CityofSanJosé FederatedCityEmployeesRetirementSystem ComprehensiveAnnualFinancialReportfortheFiscalYearsendedJune30,2018andJune30,2017 Photo credits Cover Top image:©UladzikKryhin/123rf.com, Cover Middle images, Left to Right:©KennyTong/123rf.com;©elf0724/123rf.com Title, Top to Bottom:©PanomBounak/123rf.com;©MichaelMarfell/123rf.com;©UladzikKryhin/123rf.com Introductory, Left to Right:©Dolgachov/123rf.com;©MichaelMarfell/123rf.com;©SiraJantararungsan/123rf.com Financial, Left to Right:©Dolgachov/123rf.com;©MichaelMarfell/123rf.com;©SiraJantararungsan/123rf.com Investment, Left to Right: ©Dolgachov/123rf.com;©MichaelMarfell/123rf.com;©SiraJantararungsan/123rf.com Actuarial, Left to Right: ©Dolgachov/123rf.com;©MichaelMarfell/123rf.com;©SiraJantararungsan/123rf.com Statistical, Left to Right:©Dolgachov/123rf.com;©MichaelMarfell/123rf.com;©SiraJantararungsan/123rf.com CityofSanJosé FederatedCityEmployees RetirementSystem PensionTrustandPostemploymentHealthcare RobertoL.Peña TrustFundsoftheCityofSanJosé,California Chief Executive Officer ComprehensiveAnnualFinancialReportforthe FiscalYearsendedJune30,2018andJune30,2017 OfficeofRetirementServices 1737NorthFirstStreet,Suite600 SanJosé,California951124505 Phone:4087941000Fax:4083926732 www.sjretirement.com Board Chair Letter November 9, 2018 The Honorable Mayor and City Council Members of the Federated City Employees’ Retirement System City of San José San José, California Dear Mayor, Council Members, and System Members: On behalf of the members of the Board of Administration, I present the Federated City Employees’ Retirement System’s (the System) Comprehensive Annual Financial Report (CAFR) for the fiscal year ended June 30, 2018. The System's Pension Plan earned a time-weighted gross of investment fees rate of return of 6.3% and net of investment fees rate of return of 5.9% on investments for the fiscal year, compared to a 7.4% return for its policy benchmark and an 8.0% return for the InvestorForce universe net median of public funds greater than $1 billion. Additionally, the System's Pension Plan earned a time-weighted net of investment fees rate of return of 4.2% and 5.0% for the three-year and five-year periods ending June 30, 2018, respectively; while the InvestorForce net median earned a time-weighted rate of return of 6.7% and 7.5% for the same periods. The Healthcare Plan earned a time-weighted gross of investment fees rate of return of 5.0% and net of investment fees rate of return of 4.9% on investments for the fiscal year, compared to a 7.9% return for its policy benchmark. Additionally, the System's Healthcare Plan earned a time-weighted net of investment fees rate of return of 3.5% and 4.6% for the three-year and five-year periods ending June 30, 2018, respectively. In contrast, the net rate of return assumed by the System’s actuary for fiscal year 2017-2018 is 6.875%. The System's net position increased from $2,233,162,000 to $2,346,590,000 (see the Financial Section beginning on page 15). The net increase in the System's net position for fiscal year 2017-2018 was $113,428,000. In March 2018, the System, along with the Board of Administration for the Police & Fire Department Retirement Plan, concluded the nationwide search for a Chief Investment Officer (CIO) with the hiring of Prabhu Palani. Mr. Palani spent over 25 years in the financial markets industry with a strong cross section of asset classes. In addition, the Investment Program filled its Senior Investment Officer and analyst positions during the fiscal year and into July 2018. With the aforementioned staffing additions, the Investment Program is well poised for 2019. The Investment Program continued to manage portfolio investments and move initiatives forward during the fiscal year. The continuity of the Investment Program is a testament to the human capital and infrastructure that are in place. The implementation of the risk analytics system and risk advisory work continues, along with process improvements and governance-related projects across the Investment Program. During fiscal year 2017-2018, the Investment Program completed comprehensive reviews across asset classes and improved fee reporting structures. 