s PPM for a complete description of the Fund’s term, risks and fees. *Performance fees are charged only on net performance above a cash hurdle.

31 Principal Biographies

Clifford S. Asness, Ph.D., Managing and Founding Principal Cliff is a Founder, Managing Principal and Chief Investment Officer at AQR Capital Management. He is an active researcher and has authored articles on a variety of financial topics for many publications, including The Journal of Portfolio Management, Financial Analysts Journal and The Journal of Finance. He has received five Bernstein Fabozzi/Jacobs Levy Awards from The Journal of Portfolio Management, in 2002, 2004, 2005, 2014 and 2015. Financial Analysts Journal has twice awarded him the Graham and Dodd Award for the year’s best paper, as well as a Graham and Dodd Excellence Award, the award for the best perspectives piece, and the Graham and Dodd Readers’ Choice Award. In 2006, CFA Institute presented Cliff with the James R. Vertin Award, which is periodically given to individuals who have produced a body of research notable for its relevance and enduring value to investment professionals. Prior to cofounding AQR Capital Management, he was a managing director and director of quantitative research for the Asset Management Division of Goldman, Sachs & Co. He is on the editorial board of The Journal of Portfolio Management, the governing board of the Courant Institute of Mathematical Finance at NYU, the board of directors of the Q-Group and the board of the International Rescue Committee. Cliff received a B.S. in economics from the Wharton School and a B.S. in engineering from the Moore School of Electrical Engineering at the University of Pennsylvania, graduating summa cum laude in both. He received an M.B.A. with high honors and a Ph.D. in finance from the University of Chicago, where he was Eugene Fama’s student and teaching assistant for two years (so he still feels guilty when trying to beat the market).

David G. Kabiller, CFA, Founding Principal David Kabiller is co-founder and the Head of Business Development at AQR, overseeing client relationships, business development and strategic initiatives. In this role, he has helped foster AQR’s tradition of innovation by initiating AQR’s international expansion into Europe and Asia and spearheading its introduction of mutual funds. In addition to these corporate milestones, David is dedicated to investor education and fostering young research talent. To that end, he was instrumental in creating the “AQR University” symposia series for financial advisors and the Master Class program for institutional investors. For the academic community, David helped create the AQR Insight Award for outstanding innovation in applied academic research and was a founding member of the LBS AQR Asset Management Institute. David has co-authored papers on topics including derivatives, enhanced indexation, securities lending, insurance-linked securities, hedge funds and the secret of Warren Buffett’s investing acumen. He is a member of Northwestern University’s Board of Trustees, chairman of the Executive Council of the university’s International Institute for Nanotechnology (IIN), and has been a guest lecturer at the Kellogg Graduate School of Management and Harvard Business School. He is also a member of the Advisory Council of the AQR Asset Management Institute at London Business School and has served on the Board of Trustees for the Terra Foundation for American Art. Prior to AQR, David was a vice president at Goldman, Sachs & Co., where he established and maintained relationships with the chief investment officers of many of the largest pension and endowment funds in North America. He earned a BA in economics and an MBA from Northwestern, where he received an athletic scholarship to play tennis and was named to the Big Ten’s Academic All-Conference team. At Northwestern, David founded the Kabiller Prize and the Kabiller Young Investigator Award for researchers in nanoscience and nanomedicine, and established NU for Life, a program dedicated to the professional development of Northwestern student-athletes. He is a CFA charterholder.

John M. Liew, Ph.D., Founding Principal John is a Founder and the head of the Global Asset Allocation team at AQR, where he oversees the research, portfolio management and trading associated with that strategy. Prior to AQR, he worked at Goldman, Sachs & Co. as a portfolio manager in the Asset Management Division where he developed and managed quantitative trading strategies. He began his career at Trout Trading, developing quantitative market-neutral stock-selection strategies. John has published articles in The Journal of Portfolio Management and Financial Analysts Journal, and has received the Bernstein Fabozzi/Jacobs Levy award and the Graham and Dodd award for his articles. John is a member of the University of Chicago’s Board of Trustees and sits on the university’s investment committee. He earned a B.A. in economics from the University of Chicago, where he was elected a member of Phi Beta Kappa, and went on to earn an M.B.A. and a Ph.D. in finance, also from Chicago.

32 Principal Biographies

Michele L. Aghassi, Ph.D., CFA, Principal Michele is co-head of research in AQR’s Global Stock Selection group. She played a key role in launching the firm’s emerging equities strategy in 2008 and is responsible for oversight of emerging-market stock selection. Michele has contributed to the advancement of our investment process in a variety of areas, and developed the proprietary robust optimization technology that AQR uses to build portfolios. In addition, Michele serves on the Editorial Advisory Board of the Journal of Portfolio Management. Michele graduated magna cum laude from Brown University with a B.Sc. in applied mathematics. She also earned a Ph.D. in operations research from the Massachusetts Institute of Technology, where she was a National Science Foundation Graduate Research Fellow and an MIT Presidential Graduate Fellow. Between Brown and MIT, Michele worked as a quantitative analyst in the proprietary equities department of D.E. Shaw & Co.

Gregor M. Andrade, Ph.D., Principal Gregor runs AQR’s international business development team, overseeing client relations in Europe, the Middle East, Asia, Australia and Latin America. Prior to joining AQR in 2003, Gregor was an assistant professor of finance at Harvard Business School after having worked as a mergers and acquisitions analyst at Wasserstein Perella. He is on the Advisory Council of the AQR Asset Management Institute at London Business School, has been published in academic journals and won an Amundi Smith Breeden Award for an article in The Journal of Finance. Gregor earned a B.S. in economics from the Massachusetts Institute of Technology and a Ph.D. in finance from the University of Chicago’s Graduate School of Business.

Bradley D. Asness, J.D., Principal Brad is AQR’s Chief Legal Officer, overseeing the firm’s legal department as it deals with matters ranging from fund creation to corporate finance to new rules and regulations. Prior to AQR, which he joined at its inception in 1998, Brad worked at Donaldson, Lufkin & Jenrette on public and private debt and equity offerings, asset sales and merger and acquisition transactions for real estate investment trusts and home-building companies. Brad earned a B.A. from Brandeis University, a J.D. from New York Law School, where he was a member of the law review, and an M.B.A. with distinction from New York University’s Stern School of Business. He is a member of the New York State Bar.

Jeffrey Dunn, Principal Jeff heads AQR’s Australasian business, focused on building the firm’s presence in the region. Prior to AQR, Jeff was the research manager for the international equity division at QIC, one of Australia’s largest institutional investment managers, where he was responsible for researching external asset management firms and developing portfolio and risk management infrastructure. While at QIC, Jeff also worked in a secondment role with the quantitative strategies group at Goldman Sachs Asset Management in New York. Jeff earned a B.Sc. (mathematics) and a B.Bus. (banking and finance) from the Queensland University of Technology.

Andrea Frazzini, Ph.D., Principal Andrea is a Principal on AQR’s Global Stock Selection team, focusing on research and portfolio management of the Firm’s Long/Short and Long-Only equity strategies. He is also an Adjunct Professor of Finance at New York University’s Stern School of Business. He has published in top academic journals and won several awards for his research, including the Smith Breeden Award, the Fama-DFA award, the BGI best paper award, several Bernstein Fabozzi/Jacobs Levy Awards, and the PanAgora Crowell Memorial Prize. Prior to AQR, Andrea was an associate professor of finance at the University of Chicago’s Graduate School of Business and a Research Associate at the National Bureau of Economic Research. He also served as a consultant for DKR Capital Partners and J.P. Morgan Securities and on the board of directors of the Center for Research in Security Prices at the University of Chicago. He earned a B.S. in economics from the University of Roma Tre, an M.S. in economics from the London School of Economics and a Ph.D. in economics from Yale University.

33 Principal Biographies

Jacques A. Friedman, Principal Jacques is the head of AQR’s Global Stock Selection team and is involved in all aspects of research, portfolio management and strategy development for the firm’s equity products and strategies. Prior to AQR, he developed quantitative stock-selection strategies for the Asset Management Division of Goldman, Sachs & Co. Jacques earned a B.S. in applied mathematics from Brown University and an M.S. in applied mathematics from the University of Washington. Before joining Goldman, he was pursuing a Ph.D. in applied mathematics at Washington, where his research interests ranged from mathematical physics to quantitative methods for sports handicapping.

Jeremy M. Getson, CFA, Principal Jeremy runs AQR’s North America institutional team, working with and advising clients in the United States and Canada. Prior to AQR, he was a vice president of Allstate Financial and a consultant with Mercer Investment Consulting, advising pension plans on asset allocation and investment-manager selection. Jeremy earned an A.B. in politics from Princeton University, graduating cum laude, and an M.B.A. with high honors from the University of Chicago’s Graduate School of Business, where he was named a Siebel Scholar as one of the top 25 M.B.A. students annually. He is a CFA charterholder.

Marco Hanig, Ph.D., Principal Marco is President of AQR Funds, leading the firm’s entry into the mutual funds business. In this role, he is responsible for oversight of AQR’s mutual funds and executing the firm’s distribution strategy. Prior to AQR, Marco was a principal with William Blair & Company, where he served as President of William Blair Funds and Chief Operating Officer of the Investment Management Department. Before that, he worked at First Chicago Corporation as managing director for mutual funds. He began his career as a management consultant with Bain & Company. Marco earned a B.A. in mathematics from the University of Chicago, graduating cum laude, and a Ph.D. in economics from the Massachusetts Institute of Technology.

John B. Howard, CPA, Principal John is AQR’s Chief Operating Officer and Chief Financial Officer. In those roles, he oversees much of the firm’s infrastructure functions. Earlier in his career, John was Chief Financial Officer of the global asset management firm AllianceBernstein and before that he held various senior financial positions at Knight Capital Group, including group controller and chief financial officer of Knight Equity Markets International Ltd. based in London; he ultimately was CFO of the entire firm. John began his career at Price Waterhouse, rising to become a senior manager in the securities industry practice. He earned a B.S. in accounting from Lehigh University and is a Certified Public Accountant.

Brian K. Hurst, Principal Brian is a portfolio manager for two of AQR’s macro strategies — managed futures and risk parity — and is Co-head of Trading. He has more than 20 years of experience managing money for institutional investors in both traditional and alternative investment strategies, and has been at AQR since its founding. He was named Alternatives Fund Manager of the Year by Morningstar in 2013 for his work on managed futures. He has written a number of papers on Risk Parity and Managed Futures, including “Demystifying Managed Futures” in the Journal of Investment Management, and spoken at a host of industry conferences. Before AQR, he was an original member of the quantitative research group in the Asset Management Division of Goldman, Sachs & Co. He began his career as a sell-side investment banking analyst at Donaldson, Lufkin & Jenrette. Brian earned a B.S. in economics from the Wharton School at the University of Pennsylvania.

34 Principal Biographies

Antti Ilmanen, Ph.D., Principal Antti manages AQR’s Portfolio Solutions Group, which advises institutional investors and sovereign wealth funds, and develops the firm’s broad investment ideas. Before AQR, Antti spent seven years as a senior portfolio manager at Brevan Howard, a macro hedge fund, and a decade in a variety of roles at Salomon Brothers/Citigroup. He began his career as a central bank portfolio manager in Finland. Antti earned M.Sc. degrees in economics and law from the University of Helsinki and a Ph.D. in finance from the University of Chicago. Over the years, he has advised many institutional investors, including Norway’s Government Pension Fund Global and the Government of Singapore Investment Corporation. Antti has published extensively in finance and investment journals and has received a Graham and Dodd award and Bernstein Fabozzi/Jacobs Levy awards for his articles. His book Expected Returns (Wiley, 2011) is a broad synthesis of the central issues in investing. Antti recently scored a rare double in winning the best-paper and runner- up award for best articles published in 2012 in The Journal of Portfolio Management (co-authored articles “The Death of Diversification Has Been Greatly Exaggerated” and “The Norway Model”).

Ronen Israel, Principal Ronen’s primary focus is on portfolio management and research. He was instrumental in helping to build AQR’s Global Stock Selection group and its initial algorithmic trading capabilities, and now runs the Global Alternative Premia group, which employs various investing styles across asset classes. He has received an Outstanding Article award as part of the 17th Annual Bernstein Fabozzi/Jacobs Levy Awards from The Journal of Portfolio Management in 2015 and the Special Distinction Award as part of the Harry M. Markowitz Prize for the best paper published in the Journal of Investment Management in 2015. He is on the executive board of the University of Pennsylvania’s Jerome Fisher Program in Management and Technology, is an adjunct professor of finance at New York University, has been a guest speaker at Harvard, Columbia, the University of Pennsylvania and the University of Chicago, and is a frequent conference speaker. Prior to AQR, he was a senior analyst at Quantitative Financial Strategies Inc. Ronen earned a B.S. in economics from the Wharton School at the University of Pennsylvania, a B.A.S. in biomedical science from the University of Pennsylvania’s School of Engineering and Applied Science, and an M.A. in mathematics, specializing in mathematical finance, from Columbia.

Michael Katz, Ph.D., Principal Michael is a Principal on AQR’s Global Asset Allocation team. In this role, he oversees macro, fixed income and inflation research. He is also part of the portfolio management teams for multi-strategy hedge funds, macro and long-only equity products. Prior to AQR, Michael was a teaching fellow and research assistant at Harvard University, a teaching and research assistant at Tel Aviv University and a consultant for Trigger Ltd. (now Trigger-Foresight Ltd.). He also served as an intelligence officer in the Israeli Defense Forces, achieving the rank of Major. His research has been published in the Financial Analysts Journal and the Review of Financial Studies. Michael earned a B.A. in economics and Middle East history, with honors, from Tel Aviv University, and a Ph.D. and an A.M. in economics from Harvard University.

Hoon Kim, Ph.D., CFA, Principal Hoon is the head of equity portfolio management in AQR’s Global Stock Selection group, responsible for the day-to-day portfolio management decisions for all long-short and long- only equity strategies. He has contributed to advancements in various areas of investment strategy and process, including alpha signal research, portfolio construction, performance attribution and portfolio analytics. He also played a key role in building AQR’s defensive equity strategies. Prior to AQR, he was the head of quantitative equity research at Mellon Capital Management in San Francisco. Hoon earned a B.A. in business administration from Yonsei University in South Korea, and an M.B.A. and a Ph.D. in business/accounting from Carnegie Mellon University. He is a CPA (in Korea) and a CFA charterholder.

35 Principal Biographies

Oktay Kurbanov, Principal Oktay is a key member of AQR’s Global Asset Allocation group, where he runs the portfolio management team that applies the firm’s strategies to each portfolio. He also oversees development of research and optimization software and works with other departments to streamline account management. Prior to AQR at its inception, Oktay was a quantitative analyst in the Asset Management Division of Goldman, Sachs & Co. He earned a B.S. in physics and mathematics from the University of Michigan and an M.B.A. with concentration in finance and statistics from New York University’s Stern School of Business.

Stephen J. Mellas, Principal Steve oversees both firm-wide operations and client administration at AQR. Prior to the firm, Steve was a managing director at Goldman Sachs & Co., where he was responsible for the Investment Management Division’s asset management operations worldwide. Before that, he managed fixed-income trading operations at Morgan Stanley. Steve was a founding member of the Securities Industry and Financial Markets Association’s Asset Managers Forum and currently teaches management-communications courses at New York University’s Stern School of Business and Stanford University’s Graduate School of Business. Steve earned a B.A. in economics from Villanova University and an M.B.A. from Pace University.

Michael A. Mendelson, Principal Michael is portfolio manager of AQR’s risk parity strategies and a member of both the firm’s strategic planning and risk committees. Prior to AQR, Michael was a managing director at Goldman Sachs & Co., where he founded the quantitative trading group. He has been a member of the Managed Funds Association’s board of directors and chairman of its Trading and Markets Committee and is currently co-Chair of its Government Affairs Committee. Michael earned an S.B. in mathematics, an S.B. in management, an S.B. in chemical engineering and an S.M. in chemical engineering, all from the Massachusetts Institute of Technology, and an M.B.A. from the University of California at Los Angeles.

Tobias J. Moskowitz, Ph.D., Principal and Dean Takahashi Professor of Finance, Yale University Toby contributes to research on asset pricing and investment issues related to domestic and international strategies for AQR’s Global Alternative Premia team. He currently holds the Dean Takahashi Chaired Professorship in Finance at Yale University, is a research associate at the National Bureau of Economic Research, and was formerly the Fama Family Professor of Finance at the University of Chicago Booth School of Business from 1998 to 2016. He has won numerous awards for his academic research, including the 2015 Bernstein Fabozzi/Jacobs Levy Award for the best article in The Journal of Portfolio Management. In 2007, he was awarded the Fischer Black Prize by the American Finance Association, which recognizes the best financial economist under the age of 40, and the Kauffman Prize Medal for Distinguished Research in Entrepreneurship in 2012 by the Kauffman Foundation, which recognizes the largest contribution to entrepreneurial research under the age of 40. His work has been cited in numerous print media, television appearances, and in a 2005 speech by former Federal Reserve Chairman Alan Greenspan. Toby earned a B.S. in industrial management/industrial engineering with honors and an M.S. in finance from Purdue University, as well as a Ph.D. in finance from the University of California at Los Angeles.

Lars N. Nielsen, Principal Lars is the Chief Risk Officer of AQR. Previously, Lars oversaw research in AQR’s Global Stock Selection and Global Asset Allocation teams, and was part of the portfolio management teams for a number of AQR’s multistrategy hedge funds and long-only equity portfolios. His research has been published in the Review of Financial Studies, the Financial Analysts Journal, the Journal of Portfolio Management and the Journal of Investing. Prior to AQR, he was a quantitative equity analyst at Danske Invest. Lars earned a B.Sc. and an M.Sc. in economics from the University of Copenhagen.

36 Principal Biographies

Yao Hua Ooi, Principal Yao Hua is a Principal on AQR’s Global Asset Allocation team, focusing on research and portfolio management of macro-related strategies that include commodities, risk parity and managed futures. His research has been published in the Journal of Financial Economics and the Journal of Investment Management. He was named the 2013 Alternatives Fund Manager of the Year by Morningstar for his work on managed futures, and shared the 2013 Whitebox Prize for his work on time series momentum. Yao Hua is an alumnus of the Jerome Fisher Program in Management and Technology at the University of Pennsylvania, where he earned a B.S. in economics and a B.S. in engineering, graduating summa cum laude in both.

Christopher Palazzolo, CFA, Principal Christopher heads AQR’s business development and client service in Europe. Prior to AQR, he worked as a Business Development Manager and Consultant for the Palladium Group and as an analyst at Goldman Sachs in the Investment Management Division’s Product Management group. Christopher earned a B.A. in political science with a concentration in economics from Amherst College, an M.B.A. from Harvard Business School and an M.P.A. from the Harvard University Kennedy School of Government. He is co-author of several published articles, including “Risk Parity: A Supplement to Traditional Portfolios, Not Their Replacement,” “Inflation in 2010 and Beyond (Parts I and II),” “Eurozone Inflation Update: Will ECB Actions Match its Rhetoric?,” “QE2: Not Just Another QE1,” “The Convertible Bond Dislocation of 2008” and “The Limits of Convertible Bond Arbitrage.” He is a CFA charterholder.

Neal Pawar, Principal Neal is AQR’s Chief Technology Officer. Prior to AQR, he was a managing director and Chief Information Officer of UBS’s global wealth management business in Switzerland, and a partner and co-Chief Information Officer at D.E. Shaw & Co. He began his career at Swiss Bank / O'Connor in Chicago. Neal earned a B.Sc. in computer science from Brown University.

Lasse H. Pedersen, Ph.D., Principal Lasse is a Principal on AQR’s Global Asset Allocation team, leading research on proprietary quantitative forecasting models to identify opportunities in equities, fixed income, currencies and commodities. He is also a finance professor at Copenhagen Business School and New York University’s Stern School of Business. He has served on the board of the American Finance Association, the Economic Advisory Boards of NASDAQ OMX and FTSE, and the Federal Reserve Bank of New York’s Monetary Policy Panel. Lasse has been awarded the Bernácer Prize for the best European economist under 40 and an Elite Research Prize, the Danish government’s most prestigious scientific honor. His research has been published in leading journals and cited by central bank governors. Lasse has served on the editorial boards of several journals, including The Journal of Finance, and as a research associate at the National Bureau of Economic Research and the Centre for Economic Policy Research. He earned a B.S. and an M.S. in mathematics-economics from the University of Copenhagen and a Ph.D. in finance from Stanford University.

37 Principal Biographies

CNH Partners CNH Partners is an affiliate of AQR

Mark L. Mitchell, Ph.D., Co-Founder and Principal, CNH Partners Mark is a co-founder and principal at CNH Partners, the arbitrage affiliate of AQR that trades merger arbitrage, convertible arbitrage and other strategies related to corporate events. Prior to CNH, he was a finance professor at Harvard University and the University of Chicago. In the late 1980s, he worked in the Office of the Chief Economist at the Securities and Exchange Commission, where he wrote several research papers on mergers and acquisitions. Mark publishes frequently and has won four paper-of-the-year awards from research journals: an Amundi Smith Breeden Award, a Merton Miller Prize, a Graham and Dodd Scroll and a Roger F. Murray Prize. Mark also received five teaching awards at the University of Chicago. He joined the board of directors at TD-Ameritrade in 1996 and currently chairs its risk committee. Mark earned a B.B.A. in economics from the University of Louisiana at Monroe, and an M.A. in economics and a Ph.D. in applied economics from Clemson University.

Todd C. Pulvino, Ph.D., Co-Founder and Principal, CNH Partners Todd is a co-founder and principal at CNH Partners, the arbitrage affiliate of AQR that trades merger arbitrage, convertible arbitrage and other strategies related to corporate events. Prior to CNH, Todd was a tenured associate professor of finance at Northwestern University’s Kellogg School of Management, where his research focused on the risks and returns in event arbitrage. Earlier, he was a consultant at two fund-of-fund firms, Collins Associates and Grosvenor Capital Management, and a visiting professor at Harvard Business School. He began his career as an aerospace engineer. He has published in finance journals, winning two Amundi Smith Breeden Awards for his research, and he still teaches at the Kellogg School. Todd earned a B.Sc. in mechanical engineering from the University of Wisconsin-Madison, an M.S. in the same field at the California Institute of Technology, and an A.M. and a Ph.D. in business economics from Harvard University.

Rocky Bryant, Principal, CNH Partners Rocky heads the event-driven desk at CNH Partners, the arbitrage affiliate of AQR. His team invests in opportunities created by corporate actions like mergers and other market events. He developed a database of convertible bonds issued since 1984 and maintains CNH’s legacy merger arbitrage data going back to 1963, and he has used those tools to help develop several new strategies. Prior to CNH, Rocky was a research associate at Harvard Business School, where he worked with finance professors Erik Stafford and Lisa Meulbroek. He earned a B.S. in computer science and electrical engineering from the Massachusetts Institute of Technology.

38 AQR DELTA Strategy-Related Papers

Andrade, Gregor, Mark Mitchell and Erik Stafford, 2001, “New Evidence and Perspectives on Mergers,” Journal of Economic Perspectives. Andrade, Gregor, and Erik Stafford, “Investigating the Economic Role of Mergers,” Harvard Business School Working Paper Series, No. 00-006, 1999. Asness, Cliff, “Changing Equity Risk Premia and Changing Betas over the Business Cycle and January,” University of Chicago, 1992. Asness, Cliff, “One Reason not to Avoid Market Timing,” AQR Capital Management working paper, 1996. Asness, Cliff, “Why not 100% Equities,” Journal of Portfolio Management, Winter, 1996. Asness, Cliff, “The Interaction Between Value and Momentum Strategies,” Financial Analysts Journal, March/April, 1997. Asness, Cliff, “Market-neutral Investing: Putting the ‘Hedge’ in ‘Hedge Funds,” AQR Capital Management working paper, 1998. Asness, Cliff, “Stocks vs. Bonds: Explaining the Equity Risk Premium,” Financial Analysts Journal, March/April, AIMR Graham and Dodd Excellence Award, 2000. Asness, Cliff, “An Alternative Future. An Exploration of the Role of Hedge Funds,” Journal of Portfolio Management 30th Anniversary Issue, 2004. Asness, Cliff, “An Alternative Future: Part II. An Exploration of the Role of Hedge Funds,” Journal of Portfolio Management, Fall 2004. Asness, Cliff, Jacques Friedman, Robert Krail and John Liew, “Style Timing: Value vs. Growth,” Journal of Portfolio Management, Spring, 2000. Asness, Cliff, Robert Krail and John Liew, “Do Hedge Funds Hedge?,” Journal of Portfolio Management, Fall 2001, Journal of Portfolio Management Best Paper Award. Asness, Cliff, Tobias Moskowitz and Lasse Heje Pedersen, “Value and Momentum Everywhere,” AQR working paper, 2008. Asness, Cliff, R. Burt Porter and Ross Stevens, “Predicting Stock Returns Using Industry-Relative Firm Characteristics,” On Review with the Journal of Finance, 2000. Crowell, Brian, Ronen Israel, David Kabiller and Adam Berger, “Is Alpha Just Beta Waiting to be Discovered? What Hedge Fund Beta means for Investors,” AQR Capital Management working paper, 2012 Diamonte, Robin, John Liew and Ross Stevens, “Political Risk in Emerging and Developed Markets,” Financial Analysts Journal, May/June, 1996. Kabiller, David, John O’Hara, Jacob Rosengarten and Blaine Tomlinson, Hedge Funds Demystified: Their Potential Role in Institutional Portfolios, Goldman Sachs Pension & Endowment Forum, July 1998. Kim, Hoon, “Dynamic Relation Between Stock Returns and Key Financial Ratios: A Variance Decomposition Approach,” Carnegie Mellon University, 2001. Liew, John, “Stock Returns, Inflation, and Real Money Supply: Evidence from Emerging Markets,” University of Chicago, 1993. Macey, Jonathan, Mark Mitchell and Jeffry Netter, “Restrictions on Short Selling: An Economic and Legal Analysis of the Uptick Rule and Its Role in the 1987 Stock Market Crash,” Cornell Law Review, July, 1989. Mitchell, Mark and Kenneth Lehn, “Do Bad Bidders Become Good Targets?,” Journal of Political Economy, April, 1990, Roger F. Murray Award, First Prize, 1989. Mitchell, Mark, and Harold Mulherin, “The Impact of Industry Shocks on Takeover and Restructuring Activity,” Journal of Financial Economics, June, 1996. Mitchell, Mark and Jeffry Netter, “Stock Repurchases and Insider Transactions in the Wake of the October 1987 Stock Market Crash,” Financial Management, 1989. Mitchell, Mark and Jeffry Netter, “Triggering the 1987 Stock Market Crash: Antitakeover Provisions in the House Ways and Means Tax Bill?,” Journal of Financial Economics, 1989. Mitchell, Mark, Lasse Heje Pedersen and Todd Pulvino, “Slow Moving Capital,” The American Economic Review, 2007. Mitchell, Mark and Todd Pulvino, “Characteristics of Risk and Return in Risk Arbitrage,” Journal of Finance, December, 2001. Mitchell, Mark, Todd Pulvino and Erik Stafford, “Limited Arbitrage in Equity Markets,” Journal of Finance, April, 2002, Smith-Breeden Award, First Prize 2002. Mitchell, Mark, Todd Pulvino and Erik Stafford, “Price Pressure Around Mergers,” Journal of Finance, February, 2004. Moskowitz, Tobias J. and Mark Grinblatt, “Do Industries Explain Momentum?,” Journal of Finance, August 1999. Pulvino, Todd, “Do Asset Fire-Sales Exist? An Empirical Investigation of Commercial Aircraft Transactions,” Journal of Finance, 1998, Smith-Breeden Distinguished Paper Award. Weston, Fred, Mark Mitchell and Harold Mulherin, Takeovers, Restructuring and Corporate Governance, Pearson/Prentice Hall, 4th Edition, 2004.

39 Performance Disclosures

This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. This document is intended exclusively for the use of the person to whom it has been delivered and it is not to be reproduced or redistributed to any other person. This document is subject to further review and revision.

Actual performance figures contained herein reflect the reinvestment of dividends and all other earnings and represent unaudited estimates of realized and unrealized gains and losses prepared by AQR. There is no guarantee as to the above information's accuracy or completeness. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE PERFORMANCE. There is no guarantee, express or implied, that long-term return and/or volatility targets will be achieved. Realized returns and/or volatility may come in higher or lower than expected. Diversification does not eliminate the risk of experiencing investment losses.

The Drawdown Control System described herein will not always be successful at controlling a fund’s risk or limiting fund losses.

Hypothetical performance results (e.g., quantitative backtests) have many inherent limitations, some of which, but not all, are described herein. No representation is being made that any fund or account will or is likely to achieve profits or losses similar to those shown herein. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently realized by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or adhere to a particular trading program in spite of trading losses are material points which can adversely affect actual trading results. The hypothetical performance results contained herein represent the application of the quantitative models as currently in effect on the date first written above and there can be no assurance that the models will remain the same in the future or that an application of the current models in the future will produce similar results because the relevant market and economic conditions that prevailed during the hypothetical performance period will not necessarily recur. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, all of which can adversely affect actual trading results. Discounting factors may be applied to reduce suspected anomalies. This backtest’s return, for this period, may vary depending on the date it is run. Hypothetical performance results are presented for illustrative purposes only. In addition, our transaction cost assumptions utilized in backtests , where noted, are based on AQR's historical realized transaction costs and market data. Certain of the assumptions have been made for modeling purposes and are unlikely to be realized. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions used in achieving the returns have been stated or fully considered. Changes in the assumptions may have a material impact on the hypothetical returns presented. Hypothetical performance is gross of advisory fees, net of transaction costs, and includes the reinvestment of dividends. If the expenses were reflected, the performance shown would be lower. Where noted, the hypothetical net performance data presented reflects the deduction of a model advisory fee and does not account for administrative expenses a fund or managed account may incur. Actual advisory fees for products offering this strategy may vary.

There are many risks associated with convertible securities including but not limited to liquidity risk, equity risk, interest rate risk, and credit risk of the underlying bond. Convertible bond securities may be considered illiquid securities, which cannot be sold or disposed of in the ordinary course of business at approximately the prices at which they are valued. Difficulty in selling securities may also result in a loss or may be costly to the portfolio.

40 Performance Disclosures

Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Net total return indices reinvest dividends after the deduction of withholding taxes. Investments cannot be made directly in an index.

