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LOS ALTOS HILLS Town of Los Altos Hills CALIFORNIA Reserve Policy The most recent CalPERS actuarial report in the section titled Risk Analysis describe two risks: Discount Rate assumptions and Mortality Rate assumptions. Discount Rate assumptions are discussed here, and Mortality Rate assumptions are not discussed here because a 10% increase or decrease in the Mortality Rate which is approximately $250,000 would not significantly affect the Town's financial position. However, a 1 % change up or down in the Discount Rate can result in a change to the Town's financial position of approximately $ 3 million (as shown in the table below). As shown in the following table, the Discount Rate calculation used by CalPERS actuaries has two components: The Rate of Return on Assets, and the Inflation Rate. A 1% change (up or down) in both the Rate of Return assumption and in the Inflation, assumption changes the Unfunded Liability by approximately $3 million. These two assumptions are related as movement in one affects the other. The Rate of Return component is the most significant of the two. Therefore, for convenience, the likely changes in the Rate of Return assumption are used here to evaluate when adjustments are needed to this reserve. 17 ension F esery e i I I ,titration call ciAation- - Q020 Ca1PER'S ctuarid Report pa t7) _ - Direction of Change. 1 Pate of Retl>rn 1 Inflation 1 Ar1tFPr Favnrahl P: 1 As sumpti on Chang e i s I%r ' °tersauls. 0/0 Rate of return 2,073 70'% 1.7001 60°/a �. Inflation 8871 30%I.i3�40% � Total_ hag _. 2.9601100% 2,839,1004/0 I I Threshold of the Reserve: If the financial market prices are trending up, it is less likely that the Discount Rate assumption will be adjusted downward by CalPERS. Conversely, if the financial market prices are trending down, it is more likely that the Discount Rate assumption will be adjusted downward by CalPERS. In the recent past, to address this risk, CaIPERS' Board changed the Discount Rate assumption. More recently, CalPERS Board announced it will evaluate increasing Private Equity investments to protect the existing discount rate assumption of 7%. Therefore, when considering whether to change this reserve, the Town should consider available information including trend changes in the S&P 500, policy changes under consideration by CalPERS that are likely to affect the Discount Rate assumption, and input from the Town's independent actuary, Bartel & Associates. Annually, the Town's Finance and Investment Committee should address this matter and make a recommendation to the Town's Staff and Council. Committed Reserves — continued Usage of the Reserve: Updated 2/18/21 -2- Resolution 06-21 Page 3