1 Comprehensive Annual Financial Report 2017-2018 San José Federated Employees' Retirement System Board Chair Letter (continued) The Board believes that the professional services rendered by the staff, investment consultant, actuary, and counsel have produced a sound fund capable of sustained growth over the long term. The Board of Administration and Retirement Services staff are available to provide additional information as requested. Sincerely, Matt Loesch, Chairman Board of Administration Comprehensive Annual Financial Report 2017-2018 San José Federated Employees' Retirement System 2 Table of Contents PAGE I. INTRODUCTORY SECTION Letter of Transmittal 6 Certificate of Achievement for Excellence in Financial Reporting 10 Certificate for Meeting Professional Standards in Public Pensions 11 Board of Administration, Administration, and Outside Consultants 12 Office of Retirement Services Organizational Chart 14 II. FINANCIAL SECTION Independent Auditor's Report 16 Management's Discussion and Analysis 19 Basic Financial Statements Statements of Plan Net Position 31 Statements of Changes in Plan Net Position 33 Notes to the Basic Financial Statements 35 Required Supplementary Information Schedule of Changes in the Employer's Net Pension Liability and Related Ratios - Defined Benefit Pension Plan 68 Schedule of Investment Returns - Defined Benefit Pension Plan 68 Schedule of Employer Contributions - Defined Benefit Pension Plan 69 Notes to Schedule 69 Schedule of Changes in the Employer's Net Pension Liability and Related Ratios - Postemployment Healthcare Plan 71 Schedule of Investment Returns - Postemployment Healthcare Plan 71 Schedule of Employer Contributions - Postemployment Healthcare Plan 71 Other Supplemental Information Combining Schedule of Defined Benefit Pension Plan Net Position 72 Combining Schedule of Changes in Defined Benefit Pension Plan Net Position 73 Combining Schedule of Other Postemployment Plan Net Position 74 Combining Schedule of Changes in Other Postemployment Plan Net Position 75 Schedules of Administrative Expenses and Other 76 Schedules of Payments to Consultants 76 Schedules of Investment Expenses 77 III. INVESTMENT SECTION Report of Investment Activity 79 Statement of Investment Policy 83 Investment Professionals 109 Schedule of Investment Results 110 Investment Review Target Asset Allocation / Actual Asset Allocation - Defined Benefit Pension Plan 111 Historical Asset Allocation (Actual) / Market Value Growth of Plan Assets / History of Gross and Net Performance - Defined Benefit Pension Plan 112 Target Asset Allocation / Actual Asset Allocation - Postemployment Healthcare Plan 113 3 Comprehensive Annual Financial Report 2017-2018 San José Federated Employees' Retirement System Table of Contents (continued) PAGE Market Value Growth of Plan Assets / Historical Asset Allocation (Actual) / History of Gross and Net Performance - Postemployment Healthcare Plan 114 List of Largest Assets Held 115 Schedule of Investment Fees 116 Schedule of Commissions 117 Investment Summary 121 IV. ACTUARIAL SECTION Defined Benefit Pension Plan Actuary's Certification Letter 123 Actuarial Assumptions and Methods 126 Member Valuation Data - Schedule of Active Member Data 131 Schedule of Retirees and Beneficiaries Added to and Removed From Rolls 132 Actuarial Analysis of Financial Experience 132 Alternate Analysis of Financial Experience 133 Schedule of Funded Liabilities by Type 133 Schedule of Funding Progress 134 Summary of Pension Plan Provisions 135 Postemployment Healthcare Plan Actuary's Certification Letter 140 Actuarial Assumptions and Methods 143 Schedule of Active Member Data 150 Schedule of Retirees and Beneficiaries Added to and Removed From Rolls 150 Member Benefit Coverage Information 151 Analysis of Financial Experience 151 Schedule of Funding Progress 152 Summary of Key Substantive Plan Provisions 153 V. STATISTICAL SECTION Statistical Review Changes in Plan Net Position - Defined Benefit Pension Plan 157 Changes in Plan Net Position - Postemployment Healthcare Plan 157 Benefit and Refund Deductions from Plan Net Position by Type - Defined Benefit Pension Plan 158 Benefit and Refund Deductions from Plan Net Position by Type - Postemployment Healthcare Plan 159 Employer and Employee Contribution Rates 160 Retired Members by Type of Benefit 161 Average Benefit Payment Amounts 162 Retirements During Fiscal Year Retirements 165 Deaths During Fiscal Year Deaths 167 Comprehensive Annual Financial Report 2017-2018 San José Federated Employees' Retirement System 4 This page intentionally left blank IntroductorySection PensionTrustandPostemploymentHealthcareTrustFundsoftheCityofSanJosé,California CityofSanJosé FederatedCityEmployeesRetirementSystem ComprehensiveAnnualFinancialReportfortheFiscalYearsendedJune30,2018andJune30,2017 Letter of Transmittal November 9, 2018 Board of Administration Federated City Employees' Retirement System 1737 North First Street, Suite 600 San José, CA 95112 Dear Trustees: I am pleased to present the Comprehensive Annual Financial Report (CAFR) of the Federated City Employees’ Retirement System (System) for the fiscal year ended June 30, 2018. Responsibility for both the accuracy of the data and the completeness and fairness of the presentation, including all disclosures, rests with the System’s management. This CAFR was prepared to conform to the