The S&P 500 Index is the Standard & Poor’s composite index of 500 stocks, a widely recognized, unmanaged index of common stock prices. The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The Credit Suisse Hedge Fund Index is separated into ten primary subcategories based on their investment strategy. The Credit Suisse Hedge Fund Index in all cases represents at least 85% of the AUM in each respective category of the index universe. The methodology analyzes the percentage of assets invested in each subcategory and selects funds for the index based on those percentages, matching the shape of the index to the shape of the universe. Fund weight caps may be applied to enhance diversification and limit concentration risk. The index is calculated and rebalanced monthly. Funds are reselected on a quarterly basis as necessary. The HFRI Fund of Fund Composite Index is an equally weighted performance index. All funds report net of all fees returns on a monthly basis. The index includes over 500 constituent funds (both domestic and offshore). Only Fund of Funds are included in the index and all funds report assets in USD. The criteria for inclusion include having at least $50 million under management or have been actively traded for at least 12-months. The HFRI Fund Weighted Composite Index is an equally weighted performance index. All funds report net of all fees returns on a monthly basis. The index includes over 2200 constituent funds (both domestic and offshore). No Fund of Funds are included in the index and all funds report asses in USD. The criteria for inclusion include having at least $50 million under management or have been actively traded for at least 12-months. The HFRI Relative Value (RV) Fixed Income- Convertible Arbitrage Index is an equally weighted performance index. It uses the HFR database and consists only of RV Fixed Income- Convertible Arbitrage Funds with a minimum of US $50 million AUM or a 12-month track record and that report assets in USD. It is calculated and rebalanced monthly and shows net of all fees and expenses. The HFRI Event-Driven (ED) Merger Arbitrage Index is an equally weighted performance index. It uses the HFR database and consists only of ED Merger Arbitrage funds with a minimum of US $50 million AUM or a 12-month track record and that reports assets in USD. It is calculated and rebalanced monthly, and shows net of all fees and expenses. The Barclays Capital U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS and CMBS.

There is a risk of substantial loss associated with trading commodities, futures, options, derivatives and other financial instruments. Before trading, investors should carefully consider their financial position and risk tolerance to determine if the proposed trading style is appropriate. Investors should realize that when trading futures, commodities, options, derivatives and other financial instruments one could lose the full balance of their account. It is also possible to lose more than the initial deposit when trading derivatives or using leverage. All funds committed to such a trading strategy should be purely risk capital.

AQR Capital Management, LLC is exempt from the requirement to hold an Australian Financial Services License under the Corporations Act 2001 (Cth). AQR Capital Management, LLC is regulated by the Securities and Exchange Commission ("SEC") under United States of America laws, which differ from Australian laws. Please note that this document has been prepared in accordance with SEC requirements and not Australian laws.

AQR Capital Management (Europe) LLP, a UK limited liability partnership, is authorized by the UK Financial Conduct Authority (“FCA”) for advising on investments (except on Pension Transfers and Pension Opt Outs), arranging (bringing about) deals in investments, dealing in investments as agent, managing a UCITS, managing an unauthorized AIF and managing investments. This material has been approved to satisfy UK FCA COBS 4.

41 Performance Disclosures

AQR Capital Management (Europe) LLP, a U.K. limited liability partnership, is authorized by the U.K. Financial Conduct Authority (“FCA”) for advising on investments (except on Pension Transfers and Pension Opt Outs), arranging (bringing about) deals in investments, dealing in investments as agent, managing a UCITS, managing an unauthorized AIF and managing investments. This material has been approved to satisfy UK FCA COBS 4.

Please note for materials distributed through AQR Capital Management (Asia)

This presentation may not be copied, reproduced, republished, posted, transmitted, disclosed, distributed or disseminated, in whole or in part, in any way without the prior written consent of AQR Capital Management (Asia) Limited (together with its affiliates, “AQR”) or as required by applicable law.

This presentation and the information contained herein are for educational and informational purposes only and do not constitute and should not be construed as an offering of advisory services or as an invitation, inducement or offer to sell or solicitation of an offer to buy any securities, related financial instruments or financial products in any jurisdiction.

Investments described herein will involve significant risk factors which will be set out in the offering documents for such investments and are not described in this presentation. The information in this presentation is general only and you should refer to the final private information memorandum for complete information. To the extent of any conflict between this presentation and the private information memorandum, the private information memorandum shall prevail.

The contents of this presentation have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution and if you are in any doubt about any of the contents of this presentation, you should obtain independent professional advice.

42 Performance Disclosures AQR Capital Management, LLC DELTA Composite 9/30/08‒12/31/15

Gross Return Net Return Benchmark* Number of Composite Benchmark Composite Total Firm Year % % Return % Portfolios 3-Yr StDev % 3-Yr StDev % Assets ($M) Assets ($M) 2008 7.13 6.61 0.22 1 N/A N/A 37.56 19,207.22 2009 20.87 18.51 0.21 2 N/A N/A 169.58 23,571.55 2010 14.84 12.59 0.13 2 N/A N/A 1,034.33 32,701.21 2011 -0.88 -2.84 0.10 3 5.95 0.03 1,908.78 43,540.99 2012 5.95 3.86 0.11 3 5.91 0.03 3,778.35 71,122.42 2013 7.87 5.75 0.07 4 5.42 0.03 5,736.29 98,302.69 2014 10.52 8.35 0.03 3 5.35 0.02 6,854.48 122,655.99 2015 11.92 9.72 0.05 3 5.90 0.02 7,573.76 142,173.39

* Merrill Lynch 3-Month U.S. Treasury Bill Index

This presentation cannot be used in a general solicitation or general advertising to offer or sell interest in its Funds. As such, this information cannot be included in any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and cannot be used in any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.

AQR claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. AQR has been independently verified for the period August 1998 through December 2015. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. The DELTA Composite has been examined for the periods from its inception through December 31, 2015. The verification and performance examination reports are available upon request.

Firm Information: AQR Capital Management, LLC (“AQR”) is a Connecticut based investment advisor registered with the Securities and Exchange Commission under the Investment Advisors Act of 1940. AQR conducts trading and investment activities involving a broad range of instruments, including, but not limited to, individual equity and debt securities, currencies, futures, commodities, fixed income products and other derivative securities.

For purposes of firm-wide compliance and firm-wide total assets, AQR defines the “Firm” as entities controlled by or under common control with AQR (including voting right). The Firm is comprised of AQR and its advisory affiliates, including CNH Partners, LLC (“CNH”).

Upon request AQR will make available a complete list and description of all of Firm composites, as well as additional information regarding the policies for valuing portfolios, calculating performance, and preparing compliant presentations.

Past performance is not an indication of future performance.

43 Performance Disclosures AQR Capital Management, LLC DELTA Composite 9/30/08‒12/31/15

Composite Characteristics: The DELTA Composite (the “Composite”) was created in October 2008. Accounts included invest in instruments not limited to equities, currencies, convertible securities, commodities, futures, forwards, options, swaps and other derivative products. The investment objective is to produce high risk-adjusted returns while targeting a low long term average correlation to traditional markets. The Composite's strategy attempts to capture the systematic components of dynamic trading strategies traditionally pursued by hedge funds using a rigorous, risk controlled investment approach. The Composite's strategy targets the highest ex-ante volatility relative to all of the Firm's DELTA strategy composites. The Composite is denominated in USD. The composite benchmark is the Merrill Lynch 3-Month U.S. Treasury Bill Index. The index measures the rate of return an investor would realize when purchasing a single U.S. 3-month treasury bill, holding it for one month, selling it, and rolling it into a newly selected issue at the beginning of the next month. The investments in the Composite vary substantially from those in the Benchmark. The index has not been selected to represent an appropriate benchmark to compare an investor’s performance, but rather is disclosed to allow for comparison of the investor’s performance to that of a certain well-known and widely recognized index. Benchmark returns are not covered by the report of independent verifiers.

New accounts that fit the composite definition are added at the start of the first full calendar month after the assets come under management, or after it is deemed that the investment decisions made by the investment advisor fully reflect the intended investment strategy of the portfolio. Composites will exclude terminated portfolios after the last full calendar month performance measurement period that the assets were under management. The Composite will continue to include the performance results for all periods prior to termination. Effective for periods beginning July 1, 2010 through February 28, 2015, the composite defined a significant cash flow as an external cash flow within a portfolio of 50%. Additional information is available upon request.

Calculation Methodology: All portfolios except mutual funds and UCITS are valued monthly and intra-month for large cash flows as defined by firm policy. The Modified Dietz calculation methodology is used when calculating monthly and intra-month returns. Mutual funds and UCITS are valued daily and performance is calculated on a daily basis. Gross of fees returns are calculated gross of management and performance fees, administrative and custodial costs and net of transaction costs beginning January 1, 2010. Prior to January 1, 2010, gross of fees returns are gross of management and performance fees, and net of administrative, custodial, and transaction costs. Additional information regarding fees and the calculation of gross and net performance is available upon request.

Composite net of fees returns are calculated by deducting the maximum management or advisory fee charged by AQR from the gross composite monthly returns to all portfolios in the composite. The standard model management fee per annum for this Composite is specified below. Composite assets may have been exposed to the impact of performance fees.

The dispersion measure is the equal-weighted standard deviation of accounts in the composite for the entire year. Dispersion is not considered meaningful for periods shorter than one year or for periods during which the composite contains five or fewer accounts for the full period. The three-year annualized ex-post standard deviation measure is inapplicable when 36 monthly returns are not available.

Fees: Returns are calculated net of all withholding taxes on foreign dividends. Accruals for fixed income and equity securities are included in calculations. AQR’s management or advisory fees are described in Part 2A of its Form ADV. In addition, AQR funds may have a redemption charge of 2.00% based on gross redemption proceeds that may be charged upon early withdrawals. Consultants supplied with gross results are to use this data in accordance with SEC, CFTC and NFA guidelines.

AQR’s asset based fees for portfolios within the Composite may range up to 2.00% of assets under management and are generally billed monthly or quarterly at the commencement of the calendar month or quarter during which AQR will perform the services to which the fees relate.

Other Disclosures: AQR may engage in leveraged, derivative, and short positions in order to meet its performance objectives. The use of these positions may have a material impact on performance results. Additionally, there may be subjective unobservable inputs used in the valuation of certain financial instruments utilized by certain AQR managed investment vehicles. The risks inherent to the strategies employed by accounts included are set forth in the applicable offering documents and other information provided to potential subscribers, from where more detailed information regarding the extent to which leverage, derivatives, and short positions can be obtained. These are available on request, if not provided along with this presentation itself.

44 0903c02a818403ca STRICTLY PRIVATE | CONFIDENTIAL Item 4

Merced County Employees’ Retirement Association Alternative Beta Platform: J.P. Morgan Systematic Alpha

March 20, 2017

FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION 0903c02a818403ca STRICTLY PRIVATE | CONFIDENTIAL

Table of contents

 Global Leadership in Quantitative Investing

 Defining What We Do in Systematic Alpha

 Building and Managing the Portfolio

 Fund Performance and Characteristics

Appendices:

 1: Guide to Component Strategies

 2: Portfolio Applications and Scenario Analysis

 3: Quantitative Beta Strategies Platform

 4: Team and Biographies

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Quantitative Beta Strategies

Deep expertise in developing risk premia strategies for our clients

RESEARCH DRIVEN EMPOWERING BETTER BUILDING THE RIGHT PROVEN TRACK APPROACH DECISIONS INVESTMENT RECORD PORTFOLIO • Strong team of investment • Consistent philosophy with • Amongst earliest pioneers of professionals with a focus on building better • Comprehensive range of hedge fund beta strategies quantitative backgrounds diversified portfolios risk premia strategies with a track record of more covering both smart and than 7 years • Quarterly Research Summit • Fiduciary mindset to support alternative beta across all - ongoing research to our client’s objectives asset classes • Delivering results for both enhance investment process institutional and wholesale and capabilities • Customizable solutions to investors; with ~4.5bln in meet client needs AUM

1 Source: J.P. Morgan Asset Management; as of 31 December 2016. Past performance is not necessarily a reliable indicator for current and future performance.

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A history of research and innovation in risk premia strategies

Platform Development

First equity 5 additional Event- First Factor Risk Parity strategy factor ETF driven sub-strategies alternatives ETF launched launched introduced launched Hedge Fund Beta Convertible Bond Arbitrage strategy launched strategy introduced Extended momentum factor (time-series)

2009 2010 2011 2012 2013 2014 2015 2016

2nd generation of Fully automated, broker-linked stock 3rd generation trading production borrow and order management system platform introduced systems

Growth of Assets over Time (USD mln) Current AUM Breakdown

Factor Risk Parity 5,000 1% 4,500 Strategic Beta 4,000 Strategic Beta Alternative beta 25% 3,500 3,000

2,500 Multi-Strategy 2,000 Alternative Beta Customised, (Low Vol) 1,500 Single Strategy 57% 1,000 7% 500 Multi-Strategy 0 Alternative Beta 2011 2012 2013 2014 2015 2016 (High Vol) 10%

Source: J.P. Morgan Asset Management, as at 31 December 2016

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Defining what we do

ALTERNATIVE BETA

Long/short strategies that attempt to capture sources of STRATEGIC BETA return that are uncorrelated to traditional markets

Long-only strategies that differ from passive, cap-

weighted index strategies in one or more dimensions Factor Premia / Risk Premia (used interchangeably): seek to capture absolute returns from compensated premia such as value, carry, and momentum across asset classes

Weighting: methodologies that aim to offer superior diversification Hedge Fund Beta: access sources of return particularly to a specific market and previously available only through hedge funds such as event driven or convertible arbitrage

Security Selection: seek to provide relative exposure to systematic risk factors or behavioral anomalies SYSTEMATIC ALPHA

J.P. Morgan’s flagship alternative beta strategy, launched in 2009 to generate uncorrelated sources of return through rules-based capture of 20+ alternative investment strategies

Source: J.P. Morgan Asset Management. The manager seeks to achieve the stated objectives. There can be no guarantee the objectives will be met.

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Evolution of alpha into beta

Over time, as sources of return are better understood, a portion can be captured in a systematic manner and treated as beta

TRADITIONAL INVESTMENTS ALTERNATIVE INVESTMENTS

1896 1957 1975 PRE 2008 2008-PRESENT

Dow Jones S&P 500 Bogle launches Fama-FrenchAlternative MSCI factor Alternative Beta Industrial Average launched first index fund 3 factor modelInvestments indices launchedfunds launched

Stock selection key to equity Equity beta as a investable Returns were solely Alternative Beta as an investable return; indices non-investable growth risk premium attributed to manager skill alternative risk premia

α α

α β α β

For illustrative purposes only.

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J.P. Morgan’s approach to alternative beta seeks to isolate compensated risk premia

Constructing more efficient portfolios requires gaining exposure to compensated premia while maximizing diversification across uncompensated risk factors

Alternative Alternative Beta Risk/Return Drivers J.P. Morgan’s Approach Investment Compensated premia have a positive Returns Focus expected economic return and should form an explicit part of efficient beta capture

Equities Sectors Value Value Momentum Quality α Reducing exposure to traditional markets Regions Momentum Bonds Hedge provides investors with a valuable, diversifying portfolio building block β

Equity Bond Commod.

Carry Commodities Inflation

Uncompensated risk factors are merely Exclude descriptors of risk; we should seek to maximize diversification

Region Sector Inflation

For illustrative purposes only.

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Reducing fees can meaningfully improve return capture

Hedge Fund Strategies: Attractive long-term performance (gross of fees) Hedge Fund Return Generation: 600% Over multiple market cycles, hedge funds have HFRI FOF Index (Gross of mgmt. fee) been able to generate excess performance over equities (on a gross of fee basis) by accessing 500% HFRI FOF Index (Net) diverse, positive return streams MSCI World Index 400%

300%

200% Hedge Fund Industry Fee Capture:

Adjusting hedge fund returns management fees 100% alone highlights the compounding effect of fees

Taking into account incentive fees would further 0% the comparison -100% Jun-95 Jun-98 Jun-01 Jun-04 Jun-07 Jun-10 Jun-13 Jun-16 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Dec-14

Source: J.P. Morgan Asset Management and Bloomberg, as at 31 December 2016. Performance and fees for illustrative purposes. Note: HFRI FOF Index (Gross) adjusts the HFRI FOF Index upwards by 3% per annum to represent the impact of hedge fund management fees. Adjusting for incentive fees would further the comparison.

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J.P. Morgan Systematic Alpha Strategy

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J.P. Morgan Systematic Alpha: differentiated approach to alternative beta

Diversification Multi-Cycle Orientation Evolved Implementation

• 20 alternative beta strategies • Calibrate allocation to hedge • “Soft edges” developed over 7+ across 4 hedge fund styles fund styles and alternative beta years (e.g. proprietary news filter component strategies from long- to validate merger arbitrage • Deep investment universe term perspective data) across asset classes (e.g. S&P Developed BMI ~8,500 • Avoid over-reactive response to • Understand inter-relationship of constituents vs. ~1,600 in the unstable shifts in correlation and signals across hedge fund styles MSCI World Index for Equity volatility Market Neutral) • Avoid forced allocation/leverage • Equal risk weighting across in low activity or signal conviction hedge fund styles and alternative environments beta component strategies to maximize diversification

Source: J.P. Morgan Asset Management. For illustrative proposes only. Diversification does not guarantee investment returns and does not eliminate the risk of loss.

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J.P. Morgan Systematic Alpha: diversification across alternative strategies

Alternative strategies accessed

Value GLOBAL MACRO & CTA EQUITY MARKET Momentum NEUTRAL Quality Size Merger Arbitrage Activism Tracking Conglomerate Discount Arbitrage Index Arbitrage Share Buybacks Post-reorg Equity CB Arbitrage Fixed Income Relative Value Term Premium Fixed Income Time-series Momentum Fixed Income Relative Value Carry Commodity Relative Value Roll Yield Commodity Relative Value Momentum Commodity Time-series Momentum Currency Relative Value Carry Currency Relative ValueMomentum Equity Time-series Momentum CONVERTIBLE EVENT-DRIVEN BOND ARBITRAGE STRATEGIES

Source: J.P. Morgan Asset Management. For illustrative proposes only.

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J.P. Morgan Systematic Alpha: a rules-based approach to multiple return sources

The approach uses a multi-strategy construct to access different alternative strategy styles

Alternative Beta Sub-Strategies

GLOBAL MACRO BASED STRATEGIES EQUITY MARKET NEUTRAL

 Seeks to capture exposure to carry and momentum across fixed  Captures four risk factors: Momentum, Value, Size income, currency, commodity and equity markets and Quality  Carry trades are across 6 developed bond markets, G10 and 20 EM  currencies, and 17 commodities (roll yield) Portfolio constructed to be beta neutral, as well as country and sector neutral  Time series momentum trades are across 6 developed bond markets, 11 developed market equity indices and 17 commodities  Broad developed market universe (S&P Developed BMI), with a portfolio of approximately 350 long and 350 short positions  Relative value momentum trades are made in G10 currencies and 17 commodities

CONVERTIBLE BOND ARBITRAGE EVENT-DRIVEN

 Convertible bonds trade at a discount to the sum of their parts (small  Traditionally a core hedge fund style that seeks to exploit mispricing cap and illiquidity premium): we seek to capture the underpricing of the related to companies that are undergoing significant corporate change embedded optionality within a convertible  We focus on six sub-strategies: merger arbitrage, conglomerate  100-150 convertible bonds from the Thomson Reuters US Index, with discount arbitrage, activist following, share buybacks, post reorg and min outstanding issuance of USD 300mln index reconstitution arbitrage

 Hedge out the equity sensitivity on a daily basis  Systematic investment process allows us to capture a significant proportion of the event-driven hedge fund style

The manger seeks to achieve the stated objectives. There can be no guarantee the objectives will be met.

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J.P. Morgan Systematic Alpha: an example of merger arbitrage

Premia are selected based on expectations of positive returns, in this case driven by risk of deal failure

Merger Arbitrage Example – 3G/Burger King Background and Implementation

25.0 Burger King Justification of persistence: 23.0 • Economic: compensation for the risk of deal break

21.0 • Behavioral: negative skew aversion

19.0 Basic construction:

17.0 • Universe: Developed equities (filtered for liquidity) • Implementation: Long target if cash deal, long target/short acquirer if 15.0 stock deal Jul-10 Jul-10 Aug-10 Aug-10 Sep-10 Sep-10 Oct-10 • Construction: Equal notional weight every deal (adjustment for hostile deals) 24.0 Trade example: 23.9 . 3G Capital made an offer to acquire Burger King on 2 September 2010. Sold 23.8 . Given that this was a friendly deal with a high likelihood of success, the premium available was limited. We bought the stock at USD 23.59, 23.7 selling it to 3G Capital for USD 24. . The deal completed on 20 October 2010 and thus earned 1.7%. 23.6 Bought Burger King . While this may initially sound low, this was over a two- month period, 23.5 roughly equating to an annualized figure of over 10%. 02-Sep-10 14-Sep-10 23-Sep-10 04-Oct-10 13-Oct-10 Source: Bloomberg October 2010

The example above is shown for illustrative purposes only. In should not be assume that all past recommendation experienced a similar results. The inclusion of the securities mentioned above is not to be interpreted as recommendations to buy or sell. A complete list of portfolio holdings for the past year are available upon request. Past performance is not indicative of future returns.

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J.P. Morgan Systematic Alpha: lower cost access to hedge fund returns

Alternative beta strategies can explain the returns of hedge fund indices

Performance Comparison – The beta of merger arbitrage can be created by simply holding all stocks subject to takeover activity (and hedging appropriately) 180% Merger Arbitrage Replicating Portfolio

– Increasingly, hedge funds defining themselves as 160% HFRI Merger Arbitrage Index event driven or merger arbitrage will increasingly be only able to justify their 2/20 fee structure by charging 140% fees above the ‘merger arbitrage risk premium’ rather 120% than cash 100% Merger HFRI Merger Arbitrage Jan 1994 – Dec 2015 Arbitrage 80% Replicating Index Portfolio 60% Return 7.1% 7.0% 40% Risk 3.5% 5.3% 20% IR 1.2 0.8 0% Drawdown 7.9% 11.8%

Longest underperformance 21 21

Source: J.P. Morgan Asset Management, Bloomberg. Portfolio performance is calculated using a static weight of the asset illustrated above, monthly rebalancing gross of fees. Analysis period January 1, 1994 to December 31, 2015. Past performance is not indicative of future results.

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J.P. Morgan Systematic Alpha: systematic capture across event driven strategies

 Captures the deal risk premium inherent in merger transactions Merger arbitrage  Invests in the target company of all merger deals globally, subject to a number of size and liquidity filters, while shorting the acquirer

 Captures positive performance of parent company as value is unlocked through spinoff announcement. The source of the Conglomerate discount premium is the additional information released to the markets, which typically leads to a revaluation of the company arbitrage  Long positions in all parent companies post-announcement to capture post-announcement price drift, closing just prior to record date

 Exploits outperformance of a company engaged in a share buyback program, which is driven by market underreaction in Share repurchases the reduction in the cost of capital  Long positions in stocks whose outstanding shares have been declining while hedging the beta

 Approximately 15% of all activist targets turn into merger transactions Shareholder activism  Uses 13-D filings to track activist campaigns allowing the capture of positive abnormal returns unrelated to classical equity risk premia

 Index changes typically pre-announced to avoid market dislocation on effective date due to price pressure from beta Equity index arbitrage trackers  Buy index additions at announcement and sell on effective date; compensation for liquidity provision to the market

Post-reorganisation  Companies emerging from bankruptcy exhibit binary risk, low analyst coverage, unusual shareholder composition,. and have the stigma of the former bankrupt entity despite often being restructured into a different company equity  Buy companies that have emerged from the Chapter 11 bankruptcy process to capture this set of unique risks

Source: J.P. Morgan Asset Management. For illustrative purposes only.

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J.P. Morgan Systematic Alpha: systematic capture across event driven strategies

 Systematic investment process allows us to capture a significant proportion of the hedge fund style, with a Back-tested strategy performance correlation of 0.65 to the HFRI Index

 The event driven strategy follows the six sub strategies: 400% JPM Event-driven strategy (net)  Merger arbitrage 350% HFRI Event-driven Index  Index reconstitution arbitrage MSCI World Index 300%  Share repurchases 250%  Conglomerate discount arbitrage  Activist tracking 200%  Post reorg equity 150%

100%

Max Return Risk Sharpe Drawdown 50%

JPM Diversified Event-Driven 9.1% 6.8% 1.0 20.8% 0%

-50% HFRI Event-Driven Index 7.9% 6.8% 0.8 24.2% Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14

Source: J.P. Morgan Asset Management, Bloomberg. Data as at 28 February 2015. Backtested data for the diversified event-driven strategy shown net of assumed fees of 0.95%. Past performance is not necessarily a reliable indicator for current and future performance. For illustrative purposes only. Back-test performance is simulated and no guarantee can be given that the strategy/product will perform accordingly (as based also on other factors that may not be part of the simulation).

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J.P. Morgan Systematic Alpha: equal risk principles with tactical sizing

Tactical sizing component based on opportunities within each strategy:

• Asset class risk will Global Macro Event-driven & CB Arbitrage Equity Long/Short fluctuate depending on 100% Global Macro whether the factors 90% confirm or offset each other 80%

70%

60% • As the number of events increases and 50% Event Driven diversification improves, the strategy allocation will 40% rise 30%

20%

10% • Risk in the short-term is Equity Market driven by equity market 0% Neutral dispersion Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16

Source: J.P. Morgan Asset Management. *As at 31 December 2016. Restated to be fully invested. For illustrative purposes only.

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J.P. Morgan Systematic Alpha: benefits of a diversified approach

– Individual hedge fund strategies have each had years where they have been out of favour . Merger arbitrage was weak in 2008 and 2011 . Equity long/short was weak in 2009 and 2016 . Macro was weak in 2010 and 2015

– Combining the strategies into one portfolio may diversify the return profile and reduces risk . Diversification of style and approach gives lower volatility and attractive correlation to other asset classes

Backtest and live Beta of Systematic Alpha to: Since inception period* MSCI World 0.11 -0.02 Barclays Global Aggregate Bond Index 0.22 -0.20 Barclays US Corporate High Yield Index 0.18 -0.20 S&P GSCI Commodities Index 0.06 -0.13

Source; J.P. Morgan Asset Management, Bloomberg.*Period: January 1998 – 31 December 2016. Inception 12/31/2013. Opinions and analysis offered constitute J.P. Morgan Asset Management’s judgment and are subject to change without notice. Indices do not include fees or operating expenses and are not available for actual investment. Past performance is not an indication of future performance.

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J.P. Morgan Systematic Alpha: advanced portfolio and risk management capabilities

Bespoke portfolio management platform

Risk Reporting

. Risk report includes factor by factor ex ante risk breakdown . Highlights exposures to idiosyncratic risk . Monitors Sector, Country and Beta deviation from neutrality . Broad range of ex-ante risks are monitored . Additional stress testing and analysis is performed . Reports generated in real time

Account Monitoring

. Attribution monitoring by hedge fund style and factor level . Automated portfolio reconciliation between desk trading systems and back-office systems . Automated integration with broker systems for the arrangement of stock borrow . News Alert for Event Driven strategies (in house software)

Source: J.P. Morgan Asset Management. For illustrative purposes only.

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J.P. Morgan Systematic Alpha (10% volatility target): composite - performance (gross of fees)

Since Annualized Performance as of 12/31/2016 3 Months 6 Months YTD 1 year inception* Systematic Alpha (higher vol) Composite 4.96% 7.89% 6.06% 6.06% 4.01% B of A Merrill 3 month Treasury Bill 0.08% 0.18% 0.32% 0.32% 0.14% Excess Return 4.88% 7.71% 5.74% 5.74% 3.87%

Historical Monthly Cumulative Returns Historical Risk/Return Statistics

Annualized Return 4.01% Systematic Alpha HFRI Fund of Fund Index MSCI World Risk 6.28% 17% Sharpe Ratio 0.64 Max Drawdown -4.78% 12%

-3%

-8% Jul-14 Jul-15 Jul-16 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Jan-14 Jun-14 Jan-15 Jun-15 Jan-16 Jun-16 Feb-14 Mar-14 Feb-15 Mar-15 Feb-16 Mar-16 Dec-13 Nov-14 Dec-14 Nov-15 Dec-15 Nov-16 Dec-16 Aug-14 Sep-14 Aug-15 Sep-15 Aug-16 Sep-16 May-14 May-15 May-16

All performance in USD, gross of fees. * Inception date is December 31, 2013, performance over 12 months is annualized. Excess return is calculated geometrically. All funds in the composite seek a volatility target of 10%. Past performance is not indicate of future performance. Total return assumes the reinvestment of income. Performance results are gross of investment management fees. The deduction of an advisory fee reduces an investor’s return. Actual account performance will vary depending on individual portfolio security selection and the applicable fee schedule. Fees are described in Part II of the Advisor’s ADV which is available upon request . Please see back page for additional disclosure 19 | FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION 0903c02a818403ca STRICTLY PRIVATE | CONFIDENTIAL

J.P. Morgan Systematic Alpha: summary

Providing access to core hedge fund risk premia

 ~$3.5 bn in AUM as at 31 December 2016 STRATEGY HIGHLIGHTS  Global investor base across with investors in North America, Europe and Asia  7 year track record one of the longest track records in the alternative beta space

 Diversification of strategies: Equity Market Neutral, Event-driven, Convertible Arbitrage and Global Macro  Low correlation to traditional asset classes; targets low beta to equity markets and KEY FEATURES low sensitivity to fixed income markets  Seeks to address the need for absolute return alternative investments in a liquid, low-cost and transparent manner

 Approximately 1,100 positions - limited idiosyncratic risk STRATEGY STATISTICS  Strong performance since inception in 2009, with an IR* of 0.9 net of fees

Source: J.P. Morgan Asset Management. The Investment Manager (Portfolio Manager) seeks to achieve the stated targets/objectives. There can be no guarantee the objectives/targets will be met. *IR = Information ratio, based on the JPMorgan Funds - Systematic Alpha Fund EUR C (acc), as of 31 December 2016. Fund inception 01//09/2009. Past performance is not necessarily a reliable indicator for current and future performance.

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Merced County Employees’ Retirement Association: conclusion

 Systematic Alpha offers liquid, low cost, and transparent access to a unique and diversified set of return sources that are uncorrelated to traditional equity and fixed income markets

 Risk management is integrated throughout the entire investment process:

− Strategic design

− Broad diversification

− Daily risk analysis

− Operational oversight

 We have a long history of delivering in the alternative beta space:

− Strong risk-adjusted returns dating back to 2009

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Appendix 1: Guide to Component Strategies

. Equity Market Neutral . Event Driven . Global Macro . Convertible Bond Arbitrage

The fund invests across the Merger Arbitrage, Equity Market Neutral, Convertible Bond Arbitrage and Macro based strategies. Generally uncorrelated behavioral patterns are likely to change over time. Under certain market conditions, these patterns could become correlated, exposing the fund to additional risks.

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A brief guide to common rationales for selected risk premia

Based on our internal research and what we include within vehicles the team manages

Style Risk-based Argument Behavioural Argument

. Greater default risk in value stocks . Initial underreaction, delayed overreaction to Value . Dynamic betas information . Over-extrapolation of growth trends

. . Momentum and Greater macroeconomic risk* Anchoring and confirmation bias, along with delayed . Higher discount rates for “riskier” companies* information processing Trend . Disposition effect

. In FX, high-yielding currencies are more sensitive to . Aversion to negative skew Carry volatility innovations . Flows seek higher yield . Crash, economic, and liquidity risk . Status quo bias

. Leverage and short selling constraints . Glamour stocks Low Volatility/Quality

. Smaller companies are riskier in economic downturns Size/Rebalancing . Compensation for bearing illiquidity

. Compensation for deal failure risk (merger arbitrage) . Aversion to negative skew Event . Delayed information processing

*Risk-based arguments for momentum tend to be weaker, due to low statistical power

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Equity market neutral: diversified, systematic capture of risk premia

 Risk premium  Strategy: Long “cheap” stocks, short “expensive” stocks (as measured by P/E, Div Yld etc) Value premium  These factors form the backbone of many quantitative and qualitative equity products and drive most equity investment philosophies

 Return chasing and market bias Momentum  Strategy: (1) Long positive earnings revision stocks, short negative revision stocks (2) Buy stocks whose momentum is in the top decile while shorting those in the bottom decile

 Risk premium Size premium  Strategy: Buy small cap stocks, short large cap stocks

 Behavioral bias Quality  Strategy: Buy high quality stocks, as measured on a number of metrics including profitability, financial risk and earnings quality, while shorting lower ranked stocks on these metrics.

Capturing the risk premia in our equity market neutral strategy

Beta neutral, unlike most Equity Long/Short strategies – very low correlation to equity markets

 Portfolio constructed neutrally by country and sector

8,500 companies in universe (S&P Broad Market Index), around 300-350 long and short companies in portfolio

 Diversify idiosyncratic risk, includes mid and small cap exposure;

 Equally weighted subject to minimum market cap and average daily traded volume

Capital efficient investment, low turnover

Source: J.P. Morgan Asset Management. For illustrative purposes only.

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Equity market neutral: strategy performance

Live strategy performance Systematic Alpha L/S Equity Component since inception(*): 51.9%

60% HFRX Market Neutral Index: -1.3% Systematic Alpha Long/Short Equity component HFRX Equity Hedge Index: 0.9% 50% HFRX Market Neutral Index HFRX Equity Hedge Index HFRI Market Neutral Index: 21.3% 40% HFRI Market Neutral HFRI Equity Hedge Index: 39.5% HFRI Equity Hedge 30%  Unlike merger arbitrage, there is significantly more dispersion among the managers in the HFR Market 20% Neutral Index

10%

-10%

-20% Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16

Source: Bloomberg, HFR (Hedge Fund Research), J.P. Morgan Asset Management. *As at 31 December 2016. Restated to be fully invested. Fund inception 1 July 2009.

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Event-driven investing: systematic capture of underlying strategies

Source: J.P. Morgan Asset Management. For illustrative purposes only.

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Event-driven investing: systematic capture of underlying strategies

 Systematic investment process allows us to capture a significant proportion of the hedge fund style, with a Back-tested strategy performance correlation of 0.65 to the HFRI Index

100%

Max Return Risk Sharpe Drawdown 50%

JPM Diversified Event-Driven 9.1% 6.8% 1.0 20.8% 0%

-50% HFRI Event-Driven Index 7.9% 6.8% 0.8 24.2% Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14

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Global macro: capturing macro risk premia

 Fixed income carry trades across 6 developed bond market indices  Long the long end of steepest curves and short the long end of the flattest curves Fixed income  Long the highest carry bond markets and short the lowest carry bond markets  Time series momentum trades across 6 developed bond market indices using 3, 6, and 12 months momentum

 FX carry trades  Forward rate bias across 10 developed market currencies: Long the highest yielding currencies with rising rates and short the lowest yielding currencies with decreasing rates Currency  Forward Rate Bias across 20 Emerging Market Currencies (no positions taken in currencies of countries where the CDS prices are implying an implied probability of default greater than 15%)  Relative momentum strategy across developed markets

 Relative Roll Yield – long backwardated commodities and short those in contango across 17 commodities Commodity  Time series momentum using 3, 6, and 12 months momentum  RV commodity momentum over 17 commodities using 12 month momentum

Equities  Time series momentum across a universe of 10 developed market equity indices using 3, 6, and 12 months momentum

Capturing the macro risk premia in our global macro strategy

Carry and momentum strategies across asset classes are uncorrelated

Within carry and within momentum, the strategies are also generally uncorrelated

 The two fixed income carry strategies are negatively correlated

 FX strategies exhibit the highest correlation within an asset class but are still diversifying to one another

 Use both time series momentum (trend following/CTA) and relative value momentum

Source: J.P. Morgan Asset Management. For illustrative purposes only.

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Global macro: capturing macro risk premia

 The HFRI Macro Index can be replicated using both traditional and alternative beta Backtested performance analysis

250%  Key exposures in the HFRI Macro Index include: Global Macro Replicating Portfolio – Carry and Momentum across asset classes HFRI Macro Index 200% – Traditional beta such as commodities and fixed income

 We focus on only the alternative beta components 150%

100%

Periods to Global Macro HFRI Macro March 31, 2016 (Vol Adj) Index 50%

Return (annualized) 4.7% 5.9% 0% Risk 5.6% 5.6% Maximum drawdown 11.0% 8.3% -50% Information ratio 0.8 1.1 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

Source: Bloomberg, J.P. Morgan Asset Management, 31 March 2016

1 Source: J.P. Morgan Asset Management, Bloomberg. For illustrative purposes only. Past performance is not indicative of future results. For the purposes of the back-test, the model positions were generated historically using data available at the time and run forward. Please see back test disclosure in the back of the presentation.

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Global macro: strategy performance

Live strategy performance Hedge Fund Beta Macro since inception: 16.4%

25% HFRX Macro Index HFRX Macro Index: -12.7%

20% HFRI Macro Systematic Index HFRI Macro Systematic Index: 7.5% Hedge fund beta macro, inc. CTA (backtest + 15% live)

10%  The risk premia we capture form a significant component of Macro hedge funds 5%

-5%

-10%

-15%

-20% Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16

Source: Bloomberg, J.P. Morgan Asset Management. As at 31 December 2016. For illustrative purposes only. Restated to be fully invested, includes live performance of strategies in the fund since inception, with backtested data added for the CTA style. Past performance is not indicative of future results. HFRX Macro Index is a global, macro composite index denominated in USD provided by Hedge Fund Research, Inc. N.B. CTA component added to the Macro strategy end-May 2015.

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Convertible bond arb: systematic capture of strategy

 A convertible bond trades at a discount to the sum of its parts – straight bond plus a call option on the underlying. Straight Bond  The premium is essentially an illiquidity and small cap premium.

 To eliminate this, the arbitrageur will typically go long the convertible bond and look to hedge the equity and Equity Call Option duration sensitivity.

Capturing the convertible arb

Ensuring a liquid universe is crucial

 CB’s selected from the Thomson Reuters US index. Must have an outstanding issuance of USD 300m+ and generally debt maturing within 3 months is excluded

Limiting the impact of idiosyncratic risk

 Idiosyncratic risk is limited by diversifying across the index which typically includes 100-150 holdings

– For each CB, we utilize their respective stock ranking from the Equity Market Neutral sleeve portfolio to determine those companies in the bottom decile and remove them from the Convertible Bond Arbitrage sleeve portfolio

 Equal notional exposure is targeted in each CB in the universe in order to limit idiosyncratic risk and to avoid the problems of recidivism

 To isolate and capture the small cap illiquidity premium, we use S&P futures rather than specific stock shorts:

– Small Cap stock shorts may be too expensive or unavailable

Source: J.P. Morgan Asset Management. For illustrative purposes only.

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Convertible bond arb: strategy performance

Systematic Alpha CB Arb component since fund Live strategy performance 10.1% inception:

60% HFRI Convertible Bond Arbitrage Index HFRI RV: Fixed Income-Convertible Arbitrage Index: 56.7% Systematic Alpha CB Arb Component (100% invested)

50% Live performance*→→  The HFRI CB Arbitrage index includes levered credit 40% exposure which we do not capture.

30%

20%

10%

0% Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16

Source: Bloomberg, HFR (Hedge Fund Research), J.P. Morgan Asset Management. As at 31 December 2016. Restated to be fully invested. Past performance is not indicative of future results. Fund inception 1 July 2009. Performance includes back tested data from 31/07/09 to 31/01/12

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J.P. Morgan Systematic Alpha: low correlations to traditional beta

MSCI World S&P 500 Barclays Agg High Yield GSCI Value 0.11 0.13 -0.00 0.15 -0.04

Momentum -0.18 -0.22 0.04 -0.23 0.05

Size 0.42 0.40 0.04 0.49 0.12 EQUITY MARKET MARKET NEUTRAL NEUTRAL Quality -0.25 -0.21 -0.03 -0.31 -0.09

Convertible Bond arbitrage 0.14 0.02 0.10 0.36 0.10

Merger Arbitrage 0.45 0.43 0.07 0.35 0.25 ARB ARB EVENT DRIVEN/ DRIVEN/ Event Driven ex Merger Arb 0.33 0.31 0.02 0.40 0.20

Relative Value Fixed Income Term Premium -0.07 -0.13 0.18 0.03 -0.03

Relative Value Fixed Income Carry 0.06 0.11 0.07 -0.01 -0.05

Relative Value FX Carry 0.39 0.31 0.12 0.39 0.29

Relative Value FX Momentum -0.03 -0.05 -0.03 -0.06 0.05

Relative Value Commodities Roll Yield 0.03 -0.02 0.15 0.09 0.09

GLOBAL GLOBAL MACRO Relative Value Commodities Momentum 0.00 -0.05 0.14 0.01 0.16

Time Series Momentum -0.34 -0.37 0.15 -0.34 -0.12

Sources: J.P. Morgan Asset Management, Bloomberg, Thomson Reuters Global Focus Convertible Bond index, and Merger Stat. Analysis period January 1998 to December 2016. *Definitions in glossary.

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Appendix 2: Portfolio Applications and Scenario Analysis

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Applications of alternative beta strategies in portfolios

Risk premia strategies serve as flexible portfolio building blocks, with many potential uses

Diversifying a Core – Satellite Traditional Portfolio Hedge Fund Allocation

Satellite

Equities

Fixed Income Core

Alternative Beta

• Extension of strategic beta for investors looking to • Core/satellite approach in an alternatives portfolio utilize long/short strategies to capture compensated that can improve the overall liquidity profile and factor risk premia with low correlation to traditional reduce cost, while complementing high conviction markets active managers

Source: J.P. Morgan Asset Management. For illustrative purposes only.

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J.P. Morgan Systematic Alpha: offerings

Low Volatility (5% Target) Higher Volatility (10% Target)

Vehicle Mutual Fund ERISA Commingled Fund Cayman 3c7 Fund

Domain US US US and Non-US

Sub-strategies Equity Market Neutral, Event Driven, Convertible Bond Arbitrage, and Global Macro

Individual Factors 20 20 20

Target Return (Excess)1 3-5% 6-8% 6-8%

Target Volatility2 3-5% 8-10% 8-10%

Target Equity Beta Neutral Neutral Neutral

Target Duration Neutral Neutral Neutral

Expected Leverage 250% - 300% 500% - 600% 500% - 600% (Gross Notional Exposure)

Fee 100bps (Select); 75bps (R6) 80bps 95bps

Liquidity Daily Monthly Monthly

Minimum $1M (Select); $15M (R6) $5M $5M

Source: J.P. Morgan Asset Management as of 31 December 2016 1 The target returns are for illustrative purposes only and are subject to significant limitations. An investor should not expect to achieve actual returns similar to the target returns shown above. Because of the inherent limitations of the target returns, potential investors should not rely on them when making a decision on whether or not to invest in the strategy. Please see the complete Target Return disclosure at the conclusion of the presentation for more information on the risks and limitation of target returns.

2 Target volatility has been established by J.P. Morgan Investment Management Inc. “JPMorgan” based on its assumptions and calculations using data available to it and in light of current market conditions and available investment opportunities. The target volatility is for illustrative purposes only and is subject to significant limitations. The manager seeks to achieve the stated objectives. There can be no guarantee the objectives will be met.

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Diversified alternative beta strategy performance (5% Volatility Target)

Diversified Alternative Beta Strategy

• Outperformed competitive universe with a lower equity market Diversified Alternative Beta Strategy +23.5%* (net of fees) HFRX Global Hedge Fund (EUR) +0.8% beta HFRI Fund of Fund +19.9% • The strategy’s 5-year volatility is lower than that of hedge fund 25% indices Diversified Alternative Beta Strategy HFRXGL Index 20% HFRIFOF Index

15% Diversified Alternative Beta Strategy: 10% Historical Risk/Return Statistics

Annualized Return 3.13% 5% Risk 3.14%

0% Return/Risk Ratio 1.00 Max Drawdown -3.41% -5% Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Dec-09 Aug-10 Dec-10 Aug-11 Dec-11 Aug-12 Dec-12 Aug-13 Dec-13 Aug-14 Dec-14 Aug-15 Dec-15 Aug-16 Dec-16

Source: J.P. Morgan Asset Management, Bloomberg. Period: January 2010 – 31 December 2016 *January 2010 – 30 September 2016, performance is cumulative. C-share class inception 04/04/2011. Performance is shown based on the NAV of the share class C in EUR with income reinvested including actual ongoing charges excluding any entry and exit fees. Past performance is not an indication of current and future performance. C share class inception date on 04 April 2011. The benchmark of the Fund is ICE one-month EUR LIBOR and the use of HFRX and HFRI indices is merely for comparative purposes of similar strategies. Please note that performance is shown from January 2010 as this is the date from which all strategies included at launch were running at full weight.

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Diversified alternative beta strategy scenario analysis (5% Volatility Target)

Eurozone Crisis (July 2011 – August 2011) Taper Tantrum (May 2013 – July 2013)

7-Jul 14-Jul 21-Jul 28-Jul 4-Aug 11-Aug 18-Aug 25-Aug 2-May 16-May 30-May 13-Jun 27-Jun 11-Jul 25-Jul 0% 0% -1% -5% -2% -3% -10% -4%

-15% -5% -6% -20% -7% Systematic Alpha S&P 500 Systematic Alpha S&P 500

Yuan Devaluation (August 2015 – October 2015) Q1 Drawdown (January 2016 – March 2016)

3-Aug 17-Aug 31-Aug 14-Sep 28-Sep 12-Oct 26-Oct 30-Dec 13-Jan 27-Jan 10-Feb 24-Feb 9-Mar 23-Mar 0% 0 -2% -0.02 -4% -0.04 -6% -0.06 -8% -0.08 -10% -0.1 -12% -0.12 Systematic Alpha S&P 500 Systematic Alpha S&P 500

Source: J.P. Morgan Asset Management, Bloomberg C-share class inception 04/04/2011. Performance is shown based on the NAV of the share class C in EUR with income reinvested including actual ongoing charges excluding any entry and exit fees. Past performance is not an indication of current and future performance. C share class inception date on 04 April 2011. The benchmark of the Fund is ICE one-month EUR LIBOR and the use of HFRX and HFRI indices is merely for comparative purposes of similar strategies.

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J.P. Morgan Systematic Alpha (10% volatility target): composite - performance (gross of fees)

Historical Monthly Returns

10.00% Systematic Alpha HFRI Fund of Funds Index MSCI World

8.00%

6.00%

4.00%

2.00%

0.00%

-2.00%

-4.00%

-6.00%

-8.00%

Systematic Alpha Monthly Returns

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual 2016 1.98% 0.86% -0.05% -4.73% 0.14% 0.23% 0.91% 0.53% 1.33% 0.13% 3.10% 1.61% 6.06% 2015 1.46% -3.43% 2.48% -2.65% 2.73% -2.44% 1.95% -0.96% 3.12% 2.43% -0.78% -0.01% 3.66% 2014 -1.00% 0.42% 0.45% 0.58% -0.56% -1.37% 0.61% 2.06% -0.92% 1.49% 1.77% -1.07% 2.41%

All performance in USD, gross of fees. * Inception date is December 31, 2013. All funds in the composite seek a volatility target of 10%. Past performance is not indicate of future performance. Total return assumes the reinvestment of income. Performance results are gross of investment management fees. The deduction of an advisory fee reduces an investor’s return. Actual account performance will vary depending on individual portfolio security selection and the applicable fee schedule. Fees are described in Part II of the Advisor’s ADV which is available upon request . Please see back page for additional disclosure 39 | FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION STRICTLY PRIVATE | CONFIDENTIAL

J.P. Morgan Systematic Alpha: diversification across strategies to reduce drawdown

Systematic Alpha Drawdown (Backtest + Live)

0% -5% -10% -15% -20% -25% Portfolio (Backtest + Live) HFRI FoF (Vol Scaled) -30% Live -35% Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 May-98 May-99 May-00 May-01 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15 May-16

Sub-Strategy Drawdown (Backtest + Live, Performance shown as 100% notional invested)

0% -2% -4% -6% -8% -10% -12% -14% Live Equity Market Neutral Global Macro CB Arb Event Driven -16% Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 May-98 May-99 May-00 May-01 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15 May-16

Source: JPMAM, Bloomberg. As of December 2016 For illustrative purposes only. The Strategy is an actively managed portfolio; holdings, sector weights, allocations and leverage as applicable, are subject to change and the Strategy is managed to internal guidelines which are not absolute and can change over time. Past performance is not indicative of future results. The back-tested period consists of the performance of three underlying strategies with each strategy being equally risk weighted. The three strategies are Merger Arbitrage, Equity Long/Short (beta neutral) and Global Macro. The Merger Arbitrage portion looks to capture the deal risk premium and therefore gains exposure to all announced deals subject to liquidity constraints. The Equity Long/Short (beta neutral) model captures the alternative risk premia embedded in the style by going long value stocks with positive momentum subject to quality constraints. Finally, the Global Macro style takes advantage of the forward rate bias in FX, and the long/short term premium in government bonds as well as commodities. For the purposes of the back-test, the model positions were generated historically using data available at the time and run forward. Backtested performance is calculated with the benefit of hindsight and is shown for illustrative purposes only. Investors should not rely on backtested performance when making investment decisions. Please see back-test disclosure in the back of the presentation

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Appendix 3: Quantitative Beta Strategies Platform

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Providing broad access to risk premia and factor solutions

Platform provides both off-the-shelf and customized solutions for clients

QUANTITATIVE BETA PLATFORM ALTERNATIVE BETA STRATEGIC BETA FACTOR / RISK PREMIA HEDGE FUND BETA Non-market cap weighted or factor-tilted long- Long/short capture of compensated risk Accessing sources of return previously only strategies: premia across all asset classes: available through hedge fund investments: . Value . Value . Merger Arbitrage . Low Volatility . Momentum . Event Driven . Quality . Carry . Equity Long/short . Momentum . Global Macro

Captured either standalone or through multi-strategy approaches

STRATEGIC BETA EQUITY STRATEGIC BETA + VALUE RISK PREMIA STRATEGY

GLOBAL DIVERSIFIED RISK MACRO HEDGE PREMIA FUND BETA STRATEGY DIVERSIFIED HEDGE FUND BETA

Source: J.P. Morgan Asset Management. For illustrative purposes only.

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We have a robust research & development process

Model risk and Research development (MRAD)

Interim research prepared Model documentation and testing Presented at biweekly research submitted for approval “shoutout”

Quarterly research summit Independent Model review and Final presentations on research vaildation delivered

Approved by Head of Research and Model approval received for use CIO

Embedded IT function develops production systems

Model goes live

Source: J.P. Morgan Asset Management, as of 31 December 2016

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Research feeds into thought leadership collateral for clients

Topical publications in factor based investing:

Recent papers and press coverage

. The democratisation of hedge funds: Alternative beta - Accessing hedge fund returns in a liquid, low cost and transparent manner

. Diversification – still the only free lunch? Alternative building blocks for risk parity portfolios

. Smart Beta: Evolution, not revolution. New dimensions of diversification

. The Turn of Events: Event-driven investing in the context of alternative beta

. Inside the black box : Revealing the alternative beta in hedge fund returns

Source: J.P. Morgan Asset Management. For illustrative purposes only.

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Understanding factor exposure within client portfolios

Factor Analysis Output

Factor Exposure

. Translate portfolio asset class exposures into factor terms in order to determine the contribution to overall risk from separate factors . Search for means of improving diversification by looking through traditional investment labels . Provide asset allocation recommendations utilizing enhanced factor risk parity approach . Isolate potential for tactical hedging

Investment Evaluation

. Separate investment returns into traditional beta, alternative beta, and alpha to provide insight on drivers of performance . Flexibility to incorporate proprietary, tradable factors . Determine opinion on favorability of investments based on statistical output . Identify potential for automated passive replication

Source: J.P. Morgan Asset Management. For illustrative purposes only.

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Appendix 4: Team and Biography

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Beta Strategies organization

Existing functions Global Head of Beta Strategies Functions to be created Michael Camacho Shared resources

Quantitative Beta Core Equity Portfolio NA Beta EMEA & Asia Beta International North America Strategies Mgmt Specialists Specialists (NY) ETF (Lon / NY) (Columbus) (NY) (Lon) ETF (Lon) Bob Deutsch Yaz Romahi Ove Fladberg TBC Sherene Ban TBC

Portfolio management Delivery

Leadership Bios

Michael Camacho Yaz Romahi Ove Fladberg Sherene Ban Bob Deutsch

. Global Head of Beta . Chief Investment Officer . Chief Investment Officer . Head of EMEA and Asia . Head of North America Strategies of Quantitative Beta of Market-cap weighted Beta Specialists ETF business . Member of the GIM Strategies Beta Strategies . Former Co-Head of . Former Head of J.P. Operating Committee . Former Global Head of . Responsible for the Emerging Markets and Morgan’s Global Liquidity . Former Global Head of Quantitative Strategies development of our Asia Pacific Equities business Commodities at JPM CIB and Research for Multi- market-cap weighted Client Portfolio Asset Solutions product range Management

As of December 2016

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Beta Strategies organization

Chris Willcox J. P. Morgan Global Investment Management CEO

Mike Camacho Global Head of Beta Strategies

Quantitative Beta Strategies Beta Specialist Team

Yazann Romahi Chief Investment Officer, Quantitative Beta Strategies

Victor Li Niels Schuehle Eric Isenberg Head of Equity/Alternative Beta Head of Fixed Income Head of Fixed Income Sherene Ban New Hire Research Research Portfolio Manager Team Head of EMEA & APAC Head of US Gareth Turner Garrett Norman Additional new hires Albert Chuang Kartik Aiyar Aijaz Hussain Jonathan Msika Steven Wu Additional new hires Joe Staines Naveen Kumar

Related functions/teams Independent functions

Investment Director & JPMAM Risk Management Global Research Technology Global Multi-Asset Research Including: Embedded Risk AM Counterparty Risk Group Investment risk oversight Model Risk Governance and Review Soma Rao, Asset Management Model Risk Officer +16 team members Katherine Santiago, Kent Zheng, Head of team Ed Berman, Head of team Head of Global Multi-Asset Research +6 team members +6 team members JPMAM Trading +6 Quantitative Analysts Equity - 42 traders and analysts Fixed income - 21 traders Currency trading – 18 currency managers

Source: J.P. Morgan Asset Management. As of 31 December 2016. There can be no assurance that the professionals currently employed by J.P. Morgan Asset Management will continue to be employed by J.P. Morgan Asset Management or that the past performance or success of any such professional serves as an indicator of such professional's future performance or success. 48 | FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION 0903c02a818403ca STRICTLY PRIVATE | CONFIDENTIAL

Biographies – key personnel

YAZANN ROMAHI Yazann Romahi, PhD, CFA, managing director, is CIO for Quantitative Beta Strategies focused on further developing the firm's factor-based franchise across both alternative beta and strategic beta. Prior to that he was Head of Research and Quantitative Strategies in Multi Asset Solutions, responsible for the quantitative models that help establish the broad asset allocation reflected across Multi-Asset Solutions portfolios globally. Prior to joining J.P. Morgan in 2003, Yazann worked as a research analyst at the Centre for Financial Research at the University of Cambridge and undertook consulting assignments for a number of financial institutions including Pioneer Asset Management, PricewaterhouseCoopers and HSBC. Yazann holds a PhD in Applied Mathematics from the University of Cambridge and is a CFA charterholder.

VICTOR LI Victor Li, PhD, CFA, executive director, is Head of Research for Quantitative Beta Strategies and a portfolio manager across the firm’s suite of alternative beta and strategic beta products, based in London. He was previously a member of the quantitative research team in Multi-Asset Solutions, focusing on quantitative asset allocation, systematic and factor-based investment strategies. Prior to joining the firm in 2010, Victor completed a PhD in Signal Processing at Imperial College London, where he was also employed as a research assistant. Victor additionally has an MSc with Distinction in Communications Engineering from the University of Manchester, a BEng in Information Engineering from the Beijing Institute of Technology, and is a CFA charterholder.

GARRETT NORMAN Garrett A. Norman, CFA, vice president, is a Client Portfolio Manager in the Multi Asset Solutions group based in New York. Prior to joining J.P. Morgan, Garrett was an Associate Director in Portfolio Management at PAAMCO where he focused on investments in fixed income relative value, long/short credit, distressed debt, and equity hedge fund strategies and helped develop the firm’s inaugural alternative beta offering. He has experience designing tactical asset allocation portfolios as part of a quantitative analytics group at Citigroup and has spent time conducting research on factors for use in stock-selection models at Batterymarch Financial Management, Inc. Garrett graduated magna cum laude from the University of Pennsylvania with a bachelor’s degree in Economics and holds an MBA from the University of Chicago Booth School of Business with concentrations in Analytical Finance, Econometrics & Statistics, and Economics. He is also a CFA charterholder.

There can be no assurances that the professionals currently employed by JPMAM will continue to be employed by JPMAM or that the past performance or success of any such professional serves as an indicator of such professional’s future performance or success.

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Glossary of terms

 Normal backwardation is when the futures price is below the expected future spot price. This is desirable for speculators who are net long in their positions; they want the futures price to increase. Thus, normal backwardation is when the futures price is increasing

 Contango is when the futures price is above the expected future spot price. Because the futures price must converge on the expected future spot price, contango implies that future prices are falling over time as new information brings them into line with the expected future spot price

 Spot price is the current price at which a particular commodity, security or currency can be bought or sold at a specified time and place

 The maximum drawdown is the largest percentage drawdown that has occurred in any investment data record from peak to trough

 Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is calculated using regression. A beta of one indicates that the security’s price will move in line with the market. A beta less than one means that the security will be less volatile than the market. A beta greater than one indicates that the security’s price will be more volatile than the market

 Alpha is the portion of an investment return arising from a specific (non-market) risk. It is an estimate of the amount of return expected from an investment’s inherent values and is distinct from the amount of return caused by volatility, which is measured by beta

 Volatility is the characteristic of a security, commodity or market to rise or fall sharply in price within a short-term period. A measure of the relative volatility of a stock to the overall market is its beta

 Carry refers to return obtained from an asset (if positive) or cost of holding an asset (if negative). Carry is usually associated with a currency carry trade where an investor sells a certain low-yielding currency and uses the funds to buy a different currency yielding a higher interest rate. The strategy attempts to capture the difference between the rates

For illustrative and discussion purposes only.

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Data source disclosure

Ref. Asset/Factor Data Source Time Period of Use

1 US Equity/Equity S&P500 Index (data prior to 1957 from CRSP database/Ibbotson) January 1927 – March 2016

2 MSCI World/Equity Risk Premium MSCI World Index (USD net) January 1975 - March 2016

3 MSCI EM MSCI Emerging Market Free Index (USD) January 1991 - March 2016

4 Treasuries Citigroup U.S 10 year Treasuries Index (data prior to 1980 from Ibbotson) January 1927 - March 2016

5 WGBI/Bonds Citigroup WGBI 7-10 year Index (USD) January 1975 - March 2016

6 Credit/High Yield Barclay Capital US High Yield Index (data prior to 1983 -Barclay Capital Intermediate Credit Index) January 1975 - March 2016

7 EMBI JPMorgan EMBI Global Index January 1991 - March 2016

8 Commodities/GSCI Goldman Sachs Commodity Index January 1975 - March 2016

9 REITs NAREIT Index January 1991 - March 2016

10 Value Kenneth French (1927-1990) , J. P. Morgan Asset Management GMAG (1990-2015) January 1927 - March 2016

11 Momentum Kenneth French (1927-1990) , J. P. Morgan Asset Management GMAG (1990-2015) January 1927 - March 2016

12 Size/Small Cap Kenneth French (1927-1990) , J. P. Morgan Asset Management GMAG (1990-2015) January 1927 - March 2016

13 Low beta/minimum volatility MSCI Minimum Volatility Index, J. P. Morgan Asset Management Global Multi-Asset Group January 1991 - March 2016

14 Convertible bond arbitrage UBS Global Focus Convertible Bond Index, J. P. Morgan Asset Management January 1991 - March 2016

15 Systematic merger arbitrage MergerStat, Bloomberg, J. P. Morgan Asset Management January 1991 - March 2016

16 Long/Short G7 Term Premium Citigroup WGBI Index for US, UK, EU, JP, J. P. Morgan Asset Management January 1975 - March 2016

17 Carry/FI Carry Citigroup WGBI Index for US, UK, EU, JP, J. P. Morgan Asset Management January 1975 - March 2016

18 FX Forward Rate Bias J. P. Morgan Asset Management Global Multi-Asset Group January 1998 - March 2016

19 FX Momentum J. P. Morgan Asset Management Global Multi-Asset Group January 1998 - March 2016

20 Commodities Roll Yield J. P. Morgan Asset Management Global Multi-Asset Group January 1998 - March 2016

21 Commodities Momentum J. P. Morgan Asset Management Global Multi-Asset Group January 1998 - March 2016

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Composite disclosures

Composite: Diversified Alternative Beta, as of 31st of August JPMorgan Asset Management claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. JPMorgan Asset Management has been independently verified for the periods 1st January 1996 to 31st December 2010. The verification reports are available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation. Additional information regarding policies for valuing portfolios, calculating performance and preparing compliant presentations are available upon request. HSBC Securities Services has verified JPMorgan Asset Management’s claim of compliance with GIPS since 1st January 2001.

For the purposes of GIPS® compliance, the Firm is defined as the London JPMorgan, JPMorgan Japan and the JF (Hong Kong and Singapore) investment processes of JPMorgan Asset Management. Robert Fleming Holdings was acquired by the Chase Manhattan Corporation on 1st August 2000. The Chase Manhattan Corporation and JP Morgan and Co Incorporated merged with effect from 1st January 2001. A list of business entities represented by the above investment processes, and also full details of the acquisition and merger and their impact on the investment processes, are available upon request. The firm name was changed from JPMorgan Fleming Asset Management to JPMorgan Asset Management with effect from July 2005.

This composite consists of all diversified alternative beta portfolios that are managed according to the following rules. The portfolios are managed by Multi-Asset Solutions; they must include each of the following sub-strategies: equity long-short, merger arbitrage and macro based strategies; they have a volatility target around 5%; they should not explicitly seek to capture traditional beta exposure. It does not contain any returns that have been carved out of other multi asset class portfolios.

Name changed from Systematic Alpha on 24/06/13 The Benchmark of the composite is EUR 1 Month Libor. A complete list and description of all the firm's composites is available on request. The composite was constructed during December 2009. The composite inception date is July 2009.

Valuation and Calculation The returns shown for this composite are the asset-weighted averages of the performance of all of the individual portfolios in the composite using beginning of period weightings. The performance results are time-weighted rates of return net of commissions, transaction costs and non-reclaimable withholding taxes. They have been presented gross of investment management fees (unless otherwise stated). All portfolios in this composite have been valued at least monthly to June 2005 and daily thereafter (excluding Hong Kong accounts which continue to be valued monthly), on a trade date basis using accrual accounting.

The dispersion is measured by the asset-weighted standard deviation of annual returns of those portfolios that are included in the composite for the full year. The dispersion of results are not shown where the number of accounts held during the period is less than five. Furthermore, there are no non-fee paying portfolios included within the composites and no known inconsistencies between the source of exchange rates used to calculate composite returns and those used to calculate the benchmark. There are no known local laws and regulations which conflict with GIPS®.

JPMorgan Asset Management's (JPMAM) schedule of management fees payable in USD for systematic alpha clients is: 0.75% per annum. Illustration showing impact of investment management fees:- An investment of USD 1,000,000 under the management of JPMAM achieves a 10% compounded gross annual return for 10 years. If a management fee of 0.75% of average assets under management were charged per year for the 10 year period, the annual return would be 9.25% and the value of assets would be USD 2,422,225 net of fees and compared with USD 2,593,742 gross of fees. Therefore the investment management fee, and any other expenses incurred in the management of the portfolio, will reduce the client's return. Investment advisory fees are described in Part II of the advisor's Form ADV.

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Footnotes

Back-tested Performance Limitation Back tested performance results are shown for illustrative purposes only. Back tested performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between back-tested performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of back-tested performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. Also, since the trades have not actually been executed, the results may have over or under-compensated for the impact, if any, of certain market factors such as liquidity constraints. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of back-tested performance results and all of which can adversely affect actual trading results. The back-tested results are not meant to be representative of actual results achieved by the manager while investing in the respective strategies over the time periods shown. The back-tested performance calculations for the respective strategies are shown gross of fees. If fees were included returns would be lower. Unlike an actual performance record, they do not reflect actual trading, liquidity constraints, fees and other costs. Also, since the trades have not actually been executed, the results may have under-or-over compensated for the impact of certain market factors such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. These back-tested performance results do not take into consideration the ongoing implementation of the manager’s proprietary investment strategies. When making investment decisions an investor should not rely on the back-tested performance.

The Target Return has been established by J.P. Morgan Investment Management Inc. “J.P. Morgan” based on its assumptions and calculations using data available to it and in light of current market conditions and available investment opportunities and is subject to the risks set forth herein and to be set forth more fully in the Memorandum. The target returns are for illustrative purposes only and are subject to significant limitations. An investor should not expect to achieve actual returns similar to the target returns shown above. Because of the inherent limitations of the target returns, potential investors should not rely on them when making a decision on whether or not to invest in the strategy. The target returns cannot account for the impact that economic, market, and other factors may have on the implementation of an actual investment program. Unlike actual performance, the target returns do not reflect actual trading, liquidity constraints, fees, expenses, and other factors that could impact the future returns of the strategy. The manager’s ability to achieve the target returns is subject to risk factors over which the manager may have no or limited control. There can be no assurance that the Fund will achieve its investment objective, the Target Return or any other objectives. The return achieved may be more or less than the Target Return. The data supporting the Target Return is on file with J.P. Morgan and is available for inspection upon request.

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J.P. Morgan Asset Management

RISKS ASSOCIATED WITH INVESTING

Equity: The price of equity securities may rise or fall because of changes in the broad market or changes in a company’s financial condition, sometimes rapidly or unpredictably. These price movements may result from factors affecting individual companies, sectors or industries selected for the portfolio or the securities market as a whole, such as changes in economic or political conditions. Equity securities are subject to “stock market risk” meaning that stock prices in general (or in particular, the prices of the types of securities in which a portfolio invests) may decline over short or extended periods of time. When the value of a portfolio’s securities goes down, an investment in a fund decreases in value. There is no guarantee that the use of long and short positions will succeed in limiting the Fund's exposure to domestic stock market movements, capitalization, sector-swings or other risk factors. Investment in a portfolio involved in long and short selling may have higher portfolio turnover rates. This will likely result in additional tax consequences. Short selling involves certain risks, including additional costs associated with covering short positions and a possibility of unlimited loss on certain short sale positions. Fixed Income: Investments in bonds and other debt securities will change in value based on changes in interest rates. If rates rise, the value of these investments generally drops. Securities with greater interest rate sensitivity and longer maturities tend to produce higher yields, but are subject to greater fluctuations in value. Usually, the changes in the value of fixed income securities will not affect cash income generated, but may affect the value of your investment. Credit risk is the risk of loss of principal or loss of a financial reward stemming from a borrower’s failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt. Such default could result in losses to an investment in your portfolio. International/Emerging Markets : International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Also, some overseas markets may not be as politically and economically stable as the United States and other nations. Investments that are concentrated in a single country or region are subject to the additional risk associated with a smaller number of issuers. International investing bears greater risk due to social, economic, regulatory and political instability in countries in "emerging markets." This makes emerging market securities more volatile and less liquid developed market securities. Changes in exchange rates and differences in accounting and taxation policies outside the U.S. can also affect returns. Alternatives: Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments involve greater risks than traditional investments and should not be deemed a complete investment program. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain. The value of the investment may fall as well as rise and investors may get back less than they invested. Hedge Funds: Hedge funds often engage in leverage, short-selling, arbitrage, hedging, derivatives, and other speculative investment practices that may increase investment loss. Hedge funds may be highly illiquid, are not required to provide periodic pricing or valuation information, and often charge high fees that may negatively impact performance. Additionally, hedge funds may involve complex tax structures that may delay the distribution of tax information.

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J.P. Morgan Asset Management

Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable. These views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Past performance is no guarantee of future results.

There can be no assurance that the professionals currently employed by JPMAM will continue to be employed by JPMAM or that the past performance or success of any such professional serves as an indicator of such professional’s future performance or success.

Any securities/portfolio holdings mentioned throughout the presentation are shown for illustrative purposes only and should not be interpreted as recommendations to buy or sell. A full list of firm recommendations for the past year are available upon request.

Past performance does not guarantee future results. Total returns assumes reinvestment of any income. The deduction of an advisory fee reduces an investor’s return. Actual account performance will vary on individual portfolio security selection and the applicable fee schedule. Fees are available upon request.

The following is an example of the effect of compounded advisory fees over a period of time on the value of a client’s portfolio: A portfolio with a beginning value of $100 million, gaining an annual return of 10% per annum would grow to $259 million after 10 years, assuming no fees have been paid out. Conversely, a portfolio with a beginning value of $100 million, gaining an annual return of 10% per annum, but paying a fee of 1% per annum, would only grow to $235 million after 10 years. The annualized returns over the 10 year time period are 10.00% (gross of fees) and 8.91% (net of fees). If the fee in the above example was 0.25% per annum, the portfolio would grow to $253 million after 10 years and return 9.73% net of fees. The fees were calculated on a monthly basis, which shows the maximum effect of compounding.

Securities may be sold through J.P. Morgan Institutional Investments Inc., member FINRA/SIPC.

J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, JPMorgan Chase Bank N.A., J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated , J.P. Morgan Alternative Asset Management, Inc., and J.P. Morgan Asset Management (Canada), Inc.

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PERIOD ENDING: FEBRUARY 28, 2017 Investment Performance Monthly Review for Merced County Employees’ Retirement Association Total Fund Performance Summary (Net) Preliminary Period Ending: February 28, 2017

Market Value % of 1 Mo 3 Mo 1 Yr 3 Yrs 5 Yrs 7 Yrs 10 Yrs Return Since ($) Portfolio (%) (%) (%) (%) (%) (%) (%) (%)

_ Total Fund 714,497,587 100.0 1.8 4.8 14.9 5.0 7.3 ------Dec-94 Policy Index 2.1 5.4 16.3 5.8 8.2 ------Dec-94 US Equity 223,181,628 31.2 3.9 8.2 28.5 11.1 14.3 ------Dec-94 80% R1000/ 20% R2000 3.5 7.4 27.6 9.7 13.8 13.8 7.6 9.8 Dec-94 Mellon Dynamic US Equity 70,867,178 9.9 5.5 10.6 27.3 13.3 ------18.9 Dec-12 S&P 500 4.0 8.0 25.0 10.6 14.0 13.9 7.6 15.3 Dec-12 Mellon Large Cap 111,805,373 15.6 3.9 8.0 ------17.4 Mar-16 Russell 1000 3.9 7.9 25.5 10.2 13.9 13.9 7.7 17.4 Mar-16 DFA Small Cap 20,533,396 2.9 1.0 4.0 32.4 ------8.7 Jun-14 Russell 2000 1.9 5.2 36.1 6.9 12.9 13.5 7.2 7.3 Jun-14 PanAgora 19,975,680 2.8 2.2 5.2 32.3 7.9 ------10.7 Sep-13 Russell 2000 1.9 5.2 36.1 6.9 12.9 13.5 7.2 9.3 Sep-13 International Equity 173,132,162 24.2 1.7 7.2 17.6 -1.1 3.8 ------Dec-98 MSCI ACWI ex US 1.6 7.9 19.9 0.3 4.7 5.0 1.0 3.9 Dec-98 Copper Rock 25,087,382 3.5 1.8 6.1 6.0 0.1 ------4.2 Sep-13 MSCI World ex US Small Cap GD 1.9 8.6 19.0 2.3 7.6 8.6 -- 4.8 Sep-13 EARNEST Partners 137,116 0.0 Mellon International 98,202,063 13.7 1.4 8.0 ------8.9 Mar-16 MSCI EAFE Gross 1.4 8.0 16.3 -0.2 5.6 5.7 1.5 9.1 Mar-16 Wells Capital 49,705,600 7.0 2.4 6.4 29.2 2.3 ------0.5 Mar-12 MSCI Emerging Markets Gross 3.1 9.0 29.9 1.7 0.0 2.8 3.2 0.7 Mar-12

1. See Policy Index and Benchmark History. 2. Funded 3/15/2016. 3. Liquidating as of 9/14/2016.

Merced County Employees' Retirement Association 1 Total Fund Performance Summary (Net) Preliminary Period Ending: February 28, 2017

Market Value % of 1 Mo 3 Mo 1 Yr 3 Yrs 5 Yrs 7 Yrs 10 Yrs Return Since ($) Portfolio (%) (%) (%) (%) (%) (%) (%) (%)

_ US Fixed Income 141,851,087 19.9 0.7 1.6 5.7 3.0 3.2 ------Dec-94 US Fixed Custom 0.8 1.8 6.0 3.2 2.7 3.8 4.5 5.9 Dec-94 Barrow Hanley 112,731,706 15.8 0.7 0.9 1.5 2.6 2.3 ------Mar-10 BBgBarc Aggregate 0.7 1.0 1.4 2.6 2.2 -- -- 3.7 Mar-10 Guggenheim Loan 29,119,381 4.1 0.4 1.4 8.9 ------3.9 Aug-14 Credit Suisse Leveraged Loans 0.6 2.3 12.6 3.8 5.0 5.3 4.3 3.8 Aug-14 Hedge Fund 29,409,752 4.1 0.4 2.7 6.8 ------1.9 Jun-14 Hedge Fund Custom 1.1 3.1 8.2 ------2.6 Jun-14 OZ Domestic II 15,667,717 2.2 1.0 4.2 12.0 ------4.3 Jun-14 HFRI RV: Multi-Strategy Index 0.8 2.9 9.5 3.5 5.0 5.0 3.7 3.3 Jun-14 Titan 13,742,035 1.9 -0.3 1.0 1.4 ------0.7 Jun-14 HFRI Fund of Funds Composite Index 0.9 2.8 6.5 1.4 3.1 2.7 1.3 1.3 Jun-14 Real Estate 57,417,334 8.0 0.2 1.2 6.4 8.0 8.3 ------Mar-99 NCREIF ODCE net 0.0 1.9 7.8 10.8 11.2 12.8 -- -- Mar-99 BlackRock RE 3,992,590 0.6 2.7 5.9 10.1 ------0.9 Jul-14 FTSE NAREIT Developed ex US Gross 2.7 5.9 10.7 2.5 6.0 7.1 0.1 -0.5 Jul-14 Greenfield Gap VII 10,654,308 1.5 0.0 0.2 5.3 ------10.7 Dec-14 Patron Capital V 1,326,083 0.2 0.0 -4.7 -11.8 ------10.9 Jan-16 UBS Trumbull Property 41,444,353 5.8 0.0 1.2 6.0 9.4 9.2 ------Mar-99 NCREIF ODCE net 0.0 1.9 7.8 11.4 11.8 13.0 7.8 10.2 Mar-99

*Managers reported net of fees.

Merced County Employees' Retirement Association 2 Total Fund Performance Summary (Net) Preliminary Period Ending: February 28, 2017

Market Value % of 1 Mo 3 Mo 1 Yr 3 Yrs 5 Yrs 7 Yrs 10 Yrs Return Since ($) Portfolio (%) (%) (%) (%) (%) (%) (%) (%)

_ Private Equity 35,693,704 5.0 0.0 0.2 4.0 6.1 5.5 9.6 7.6 6.9 Jun-05 Russell 3000 +3% 1Q Lag 4.6 3.2 11.3 11.7 18.0 ------Jun-05 Adams Street 8,633,713 1.2 0.0 0.0 6.8 10.5 11.2 12.9 7.7 5.7 Sep-05 Invesco IV 2,904,963 0.4 0.0 0.0 5.4 7.8 5.6 ------Jun-05 Invesco VI 4,578,998 0.6 0.0 0.0 3.8 11.5 ------9.9 Jun-13 Ocean Avenue II 5,586,136 0.8 0.0 1.2 1.0 ------1.1 Jun-14 Pantheon I 1,825,165 0.3 0.0 0.0 2.1 3.0 5.1 ------Dec-05 Pantheon II 3,584,286 0.5 0.0 0.0 6.6 7.3 9.8 -- -- 9.5 Dec-11 Pantheon Secondary 2,128,852 0.3 0.0 0.0 -1.4 0.1 -1.3 ------Jun-07 Raven Asset Fund II 6,451,591 0.9 0.0 0.0 4.3 ------1.5 Aug-14 Infrastructure 6,270,228 0.9 0.0 -1.4 0.9 ------0.3 Dec-14 S&P Global Infrastructure 3.0 4.2 11.3 ------7.5 Dec-14 KKR Global II 3,970,471 0.6 0.0 -2.4 -2.8 ------5.2 Dec-14 North Haven Infrastructure II 2,299,757 0.3 0.0 0.0 7.1 ------2.6 May-15 S&P Global Infrastructure 3.0 4.2 11.3 ------8.5 May-15 Natural Resources 2,672,996 0.4 0.0 4.1 43.4 ------27.3 Sep-15 S&P Global Natural Resources -1.4 2.8 9.9 ------8.2 Sep-15 GSO Energy Opportunities 1,337,199 0.2 0.0 0.0 37.9 ------27.4 Nov-15 Taurus Mining 1,237,849 0.2 0.0 7.3 48.2 ------30.4 Sep-15 S&P Global Natural Resources -1.4 2.8 9.9 ------8.2 Sep-15 Taurus Mining Annex 97,948 0.0 0.0 ------0.0 Jan-17 S&P Global Natural Resources -1.4 6.1 36.9 ------1.4 Jan-17

4. Funded on 1/31/2017. +Private Equity managers are valued at a aquarter lag.

Merced County Employees' Retirement Association 3 Total Fund Performance Summary (Net) Preliminary Period Ending: February 28, 2017

Market Value % of 1 Mo 3 Mo 1 Yr 3 Yrs 5 Yrs 7 Yrs 10 Yrs Return Since ($) Portfolio (%) (%) (%) (%) (%) (%) (%) (%)

_ Cash 44,868,697 6.3 0.0 0.2 0.7 0.5 0.5 ------Sep-03 Treasury Cash 3,747,599 0.5 ------Sep-11

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Merced County Employees' Retirement Association 4 Total Fund Performance Summary (Gross) Preliminary Period Ending: February 28, 2017

Market Value % of 1 Mo 3 Mo 1 Yr 3 Yrs 5 Yrs 7 Yrs 10 Yrs Return Since ($) Portfolio (%) (%) (%) (%) (%) (%) (%) (%)

_ Total Fund 714,497,587 100.0 1.8 4.9 15.2 5.4 7.8 8.7 5.0 -- Dec-94 Policy Index 2.1 5.4 16.3 5.8 8.2 ------Dec-94 US Equity 223,181,628 31.2 3.9 8.2 28.7 11.3 14.5 14.2 8.2 -- Dec-94 80% R1000/ 20% R2000 3.5 7.4 27.6 9.7 13.8 13.8 7.6 9.8 Dec-94 Mellon Dynamic US Equity 70,867,178 9.9 5.5 10.6 27.6 13.6 ------19.1 Dec-12 S&P 500 4.0 8.0 25.0 10.6 14.0 13.9 7.6 15.3 Dec-12 Mellon Large Cap 111,805,373 15.6 3.9 8.0 ------17.4 Mar-16 Russell 1000 3.9 7.9 25.5 10.2 13.9 13.9 7.7 17.4 Mar-16 DFA Small Cap 20,533,396 2.9 1.0 4.0 32.7 ------9.0 Jun-14 Russell 2000 1.9 5.2 36.1 6.9 12.9 13.5 7.2 7.3 Jun-14 PanAgora 19,975,680 2.8 2.2 5.4 33.3 8.8 ------11.5 Sep-13 Russell 2000 1.9 5.2 36.1 6.9 12.9 13.5 7.2 9.3 Sep-13 International Equity 173,132,162 24.2 1.7 7.3 18.2 -0.5 4.5 5.8 2.3 -- Dec-98 MSCI ACWI ex US 1.6 7.9 19.9 0.3 4.7 5.0 1.0 3.9 Dec-98 Copper Rock 25,087,382 3.5 1.8 6.3 7.2 1.0 ------5.0 Sep-13 MSCI World ex US Small Cap GD 1.9 8.6 19.0 2.3 7.6 8.6 -- 4.8 Sep-13 EARNEST Partners 137,116 0.0 Mellon International 98,202,063 13.7 1.4 8.0 ------8.9 Mar-16 MSCI EAFE Gross 1.4 8.0 16.3 -0.2 5.6 5.7 1.5 9.1 Mar-16 Wells Capital 49,705,600 7.0 2.4 6.6 30.5 3.1 ------1.5 Mar-12 MSCI Emerging Markets Gross 3.1 9.0 29.9 1.7 0.0 2.8 3.2 0.7 Mar-12

1. See Policy Index and Benchmark History. 2. Funded 3/15/2016. 3. Liquidating as of 9/14/2016.

Merced County Employees' Retirement Association 5 Total Fund Performance Summary (Gross) Preliminary Period Ending: February 28, 2017

Market Value % of 1 Mo 3 Mo 1 Yr 3 Yrs 5 Yrs 7 Yrs 10 Yrs Return Since ($) Portfolio (%) (%) (%) (%) (%) (%) (%) (%)

_ US Fixed Income 141,851,087 19.9 0.7 1.7 5.9 3.2 3.5 4.8 3.9 -- Dec-94 US Fixed Custom 0.8 1.8 6.0 3.2 2.7 3.8 4.5 5.9 Dec-94 Barrow Hanley 112,731,706 15.8 0.7 1.0 1.7 2.8 2.6 3.9 -- 3.9 Mar-10 BBgBarc Aggregate 0.7 1.0 1.4 2.6 2.2 -- -- 3.7 Mar-10 Guggenheim Loan 29,119,381 4.1 0.4 1.4 8.9 ------3.9 Aug-14 Credit Suisse Leveraged Loans 0.6 2.3 12.6 3.8 5.0 5.3 4.3 3.8 Aug-14 Hedge Fund 29,409,752 4.1 0.4 2.7 6.8 ------1.9 Jun-14 Hedge Fund Custom 1.1 3.1 8.2 ------2.6 Jun-14 OZ Domestic II 15,667,717 2.2 1.0 4.2 12.0 ------4.3 Jun-14 HFRI RV: Multi-Strategy Index 0.8 2.9 9.5 3.5 5.0 5.0 3.7 3.3 Jun-14 Titan 13,742,035 1.9 -0.3 1.0 1.4 ------0.7 Jun-14 HFRI Fund of Funds Composite Index 0.9 2.8 6.5 1.4 3.1 2.7 1.3 1.3 Jun-14 Real Estate 57,417,334 8.0 0.2 1.4 7.4 9.3 9.5 11.2 5.8 8.7 Mar-99 NCREIF ODCE net 0.0 1.9 7.8 10.8 11.2 12.8 -- -- Mar-99 BlackRock RE 3,992,590 0.6 2.7 5.9 10.2 ------0.8 Jul-14 FTSE NAREIT Developed ex US Gross 2.7 5.9 10.7 2.5 6.0 7.1 0.1 -0.5 Jul-14 Greenfield Gap VII 10,654,308 1.5 0.0 0.2 5.9 ------13.6 Dec-14 Patron Capital V 1,326,083 0.2 0.0 -4.7 -11.8 ------10.9 Jan-16 UBS Trumbull Property 41,444,353 5.8 0.0 1.5 7.2 10.6 10.2 ------Mar-99 NCREIF ODCE net 0.0 1.9 7.8 11.4 11.8 13.0 7.8 10.2 Mar-99

* Managers reported net of fees.

Merced County Employees' Retirement Association 6 Total Fund Performance Summary (Gross) Preliminary Period Ending: February 28, 2017

Market Value % of 1 Mo 3 Mo 1 Yr 3 Yrs 5 Yrs 7 Yrs 10 Yrs Return Since ($) Portfolio (%) (%) (%) (%) (%) (%) (%) (%)

_ Private Equity 35,693,704 5.0 0.0 0.2 4.0 6.1 5.8 9.9 7.9 7.1 Jun-05 Russell 3000 +3% 1Q Lag 4.6 3.2 11.3 11.7 18.0 ------Jun-05 Adams Street 8,633,713 1.2 0.0 0.0 6.8 10.5 11.8 14.1 9.9 10.0 Sep-05 Invesco IV 2,904,963 0.4 0.0 0.0 5.4 7.8 5.8 12.0 9.7 8.7 Jun-05 Invesco VI 4,578,998 0.6 0.0 0.0 3.8 11.5 ------9.9 Jun-13 Ocean Avenue II 5,586,136 0.8 0.0 1.2 1.0 ------1.1 Jun-14 Pantheon I 1,825,165 0.3 0.0 0.0 2.1 3.0 5.3 ------Dec-05 Pantheon II 3,584,286 0.5 0.0 0.0 6.6 7.3 10.6 -- -- 10.2 Dec-11 Pantheon Secondary 2,128,852 0.3 0.0 0.0 -1.4 0.1 -0.9 ------Jun-07 Raven Asset Fund II 6,451,591 0.9 0.0 0.0 4.3 ------1.5 Aug-14 Infrastructure 6,270,228 0.9 0.0 -1.4 0.9 ------0.3 Dec-14 S&P Global Infrastructure 3.0 4.2 11.3 ------7.5 Dec-14 KKR Global II 3,970,471 0.6 0.0 -2.4 -2.8 ------5.2 Dec-14 North Haven Infrastructure II 2,299,757 0.3 0.0 0.0 7.1 ------2.6 May-15 S&P Global Infrastructure 3.0 4.2 11.3 ------8.5 May-15 Natural Resources 2,672,996 0.4 0.0 4.1 43.4 ------27.3 Sep-15 S&P Global Natural Resources -1.4 2.8 9.9 ------8.2 Sep-15 GSO Energy Opportunities 1,337,199 0.2 0.0 0.0 37.9 ------27.4 Nov-15 Taurus Mining 1,237,849 0.2 0.0 7.3 48.2 ------30.4 Sep-15 S&P Global Natural Resources -1.4 2.8 9.9 ------8.2 Sep-15 Taurus Mining Annex 97,948 0.0 0.0 ------0.0 Jan-17 S&P Global Natural Resources -1.4 6.1 36.9 ------1.4 Jan-17

4. Funded on 1/31/2017. +Private Equity managers are valued at a aquarter lag.

Merced County Employees' Retirement Association 7 Total Fund Performance Summary (Gross) Preliminary Period Ending: February 28, 2017

Market Value % of 1 Mo 3 Mo 1 Yr 3 Yrs 5 Yrs 7 Yrs 10 Yrs Return Since ($) Portfolio (%) (%) (%) (%) (%) (%) (%) (%)

_ Cash 44,868,697 6.3 0.0 0.2 0.7 0.5 0.5 1.0 4.7 4.4 Sep-03 Treasury Cash 3,747,599 0.5 ------Sep-11

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Merced County Employees' Retirement Association 8 Policy Index and Benchmark History Period Ending: February 28, 2017

Merced County Employees' Retirement Association 9 Policy Index and Benchmark History Period Ending: February 28, 2017

Merced County Employees' Retirement Association 10 Policy Index and Benchmark History Period Ending: February 28, 2017

Merced County Employees' Retirement Association 11 Policy Index and Benchmark History Period Ending: February 28, 2017

Merced County Employees' Retirement Association 12 FEBRUARY 2017 Capital Markets Update Market commentary

ECONOMIC CLIMATE DOMESTIC FIXED INCOME ― Headline CPI increased by 2.5% year- over-year in January, up 45 — Domestic fixed income returns were positive in February, as the bps from the prior month, mainly driven by rising energy prices. Bloomberg Barclays U.S. Aggregate returned 0.7%. Core CPI increased 2.3% over the previous year, up 4 bps from the — U.S. interest rates fell modestly as the 10-year Treasury yield prior month. dropped 9 bps and ended the month at 2.36%. ― Consumer spending increased in January by 0.4% month-over- — The U.S. Treasury curve flattened slightly in February, with the month, above the consensus estimate of 0.1%. Furthermore, 10-year minus 2-year Treasury yield spread contracting from December’s retail sales growth rate was revised upwards from 1.26% to 1.14%. 0.6% to 1.0%. INTERNATIONAL MARKETS ― The Conference Board Consumer Confidence Index rose 3.2 points to a 15-year high of 114.8 in February. The increase was attributed — International equities underperformed domestic equities (S&P 500 to optimistic expectations of employment and wage growth. 4.0%) as the unhedged MSCI ACWI ex US returned 1.6% (1.9% hedged). ― The ISM manufacturing index increased 1.7% in February to a 2-year high of 57.7, above the consensus estimate of 56.4. — Inflation in the U.K. approached the Bank of England’s annual Readings above 50 indicate a general expansion in manufacturing target of 2.0% for the first time since 2013, as CPI grew at 1.8% activity. year-over-year in January, influenced by increased energy and food prices. DOMESTIC EQUITIES — Japanese headline inflation was 0.4% year-over-year in January, — Domestic equities provided a positive return for the fourth well below the Bank of Japan’s annual target of 2.0%. Core consecutive month, as the S&P 500 returned 4.0% in February. inflation increased 0.1% year-over-year, the first positive change — The Dow Jones Industrial Average tied it’s longest streak of since December of 2015. consecutive record high closes at 12 sessions, and briefly topped — According to Bloomberg, emerging market debt and equity ETFs 21,000 points before ending the month at 20,812. have received inflows of more than $7 billion year-to-date. Russia, — With 98% of companies in the index reporting results for the Brazil and Turkey were the largest beneficiaries of the investment fourth quarter thus far, the blended earnings growth rate for the flows. S&P 500 was 4.9% as of March 2nd.

Capital Markets Update 2 February 2017 Major asset class returns

ONE YEAR ENDING FEBRUARY TEN YEARS ENDING FEBRUARY

41.3% Russell 2000 Value 9.1% Russell 1000 Growth

36.1% Russell 2000 8.0% Russell 2000 Growth

30.9% Russell 2000 Growth 7.6% S&P 500

29.5% MSCI EM 7.5% BBgBarc US Corp. High Yield

29.1% Russell 1000 Value 7.2% Russell 2000

25.0% S&P 500 6.3% Russell 2000 Value

22.2% Russell 1000 Growth 6.2% Russell 1000 Value

21.8% BBgBarc US Corp. High Yield 5.3% BBgBarc US Credit

16.0% Bloomberg Commodity 4.4% Wilshire US REIT

15.8% MSCI EAFE 4.3% BBgBarc US Agg Bond

15.8% Wilshire US REIT 3.9% BBgBarc US Treasury

5.7% BBgBarc US Credit 3.1% BBgBarc US Agency Interm

1.4% BBgBarc US Agg Bond 2.9% MSCI EM

0.3% BBgBarc US Agency Interm 1.0% MSCI EAFE

-1.2% BBgBarc US Treasury -5.9% Bloomberg Commodity

-10% 0% 10% 20% 30% 40% 50% -10% -5% 0% 5% 10% 15%

Source: Morningstar, as of 2/28/17 Source: Morningstar, as of 2/28/17

Capital Markets Update 3 February 2017 U.S. large cap equities

— The S&P 500 returned 4.0% in February and reached — The 1-year trailing P/E ratio of the S&P 500 increased a new intraday high on February 27th of 2,372. to 21.9 in February, as Q4 earnings were revised down and the index rose. — Minutes from the FOMC meeting in January revealed members were monitoring the low levels of implied — Health Care outperformed the S&P 500 index (4.0%) volatility given the uncertainty of potential changes in in February, as the sub-index returned 6.4%. The two fiscal, regulatory, and other government policies. The worst performing sectors were Energy and Telecom VIX, a measure of 30-day implied volatility for the S&P Services, returning -2.2% and -0.4%, respectively. 500, ended February at 12.92, below the 3-year average of 15.39.

US LARGE CAP (S&P 500) VALUATION SNAPSHOT RETURNS IF P/E MOVED TO HISTORIC LEVEL S&P 500 VALUATION SNAPSHOT

50% 35 25 21.9 Feb-17 % return if P/E were to immediately move to: 30% 30 28.7 28.4 Jan-17 20 18.4 24.024.6 24.4 25 Feb-16 10% 15 20 5 Year Average -10% -9% 30 Year Average 10 15 -30% -24% 5.4 -33% 4.6 10 % return given P/Emove 5 -50% 2.0 2.1 4.1 4.9 5 3.5 3.54.2 -55% 2.0 2.0 2.3 2.0 2.2 -70% 0 Trailing Forward Current Implied Trailing Implied 0 3rd quartile Long-term 30-year 1st quartile P/E (since average P/E average P/E P/E (since 1 Yr P/E 1 Yr P/E Div. Yld Div. Yld Earnings Earnings Shiller P/E Ratio Dividend Yield (%) Earnings Yield (%) 1926) (since 1926) 1926) (%) (%) Yld (%) Yld (%)

Source: Yale/Shiller, as of 2/28/17 Source: Yale/Shiller, Verus, as of 2/28/17 Source: Bloomberg, as of 2/28/17

Capital Markets Update 4 February 2017 Fixed income

— The U.S. Treasury curve flattened slightly in February, — U.S. high yield option-adjusted spreads continued as yields with shorter maturities between 3-months their downward trend to the lowest point since June and 3-years increased, and longer maturities of 2014, as they fell 26 bps and ended the month at decreased. The 10-year minus 2-year Treasury yield 3.7%. spread contracted from 1.26% to 1.14%. — U.S. outstanding student loan debt reached $1.4 — The yield of the Bloomberg Barclays U.S. Aggregate trillion in Q4 2016. According to the New York Fed, ended the month at 2.6% (annualized), above 2.3% 11.2% of outstanding debt was delinquent by 90+ from 1-year prior, but well below the 20-year average days or in default, above the average delinquency of 3.8%. rate of 8.7% since 2003.

U.S. TREASURY YIELD CURVE NOMINAL FIXED INCOME YIELDS IMPLIED INFLATION (TIPS BREAKEVEN)

4% Feb-17 10% Feb-17 4.0% 5-Year Implied Inflation Aug-16 9% Feb-16 8% 3.5% 3% Feb-16 20-Year Average 10-Year Implied Inflation 7% 3.0% 6% 5% 2.5% 2% 1.9% 2.0% 4% 2.0% 1.5% 3% 1.4% 1.5% 1.2% 1.3% 1% 2% 1% 1.0% 0% 0% BBgBarc US BBgBarc US BBgBarc US BBgBarc US EMBI-Global 0.5% Treasury Aggregate Credit Index Corp Index Index Index High Yield 0.0% Index 1 Year Prior 6 Months Prior Feb-17

Source: Federal Reserve, as of 2/28/17 Source: Morningstar, as of 2/28/17 Source: Federal Reserve, as of 2/28/17

Capital Markets Update 5 February 2017 Global markets

― Global sovereign bond yields decreased in February. — Real GDP in Greece decreased at a -4.7% annualized U.K. and German 10-year yields experienced the rate in the fourth quarter of 2016 (-1.1% year-over- largest change, falling by 27 and 23 bps, respectively. year), further complicating bailout discussions with the country’s international creditors. — The U.S. major currency index decreased -0.5% to 107.6 in February against a trade weighted basket of currencies. The index remained well above the long- term average of 93.8.

MSCI VALUATION METRICS (3 MONTH GLOBAL SOVEREIGN 10 YEAR INDEX YIELDS U.S. DOLLAR MAJOR CURRENCY INDEX AVERAGE)

7% 140 6% 25 Stronger USD 21.6 6% 20.6 20.9 EAFE 5.4% 4% 20 United States 5% 120 2% 15.2 Emerging Markets 4% 13.3 3.2% 15 3.0% 100 0% 11.3 3% 2.4% 2.1% -2% 10 2% 1.6% 6.6 1.2% 80 0.9% 4.94.6 -4% 1% 5 3.0 3.2 2.5 0.1% 0.2% Weaker USD 1.6 1.5 2.0 0% 60 -6% 0 Jun-74 Jun-88 Jun-02 Jun-16 P/BV P/E Price/FCF Dividend Earnings US Major Currency Index (real) Average Currency Index Value Yield (%) Yield (%) Subsequent 10 Year Return

Source: Morningstar, as of 2/28/17 Source: Federal Reserve, as of 2/28/17 Source: Bloomberg, as of 2/28/17

Capital Markets Update 6 February 2017 Style tilts: U.S. large value vs. growth

— Growth equities narrowly outperformed value — The underperformance of value equities in February equities in February, as the Russell 1000 Growth was partially attributable to a higher concentration of Index and Russell 1000 Value Index returned 4.2% Energy companies in the Russell 1000 Value relative and 3.6%, respectively. to the Russell 1000 Growth. The Russell 1000 Energy sub-index returned -2.3% in February. — The P/E ratio of both growth and value equities increased in February but the relative P/E ratio remained materially unchanged at 0.88. This metric remains slightly above its long-term average of 0.77.

RELATIVE PE RATIO OF U.S. VALUE VS. GROWTH U.S. VALUE VS. GROWTH ABSOLUTE U.S. VALUE VS. GROWTH RELATIVE PERFORMANCE PERFORMANCE

2.5 20% Relative P/E (Value/Growth) (Left) RUSSELL 1000 GROWTH RUSSELL 1000 VALUE 8.0 7.0 Relative Average Valuation (Left) ANNUALIZED RETURN TO DATE % ANNUALIZED RETURN TO DATE % Subsequent 5 Year Rolling Excess Returns (Value/Growth) (Right) 15% 2.0 6.0 QTD 7.7 4.3 Value relatively expensive 10% YTD 7.7 4.3 Value Outperformance 4.0 1.5 5% 1 YEAR 22.2 29.1 3 YEARS 10.5 9.9 2.0 1.3 0% 5 YEARS 13.8 14.0 1.0 0.2 10 YEARS 9.1 6.2 0.0 -5% 20 YEARS 6.9 8.2 0.5 SHARPE RATIO SHARPE RATIO -0.6 -10% -2.0 Value relatively cheap 3 YEARS 0.94 0.94 Growth 5 YEARS 1.26 1.29 Outperformance 0.0 -15% -4.0 -2.9 10 YEARS 0.60 0.42 -3.3 -3.3 QTD YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs 20 YEARS 0.35 0.46

Source: Russell, Bloomberg, as of 2/28/17 Source: Morningstar, as of 2/28/17 Source: Morningstar, as of 2/28/17

Capital Markets Update 7 February 2017 Style tilts: U.S. large vs. small

— U.S. large cap equities outperformed small cap — Quarter-to-date, large cap equities have equities in February, as the Russell 1000 index and outperformed small cap equities by 3.6%, a Russell 2000 index returned 3.9% and 1.9%, short-term reversal from the trend in 2016, when respectfully. small caps equities outperformed large by 9.3% over a 1-year period. — The relative P/E ratio of small to large equities remained elevated at 2.34, well above the long-term average of 1.39, mainly due to recent increases in small cap valuations.

RELATIVE PE RATIO OF U.S. SMALL VS. LARGE U.S. LARGE VS. SMALL ABSOLUTE U.S. SMALL VS. LARGE RELATIVE PERFORMANCE PERFORMANCE

Relative P/E (Small/Large) (Left) 2.5 15% RUSSELL 1000 INDEX RUSSELL 2000 INDEX 10.6 Relative Valuation Average (Left) ANNUALIZED RETURN TO DATE % ANNUALIZED RETURN TO DATE % 10.0 2.2 Subsequent 5 Yr Rolling Excess Returns (Small-Large) (Right) 10% QTD 6.0 2.3 8.0 Small relatively expensive 1.9 5% YTD 6.0 2.3 6.0 1 YEAR 25.5 36.1 4.0 Small Outperformance 1.6 0% 3 YEARS 10.2 6.9 5 YEARS 13.9 12.9 2.0 0.6 1.3 -5% 10 YEARS 7.7 7.2 0.0 20 YEARS 7.8 8.4 -0.5 1.0 -10% SHARPE RATIO SHARPE RATIO -2.0 -1.1 Small relatively cheap 3 YEARS 0.96 0.49 -4.0 Large 0.7 -15% -3.3 5 YEARS 1.31 0.91 -3.6 -3.6 Outperformance -6.0 10 YEARS 0.51 0.42 QTD YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs 20 YEARS 0.43 0.40

Source: Russell, Bloomberg, as of 2/28/17 Source: Morningstar, as of 2/28/17 Source: Morningstar, as of 2/28/17

Capital Markets Update 8 February 2017 Commodities

— The Bloomberg Precious Metals sub-index they increased by 5.8% and 10.2%, respectively. outperformed the overall Bloomberg Commodity Index (0.2%) in February and returned 3.9%. Gold — WTI Crude Oil ended the month up 2.3% at $54.01 increased 2.3% and ended the month at $1,252 per per barrel and continued to trade within a narrow $3 ounce. Silver rose 5.3% and finished the month at range. U.S. Crude Oil inventory rose by 34 million $18.47 per ounce. barrels in February to a record high of 528 million barrels. OPEC is set to review its current production — The Bloomberg Industrial Metals sub-index also cut plan at their next official meeting in June. outperformed as it returned 2.2% in the month. Aluminum and Nickel were positive contributors as

INDEX AND SECTOR PERFORMANCE COMMODITY PERFORMANCE

1 3 5 10 QTD YTD Year Year Year Year 140

Bloomberg Commodity 0.3 0.3 16.0 (13.0) (9.8) (5.9) 120 Bloomberg Agriculture 3.0 3.0 9.1 (10.1) (6.9) (1.1) 100 Bloomberg Energy (10.1) (10.1) 24.3 (28.5) (18.3) (16.8)

Bloomberg Grains 4.0 4.0 0.0 (12.6) (7.6) (2.7) 80 Bloomberg Industrial Metals 9.9 9.9 29.3 (2.6) (6.9) (5.5) 60 Bloomberg Livestock (0.1) (0.1) (7.8) (8.5) (5.1) (7.8)

Bloomberg Petroleum (4.1) (4.1) 28.3 (27.5) (18.1) (9.8) 40 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Dec-16 Bloomberg Precious Metals 10.5 10.5 5.9 (3.1) (8.1) 4.9 Oil Gold Copper Natural Gas Agriculture Bloomberg Softs 1.5 1.5 24.6 (8.2) (9.8) (1.2)

Source: Morningstar, as of 2/28/17 Source: Bloomberg, as of 2/28/17

Capital Markets Update 9 February 2017 Appendix

Capital Markets Update 10 February 2017 Periodic table of returns

BEST 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD 5-Year 10-Year Emerging Markets Equity 16.6 38.4 23.2 35.2 38.7 66.4 31.8 14.0 25.9 56.3 26.0 34.5 32.6 39.8 5.2 79.0 29.1 14.3 18.6 43.3 13.5 13.3 31.7 8.7 14.0 9.1

Large Cap Growth 8.1 37.8 23.1 32.9 27.0 43.1 22.8 8.4 10.3 48.5 22.2 21.4 26.9 16.2 1.4 37.2 26.9 7.8 18.1 38.8 13.2 5.7 21.3 7.7 13.9 8.0

Large Cap Equity 6.4 37.2 22.4 31.8 20.3 33.2 12.2 7.3 6.7 47.3 20.7 20.1 23.5 15.8 -6.5 34.5 24.5 2.6 17.9 34.5 13.0 0.9 17.3 6.0 13.8 7.7

International Equity 4.4 31.0 21.6 30.5 19.3 27.3 11.6 3.3 1.6 46.0 18.3 14.0 22.2 11.8 -21.4 32.5 19.2 1.5 17.5 33.5 11.8 0.6 12.1 4.4 13.4 7.2

Large Cap Value 3.2 28.5 21.4 22.4 16.2 26.5 7.0 2.8 1.0 39.2 16.5 7.5 18.4 11.6 -25.9 28.4 16.8 0.4 16.4 33.1 6.0 0.0 11.8 4.3 12.9 6.9

Small Cap Growth 2.6 25.7 16.5 16.2 15.6 24.3 6.0 2.5 -5.9 30.0 14.5 7.1 16.6 10.9 -28.9 27.2 16.7 0.1 16.3 32.5 5.6 -0.4 11.3 4.1 12.3 6.3

60/40 Global Portfolio 0.4 19.6 14.4 13.9 8.7 21.3 4.1 -2.4 -6.0 29.9 14.3 6.3 15.5 10.3 -33.8 23.3 16.1 -2.1 15.3 23.3 4.9 -0.8 11.2 4.0 10.9 6.2

Small Cap Equity -1.5 18.5 11.3 12.9 4.9 20.9 -3.0 -5.6 -11.4 29.7 12.9 5.3 15.1 7.0 -35.6 20.6 15.5 -2.9 14.6 12.1 4.2 -1.4 8.0 2.3 5.2 4.3

Hedge Funds of Funds -1.8 15.2 10.3 10.6 1.2 13.2 -7.3 -9.1 -15.5 25.2 11.4 4.7 13.3 7.0 -36.8 19.7 13.1 -4.2 11.5 11.0 3.4 -2.5 7.1 1.9 5.1 4.1

US Bonds -2.0 11.6 9.9 9.7 -2.5 11.4 -7.8 -9.2 -15.7 23.9 9.1 4.6 10.4 5.8 -37.6 18.9 10.2 -5.5 10.5 9.0 2.8 -3.8 5.7 0.9 3.1 2.9

Small Cap Value -2.4 11.1 6.4 5.2 -5.1 7.3 -14.0 -12.4 -20.5 11.6 6.9 4.6 9.1 4.4 -38.4 11.5 8.2 -5.7 4.8 0.1 0.0 -4.4 2.6 0.7 2.2 1.3

Commodities -2.9 7.5 6.0 2.1 -6.5 4.8 -22.4 -19.5 -21.7 9.0 6.3 4.2 4.8 -0.2 -38.5 5.9 6.5 -11.7 4.2 -2.0 -1.8 -7.5 1.0 0.3 0.1 1.0

Cash -3.5 5.7 5.1 -3.4 -25.3 -0.8 -22.4 -20.4 -27.9 4.1 4.3 3.2 4.3 -1.6 -43.1 0.2 5.7 -13.3 0.1 -2.3 -4.5 -14.9 0.5 0.1 -0.4 0.6

Real Estate -7.3 -5.2 3.6 -11.6 -27.0 -1.5 -30.6 -21.2 -30.3 1.0 1.4 2.4 2.1 -9.8 -53.2 -16.9 0.1 -18.2 -1.1 -9.5 -17.0 -24.7 0.3 N/A -9.8 -5.9

Large Cap Equity Small Cap Growth Commodities WORST

Large Cap Value International Equity Real Estate

Large Cap Growth Emerging Markets Equity Hedge Funds of Funds

Small Cap Equity US Bonds 60% MSCI ACWI/40% BBgBarc Global Bond Small Cap Value Cash

Source Data: Morningstar, Inc., Hedge Fund Research, Inc. (HFR), National Council of Real Estate Investment Fiduciaries (NCREIF). Indices used: Russell 1000, Russell 1000 Value, Russell 1000 Growth, Russell 2000, Russell 2000 Value, Russell 2000 Growth, MSCI EAFE, MSCI EM, BBgBarc US Aggregate, T-Bill 90 Day, Bloomberg Commodity, NCREIF Property, HFRI FOF, MSCI ACWI, BBgBarc Global Bond. NCREIF Property Index performance data as of 12/31/16.

Capital Markets Update 11 February 2017 S&P 500 and S&P 500 sector returns

QTD ONE YEAR ENDING FEBRUARY

9.8% Information Technology 46.4% Financials

8.8% Health Care 33.0% Information Technology

6.7% Consumer Staples 27.8% Materials

6.6% Utilities 27.7% Industrials

6.3% Consumer Discretionary 26.2% Energy

5.9% S&P 500 25.0% S&P 500

5.4% Financials 18.3% Consumer Discretionary

5.4% Materials 15.9% Utilities

5.3% Industrials 15.2% Health Care

-2.9% Telecom 11.5% Consumer Staples

-5.7% Energy 9.4% Telecom

-15% -10% -5% 0% 5% 10% 15% -10% 0% 10% 20% 30% 40% 50%

Source: Morningstar, as of 2/28/17 Source: Morningstar, as of 2/28/17

Capital Markets Update 12 February 2017 Detailed index returns DOMESTIC EQUITY FIXED INCOME Month QTD YTD 1 Year 3 Year 5 Year 10 Year Month QTD YTD 1 Year 3 Year 5 Year 10 Year Core Index Broad Index

S&P 500 4.0 5.9 5.9 25.0 10.6 14.0 7.6 BBgBarc US Treasury US TIPS 0.5 1.3 1.3 3.4 1.9 0.8 4.3 S&P 500 Equal Weighted 3.2 5.4 5.4 26.7 9.8 14.6 8.8 BBgBarc US Treasury Bills 0.0 0.1 0.1 0.4 0.2 0.2 0.8 DJ Industrial Average 5.2 5.8 5.8 29.3 11.2 12.8 8.3 BBgBarc US Agg Bond 0.7 0.9 0.9 1.4 2.6 2.2 4.3 Russell Top 200 4.3 6.2 6.2 25.0 11.0 14.1 7.6 Duration Russell 1000 3.9 6.0 6.0 25.5 10.2 13.9 7.7 BBgBarc US Treasury 1-3 Yr 0.1 0.2 0.2 0.4 0.7 0.6 2.0 Russell 2000 1.9 2.3 2.3 36.1 6.9 12.9 7.2 BBgBarc US Treasury Long 1.6 2.0 2.0 (4.5) 6.3 3.4 6.7 Russell 3000 3.7 5.7 5.7 26.3 9.9 13.9 7.6 BBgBarc US Treasury 0.5 0.7 0.7 (1.2) 2.0 1.4 3.9 Russell Mid Cap 2.8 5.3 5.3 26.8 8.4 13.6 8.0 Issuer Style Index BBgBarc US MBS 0.5 0.4 0.4 0.4 2.6 2.0 4.2 Russell 1000 Growth 4.2 7.7 7.7 22.2 10.5 13.8 9.1 BBgBarc US Corp. High Yield 1.5 2.9 2.9 21.8 4.7 6.8 7.5 Russell 1000 Value 3.6 4.3 4.3 29.1 9.9 14.0 6.2 BBgBarc US Agency Interm 0.2 0.5 0.5 0.3 1.3 1.1 3.1 Russell 2000 Growth 2.5 4.1 4.1 30.9 5.4 12.3 8.0 BBgBarc US Credit 1.1 1.5 1.5 5.7 3.6 3.6 5.3 Russell 2000 Value 1.4 0.7 0.7 41.3 8.4 13.4 6.3

INTERNATIONAL EQUITY OTHER

Broad Index Index MSCI ACWI 2.8 5.6 5.6 22.1 4.8 8.3 4.1 Bloomberg Commodity 0.2 0.3 0.3 16.0 (13.0) (9.8) (5.9) MSCI ACWI ex US 1.6 5.2 5.2 19.3 (0.2) 3.5 1.4 Wilshire US REIT 3.6 2.9 2.9 15.8 11.6 11.5 4.4 MSCI EAFE 1.4 4.4 4.4 15.8 (0.6) 5.2 1.0 CS Leveraged Loans 0.6 1.1 1.1 12.6 3.8 5.0 4.3 MSCI EM 3.1 8.7 8.7 29.5 1.4 (0.4) 2.9 Regional Index MSCI EAFE Small Cap 2.2 5.9 5.9 17.5 2.7 8.8 3.1 JPM EMBI Global Div 2.0 3.5 3.5 12.1 6.6 5.8 7.1 Style Index JPM GBI-EM Global Div 1.8 4.1 4.1 12.4 (2.5) (2.5) 4.2 MSCI EAFE Growth 2.2 5.7 5.7 11.3 0.4 5.5 2.0 Hedge Funds MSCI EAFE Value 0.7 3.2 3.2 20.3 (1.7) 4.7 (0.1) HFRI Composite 1.0 2.2 2.2 10.7 2.7 4.0 3.4 Regional Index HFRI FOF Composite 0.9 1.9 1.9 6.5 1.4 3.1 1.3 MSCI UK 2.0 3.3 3.3 10.8 (4.1) 2.9 0.7 Currency (Spot) MSCI Japan 1.1 4.9 4.9 20.3 5.7 7.2 0.5 Euro (1.7) 0.7 0.7 (2.2) (8.4) (4.5) (2.2) MSCI Euro 0.9 2.1 2.1 14.1 (3.3) 5.0 (0.5) Pound (1.1) 0.7 0.7 (10.7) (9.4) (4.9) (4.4) MSCI EM Asia 3.6 9.7 9.7 27.3 3.9 3.0 4.6 Yen 0.6 4.2 4.2 0.9 (3.0) (6.3) 0.6 MSCI EM Latin American 3.6 11.4 11.4 47.5 (1.4) (6.8) 1.5 Source: Morningstar, as of 2/28/17

Capital Markets Update 13 February 2017 Definitions

Conference Board Consumer Confidence Index – a barometer of the health of the U.S. economy from the perspective of the consumer. The index is based on consumers’ perceptions of current business and employment conditions, as well as their expectations for six months hence regarding business conditions, employment, and income. (www.conference-board.org)

ISM Manufacturing Index – based on data compiled from purchasing and supply executives nationwide. Survey responses reflect the change, if any, in the current month compared to the previous month. For each of the indicators measured (New Orders, Backlog of Orders, New Export Orders, Imports, Production, Supplier Deliveries, Inventories, Customers’ Inventories, Employment and Prices), this report shows the percentage reporting each response, the net difference between the number of responses in the positive economic direction and the negative economic direction, and the diffusion index. (www.instituteforsupplymanagement.org)

Capital Markets Update 14 February 2017 Notices & disclosures

Past performance is no guarantee of future results. This document is provided for informational purposes only and is directed to institutional clients and eligible institutional counterparties only and is not intended for retail investors. Nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security or pursue a particular investment vehicle or any trading strategy. This document may include or imply estimates, outlooks, projections and other “forward-looking statements.” No assurance can be given that future results described or implied by any forward looking information will be achieved. Investing entails risks, including possible loss of principal. Verus Advisory Inc. and Verus Investors, LLC (“Verus”) file a single form ADV under the United States Investment Advisors Act of 1940, as amended. Additional information about Verus Advisory, Inc. and Verus Investors, LLC is available on the SEC’s website at www.adviserinfo.sec.gov.

Capital Markets Update 15 February 2017 Item 7 Merced County Employees’ Retirement Association (MCERA) RETIREMENT BOARD AGENDA ITEM

MARCH 23, 2017

TO: MCERA Board of Retirement FROM: Kristie Santos, Plan Administrator

SUBJECT: Request for Proposal (RFP) #7182 for Private Equity and potentially Hedge Fund Consulting Services by Cliffwater LLC.

ITEM NUMBER:

ITEM TYPE: Action

STAFF RECOMMENDATION: 1. Approve Request for Proposal (RFP) #7182 evaluation committee recommendations to move forward with negotiating contract, including fees and scope of services with Cliffwater LLC for Private Equity and potentially Hedge Fund Consulting Services.

DISCUSSION: Based on the results of an RFP #7182 released February 2, 2017 for private equity consulting services, the MCERA RFP evaluation committee is recommending moving forward with negotiating contract terms including fees and scope of services with Cliffwater, LLC to possibly include hedge funds consulting services.

The evaluation committee interviewed Cliffwater for several hours and noted that the team is very transparent, has a wide breadth of knowledge of the private equity and the hedge fund industry, is proposing a highly qualified senior consulting team to consult for MCERA and is proposing a well defined and vetted program with processes, goals and targets for more disciplined investing.

Cliffwater came prepared with a high level overview of MCERA’s current investments (based on information on MCERA’s website) and how their disciplined structured program could assist MCERA with current and future investing of private equity and potentially hedge funds. Cliffwater presented a track record of performance with their current clients and explained their access to top quartile funds. Detailed discussions occurred on their due diligence process (investment and operational).

Cliffwater’s proposal includes (but not limited to – see Scope of Services as appendix in draft contract for more detail); reporting of AB2833 required information on current and future alternative investments vehicles and defines ‘private equity’ to include sub classes of buyout, venture capital, distressed, private debt, real estate, natural resources, mining, energy and infrastructure. Cliffwater also has a robust hedge fund practice within their organization.

The evaluation committee would like to explore in more detail the hedge fund services that Cliffwater offers and possibly include hedge funds to the Scope of Services.

The RFP evaluation committee is recommending moving forward to begin negotiating contract terms including fees and scope of services with Cliffwater LLC to potentially include hedge funds. Page 1 Item 7a

PRIVATE EQUITY AND HEDGE FUNDS CONSULTING SERVICES AGREEMENT

BETWEEN MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION AND

CLIFFWATER LLC

Dated: ______, 2017

50115219.v1

TABLE OF CONTENTS

Page

1. Definitions; Gender and Number ...... 2 2. Appointment as Consultant ...... 4 3. Description of Services ...... 4 4. Standard of Care; Limitations on Authority ...... 4 5. Performance of Consulting Services ...... 4 6. Authorized MCERA Personnel...... 5 7. Compensation for Services ...... 5 8. Seminars and Training Programs ...... 6 9. Term ...... 6 10. Termination for MCERA’s Convenience ...... 6 11. Termination by MCERA for Default ...... 6 12. Termination for Consultant’s Convenience ...... 7 13. Termination by Consultant for Default ...... 8 14. Force Majeure ...... 8 15. Rights, Remedies and Responsibilities upon Termination ...... 8 16. Indemnification ...... 9 17. Mechanics of Indemnity ...... 10 18. Insurance ...... 10 19. Consultant’s Representations, Warranties and Covenants ...... 11 20. MCERA’s Representations, Warranties and Covenants ...... 14 21. Compliance with Legal Requirements ...... 14 22. Assurance of Compliance with Civil Rights Laws ...... 14 23. Nondiscrimination in Employment ...... 14 24. Replacement of Consultant’s Agents ...... 14 25. Record Retention and Inspection ...... 14 26. Confidentiality ...... 15 27. Audit Settlement ...... 15 28. No Third Party Beneficiary ...... 16 29. Dispute Resolution………………………………………………………………………16

50115219.v1

TABLE OF CONTENTS

Page 30. Notices ...... 16 31. Attorneys’ Fees ...... 16 32. Section Headings: Interpretation ...... 16 33. Entire Agreement: Exhibits, Schedules and Appendices ...... 17 34. Severability ...... 17 35. Waiver ...... 17 36. Amendments in Writing ...... 17 37. Governing Law and Venue ...... 17 38. Assignment and Delegation ...... 18 39. Execution in Counterparts...... 18

Exhibits A. Statement of Services B. List of MCERA Authorized Personnel C. Merced County Employees’ Retirement Association Conflict of Interest Policy, Resolution No. 2007-03 D. Consultant Conflict of Interest Policy [TO BE ATTACHED] E. Form ADV [TO BE ATTACHED] F. Merced County Employees’ Retirement Association Investment Objectives and Policy Statement (Adopted February 23, 2017)

50115219.v1

PRIVATE EQUITY AND HEDGE FUNDS CONSULTING SERVICES AGREEMENT BETWEEN THE MERCED COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION AND CLIFFWATER LLC

This PRIVATE EQUITY CONSULTING AND HEDGE FUNDS SERVICES AGREEMENT (“Agreement”) is entered into and effective as of ______, 2017 by and between the MERCED COUNTY EMPLOYEES RETIREMENT ASSOCIATION (“MCERA”) and CLIFFWATER LLC, a Delaware limited liability company (“Consultant”).

RECITALS

WHEREAS, pursuant to California Government Code Section 31595 and related provisions of law, the Board of Retirement of MCERA has exclusive control of the investment of MCERA’s retirement fund and may, in its discretion, delegate the authority to manage, supervise and evaluate the investment assets of the retirement fund when prudent in the informed opinion of the Board;

WHEREAS, the Board must execute its duties with respect to MCERA’s retirement fund with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with like matters would use in conducting an enterprise of like character and like aims;

WHEREAS, the Board must diversify the assets of MCERA’s retirement system so as to minimize the risk of loss and to maximize the rate of return, unless under the circumstances it is clearly prudent not to do so;

WHEREAS, the Board has determined that, to execute its duties according to such standards, it is in the best interests of MCERA, its members, and beneficiaries to engage a competent, knowledgeable and professional consultant to provide investment consulting services for private equity and related investments;

WHEREAS, the Board issued a request for proposals (RFP) with respect to such private equity consulting and hedge funds services, and as a result of the competitive selection process in connection with such RFP the Board has selected Consultant to perform such services in accordance with the terms and conditions of this Agreement;

WHEREAS, Consultant represents that it possesses the qualifications, skills and resources necessary to advise the Board in performing the duties identified in this Agreement;

NOW, THEREFORE, in consideration of the above stated recitals, the mutual promises, covenants, representations and conditions contained herein, and the mutual benefits to be derived therefrom, MCERA and Consultant agree as follows:

AGREEMENT

1. Definitions; Gender and Number. For purposes of this Agreement, capitalized terms shall have the meanings set forth in this Section 1. In this Agreement, unless the context otherwise requires, the masculine, feminine and neuter genders and the singular and plural include one another.

“MCERA” means the Merced County Employees’ Retirement Association, an independent public pension fund established under the authority of the County Employees Retirement Law of 1937 (California Government Code Sections 31450 et seq.).

“MCERA Records” has the meaning set forth in Section 25 herein.

“Agents” means any of Consultant’s employees, agents, or representatives providing services in connection with this Agreement.

“Agreement” means this Private Equity Consulting Services Agreement entered into by and between MCERA and Consultant.

“Authorized Persons” has the meaning set forth in Section 6 herein.

“Board” means the nine-member Board of Retirement, which controls and directs the investment of the retirement funds managed by MCERA.

“Claims” shall have the meaning set forth in Section 5 herein.

“Change of Control” means (a) the consummation of a merger or consolidation of an entity with or into another entity or any other reorganization, if more than fifty percent (50%) of the combined voting power of the continuing or surviving entity’s securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons or entities who were not stockholders or members of the disappearing entity immediately prior to such merger, consolidation or other reorganization; or (b) the sale, transfer or other disposition of all or substantially all of an entity’s assets. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the entity’s incorporation or to create a holding entity that will be owned in substantially the same proportions by the persons or entities who held the entity’s securities immediately before such transaction.

“Confidential Information” has the meaning set forth in Section 26 herein.

“Consultant” means Cliffwater LLC.

“Consulting Services” means those services listed in Exhibit A, Statement of Services.

“Disclosure Statement” has the meaning set forth in Section 19(m) herein.

“Effective Termination Date” means the date on which work under this Agreement will formally cease, as specified in any Notice of Termination delivered by one party to the other.

“Event of Default by MCERA” has the meaning set forth in Section 13 herein.

“Event of Default by Consultant” has the meaning set forth in Section 11 herein.

“Fed Funds Rate” means the average federal funds rate as published daily in the Wall Street Journal, which rate shall be used to calculate any interest required to be paid under this Agreement.

“Initial Term” has the meaning set forth in Section 9 herein.

“Investment and Strategic Plans” means MCERA’s Investment Objectives and Policy Statement, a current version of which is attached as Exhibit F. MCERA may update and revise the Investment and Strategic Plans at any time and from time to time, and upon such update and/or revision being made publicly available, such updated Investment and Strategic Plan(s) shall replace Exhibit E, in whole or in part, as applicable.

“Legal Requirements” means all foreign, international, federal, state, regional, county, and local laws, regulations, ordinances, registrations, filings, approvals, authorizations, consents and examinations which may apply to Consultant or MCERA in relation to their performance under this Agreement.

“Notice of Claim” has the meaning set forth in Section 17 herein.

“Notice of Termination for Convenience” means a notice delivered by one party to the other when the notifying party wishes to terminate this Agreement for its convenience.

“Notice of Termination for Default” means a notice delivered by one party to the other when the notifying party wishes to terminate this Agreement due to a default by the other party.

“Renewal Term” has the meaning set forth in Section 9 herein.

“Responsible Persons” means Kathleen Barchick, James Feilder and Gabrielle Zadra, and any other person or persons who replace or are in addition to such persons and who has been approved in writing by MCERA.

“Retainer Fee” means a fixed annual fee of $ [insert amount] payable quarterly in arrears that MCERA has agreed to pay for all services listed on Exhibit A, Statement of Services.

“Standard of Care” has the meaning set forth in Section 4 herein.

“Statement of Services” means the manner and form of the investment consulting services to be provided by Consultant, a copy of which is attached hereto as Exhibit A.

“Termination Invoice” means the final invoice itemizing Consultant’s prorated fees for the relevant billing period, which Consultant shall submit to MCERA no later than thirty (30) days following the Effective Termination Date.

“Transition Period” means a period of up to ninety (90) days following the Effective Termination Date during which period, at the election of MCERA, Consultant continues to perform the Consulting Services required under this Agreement in order to facilitate an orderly transition of the investment consulting services to a successor.

2. Appointment as Consultant. Subject to the terms, conditions and covenants of this Agreement, MCERA hereby appoints Consultant to provide the Consulting Services. Consultant hereby accepts such appointment and agrees to execute its duties according to the terms, conditions and standards set forth in this Agreement.

3. Description of Services. Consultant shall provide to MCERA the investment consulting services described in the Statement of Services, attached hereto as Exhibit A, according to the terms, conditions and standards set forth herein, including but not limited to compliance with the Investment and Strategic Plans. Consultant agrees that should it perform work outside the scope of the Consulting Services, which may be amended from time to time, such work shall be deemed a gratuitous effort by Consultant and Consultant shall have no claim against MCERA for any compensation for such work.

4. Standard of Care; Limitations on Authority.

a. Standard of Care. Consultant acknowledges that it will have access to MCERA’s Confidential Information and strategic goals and is appointed to a position of utmost trust and confidence and therefore is a fiduciary under this Agreement and is bound by all of the obligations of a fiduciary. As such, Consultant shall discharge each of its duties and exercise each of its powers under this Agreement with the competence, care, skill, prudence and diligence under the circumstances then prevailing in the investment consulting industry and which a prudent person acting in a like capacity and familiar with investment consulting for United States employee public pension funds would use in the conduct of a like enterprise with like aims, in conformance with the California Constitution, Article 16, Section 17 and California Government Code Section 31595 (“Standard of Care”). Consultant shall cause any and all of its Agents, including but not limited to the Responsible Persons, to exercise the same Standard of Care. Consultant warrants that it will not delegate its fiduciary responsibilities under this Agreement.

b. Limitations on Authority. Neither the Consultant, Agents nor Responsible Persons shall enter into any agreement nor incur any obligations on MCERA’s behalf, or commit MCERA in any manner without MCERA’s prior written consent, which may be granted or withheld in MCERA’s reasonable discretion.

5. Performance of Consulting Services.

a. Independent Contractor Status. In performing under this Agreement, Consultant shall be deemed at all times to be an independent contractor. This Agreement is not intended, and shall not be construed, to create the relationship of agent, servant, employee, partnership, joint venture, or association as between Consultant and MCERA. Nothing in this Agreement shall cause MCERA to be responsible for any action, omission or inaction of Consultant. It is understood by the parties that no duty on the part of MCERA shall arise to pay any sums on behalf of or for the benefit of Consultant relating to withholding taxes, unemployment

compensation insurance, disability insurance, Social Security contributions or any other similar amounts or contributions customarily payable by virtue of an employment relationship. Consultant shall be responsible for all such obligations described in the preceding sentence, and shall be responsible for making any required reports or disclosures to federal, state or local taxing authorities regarding Consultant’s income and expenses. Consultant shall defend, indemnify and save harmless MCERA, its directors, officers, agents, employees, and assigns from any and all liabilities, costs, damages, losses, claims, penalties, actions, proceedings, suits, investigations, demands, assessments, judgements and expenses (including, without limitation, all attorney’s fees and costs) (collectively, “Claims”) arising from Consultant’s failure to make such payments and reports in a timely and proper fashion.

b. Responsible Persons. Consultant acknowledges and agrees that in entering into this Agreement MCERA has relied upon Consultant’s representations and promises to assign those persons designated herein as the Responsible Persons to the performance of the Consulting Services. Consultant shall not change the Responsible Persons (“Change of Responsible Person”) without the prior written consent of MCERA. For purposes of this Section 5, any material decrease in the availability, duties, responsibilities or services performed by a Responsible Person shall constitute a Change of Responsible Person.

6. Authorized MCERA Personnel. Attached as Exhibit B is a list of authorized persons who are permitted to advise, inform and direct Consultant on MCERA’s behalf (“Authorized Persons”). Except as authorized in writing in advance by MCERA’s Plan Administrator or Board Chair, Consultant shall not furnish any information related to the services it provides under this Agreement to any MCERA employee, representative or other person not specifically named on the then current list of Authorized Persons.

Any changes to the list of Authorized Persons shall be made in writing to Consultant and signed by MCERA’s Plan Administrator or designee and shall be incorporated in the Agreement as an amendment to Exhibit B without the necessity of written approval of Consultant, notwithstanding Section 36 herein. Until notified of any such change, Consultant may rely on and act upon instructions and notices received from an Authorized Person identified on the then current list furnished by MCERA. If Consultant receives instructions or notices from a source other than an Authorized Person, Consultant shall not comply with them and shall immediately notify MCERA’s Chief Investment Officer in writing of such unauthorized instructions or notices.

7. Compensation for Services.

a. Retainer Fee. MCERA shall pay Consultant the “Retainer Fee” for the Consulting Services performed under this Agreement pursuant to Exhibit A, Statement of Services. The Retainer Fee shall include any and all direct expenses and any and all overhead or indirect expenses incurred by Consultant in performing these services, including, but not limited to, travel expenses, costs of production of reports, telephone and fax expenses. The Retainer Fee shall be in the amounts specified in the table below for each year of the Term of this Agreement:

Year Annual Fee (US $)

1 $

2 $

3 $

4 (First Extension) $

5 (Second Extension) $

Total Fee: $

b. Invoices. Consultant shall submit to MCERA a quarterly invoice on or before the end of the quarter during which Consulting Services are provided. Each invoice shall represent the fee for a full quarter of Retainer Services. If Consultant provides less than a full quarter of Retainer Services, the Retainer Fee shall be prorated on a daily basis based on the actual number of days of Retainer Services provided in proportion to the actual number of days in such quarter of the Term. Consultant shall not be entitled to be paid compensation in advance of services rendered.

c. Payment Does Not Imply Acceptance of Services. The making of any payment by MCERA, or the acceptance thereof by Consultant, shall in no way lessen the liability of Consultant to replace unsatisfactory Consulting Services, although the unsatisfactory character of such Consulting Services may not have been apparent or detected at the time such payment was made. Consulting Services that do not conform to the requirements of this Agreement may be rejected by MCERA and in such case must be replaced by Consultant without delay.

8. Seminars and Training Programs. In the event Consultant conducts seminars, training sessions or similar events, which are generally made available to Consultant’s U.S. based consulting clients, MCERA shall be invited to attend upon the same terms and conditions as such other clients. At MCERA’s election, all Authorized Persons and members of MCERA’s Board of Retirement shall be permitted to attend such seminars, training sessions or similar events. If Consultant offers to pay the cost of such events and/or the travel or lodging expenses incurred by its U.S. based clients in connection with attending such events, Consultant shall reimburse MCERA for such expenses on the same basis as Consultant reimburses the expenses of its other clients.

9. Term. The term of this Agreement shall commence on the date first set forth above and shall continue for an initial period of three (3) years (the “Initial Term”). After the Initial Term, it shall renew for two one-year terms (each, a “Renewal Term”) as approved by MCERA Board or designee, unless terminated by MCERA pursuant to the provisions of Sections 10 or 11 below, or by Consultant pursuant to the provisions of Sections 12 or 13 below.

10. Termination for MCERA’s Convenience. MCERA may terminate this Agreement without cause and for any reason whatsoever, at any time by delivering to Consultant a written Notice of Termination for Convenience specifying the Effective Termination Date. The Effective Termination Date shall be no earlier than thirty (30) calendar days after such Notice of Termination for Convenience is delivered to Consultant. In no event shall MCERA’s termination of this Agreement under this Section 10 be deemed a waiver of MCERA’s rights or remedies against Consultant for damages resulting from any default by Consultant, which default occurred prior to the Effective Termination Date, regardless of whether the default was discovered after the Effective Termination Date.

11. Termination by MCERA for Default. Upon the occurrence of an Event of Default (as defined below) by Consultant, MCERA may immediately terminate this Agreement by delivering to Consultant a written Notice of Termination for Default, which specifies the Effective Termination Date. For purposes of this Section 11, an “Event of Default by Consultant” shall mean any one, or more, of the following:

a. If Consultant fails to perform or cause to be performed the Consulting Services and subsequently fails to cure such default within ten (10) calendar days (or such longer period as MCERA may authorize in writing) after receiving notice from MCERA of such default;

b. If Consultant defaults, breaches or violates any provision of this Agreement, other than as set forth in Section 11(a) above, and fails to cure such default, breach or violation, at Consultant’s sole expense, within five (5) calendar days (or such longer period as MCERA may authorize in writing) after receipt of written notice from MCERA of such default, breach or violation;

c. If there is a willful Change of Responsible Persons which has not been authorized by MCERA (i.e. involuntary termination) and Consultant fails to cure such default within five (5) days of receipt of notice from MCERA of such default;

d. Without notice or opportunity to cure, if Consultant fails to perform according to this Agreement following receipt of more than two (2) prior notices and failure to cure pursuant to paragraphs (a), (b) or (c) of this Section 11; or

e. Without notice or opportunity to cure if Consultant (i) breaches any of the warranties, representations or covenants contained in Section 19 below; (ii) files any petition or action for relief under any bankruptcy, moratorium, receivership, insolvency, reorganization, or other similar debtor relief law from time to time in effect affecting the rights of creditors generally; (iii) there is a petition for bankruptcy filed against the Consultant by any of the Consultant’s creditors; (iv) has appointed, a custodian, receiver, trustee (or other similar official) to take possession, custody or control of any material part of the properties or assets of Consultant, or Consultant makes a general assignment for the benefit of creditors or any material portion of Consultant’s assets is attached, executed upon or judicially seized in any manner; (v) is indicted or criminally charged, or is found civilly or criminally liable by a trial court, jury or administrative body in connection with any matter involving breach of trust, breach of fiduciary duty, fraud, theft, securities law violations, bankruptcy law violations or any act or

omission involving moral turpitude; or (vi) attempts or purports to assign this Agreement or any portion hereof, or any of its rights or obligations hereunder, without obtaining MCERA’s prior written consent; (vii) 1oses any license or permit required by any Legal Requirement; or (viii) fails to procure or maintain the insurance policies described in Section 18 below.

If MCERA terminates this Agreement for default pursuant to this Section 11, MCERA shall be entitled to recover from Consultant all damages resulting from such default subject to proof. Nothing contained in this Section 11 shall limit or affect MCERA’s right to terminate this Agreement for convenience at any time, pursuant to Section 10 above, or limit its rights and remedies for such default and breach.

12. Termination for Consultant’s Convenience. Consultant may terminate this Agreement without cause at any time after the Initial Term by delivering to MCERA a written Notice of Termination for Convenience specifying the Effective Termination Date. The Effective Termination Date shall be no earlier than ninety (90) days after the Notice of Termination for Convenience is delivered to MCERA unless otherwise agreed in writing by MCERA. During this 90 –day period, Consultant shall continue to provide all services as provided in this Agreement. In no event shall Consultant’s termination of this Agreement under this Section 12 be deemed a limitation or waiver of Consultant’s rights or remedies against MCERA for damages resulting from any default by MCERA, which occurred prior to the Effective Termination Date. Nothing contained herein shall in any way limit MCERA’s right to terminate this Agreement pursuant to Sections 10 or 11 above.

13. Termination by Consultant for Default. Upon the occurrence of an Event of Default by MCERA, Consultant may terminate this Agreement by delivering to MCERA a written Notice of Termination for Default which specifies the Effective Termination Date, provided, however, that the Effective Termination Date shall not under any circumstance be earlier than the expiration of all cure periods specified below and shall not limit the obligations of Consultant to MCERA during the Transition Period pursuant to Section 15 below. For purposes of this Section 13, the term “Event of Default by MCERA” shall mean the following:

a. If MCERA fails to perform any of its obligations under this Agreement and fails to cure such default, breach or violation within ninety (90) calendar days of receiving Consultant’s written notice of such default, or

b. Without notice or cure if MCERA breaches any of the warranties, representations or covenants contained in Section 20 below.

14. Force Majeure. Neither Consultant nor MCERA shall be terminated for default, pursuant to Sections 11 or 13 above, if Consultant’s or MCERA’s failure to perform under this Agreement arises solely from causes beyond the reasonable control of the other party, the effects of which could not be reasonably anticipated or diminished with reasonable prudence and without the fault or negligence of such party. Such causes may include, but are not restricted to, acts of God or of the public enemy, acts of any foreign, international, federal or state government (including all subdivisions thereof) in such government’s sovereign capacity, fires, floods and earthquakes.

15. Rights, Remedies and Responsibilities upon Termination. In the event of any termination of this Agreement, all of the terms and conditions herein shall continue to apply through the Effective Termination Date and through any Transition Period. The following provisions shall also apply to any termination of this Agreement:

a. Post-Termination Responsibilities. If either party terminates this Agreement, and unless otherwise expressly directed by MCERA, Consultant shall, subject to any Transition Period and Consultant’s obligations under paragraph (d) of this Section 15, take all necessary steps to stop services under this Agreement on the Effective Termination Date.

b. Termination Invoice. Consultant shall submit to MCERA, in the form and with any reasonable certifications as may be prescribed by MCERA, Consultant’s Termination Invoice. The Termination Invoice shall prorate the then-current Retainer Fee, on a daily basis, for work actually performed but for which Consultant has not been compensated up to the Effective Termination Date. Upon Consultant’s failure to submit its Termination Invoice within the time allowed, MCERA may determine, on the basis of information available to it, the amount, if any, due to Consultant and such determination shall be deemed final. Subject to the provisions of paragraph (c) below, after MCERA has made such determination, or after Consultant has submitted its Termination Invoice, MCERA shall authorize payment to Consultant. In the event of a dispute over the Retainer Fee due Consultant for Consulting Services performed after any Notice of Termination is issued, MCERA’s good faith determination shall be final and binding on the parties hereto.

c. Payment Withheld for Default. Payment for Consulting Services, which MCERA received prior to any default, breach or violation, will be determined according to the provisions of paragraph (b) above. Payment for Consulting Services provided during any cure period shall only be due and owing if and after Consultant has timely cured the default, breach or violation, to the satisfaction of MCERA. No payment for Consulting Services provided during any cure period shall be due and owing if Consultant has failed to timely cure the default, breach or violation, to the satisfaction of MCERA.

d. Good Faith Transfer. Upon any termination of this Agreement by either party and to the extent requested in writing by MCERA in its sole discretion, Consultant shall continue to serve as investment consultant hereunder and shall be paid a Retainer Fee in the amount then in effect until the services provided hereunder are transferred or until otherwise terminated by MCERA. Consultant shall cooperate with MCERA to effect a smooth and orderly transition of the Consulting Services and shall transfer all applicable MCERA Records within thirty (30) days after any Effective Termination Date of this Agreement. Upon termination of this Agreement, Consultant shall retain all copies of MCERA Records according to the record retention provisions set forth in Section 25 below or as otherwise directed in writing by MCERA.

e. Cumulative Nature of Rights and Remedies. The rights and remedies of the parties provided by this Section 15 are not exclusive, but cumulative and in addition to any other rights and remedies provided by law, in equity or under any of the provisions of this Agreement.

16. Indemnification.

a. To the fullest extent permitted by law, Consultant shall indemnify and save harmless MCERA and its directors, officers, agents, employees and assigns from, and, if requested, shall defend them against any and all Claims thereof (1) arising directly or indirectly from any breach of any representation or warranty made by Consultant in this Agreement, (2) arising directly or indirectly from any breach of any covenant, agreement or obligation of Consultant contained in this Agreement, including without limitation breach of fiduciary duty, breach of the Standard of Care, breach of trust or breach of confidentiality, (3) arising directly or indirectly from any (i) bad faith, (ii) negligence, (iii) willful misconduct or (iv) improper or unethical practice in violation of law by Consultant or its agents or (4) for injury to or death of a person, including employees of Consultant or loss of or damage to property, arising directly or indirectly from Consultant’s performance of this Agreement, including, but not limited to, Consultant’s use of facilities or equipment provided by MCERA or others, regardless of the negligence of, and regardless of whether liability without fault is imposed or sought to be imposed on MCERA, except, in the case of subsection (4) of this Section 16, where such loss, damage, injury, liability or claim is the result of the active negligence or willful misconduct of MCERA and is not contributed to by any act of, or by any omission to perform some duty imposed on Consultant, its subcontractors or either’s agent or employee. The foregoing indemnities shall include, without limitation, reasonable fees of attorneys, consultants and experts and related costs and MCERA’s costs of investigating any claims against MCERA. In addition to Consultant’s obligation to indemnify MCERA, Consultant specifically acknowledges and agrees that it has an immediate and independent obligation to defend MCERA from any claim which actually or potentially falls within this indemnification provision, even if the allegations are or may be groundless, false or fraudulent, which obligation arises at the time such claim is tendered to Consultant by MCERA and continues at all times thereafter. Consultant shall indemnify and hold MCERA harmless from all loss and liability, including attorneys’ fees, court costs and all other litigation expenses for any infringement of the patent rights, copyright, trade secret or any other proprietary right or trademark, and all other intellectual property claims of any person or persons in consequence of the use by MCERA, or any of its officers or agents, of articles or services to be supplied in the performance of this Agreement.

b. MCERA shall promptly, and in any event within thirty (30) days after acquiring knowledge of any Claims, give written notice to Consultant of the relevant Claim (“Notice of Claim”) and notice of whether MCERA elects for Consultant to defend MCERA. If MCERA so notifies Consultant, Consultant shall, at its own expense, promptly defend, contest or otherwise protect MCERA against any Claims.

c. In the event that Consultant shall undertake to compromise or defend any Claim, Consultant shall notify MCERA promptly, and in any event within thirty (30) days after the receipt of the Notice of Claim, of its intention to do so. If Consultant undertakes the defense of such Claim, MCERA shall have the right to participate in the defense of the Claim at its sole expense. Consultant shall not enter into a settlement that may affect MCERA’s rights or interest without MCERA’s prior written approval. Consultant shall have the right to control the defense of any such Claim unless it is relieved of its liability hereunder with respect to such defense by MCERA. MCERA shall cooperate in said defense, including without limitation, the services of any MCERA employees who are familiar with the transactions out of which any such Claim may have arisen.

d. In the event that Consultant, after receiving a timely Notice of Claim, fails to take timely action to defend the same, MCERA shall have the right to defend such Claim by counsel of its own choosing but at the cost and expense of Consultant. In the event that MCERA defends a Claim, it shall not compromise or settle any such Claim without the written consent of Consultant, such consent not to be unreasonably withheld or delayed.

e. Survival. This Section 16 shall survive any termination of this Agreement.

17. Ownership of Results; Works for Hire.

a. Ownership of Results. Any interest of Consultant or its subcontractors, in drawings, plans, specifications, blueprints, studies, reports, memoranda, computation sheets, computer files and media or other documents prepared by Consultant or its subcontractors in connection with the Consulting Services shall become the property of and will be transmitted to MCERA in a useable format (including electronic format) upon demand by MCERA; provided, however, Consultant may retain and use copies for reference and as documentation of its experience and capabilities. MCERA shall have the unrestricted authority to publish, disclose, distribute or otherwise use in whole or in part any reports, data or other materials prepared under this Agreement, crediting Consultant as the source.

b. Works for Hire. If, in connection with services performed under this Agreement, Consultant or its subcontractors create artwork, copy, posters, billboards, photographs, videotapes, audiotapes, systems designs, software, reports, diagrams, surveys, blueprints, source codes or any other original works of authorship, such works of authorship shall be works for hire as defined under Title 17 of the United States Code, and all copyrights in such works are the property of MCERA. If it is ever determined that any works created by Consultant or its subcontractors under this Agreement are not works for hire under U.S. law, Consultant hereby assigns all copyrights to such works to MCERA, and agrees to provide any material and execute any documents necessary to effectuate such assignment. With the prior written approval of MCERA, Consultant may retain and use copies of such works for reference and as documentation of its experience and capabilities.

18. Insurance. Without limiting Consultant’s indemnity obligations under Section 16 above, for the duration of this Agreement, Consultant shall maintain at its own expense the insurance policies described in this Section 18 to cover Consultant’s business activities. Such insurance shall be provided by insurer(s) rated A-, Class XII or better by A.M. Best & Company, or otherwise approved in writing by MCERA. On or before the commencement date of this Agreement, and annually thereafter, evidence of such insurance shall be provided to MCERA, which may be in the form of a Certificate of Insurance. Such certificate shall describe the nature, amount and term of the insurance provided. In addition, Consultant shall provide to MCERA at least thirty (30) days advance written notice of any material modification or termination of any policy of insurance. Each policy shall provide for waiver of subrogation to the extent commercially feasible. Failure by Consultant to procure or maintain the insurance described in this Section 18 shall constitute a material breach upon which MCERA may immediately terminate this Agreement for default without opportunity to cure, pursuant to Section 11 above.

a. Commercial General Liability. Consultant shall provide and maintain a Commercial General Liability insurance policy, which names MCERA as additional insured. Such policy shall cover liability for bodily injury and property damage arising out of Consultant’s business activities and shall include, without limitation, endorsements for Premises- Operations, Products/Completed Operations, Contractual, Broad Form Property Damage and Personal Injury coverages with a limit of at least Five Million Dollars ($5,000,000).

b. Workers’ Compensation. Consultant shall bear sole responsibility and liability for furnishing Workers’ Compensation benefits to Consultant’s employees for injuries arising from or related to any services provided to MCERA under this Agreement. Consultant shall provide and maintain a program of Workers’ Compensation and Employer’s Liability insurance, in an amount and form to meet all applicable statutory requirements, to cover all of Consultant’s employees, which in any event shall have not less than a limit of One Million Dollars ($1,000,000).

c. Fiduciary Liability. Consultant shall provide and maintain a Fiduciary Liability Policy covering Consultant’s failure to meet its fiduciary obligations to MCERA under this agreement with a limit of Five Million Dollars ($5,000,000).

d. Errors and Omissions. Consultant shall provide and maintain a Professional Liability, Fiduciary Indemnity and Errors and Omissions Policy covering liability arising from or relating to any error or omission by Consultant or its Agents in performing under this Agreement with a per occurrence limit of at least Five Million Dollars ($5,000,000) and an annual aggregate of at least Five Million Dollars ($5,000,000).

19. Consultant’s Representations, Warranties and Covenants. Consultant acknowledges, represents, warrants, covenants and agrees that:

a. Authorization. Consultant has completed, obtained and performed all registrations, authorizations, licenses, consents or examinations required by any government or government agency regarding any Consulting Services to be performed by Consultant pursuant to this Agreement. This Agreement has been duly authorized, validly executed and delivered by Consultant and constitutes the legal, valid and binding agreements and obligations of Consultant, enforceable against Consultant in accordance with its terms, except insofar as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar limitations on creditors’ rights generally and general principles of equity. Consultant is not subject to or obligated under any law, rule or regulation of any governmental authority, or any order, injunction or decree, or any agreement, that would be breached or violated by Consultant’s execution, delivery or performance of this Agreement.

b. Quality of Services. The Consulting Services, which Consultant provides or is required to provide in all respects hereunder, shall meet the requirements and standards set forth in this Agreement including the Standard of Care. Consultant shall promptly correct any errors or omissions in providing such Consulting Services, all at its own expense. Nothing contained herein shall limit or prevent MCERA from proceeding pursuant to Sections 10 or 11 above.

c. Contingent Fees. No person or selling agency has been employed or retained to solicit or secure this Agreement under any agreement or understanding for compensation, whether as a commission, percentage, brokerage, or contingent fee, or otherwise except bona fide employees of Consultant. In the event of any breach or violation of this warranty, MCERA shall have the right to immediately terminate this Agreement for default and, in MCERA’s sole discretion, to deduct from Consultant’s compensation under this Agreement, or otherwise recover, the full amount of such compensation, commission, percentage, brokerage or contingent fee.

d. Gratuities. No gratuities in the form of gifts, entertainment or otherwise, were offered or given by Consultant to any officer, fiduciary, agent or employee of MCERA or the County of Merced. Consultant covenants that no such gratuities will be offered or given to any such person with a view toward securing any favorable determination concerning the acquisition, performance and/or continuation of this Agreement.

e. Conflicts of Interest With Persons Related to MCERA. Consultant acknowledges that all MCERA Trustees, and pertinent MCERA staff are bound by the conflict of interest prohibitions and reporting requirements set forth in Government Code Sections 87100 et seq. concerning gifts, by the provisions of the Levine Act, Government Code Sections 84300 et seq. concerning campaign contributions, by the provisions of Government Code Sections 1090 et seq. prohibiting any financial interest in an MCERA contract and/or by the MCERA Conflict of Interest Policy, a copy of which is appended hereto as Exhibit C. Consultant hereby acknowledges receipt of and hereby agrees to MCERA’s Conflict of Interest Policy and shall not cause or contribute to a breach or violation of such policy. No MCERA employee or fiduciary whose position with MCERA enables such person to influence the award of this Agreement or any competing agreement, and no spouse or economic dependent of such person, is or will be employed or compensated in any capacity by Consultant. No such MCERA employee or fiduciary or spouse or economic dependent of such employee or fiduciary does or will have any direct or indirect financial interest in this Agreement. Consultant shall immediately advise MCERA if any member of the MCERA Board or key staff or any elected or appointed official of Merced County, or any person claiming to represent or have influence with the Board or with any member of the Board contacts Consultant with respect to a financial transaction or solicitation which is not solely on behalf of MCERA’s business with Consultant. In order that all Board members and pertinent MCERA staff are able to participate in matters coming before the Board and to avoid conflicts of interest, Consultant agrees that it will not make any political contributions, gifts, reimbursement of expenses or provide any other personal or financial benefit or take any action or make any offer to any MCERA Board member or staff member that would result in a violation of the provisions of any of the foregoing Government Code Sections and/or the MCERA Conflict of Interest Policy. Invitations to educational conferences, and similar events including travel and accommodations, as referenced in Section 8 above, shall be made to the entire Board or MCERA and not directed to individual Board members or staff. The Board will determine whether to accept such invitations and will be solely responsible for selection of Board member, staff member, or other individual who will attend or otherwise participate on behalf of MCERA. Except as set forth in Section 8, all costs or expenses related to the conference or event, including travel and accommodations, will be paid by MCERA. Consultant

shall deliver to MCERA on or before March 30th of each year, the Fair Political Policies Commission Form 700.

f. Conflicts of Interest Arising From Other Business Activities. Consultant represents and warrants that it has implemented appropriate procedures, attached as Exhibit D, necessary to assure that no actual conflict of interest arises during the term of this Agreement, and that Consultant shall at all times properly discharge its duty of loyalty owed to MCERA as a result of Consultant acting as a fiduciary for MCERA. Consultant shall inform MCERA in writing of any change in these procedures not less than five (5) days prior to the effective date of any such change. Consultant shall not establish any financial interest, whether by indirect investment, affiliation, investment or otherwise with any advisor or manager that is evaluated or recommended by Consultant. Consultant shall provide MCERA with an appropriate party within Consultant’s organization to provide MCERA with information about any business relationship between Consultant and any of Consultant’s affiliates and any advisor or manager or specific investment recommended by Consultant. Consultant shall notify MCERA of all recommendations and advice given by Consultant to any affiliate of Consultant concerning or in any way related to any manager or investment currently retained or owned by MCERA. Such notice shall be transmitted by telephone call to MCERA’s Chief Investment Officer, followed by written confirmation promptly but in no event later than the same time as other clients of Consultant are notified. Prior to MCERA acting on any direct or indirect investment opportunity that arose due to the Consulting Services, Consultant shall disclose to MCERA in writing whether Consultant or, to Consultant’s best knowledge, any of the principals or investment professionals of Consultant has also invested in such opportunity. MCERA may choose to take or reject such investment opportunity at its sole discretion in the event Consultant, its principals or its investment staff have invested in such opportunity. Consultant covenants and warrants that it has an ongoing duty to notify MCERA if Consultant or any of its principals or investment professionals intend to make direct or indirect investments where MCERA is also an investor, and Consultant shall not make and shall not permit its principals or investment staff to make such direct or indirect investments within the written approval of MCERA, which may be granted or withheld in its sole discretion but that MCERA will provide promptly.

g. Audits and Financial Reports. Consultant shall provide MCERA’s Chief Investment Officer or designee an opportunity to examine a copy of its annual unaudited financial statement at Consultant’s offices upon three (3) business days’ advance notice. This statement shall be deemed confidential and produced, disclosed or disseminated to third parties by MCERA only upon receipt of a valid court order to do so, or unless MCERA is otherwise required by law to disclose or disseminate such financial statement.

h. Changes. Consultant shall notify MCERA in writing within three (3) business days of any of the following changes: (1) Consultant becomes aware that any of its representations, warranties and covenants set forth in this Agreement cease to be true at any time during the term of this Agreement; (2) there is any Change in Control of Consultant; or (3) Consultant becomes aware of any other material change in Consultant’s business organization, including without limitation, the filing for bankruptcy relief.

i. Investigations and Complaints. To the extent not prohibited by applicable law, Consultant shall promptly advise MCERA, in writing, of any non-routine investigation, examination, complaint, disciplinary action or other proceeding involving Consultant, any of its subsidiaries or affiliates, any of Consultant’s Agents, or any investment professional employed by Consultant who has performed any Consulting Services in the twenty four (24) months preceding such actions, which is commenced by: (1) the Securities and Exchange Commission of the United States, (2) the New York Stock Exchange, (3) the American Stock Exchange, (4) the National Association of Securities Dealers, (5) any Attorney General of any State in the United States, (6) any State or U.S. government department or agency, (7) any other governmental agency within or outside the United States regulating securities, securities brokers or dealers, or similar matters or (8) any litigation involving professional services similar to the Statement of Services brought against Consultant or any of its Key Persons.

j. Registered Investment Advisor. Consultant hereby represents that it is a registered investment adviser under the Investment Advisers Act of 1940. Consultant shall immediately notify MCERA if at any time during the term of this Agreement it is not so registered or if its registration is suspended.

k. Consultant’s Agents. The Responsible Persons or the Agents of Consultant who will be responsible for performing under this Agreement are individuals who are duly qualified to perform the Consulting Services and experienced in the performance of the various functions contemplated by this Agreement and have not been convicted of any crime or found liable in a civil or administrative proceeding or pleaded no contest, or agreed to any consent decree with respect to any matter involving breach of trust, breach of fiduciary duty, fraud, theft, securities law violations, bankruptcy law violations or any act or omission involving moral turpitude.

l. Disclosure Statement. Consultant represents that it has delivered to MCERA at least five (5) business days prior to the execution of this Agreement, Consultant’s current Securities and Exchange Commission Form ADV, Parts 1 and 2 ( “Disclosure Statement”), a copy of which is attached hereto as Exhibit E. MCERA acknowledges that it has received such Disclosure Statement at least five (5) business days prior to the execution of this Agreement. Consultant warrants that it will provide to MCERA copies of the annual Disclosure Statement and any amendments to the Disclosure Statement filed with the U.S. Securities and Exchange Commission within thirty (30) days of such filing.

m. Intellectual Property. Consultant represents that has all appropriate rights to any materials subject to patents, copyright, trademark, trade secret or similar laws or rules and warrants that, in the event the Consulting Services require the use of any such materials, Consultant shall obtain all necessary rights to use such materials.

Consultant understands that MCERA has relied upon the foregoing acknowledgments, representations, warranties, covenants and agreements and that the same constitutes a material inducement to MCERA’s decision to enter into this Agreement.

20. MCERA’s Representations Warranties and Covenants. MCERA represents, warrants, and covenants that this Agreement has been duly authorized, validly executed and

delivered by MCERA and constitutes the legal, valid and binding agreements and obligations of MCERA enforceable against MCERA in accordance with its terms. MCERA is not subject to or obligated under any law, rule or regulation of any governmental authority, or any order, injunction or decree, or any agreement that would be breached or violated by the execution, delivery or performance of this Agreement by MCERA. MCERA understands that Consultant has relied upon the foregoing acknowledgment, representations, warranties, covenants and agreements and that the same constitutes a material inducement to Consultant’s decision to enter into this Agreement.

21. Compliance with Legal Requirements. In performing under this Agreement, Consultant and MCERA agree to comply with all Legal Requirements, and all provisions required thereby to be included in this Agreement are hereby incorporated by reference.

22. Assurance of Compliance with Civil Rights Laws. Consultant hereby assures MCERA that at all times during the term of this Agreement Consultant shall comply with Subchapter V1 of the Civil Rights Act of 1964, (42 U.S. Code Sections 2000(e) through 2000(e)(17)), to the end that no person shall, on grounds of race, creed, color, sex, or national origin be excluded from participation in, be denied the benefits of, or be otherwise subjected to discrimination under this Agreement or under any project, program, or activity undertaken pursuant to this Agreement.

23. Nondiscrimination in Employment. Consultant shall take all necessary action to ensure that its job applicants are employed, and that its employees are treated during employment, without regard to their race, color, religion, sex, age, marital status, sexual orientation, disability, medical condition, ancestry or national origin. For purposes of this Section 23, the term “employment” shall include, but not be limited to the following: employment, upgrading, promotion, demotion or transfer; recruitment or recruitment advertising; layoff or termination; rates of pay or other forms of compensation; and selection for training, including apprenticeship.

24. Replacement of Consultant’s Agents. Upon request by MCERA, Consultant shall replace any Responsible Person or Agent assigned to perform services under this Agreement who MCERA determines in its sole discretion, is unable to effectively perform the Consulting Services as required by this Agreement.

25. Record Retention and Inspection.

a. Record Maintenance. Consultant shall keep and maintain all records related to MCERA, including but not limited to any pertinent transaction, activity, time sheets, cost, billing, accounting and financial records, proprietary data, electronic recordings, and any other records created in connection with this Agreement or the performance of the Consulting Services (“MCERA Records”). Consultant shall keep and maintain MCERA Records for no less than seven (7) years following the termination of this Agreement at which time they will become subject to Consultant’s normal retention policy.

b. Record Review and Audit. Consultant agrees that MCERA or any duly authorized representative of MCERA shall have access to and the right to examine, audit, excerpt, copy or transcribe any MCERA Records at any time during the term of this Agreement, or for as long as the records are retained pursuant to Consultant’s normal retention policy. At

MCERA’s request, and on reasonable notice, Consultant shall make such records available for review during normal business hours at Consultant’s closest business office to MCERA. Consultant shall make the persons responsible for creating and maintaining MCERA Records available to MCERA during such review for the purpose of responding to MCERA’s inquiries provided they are still employed.

26. Confidentiality.

a. Confidential Information. Consultant shall treat, and cause its accountants, attorneys, employees, Agents and other representatives to treat, as confidential all documents and information relating to MCERA (“Confidential Information”) furnished by MCERA in connection with the transactions contemplated hereby and shall not release any such Confidential Information from its immediate control without the prior written consent of MCERA. However, if such Confidential Information (i) becomes generally available to the public other than as a result of a disclosure by Consultant, (ii) becomes lawfully available to Consultant on a non- confidential basis from a third party which is not under an obligation of confidentiality with respect thereto, or (iii) consists of information independently developed by Consultant, it shall not be Confidential Information. In the event Consultant, Responsible Persons or any of representatives or Agents of Consultant is requested or required by any federal, state, local or foreign governmental or regulatory entity (or any department, agency, authority or political subdivision thereof) to disclose any Confidential Information supplied to it in the course of its dealings hereunder, Consultant will provide MCERA with prompt notice of any such request or requirement so that MCERA may seek an appropriate protective order from a court of competent jurisdiction. If no such protective order has been obtained and Consultant or any of its agents is, in the reasonable opinion of its counsel, compelled to disclose any Confidential Information, Consultant may disclose such Confidential Information, provided that notice of such intended disclosure first be given to MCERA.

b. Third Parties. Nothing in this Agreement shall be construed as prohibiting Consultant from disclosing Confidential Information to third parties engaged by Consultant to assist Consultant in its obligations under this Agreement, provided MCERA approves of the third party engagement (which approval shall not be unreasonably withheld), and such third party agrees in writing to be bound by the terms of this Section 26 for the benefit of MCERA.

c. Other Confidential Data. Consultant shall maintain the confidentiality of all MCERA Records. Consultant shall indemnify, defend and hold harmless MCERA and its directors, members, employees, officers, representatives, assigns and agents from and against any Claims arising from or relating to the unauthorized disclosure of any MCERA records by Consultant or its Responsible Persons or Agents.

d. Survival. This Section 26 shall survive the termination of this Agreement.

27. Audit Settlement. If an error that is directly or indirectly related to the Consulting Services is discovered as a result of an audit performed by MCERA, or if Consultant becomes aware of any error affecting MCERA through any other means, Consultant shall promptly correct such error by crediting or debiting MCERA in the appropriate amount. If any such error

is greater than five percent (5%), regardless of whether it was discovered by MCERA or Consultant, Consultant shall pay any and all fees incurred by MCERA in conducting such audit and damages pursuant to Section 16 above.

28. No Third Party Beneficiary. Subject to Section 26(b) above, all of the understandings, agreements, representations and warranties contained herein are solely for the benefit of MCERA and Consultant and there are no other parties who are intended to be benefited, in any way whatsoever by this Agreement.

29. Intentionally omitted.

30. Notices. All notices, requests, demands or other communications required or desired to be given hereunder or under any law now or hereafter in effect shall be in writing. Such notices shall be deemed to have been given if delivered by facsimile with telephone confirmation of receipt, or by overnight courier, or if mailed by first class registered or certified mail, postage prepaid, and addressed as follows (or to such other address as either party from time to time may specify in writing to the other party in accordance with this notice provision):

If to MCERA: If to Consultant:

Kristen Santos [Contact Name] Plan Administrator [Contact Title] MCERA Cliffwater LLC 3199 M Street 4640 Admiralty Way, 11th Floor Merced, CA 95348 Marina del Rey, CA 90292-6623 Telephone: 209-726-2724 Tel: (310) 448-5000 Facsimile: 209-725-3637 Fax: (310) 448-5001

31. Attorneys’ Fees. If either or both of the parties initiate any litigation to enforce or interpret any of the provisions of this Agreement, then the non-prevailing party shall pay to the prevailing party all reasonable costs and expenses incurred therein by the prevailing party, including, without limitation, reasonable attorneys’ fees and court costs. These expenses shall be in addition to any other relief to which the successful party may be entitled and shall be included in and as part of the judgment or decision rendered in such litigation.

32. Section Headings: Interpretation. Caption and paragraph headings used in this Agreement are for convenience and reference only and shall not affect in any way the meaning, construction or interpretation of this Agreement. Each party hereto and its counsel have participated fully and equally in the review and negotiation of this Agreement. Each party hereto agrees that neither party, nor its counsel, shall be deemed the drafter of this Agreement for purposes of construing the provisions hereof. Any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not apply in interpreting this Agreement. The language in all parts of this Agreement shall in all cases be construed according to its fair meaning and not strictly for or against any party hereto.

33. Entire Agreement: Exhibits, Schedules and Appendices. This Agreement, together with any and all Exhibits, Schedules and Appendices attached hereto, contains the entire and exclusive Agreement between the parties hereto and supersedes all previous oral and written

agreements or understandings, and all contemporaneous oral and written negotiations, commitments, understandings and communications between the parties, relating to the subject matter of this Agreement. The Exhibits, Schedules and Appendices attached hereto are incorporated in and made a part of this Agreement by reference.

If any conflicts, inconsistencies or ambiguities should arise between or among this Agreement and the incorporated documents, the following precedence shall be used to interpret the requirements of this Agreement:

(1) The terms of this Agreement; (2) The terms of the Exhibits according to the order in which they appear.

34. Severability. If any provision of this Agreement is held by any court to be invalid, void or unenforceable, in whole or in part, the other provisions shall remain unaffected and shall continue in full force and effect.

35. Waiver. The waiver of any breach of any provision of this Agreement by either party shall not constitute a waiver of any preceding or subsequent breach of such provision or of any other provision of this Agreement. The failure or delay of either party to exercise any right given to the party under this Agreement shall not constitute a waiver of such right, nor shall any partial exercise of any right given hereunder preclude further exercise of such right.

36. Amendments in Writing. At any time prior to the termination of this Agreement, but only by mutual written agreement executed by the Chairman of MCERA’s Board of Retirement and a duly authorized officer of Consultant, the parties hereto may: (a) extend the time for performing any of the conditions, covenants, rights, obligations or other acts of the parties required herein; (b) waive the performance of any of the conditions, covenants, rights, obligations or other acts of the parties required herein; or (c) amend or supplement any of the provisions of this Agreement. The parties shall meet and confer in good faith on any modification of this Agreement that may become necessary to make its provisions consistent with any investment policy of MCERA, or any foreign, international, federal, state, county or local statute, rule, regulation or ordinance which governs any aspect of this Agreement.

37. Governing Law and Venue. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California without regard to principles of conflicts of laws. Should either party initiate a lawsuit or other dispute resolution proceeding over any matter relating to or arising out of this Agreement, such lawsuit or other proceeding shall be filed and conducted in the County of Merced, State of California.

38. Assignment and Delegation. Consultant may not assign any of its rights or delegate any of its duties hereunder without MCERA’s prior written consent, which consent may be granted or withheld in MCERA’s sole discretion. MCERA may not assign any of its rights or delegate any of its duties hereunder without Consultant’s prior written consent, which consent may be granted or withheld in Consultant’s reasonable discretion. Any assignment of rights or delegation of duties under this Agreement, to which the parties hereto agree in writing, shall bind and inure to the benefit of the successors in interest of MCERA and Consultant.

39. Limitation on Liability of MCERA. MCERA’s payment obligations under this Agreement shall be limited to payment of the compensation provided in Section 7 herein. Notwithstanding any other provision of this Agreement, in no event shall MCERA be liable, regardless of whether any claim is based on contract or tort, for any special, consequential, indirect or incidental damages, including but not limited to, lost profits, arising out of or in connection with this Agreement or the Consulting Services.

40. Execution in Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument.

IN WITNESS WHEREOF, the Board of Retirement of MCERA has caused this Agreement to be executed on behalf of MCERA and Consultant has caused this Agreement to be executed by its duly authorized officer as of the date first above written.

MERCED COUNTY EMPLOYEES CLIFFWATER LLC RETIREMENT ASSOCIATION

By: By: Name: ______Name:______Its:______Its:______

APPROVED AS TO FORM:

By: Name:______Its:______

EXHIBIT A

STATEMENT OF SERVICES

1. STRATEGIC PRIVATE EQUITY AND HEDGE FUND CONSULTING

a.Assist the Board and MCERA staff in the development of an appropriately structured private equity program (including but not limited to buyout, private debt, distressed, venture capital, energy, infrastructure, mining, natural resources, real estate) and hedge funds, including the establishment of goals, strategies, objectives, and performance benchmarks and standards.

b.Develop and/or review the Board’s private equity and hedge funds investments policies and guidelines on an ongoing basis and make recommendations for modifications as necessary.

c.Prepare quarterly and annual performance reports for the private equity portfolio and hedge funds.

d.Produce written research on private equity and hedge funds market conditions and opportunities, including conduct of special projects or other activities as requested.

e.Appear quarterly at Board meetings or other meetings to present performance, program updates, research, analyses, written reports, and investment recommendations and respond to questions relating to the private equity program and hedge funds.

f.Coordinate and communicate with MCERA’s consultants, advisors, legal counsel and other professionals, as appropriate, to ensure effective administration of the private equity program.

2. INVESTMENT SOURCING AND SELECTION

a.Develop a structured, ongoing process to screen the global universe of available private equity investments and hedge funds (i.e., domestic and international opportunities) and identify those most appropriate for MCERA portfolio; provide semi-annual reports to MCERA staff and the Board summarizing screening activity.

b.Evaluate prospective investments and transactions (primaries, secondaries, and co- investments); including those that may have been sourced by MCERA’s other consultants. If appropriate, engage in comprehensive due diligence that may include general partner site visits, background and reference checking.

c.Present written investment recommendation reports to the Board and MCERA staff; reports will include, but shall not be limited to; full results of the comprehensive due diligence, strategic considerations, partnership reviews, and commitment amounts and how the investments complement the overall portfolio.

d.Work with MCERA staff and legal counsel to negotiate fund terms, in the best interests of MCERA, relevant contracts and legal documents including limited partnership agreements and

subscription agreements. Obtain fully-executed placement agent disclosure statement. Complete subscription sub booklets, KYC/AML documents, and other subscription documents for MCERA. Please note MCERA retains external legal counsel for legal review of fund documents and negotiation of side letters.

3. MONITORING OF PRIVATE EQUITY PORTFOLIO AND HEDGE FUNDS

a.Provide on-going investment monitoring that may include attending annual meetings, serving on advisory boards, analyzing policy and peer benchmarks, and conducting manager meetings.

b.Provide regular updates/assessments of relevant operational and/or strategic changes with investment managers, including, but not limited to, performance, organization, ownership, investment products, and disclosure issues.

c.Ensure that investment managers comply with the terms of their contracts.

d.Review and recommend course of action on all fund document amendments, consents, and extensions.

e.Assist and advise MCERA staff and counsel with work-out situations, breaches or violations of limited partnership and side letter provisions, and fund dissolutions as may arise.

4. DATABASE MANAGEMENT

a.Maintain information on portfolio exposure, including to vintage years, sub-asset classes (i.e. buyout, venture capital, special situations, etc.), geographic regions, and industries. Maintain information by portfolio type (i.e., core/satellite portfolios) and hedge funds.

b.Maintain historical information on all cash flow, net asset values, commitments (total, funded, and unfunded), fee payments, cost basis and returns on each investment.

c.Calculate performance metrics including net and gross internal rate of return (“IRR”) and investment multiple calculations measured against performance benchmarks.

d.Provide ability to review cash flows and performance data by individual investment, sector, sub-asset class and portfolio type over quarterly periods.

5. REPORTING REQUIREMENTS

a. Quarterly performance report to include at a minimum: i. Market overview and outlook ii. Allocation breakdown by geography, strategy and industry iii. Update on each fund iv. Listing of each fund by strategy v. Date of commitment to each fund

vi. Commitment amount to each fund vii. Drawdown amounts by fund viii. Outstanding commitment by fund ix. Distribution amounts by fund x. Fund net asset values xi. IRR and multiples of each fund

b. Quarterly and Annual Reports to include at a minimum: i. Listing of each fund by strategy ii. Date of commitment to each fund iii. Commitment amount to each fund iv. Drawdown amounts by fund v. Outstanding commitment by fund vi. Distributions by fund vii. Prepare reports on behalf of MCERA to insure compliance with California Government Code Section 7514.7 (AB2833)

c. Reconcile monthly and quarterly reports with the records of MCERA custodian bank; provide any other reporting required by MCERA Accounting Staff.

d. Provide assistance with appropriate information to satisfy public information requests or public reporting requirements.

e. Coordinate with general partners to obtain relevant information related to GASB 72 reporting requirements.

f. Provide a satisfactory operational solution (including the consultant’s coordination with general partners) to ensure MCERA’s compliance with California Government Code Section 7514.7 (AB2833 legislation).

g. Provide report on management fees, organizational expenses, and partnership expenses by partnership on an annual basis.

6. EDUCATION

a. Provide educational and/or training sessions on private equity and hedge funds investing and strategies to the Board and MCERA staff as requested. MCERA estimates a minimum of 6 hours per year of education.

b. Provide MCERA staff with access to investment research and publications used by Consultant.

c. Provide education to MCERA staff in the administration of private equity investments and hedge funds.

EXHIBIT B

LIST OF MCERA AUTHORIZED PERSONNEL

CURRENT BOARD OF ADMINISTRATION Karen Adams Darlene Ingersoll Ronald Scott Johnston Ronald Kinchloe David Ness Ryan Paskin Alfonse Peterson Michael Rhodes Jason Goins Sam Spangler Jerry O’Banion

CURRENT STAFF Kristen Santos Mark Harman David Bren Horrocks Angelo Lamas Michelle Lee Brenda Mojica Adriana Valdez Sheri Villagrana Forrest Hansen (County Counsel)

Departed Trustees within the last 3 years: Mark Bodley Mary McWatters James Pacheco Deirdre Kelsey

Departed Staff within the last 3 years: Maria Arevalo Brian Baker Steven Bland David Liu Gale Garcia Rhianna Phillips Frank Romero Yadira Vazquez Deanne Peterson

EXHIBIT C

MCERA CONFLICT OF INTEREST POLICY

Date: 3/16/17

Acknowledgment

Pursuant to the terms of the Conflict of Interest and Board Governance Policy, members of the Board will on an annual basis, review and acknowledge the terms of the policy.

I acknowledge that I have received a copy of Retirement Board Resolution 2007-03 pertaining to Conflict of Interest and Board Governance.

I understand it is my responsibility to read and understand said Resolution and I further acknowledge that I will, to the best of my ability, adhere to the provisions herein.

______Signature Date

EXHIBIT D

CLIFFWATER CONFLICT OF INTEREST POLICY

[TO BE PROVIDED BY CONSULTANT]

EXHIBIT E

CLIFFWATER FORM ADV

[TO BE ATTACHED BY CLIFFWATER]

EXHIBIT F

MCERA INVESTMENT OBJECTIVES AND POLICY STATEMENT

MERCED COUNTY EMPLOYEES' RETIREMENT ASSOCIATION

INVESTMENT POLICY STATEMENT

Adopted: February 23, 2017

Table of Contents

PART I ...... i POLICY PERSPECTIVES ...... i 1.0 INTRODUCTION AND POLICY STATEMENT ...... i 1.1 Introduction ...... i 1.2 Policy Statement ...... i 2.0 Policy Scope ...... i 3.0 POLICY OBJECTIVES ...... i 3.1 Board Management Objectives: ...... i 3.2 Basic Goals: ...... i 3.3 Investment Objectives:...... i 4.0 Governance ...... ii 4.1 Board's Role and Responsibilities ...... ii 4.2 Staff Role and Responsibilities ...... ii 4.3 General Investment Consultant ...... iii 4.4 Specialty Investment Consultants ...... iii 4.5 Investment Managers ...... iii 4.6 Custodian Bank ...... iv PART II ...... v MCERA's PORTFOLIO MANAGEMENT ...... v 5.0 INVESTMENT POLICIES ...... v 5.1 Diversification...... v 5.2 Style Orientation ...... v 5.3 Asset Allocation ...... v PART III ...... vi INVESTMENT GUIDELINES ...... vi 6.0 INVESTMENT MANAGERS' RESPONSIBILITIES, POLICIES AND GUIDELINES ...... vi 6.1 Investment Manager Policies ...... vi 6.2 Derivatives Investing Policies...... vi 6.3 Investment Manager Guidelines ...... vii 6.4 Watch List Policy ...... xii

PART IV ...... xiv CONTROLS ...... xiv 7.0 PROXY VOTING...... xiv 8.0 TRANSACTIONS, BROKERAGE, and Commission Recapture Program ...... xiv 9.0 BOARD REVIEW & Due-DILIGENCE POLICY ...... xiv 10.0 POLICY Compliance REVIEW ...... xiv 11.0 PORTFOLIO REBALANCING...... xiv Appendix A ...... xvi ASSET ALLOCATION PLAN AND TARGET ASSET MIX ...... xvi Appendix B ...... xviii Placement Agent Disclosure Policy ...... xviii

MERCED COUNTY EMPLOYEES' RETIREMENT ASSOCIATION INVESTMENT POLICY STATEMENT

PART I

POLICY PERSPECTIVES

1.0 INTRODUCTION AND POLICY STATEMENT

1.1 Introduction The Merced County Employees' Retirement Association’s (“MCERA” or “Plan”) Investment Policy Statement is a document which establishes and outlines the responsibilities of the various parties that are associated with the management of the MCERA. In addition, this document states various control procedures to ensure that the MCERA is appropriately managed. Reports from investment managers, the custodians, consultants and others must verify that the Board is operating within the framework of the Plan’s guidelines.

1.2 Policy Statement Notwithstanding any other provisions to the contrary, the policy of the Board of Retirement ("Board") of the Merced County Employees' Retirement Association shall be to invest public funds in a manner that is consistent with the County Employees' Retirement Law of 1937, as well as State and Federal laws. The fundamental mission of MCERA is to provide retirement and other benefits to plan participants and to invest Plan assets solely in the interest of Plan participants and beneficiaries.

2.0 Policy Scope This policy shall set forth guidance and requirements for the investment activities conducted by the Board. The funds eligible for investment are all those under the direct authority of the Board.

3.0 POLICY OBJECTIVES The basic objectives of the Board's investment program are the following:

3.1 Board Management Objectives: 1. Ensure Plan’s ability to pay benefits to Plan Participants; 2. Increase funding ratio to ensure long-term sustainability of MCERA; 3. Keep Plan contributions as low as possible once objectives #1 and #2 are met.

3.2 Basic Goals: The goals of the Board are to fund the Plan's benefit payments, while assuming a risk posture that is consistent with the Board's risk tolerance, protect against loss of purchasing power by achieving rates of return above inflation, and seek to obtain a fully funded pension plan status.

3.3 Investment Objectives: The Board's long-term investment objectives are as follows: 1. At a minimum, achieve a nominal return equivalent to the MCERA’s actuarial assumed rate of return. 2. Earn a total return that averages in excess of the Actuarial Inflation Rate. 3. Exceed the return of MCERA’s passive, market-based, investment benchmark. Allocations to specific asset classes are based on MCERA’s target asset mix, which is based on the MCERA’s most recent asset allocation study.

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4.0 Governance

4.1 Board of Retirement's Role and Responsibilities The MCERA Board of Retirement (“Board”) holds the fiduciary responsibility for MCERA. The Board also understands it may delegate certain responsibilities under the Investment Program for purposes of administrative efficiency and expertise. The areas the Board may not delegate include: • The governance model of the Investment Program • Establishing and maintaining investment policy, including: o Investment philosophy o This Investment Policy Statement (IPS) o Investment objectives o Strategic asset allocation o Allocation-level performance benchmarks o Risk philosophy • Engaging Board consultants and service providers • Monitoring the Investment Program

The Board shall act according to the "prudent person rule," which shall be applied in the context of MCERA’s investment portfolio. The Board reserves the right to hold all parties doing business with MCERA accountable. The Board reserves the right to delegate an individual to hold an advisory board seat on any Plan investment. The Fund will be invested in a manner consistent with the County Employees' Retirement Law of 1937 and State laws.

The Investment Policy Statement will be reviewed at least every 3 years.

4.2 Staff Role and Responsibilities MCERA Staff (“Staff”) is broadly responsible for supporting the Board in the effective execution of the Plan. Staff has been delegated authority to execute specific elements of the Investment Program as outlined herein.

• Prepare and Review Recommendations to the Board • Monitor all transactions and cash flows • With Board direction, execute cash flows between manager accounts • Monitor and reconcile custodial bank and managers • Maintain Investment Manager Watch List • Notify Manager(s) of their Watch List status • Monitor for accuracy and validity of invoices and statements • Provide external managers with IPS • Ensure compliance with contractual agreements • Plan Administrator has the authority to manage the investments managers and consultants • Staff shall act according to the "prudent person rule," which shall be applied in the context of MCERA’s investment portfolio. • Staff shall act reasonably as custodians of the public trust, and shall recognize that the investment portfolio is subject to public review and evaluation. The overall management of the Retirement program shall be designed and managed with a degree of professionalism that is worthy of the public trust.

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4.3 General Investment Consultant The General Investment Consultant (“Consultant”) is engaged by the Board to provide independent, objective investment advice, free of conflicts of interest. The Consultant is and shall agree to be a fiduciary to the Plan under California law. The Consultant works with Staff in the development of recommendations while recognizing its fiduciary duty is to provide prudent investment advice to the Board. The Consultant provides advice without discretionary authority to execute on its advice. The specific duties of the Consultant are contained in an Agreement for Investment Consulting Services, and generally include providing advice with respect to: • Investment strategy development and implementation • Investment policy development • Asset allocation among classes and subclasses • Investment manager selection, evaluation and termination • Investment performance monitoring • Investment risk monitoring • Capital markets projections • Coordination with the Plan’s actuary in conducting periodic asset/liability studies and other required reporting • Board education • Collaborate with Staff on Maintaining Watch List

4.4 Specialty Investment Consultants Specialty Investment Consultants may be hired by the Board to work with Staff, the Board, the General Investment Consultant, other consultants hired by the Board. These will typically be asset class consultants (e.g., real estate, private equity, hedge funds) that may operate on a discretionary or non- discretionary basis, as directed by the Board, to meet the objectives of the Investment Program.

4.5 Investment Managers Investment Managers are delegated the responsibility of investing and managing Plan assets in accordance with this IPS and all other applicable laws and terms of the applicable investment documents evidencing MCERA’s acquisition of an interest in an investment vehicle, and other controlling documents. Each Investment Manager must be 1) an investment advisor registered under the Investment Advisors Act of 1940 and with the Securities and Exchange Commission and/or the applicable regulatory authority in their domiciled country; 2) a bank, as defined by the Act; 3)an insurance company qualified under the laws of more than one state to perform the services of managing, acquiring or disposing of the Plan’s assets; 4) a trust operating as an investment company under the Investment Company Act of 1940; or 5) a state chartered trust company authorized to carry on a trust banking business. Each Investment Manager shall agree that it is a fiduciary of the Plan under California law. Subject to this IPS and their specific contractual obligations to the Plan, Investment Managers are responsible for making all investment decisions on a discretionary basis regarding assets placed under their jurisdiction and will be accountable for achieving their investment objectives. Such discretion shall include decisions to buy, hold, and sell investments in amounts and proportions that are reflective of the stated investment mandate. Such investment managers will maintain proper and adequate insurance coverage’s including errors & omissions, surety bond, fiduciary liability. In addition, MCERA's investment managers agree to notify the Board Chairman and the Plan Administrator, in writing, if they are unable to continue acting in the capacity of a fiduciary or investment advisor. As stated above, investment managers are expected to act

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as prudent experts in the management of a fully-discretionary account(s) for MCERA and agree to be fiduciaries to the Plan. In fulfilling their roles, managers will continually educate the Board about capital market developments that pertain to their area of investment expertise.

Investment managers are expected to meet applicable investment objectives over the designated time horizon. If such objectives become unreasonable for any reason, it is the manager's responsibility to communicate his/her reservations about the objectives in writing to the Board Chairman and the Plan Administrator. Otherwise, failure to meet these objectives may result in dismissal.

Satisfying the quarterly portfolio reporting and monitoring requirements of the Plan is also an important part of the manager's responsibilities. These requirements are stated in a subsequent section of this document. Past or any anticipated significant portfolio developments, as well as major changes in the firm's ownership, organizational structure and personnel, should be immediately communicated in writing via e-mail to the Board and its investment consultant. Such communication will in turn be provided to the Board members.

It is the responsibility of each investment manager to provide a current version of its internal code of ethics. Additionally, once a year the manager will provide updated copies of investment and other policies developed by the firm that are relevant to MCERA and its portfolio(s). Policies will be given to the MCERA Staff.

Individual investment managers are hired by the Board to achieve the Plan's goals and investment objectives. In addition, managers are hired to implement Plan's asset allocation decisions, as evidenced by stated fund target asset mix in Appendix A. To the extent possible, investment managers will be hired to fulfill the Plan's diversification policies.

Investment managers are required to inform the Board of any regulatory investigations/ judgments and court cases relating to trading activities. If the investment managers conduct on-going internal reviews of trading activities, results of these reviews will be supplied to the Board.

The Board of Retirement reserves the right to terminate an investment management contract in accordance with the investment agreement for any reason.

4.6 Custodian Bank The Custodian Bank, selected by the Board to act as the principal custodian of assets of the trust, is delegated the responsibility of holding the assets and evidence of interests owned by the MCERA in investment vehicles and cash (and equivalents). The Board may authorize the Custodian Bank to invest in temporary short-term fixed income investments both for the investment strategies and as a part of the cash portion of Plan assets. Such investments will be managed in general accordance with short-term fixed income investment guidelines as detailed in the custodial agreement. The Custodian Bank, according to the custodial bank agreement/contract, may be authorized to conduct a securities lending program within liquidity and risk constraints as authorized by the custodial agreement.

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PART II

MCERA's PORTFOLIO MANAGEMENT

5.0 INVESTMENT POLICIES

5.1 Diversification As it is prudent to diversify investment risk, the Board has adopted an asset allocation mix to invest in several institutionally acceptable asset classes.

5.2 Managers Diversification and Investment Style As part of the diversified asset class investment approach of MCERA, the Board will also seek to employ a diverse group of investment portfolio managers within a specific asset class, if the size of the asset class commitment warrants more than one investment manager. Investment style and market capitalization will be used to differentiate among managers in the same domestic and international equity asset classes. The purpose of this diversification is to allow participation in various phases of a market cycle. Investment style diversification will also be applied to MCERA's investments in other asset classes if deemed appropriate.

5.3 Asset Allocation The Board has adopted a strategic asset allocation based on MCERA’s projected actuarial liabilities, liquidity needs, risk tolerance and the risk/return expectations for various asset classes. This asset allocation seeks to optimize long-term returns for the level of risk the Board considers appropriate. The current asset allocation table may be found in Appendix A: Asset Allocation Plan and Target Mix.

Since projected liability and risk/return expectations will change over time, the Board will conduct a periodic review of the strategic asset allocation to maintain an expected optimal allocation. The Board may also revise the asset allocation in response to significantly changing conditions that have affected valuations and/or forward-looking expected returns of asset classes. The Board will review capital market expectations annually.

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PART III

INVESTMENT GUIDELINES

6.0 INVESTMENT MANAGERS' RESPONSIBILITIES, POLICIES AND GUIDELINES

6.1 Investment Manager Policies The investment policies governing each investment manager hired by the MCERA are as follows: 1. The investment manager is required to accept the responsibilities in Section 4.5. These responsibilities include acting as a prudent expert and agreeing to be a fiduciary to the MCERA. The investment manager will seek to satisfy the Board's investment objectives. If a problem exists with these objectives, it is the investment manager's responsibility to formally discuss these problems in a written communication to the Board Chairman and the Plan Administrator. Also, the investment manager agrees to satisfy the Board's prescribed quarterly reporting requirements. 2. Under any and all capital market environments, the investment manager agrees to maintain the investment approach that they were hired to implement. Changes to the investment manager's investment decision making process are to be immediately reported in writing to the Board Chairman and Plan Administrator. On-going introspective research of the firm's investment process, analytics, inputs, and decision-making process will be regularly explained in writing to the Board Chairman and Plan Administrator. It is the responsibility of the investment manager to fully educate the Board as to the specifics of its investment process and internal research that may lead to changes in the firm's investment approach. 3. An investment portfolio constructed for the MCERA is expected to generally conform to other portfolios managed by the investment organization, exclusive of specific investment guidelines. When the MCERA's guidelines require the investment manager to manage a portfolio significantly different than its other portfolios, it is the responsibility of the investment manager to communicate in writing the potential impact of the MCERA's guidelines on the portfolio. Notification in writing shall be to the Board Chairman and the Plan Administrator. 4. The investment manager will otherwise treat the MCERA's portfolio in a manner similar to other comparable portfolios in portfolio construction, trading, and all other aspects. 5. The members of the investment management firm's research and portfolio teams are expected to comply with the Chartered Financial Analyst (CFA) Standards of Practice and Code of Ethics. Any industry or regulatory disciplinary action taken against members of the firm's investment staff must be immediately reported in writing to the Board Chairman and Plan Administrator in writing. 6. Portfolios managed for the MCERA are fully discretionary, but must meet the provisions of the MCERA's investment objectives and policies. Investment guidelines also exist for each investment manager within the major asset classes. 7. If the Board delegates proxy voting responsibilities to an investment manager, the manager agrees to vote all proxy ballots according to the best economic interest of the MCERA's members and in a manner consistent with the Board's proxy policies. 8. Investment managers agree to actively support the MCERA's securities lending and commission recapture programs.

6.2 Derivatives Investing Policies Exposure to risk by use of derivative instruments must be consistent with MCERA’s overall investment policy as well as an individual Manager’s Specific Investment Guidelines. Any other derivative investment purpose may be allowed by the explicit authorization of the Board. Derivatives may not be introduced into the portfolio to create economic leverage or to create investment exposures that are otherwise

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excluded by MCERA's Investment Policy unless authorization is given by the Board. Should there be any conflict between an individual Manager’s Specific Investment Guidelines and this Policy statement regarding the use of derivative instruments, the MCERA IPS shall control.

6.3 Investment Manager Guidelines 1. Diversification, Liquidity & Restrictions Portfolio holdings are expected to be well-diversified, so as to avoid excessive volatility and unsystematic risk to the Plan.

2. Cash and Equivalents Transactional cash, portfolio assets that are temporarily not invested in authorized, longer term securities as stated below, may either be directly invested in allowable high-grade short-term fixed income investments or may be "swept" into the Plan's custodial short-term investment (money market) commingled fund. Allowable high-grade, short-term fixed income investments are as follows: certificates of deposit, commercial paper, U. S. Treasury bills and repurchase agreements. These investments will have short maturities, typically less than 90 days, but none more than 1 year. If an investment is made in the custodian's money market fund, it is the responsibility of the investment manager to make sure that the money market fund has investment guidelines that comply with MCERA's investment objectives and policy statement. At this time, it is not contemplated to allow investment managers to invest in money market funds other than those offered by the custodian. If an investment manager wishes to use non- custodian provided money market funds, this issue must be addressed in writing and directed to the Board of Retirement.

3. Domestic Equity Portfolios - Large Capitalization The types of assets that may be held in large capitalization, domestic equity accounts are common stock, preferred stock, convertible securities, with the vast majority of holdings in common stock. Large capitalization domestic equity portfolios will primarily invest in stocks with market capitalizations. The vast majority of equity holdings will be in large capitalization issues.

Firm's that manage equity portfolios will continually monitor the risk associated with their equity investments. They will be expected to report on the active management decisions they have assumed relative to their respective benchmarks. As a result of this risk/reward analysis, active equity managers will statistically attribute actual performance variance from their benchmarks in each regular quarterly report. Included in this report will be statistics attributing performance to sector weighting decisions versus the benchmark and security selection decisions within each sector relative to the benchmark.

American Depository Receipts (ADR's) of foreign companies and foreign common stocks traded in U. S. dollars and on U. S. exchanges are authorized investments. ADR's and foreign common stocks traded in U. S. dollars and on U. S. exchanges should not exceed 15% of the portfolio.

Derivative securities may not be held in domestic equity portfolios except to mitigate risk, on a temporary basis, of underlying portfolio holdings. Compliance with the previously stated derivatives guidelines must be met.

No single security can represent more than 7% of the market value of a portfolio at the time of purchase, and no single industry (based on Global Industry Classification System - GICS - codes) can represent more than 25% of the market value of the account. If the manager feels another index is more appropriate, this case should be made in writing to the Board Chairman and Plan Administrator.

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4. Domestic Equity Portfolios - Mid Capitalization The above restrictions and guidelines for large capitalization domestic equity portfolios also apply to mid-capitalization domestic equity portfolios, except for the applicable benchmark related requirements. Mid-capitalization, domestic equity portfolios will invest in stocks with market capitalizations consistent with the Plan’s policy benchmarks. If the manager feels another index is more appropriate, this case should be made in writing to the Board Chairman and Plan Administrator.

5. Domestic Equity Portfolios - Small Capitalization The above restrictions and guidelines for large capitalization domestic equity portfolios also apply to small capitalization domestic equity portfolios, except for the applicable benchmark related requirements. Small capitalization, domestic equity portfolios will invest in stocks with market capitalizations consistent with the Plan’s policy benchmarks. If the manager feels another index is more appropriate, this case should be made in writing to the Board Chairman and Plan Administrator.

6. International Equity (Large & Small Cap) Portfolios - Developed & Emerging Markets Assets in international equity portfolios will be primarily composed of foreign ordinary shares and ADR's (including ADR's that are 144A securities). Short term, high-grade fixed income securities may be purchased as previously stated, similar types of securities denominated in foreign currencies may be purchased, or the Fund's custodial sweep account may be employed. International equity portfolios will invest in stocks with market capitalizations consistent with their underlying benchmarks. Emerging market equity portfolios can invest in stocks with large, mid and small market capitalizations. Firms will continually monitor the country, currency, sector and security selection risks associated with their international and emerging market equity portfolios. All of the risks will be included in the manager's quarterly reports and performance attribution based on these factors will also be included. Currency hedging, consistent with the previously stated derivative policy, is an acceptable investment activity. However, prior to initiating such hedging activities, the firms must adequately demonstrate their capability and expertise in this area to the Board.

Large capitalization international equity portfolios will be measured against the Plan’s policy benchmark. Small capitalization international equity portfolios will be measured against the Plan’s policy benchmark for small cap international equities. Emerging market equity portfolios will be measured against the Plan’s policy benchmark in emerging market equities. If the manager feels another index is more appropriate, this case should be made in writing to the Board Chairman and Plan Administrator.

7. Hedge Funds The role of hedge funds is to provide a diversified set of risk exposures, little-to-no correlation to the broader equity and credit markets and achieve an attractive risk-adjusted return.

It is expected that the hedge fund composite (the aggregation of all hedge funds employed by the Plan) should outperform the Policy benchmark for hedge funds, over rolling 3-5 year period. The hedge fund program will have the flexibility to invest as it sees fit but will typically invest through hedge fund-of-funds, multi-strategy hedge funds and/or single strategy hedge funds. The Board shall establish investment guidelines for the hedge fund portfolio in aggregate and shall select Investment Managers it believes are positioned to achieve the stated objectives.

The Fund seeks to be diversified across and within strategies, without regard to the specific vehicle (i.e., recognizing that Portfolio Funds may encompass more than one strategy). The following look-through exposure categories shall be represented in the Fund:

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Relative Value Strategies Relative Value strategies seek to earn excess returns by identifying mispriced securities without taking broad asset class directional risk. Representative strategies include convertible arbitrage, fixed income arbitrage, credit arbitrage, option volatility arbitrage, and equity market neutral strategies.

Event Driven Strategies Event Driven strategies identify securities that can benefit from extraordinary transactions or events such as restructurings, takeovers, mergers, spin-offs, and bankruptcies. Representative strategies include merger/statistical arbitrage, corporate credit (including distressed credit) and structured credit.

Long/Short Equity Strategies Long/Short Equity strategies attempt to earn excess returns through selected net market exposures, long or short, and security selection. Representative strategies include regional and global long/short, and sector specialist exposures

Opportunistic Strategies Opportunistic strategies include shifting from directionally biased to non-directionally biased portfolios. Representative strategies include global macro, commodities trading advisors (CTAs), and tail risk hedging strategies.

8. Private Equity The private equity market is inefficient and illiquid due partially to privately negotiated, non- auction pricing mechanisms. High return premiums are expected by investors who are willing to accept the illiquid and inefficient characteristics of the private equity market. Therefore, the long-term expected return from private equity markets should exceed the expected return of public equity markets.

Controlling risk in the private equity portfolio is equally as important as seeking higher returns. Because private equity cannot measure risk in a traditional manner (using quantitative risk measures like standard deviation and benchmark tracking error), risk will be managed through a combination of quantitative and qualitative constraints, such as diversification of investment type and thorough due diligence.

The criteria used to develop partnership allocations will consist of (and not be limited to) geographic location, industry investment orientation, financial funding stage orientation, source of deal flow, and investment size.

Performance will be reported on a vintage year internal rate of return (IRR) basis. Internal rate of return is a total dollar weighted rate of return where the discount rate equates the net present value (NPV) of an investment's cash inflows with its cash outflows. Vintage year is the year of fund formation and first takedown of capital. The long-term objective is to outperform the benchmark, net of investment management fees, calculated on an IRR basis over rolling ten-year periods.

Asset allocation is a critical driver for the long-term success of the private equity program. To control asset allocation risk, investments are diversified through long-term subclass parameters:

• Leveraged Buyouts/Corporate Finance: the acquisition of a product or business that is typically further along the business life cycle, having relatively predictable cash flows and the ability to raise capital utilizing a significant amount of debt and little or no equity.

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• Venture Capital: targets companies in the earliest phases of a business cycle. Companies may be classified as seed, early, middle and late stage. These companies have uncertain revenues and a need for cash to build their businesses and are subject to high failure rates

• Special Situations: includes investments in distressed debt, mezzanine, sector, opportunity, and secondary funds.

• Geography/Domestic vs. Global: investments either made in the United States or investments made outside of the U.S. including Europe, Asia, and Canada.

• Infrastructure: investments will be in companies or assets that fall into the infrastructure sector both in domestic and international markets.

• Natural Resources: investments will be in companies or assets that fall into the energy, mining, agriculture and/or timber industries in both domestic and international markets. Risk will also be controlled by liquidity, vintage year, investment managers, firm, time and geographic and economic region.

• Liquidity risk is managed by minimizing the possibility of forced sales that may arise from exceeding maximum exposure limits or lowering asset allocation exposure limits. Exposure through a fund of funds will help minimize this risk.

• Vintage year reflects the year of fund formation and first takedown of capital. Vintage risk refers to the variability of private equity commitments over time. A secondary investment is a vehicle in the special situation subclass that allows the portfolio to gain prior year vintage exposure, further minimizing vintage risk.

• Manager risk consists of the exposure within a partnership and the number of general partners in the private equity portfolio. Most partnerships require minimum commitments, which help control the exposure of partnerships.

• Commitments will be made over the full course of the business cycle and will not be concentrated in any one year.

• Geographic and Economic Region: In the selection of private equity investments, the portfolio will not favor particular economic or geographic regions. Most likely, the focus will be globally oriented.

• Alignment of Interests: General partnership agreements will be actively negotiated. The partnership agreements will ensure that the interests of the general partner are aligned with the limited partners.

If the manager feels another index is more appropriate, this case should be made in writing to the Board Chairman and Plan Administrator.

9. Domestic Fixed Income Portfolios Acceptable security types for domestic fixed income portfolios are certificates of deposit, commercial paper, other high grade short-term securities, U. S. Government and Agency

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securities, corporate bonds, mortgage- and asset-backed securities1 and Yankee bond securities. In addition, taxable municipal bonds, commercial mortgages and trust preferred securities are acceptable security types. Cash and equivalent holdings may be comprised of high grade certificates of deposit, commercial paper, U. S. Treasury bills and repurchase agreements.

Firm's that manage fixed income portfolios will continually monitor the risk associated with their fixed income investments. They will be expected to report on their active investment management decisions they have assumed relative to their respective benchmarks. Statistics which relate performance variance to effective duration decisions, yield curve positioning, sector allocation, security selection and other portfolio management decisions will be included in each quarterly report. Also, to the extent possible, various interest rate scenarios will be depicted in horizon analysis testing, with time horizons spanning the next six months to one year, or longer.

As mentioned above, investments in Yankee bond securities (U.S. dollar denominated international bonds that are registered with the Securities & Exchange Commission) are an acceptable investment.

No single security can represent more than 5% of the market value of a portfolio at the time of purchase, and no single industry (based on Global Industry Classification System - GICS - codes) can represent more than 15% of the market value of the account. These single security and single industry restrictions do not apply to U. S. Government and Agency bond holdings.

10. Bank Loans The same fundamentally-based research effort required of domestic fixed income managers is also required of bank loan managers. The goal of the bank loans allocation is to generate high total returns, hedge rising interest rates, while investing across the full maturity spectrum of corporate securities. Proper diversification of bank loan portfolios is required; such that reasonable risk/reward expectations are maintained. Performance attribution is required, as is the case of domestic fixed income managers. Bank Loan portfolios are anticipated to provide a hedge to rising interest rates as well as add incremental return to a traditional fixed income portfolio. All other requirements of domestic fixed income managers apply to bank loan fixed income managers.

10. Treasury Inflation Protected Securities (TIPS) MCERA has also approved the use of TIPS. An active investment approach will be taken toward the management of TIPS portfolios. The same fundamental and valuation-based research effort required of domestic fixed income managers is also required of TIPS managers. The goal of the TIPS allocation is to protect against inflation. Proper diversification of TIPS portfolios is required; such that reasonable risk/reward expectations are maintained. Performance attribution is required, as is the case of domestic fixed income managers. All other requirements of domestic fixed income managers apply to TIPS portfolios.

11. Real Estate Investment Trust (REITs) and Private Real Estate The above restrictions and guidelines for large and small capitalization domestic equity portfolios also apply to Domestic and Global REIT portfolios, except for the following differences. Investments are expected to be primarily in common stocks. A small percentage (less than 10%) may be in preferred stock. No restrictions exist on the market capitalization of Domestic and Global REIT portfolio holdings. In addition, the Domestic and Global REIT benchmarks may have individual security market capitalization weights greater than 5%. As a result, individual security

1Please note that convertible debt, traditional zero coupon bonds, mortgage-pass through securities and asset-backed securities are technically derivative securities but for the purposes of this Investment Policy Statement these securities are not classified as derivatives. Such investments must be at least BBB rated and meet the risk requirements discussed in the subsequent footnote.

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positions in Domestic and Global REIT portfolios may generally reflect the weights in the underlying benchmarks. (It may be that MCERA’s Domestic and Global REIT commitment could be in a commingled fund, and that the MCERA would have to accept the investment guidelines of the Domestic and Global REIT fund.)

While global REIT securities are recognized to have real estate and small cap security characteristics, global REIT security portfolios are primarily viewed as an alternative to direct real estate investments or real estate operating companies. These securities also have a higher level of liquidity than direct real estate investments and this is considered a favorable attribute. As such, there is a desire to maintain the favorable liquidity attributes of these securities and not to become over-concentrated in individual portfolio holdings.

In addition to real estate securities, the MCERA will invest in private real estate investment structures. The objective of these funds are to outperform domestic and international real estate markets. Domestic real estate funds will be measured against the Plan’s policy benchmark in real estate. Diversification will be obtained both through property type and geographical location. It is expected that investments will be primarily in large metropolitan centers. Relatively conservative levels of debt financing will be used in the purchase of real estate properties and modest investments in value-added real estate opportunities will be made. Property valuations will be conducted so as to reflect realistic economic value at quarter-end periods.

6.4 Watch List Policy

Purpose of Watch List In order to more officially monitor and track existing and potential problems at the fund/portfolio management, the Board has adopted the following “watch list” policy. The watch list has been instituted to specifically monitor portfolios and managers on both quantitative and qualitative factors. The purpose of such a list and its procedures is to identify how performance and other issues will be monitored and how they will be responded to in a timely manner. The Board reserves the right to take any action with respect to its investment managers at any time. The watch list policy does not restrict the Board from any action.

Quantitative Screens The quantitative portion of the watch list will be primarily focused on performance of the fund vs. the appropriate benchmark and peer group.

Qualitative Factors In addition to the performance screens, several other factors relating to the portfolio/ fund’s management and style will be continually monitored. These factors are: 1. The portfolio’s fundamental investment characteristics vs. the appropriate market index (benchmark) 2. The portfolio’s ability to adhere to its stated investment style 3. Continuity of the portfolio management and analytical research staff members 4. Continuity of firm’s senior management and organizational structure 5. Ownership changes of the organization 6. Style drift or changes

Regulatory Developments The Board reserves the right to take any action with respect to its investment managers at any time.

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Watch list status indicates an increased level of concern, but does not indicate major deficiencies. Managers may be placed on MCERA’s Watch list for one or more reasons stated below. The Watch list period will be defined by the Board. The Board, with the help of the General Investment Consultant, shall conduct a comprehensive evaluation of the Manager at the end of the one-year Watch list status period to determine whether the Manager may be removed from Watch list status.

A manager may be added to the MCERA Watch List for any of the following criteria: • Under/Over Performance • Style Deviation • Organization Change • Non-Compliance • Poor Client Service • SEC Filings and Investigations • Fees • Other as deemed appropriate by the Board of Retirement

Manager may be removed from MCERA’s Watch list if the Manager demonstrates adequate improvement in identified areas of concern. The Board reserves the right to remove a manager from the Watch List at any time.

Termination The Board reserves the right to terminate an investment management contract in accordance with the investment agreement for any reason it deems appropriate.

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PART IV

CONTROLS

7.0 PROXY VOTING Voting Proxy ballots will be for the exclusive benefit of the members and beneficiaries of the Plan. The Board may delegate proxy voting to each respective investment manager.

8.0 TRANSACTIONS, BROKERAGE, and Commission Recapture Program The Board understands their fiduciary responsibility with respect to transactions and hereby instructs their investment managers to seek best execution when conducting all trades. Managers are instructed to seek to minimize commission and market impact costs when trading securities. Also, either internally or through an externally provided transaction cost evaluation service, investment managers are expected to measure the costs associated with their investment trades.

All securities transactions shall be executed through reputable member-firm broker/dealers.

9.0 BOARD REVIEW & Due-DILIGENCE POLICY The Board will conduct the monitoring of investment performance and manager structure. On a monthly basis, the Board will review monthly investment reports, investment strategy, market conditions, portfolio manager performance and the status of MCERA's asset allocation plan. The Board, individual trustees or designated Staff and Investment Consultant(s) will meet the Plan’s traditional asset class investment managers once every 18 months. Providing ongoing oversight of the investment management firms selected to invest MCERA’s assets is an important component of the fiduciary duty of prudent investment. This oversight involves not only monitoring investment performance, but also includes: (1) Understanding the reasons for positive or negative performance; (2) Assuring consistency in the investment process and philosophy utilized in managing the portfolio; (3) Monitoring the organizational structure and financial stability of the firm; (4) Staying abreast of any regulatory actions or litigation involving the firm; (5) Monitoring the firm’s increase or decrease in assets under management; and (6) Obtaining any other information that is relevant and material to understanding the firm’s management of MCERA’s assets. Conducting periodic on-site due diligence meetings and reviews with investment managers is an excellent method for addressing these oversight responsibilities and for assuring that the continued engagement of a particular investment management firm is prudent and in the best interests of MCERA. Accordingly, the Board will endeavor to perform on-site due diligence visits with investment managers, as necessary. Such on-site due diligence meetings will focus on in-depth manager specific issues relevant to the engagement and a report on the meeting will be presented to MCERA’s Board of Retirement. Additional on-site due diligence visits may be undertaken with an investment management firm. The Board may require bi- annual updates on certain investments. Subsequent meetings may be required of the manager with staff and the investment consultant(s).

10.0 POLICY Compliance REVIEW This investment policy shall be reviewed every three years at a minimum to ensure MCERA’s compliance with the overall objectives of the Investment Policy Committee.

11.0 PORTFOLIO REBALANCING 1. The investment consultant(s) shall monitor the portfolio regularly and report to the Board not less than quarterly on the advisability of rebalancing the portfolio, unless otherwise specified by the Board.

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2. In monitoring the portfolio, the consultant shall be guided by the target asset allocation for each asset class in Appendix A. The Board shall also establish acceptable asset allocation ranges for each of the MCERA's investment classes.

3. The Board has authority to issue instructions to managers to liquidate securities for reallocation to other managers or other asset classes, but shall do so only after considering the recommendation of the Plan Administrator and investment consultant(s).

4. The Plan Administrator, in conjunction with the Investment Consultant(s), may prorate net positive cash flows to asset classes that have fallen beneath their target allocation and are approaching the minimum allocation level. The proration may take into account the asset class' percentage of the total portfolio and the magnitude of the deviation from the target. • When all asset classes are within 2 percent of the target allocation, the Plan Administrator may prorate net positive cash flows to each asset class on a rotating basis in order of the asset class’ percentage of the total portfolio. • The Board may review the allocation of assets to each investment manager as part of the Board's asset allocation review.

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Appendix A

ASSET ALLOCATION PLAN AND TARGET ASSET MIX

Based on the MCERA's asset allocation study and acceptance of the proposed target asset mix (as stated in the October 2016 Asset Allocation Study report) the following is the MCERA's target asset mix and allocation ranges. The MCERA will review its asset allocation position as needed or a minimum of once every three to five years.

Allocation Ranges Target Mix% Minimum% Maximum% Total Domestic Equity 27.0 Large Cap 22.0 18.0 26.0 Small Cap 5.0 4.0 6.0

International Equity 16.0 14.0 18.0

Emerging Markets 7.0 5.0 9.0

Private Equity 9.0 7.0 11.0

Domestic & Global Real Estate 8.0 6.5 9.5

Domestic Fixed Income 17.0 15.0 19.0

Bank Loan 5.0 4.0 6.0

Hedge Fund 5.0 4.0 6.0

Real Assets 6.0 4.5 7.5

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The market benchmarks for the above asset classes are as follows: Large Cap Equity Russell 1000 or S&P 500 Small Cap Equity Russell 2000, Russell 2000 Growth or Value International Equity MSCI Europe, Australia, & Far East Index (EAFE) Emerging Markets Equity MSCI Emerging Markets Index Private Equity Russell 3000 + 3% 1Q lag; Thompson Reuters Venture Economics All Private Equity Index and Cambridge Private Equity Index Real Estate NCREIF ODCE Property Index Domestic Fixed Income Barclays Capital US Aggregate Bond Index Bank Loan Credit Suisse Leveraged Loan Index Hedge Fund Hedge Fund Custom Index Real Assets 50/50 Blend of S&P Global Infrastructure Index & S&P Global Natural Resources Index Total Fund Benchmark Target asset mix percentages are applied to individual asset class benchmarks to arrive at the total fund benchmark. The private equity allocation is scaled in over time

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Appendix B

Placement Agent Disclosure Policy

I. PURPOSE This Policy sets forth the circumstances under which the Merced County Employees’ Retirement MCERA (MCERA) shall require the disclosure of payments to Placement Agents, in connection with MCERA investments in or through External Managers. This Policy is intended to apply broadly to all of the types of investment partners with whom MCERA does business, including the general partners, managers, investment managers and sponsors of hedge funds, private equity funds, real estate funds and infrastructure funds, as well as investment managers retained pursuant to a contract. MCERA adopts this Policy to require broad, timely, and updated disclosure of all Placement Agent relationships, compensation and fees. The goal of this Policy is to help ensure that MCERA investment decisions are made solely on the merits of the investment opportunity by individuals who owe a fiduciary duty to MCERA.

II. APPLICATION This Policy applies to all agreements with Investment Managers that are entered into on behalf of MCERA. This Policy also applies to existing agreements with Investment Managers. Agreements may be amended in any way to continue, terminate, or extend the term of the agreement or the investment period, increase the commitment of funds by MCERA or increase or accelerate the fees or compensation payable to the Investment Manager (Referred to hereafter as “Amendment”.) In the case of an Amendment, the disclosure provisions of this Policy shall apply to the Amendment and original agreement.

III. RESPONSIBILITIES A. The Board is responsible for: 1. Not entering into any agreement with an External Manager that does not agree in writing to comply with this policy. 2. Not entering into any agreement with an External Manager who has violated this policy within the previous five years. However, this prohibition may be reduced by a majority vote of the Board at a public meeting upon a showing of good cause, as deemed by the Board.

B. Each External Manager is responsible for: 1. Providing a statement in writing that the External Manager will comply with this policy. Notification in writing shall be made to the Chairman of the Board and Plan Administrator. 2. Providing the following information, in writing, to the MCERA Investment Staff within 45 days of the time investment discussions are initiated by the External Manager, but in any event, prior to the completion of due diligence. In the case of Amendments, the Placement Agent Information Disclosure is required prior to execution of the Amendment. All disclosures and notifications shall be made to the Chairman of the Board and the Plan Administrator. a. Disclosure of payments or compensation by the External Manager or any of its principals, employees, agents or affiliates, directly or indirectly, to any person or entity to act as a Placement Agent in connection with MCERA investments. b. A resume for each officer, partner, principal of the Placement Agent detailing the person’s education, professional designations, regulatory licenses and investment and work experience. If any such person is a current or former MCERA Board

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trustee, employee or consultant or a member of the immediate family of any such person, this fact shall be specifically noted. c. A description of any and all compensation of any kind provided or agreed to be provided to a Placement Agent, including the nature, timing and value thereof. Compensation to Placement Agents shall include, but not be limited to, compensation to third parties as well as employees of the External Manager who solicit or market investments to MCERA or who are paid based upon investment commitments secured by such employees. d. A description of the services to be performed by the Placement Agent and a statement as to whether the Placement Agent is utilized by the External Manager with all prospective clients or only with a subset of the External Manager’s prospective clients. e. A written copy of any and all agreements between the External Manager and the Placement Agent. f. A statement whether the placement agent, or any of its affiliates, are registered with the Securities and Exchange Commission or the Financial Industry Regulatory Association, or any similar regulatory agent in a country other than the United States, and the details of that registration or explanation as to why no registration is required. g. A statement whether the placement agent, or any of its affiliates, is registered as a lobbyist with any state or national government. h. The names of any current or former MCERA Board Trustee, employees, or consultants who suggested the retention of the Placement Agent. 3. Providing an update of any changes to any of the information provided pursuant to section B.2 above within 14 calendar days of the date that the External Manager knew or should have known of the change in information. 4. Representing and warranting the accuracy of the information described in section B.2 above. 5. Causing its engaged Placement Agent to disclose, prior to acting as a Placement Agent to MCERA; a. All campaign contributions made by the Placement Agent to any publicly elected MCERA Board Trustee during the prior 24-month period. Additionally, any subsequent campaign contribution made by the Placement Agent to any publicly elected MCERA Board Trustee during the time the Placement Agent is receiving compensation in connection with a MCERA investment shall also be disclosed. b. All gifts given by the Placement Agent to any MCERA Board Trustee during the prior 24 - month period. Additionally, any subsequent gift made by the Placement Agent to any MCERA Board Trustee during the time the Placement Agent is receiving compensation in connection with a MCERA investment shall also be disclosed. 6. MCERA reserves the right to deem the failure to disclose the information required by 5(a) and 5(b) as a material breach of the agreement with the External Manager.

MCERA Staff (“Staff”) are responsible for: 1. Providing External Managers with a copy of this Policy at the time that discussions are initiated with respect to a prospective investment or engagement. 2. Confirming that the information in Appendix B Section B above has been received within 45 days of the time investment discussions are initiated, but in any event, prior to the completion of due diligence and any recommendation to proceed with the contract or Amendment.

3. For new contracts and amendments to contracts existing as of the date of the initial adoption of this Policy, securing the agreement of the External Manager in the final

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written agreement between MCERA and the External Manager to provide in the event that there was or is an intentional material omission or inaccuracy in the Placement Agent Information Disclosure or any other violation of this Policy, MCERA is entitled to the greater of the reimbursement of any management or advisory fees paid by MCERA for the prior two years or an amount equal to the amounts paid or promised to be paid to the Placement Agent as a result of the MCERA investment; and 4. Prohibiting any External Manager or Placement Agent from soliciting new investments from MCERA for five years after they have committed a material violation of this Policy; provided, however, that MCERA’s Board, by majority vote at a noticed, public meeting, may reduce this prohibition upon a showing of good cause. 5. Providing a quarterly report to the Board containing (a) the names and amount of compensation agreed to be provided to each Placement Agent by each External Manager as reported in the Placement Agent Information Disclosures, and (b) any material violations of this Policy; and maintaining the report as a public record.

50115219.v1 Item 8 Merced County Employees’ Retirement Association (MCERA) RETIREMENT BOARD AGENDA ITEM

MARCH 23, 2017

TO: MCERA Board of Retirement FROM: Kristie Santos, Plan Administrator

SUBJECT: Terminate current contract with Bank of New York Mellon and accept recommendations of staff to contract with Northern Trust conditioned on final legal review of contract by MCERA’s County Counsel and outside counsel.

ITEM NUMBER:

ITEM TYPE: Action

STAFF RECOMMENDATION: 1. Authorize staff to terminate the current contract with Bank of New York Mellon as of June 30, 2017 and authorize contract with Northern Trust for custodial services conditioned on County Counsel and outside counsel review and acceptance of the terms of the contract.

DISCUSSION: Based on the results of an RFP for custodial services, Bank of New York Mellon was initially the selected entity to provide custodial services to MCERA. The MCERA Retirement Board approved this pending legal review of the contract.

With the assistance of MCERA Fiduciary Attorneys, Nossaman LLP, the contract with Bank of New York Mellon was amended through June 30, 2017 to allow for contract and fees negations. Negotiations were unsuccessful due to the fiduciary language regarding the standard of care. As a result, the Board of Retirement gave staff permission to reach out to the second place bidder in the RFP process, Northern Trust.

Negotiations have been successful with Northern Trust, which includes fees. Northern Trust has a fee structure that allows MCERA to pay a flat rate which will not change throughout the life of the contract. Negotiations on fees are completed and accepted by both parties. This new contract must be reviewed and approved by MCERA’s County Counsel and outside counsel.

Staff recommends the Board authorize terminating the contract with Bank of New York Mellon as of March 31, 2017 (in keeping with the 90 day termination clause in the current amendment) and contracting with Northern Trust conditioned on final legal review of the contract by MCERA’s County Counsel and outside counsel. Staff anticipates the transition to Northern Trust to be completed no later than June 30, 2017.

Page 1 Item 8a MERCED COUNTY EMPLOYEES’ RETIREMENT Telephone 209-726-2724 Fax 209-725-3637 ASSOCIATION Email: [email protected]

3199 “M” Street Merced, California 95348

March 23, 2017 Attention: Kimberly A. Henry Vice President, Account Manager Bank of New York Mellon Asset Servicing 500 Grant Street, Room 4040 Pittsburgh, PA 15258

Dear Ms. Henry, As you know, the Merced County Employees Retirement Association (MCERA) contract with bank of New York Mellon (BNY Mellon) will terminate effective June 30, 2017. This letter is to inform BNY Mellon that MCERA will not be renewing its custodial contract on or after June 30, 2017 and therefore is effectively terminating the contract.

MCERA will begin the transition to a new custodial bank beginning April of 2017. MCERA appreciates all of your assistance during this time and your willingness to work with the Association.

Sincerely,

______Darlene Ingersoll Chair of MCERA Board of Retirement

______Kristen Santos Plan Administrator of MCERA

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