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August 2016 Asset/Liability Study Texas Municipal Retirement System Asset/Liability Study Texas Municipal Retirement System Table of Contents A CKNOWLEDGEMENTS ........................................................................... P AGE 2

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Asset/Liability Study

Texas Municipal Retirement System

August 2016

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Asset/Liability Study Texas Municipal Retirement System

Table of Contents ACKNOWLEDGEMENTS ........................................................................... PAGE 2 INTRODUCTION ....................................................................................... PAGE 3 CURRENT STATUS ................................................................................. PAGE 7 DETERMINISTIC ANALYSIS ...................................................................... PAGE 8 DETERMINISTIC SCENARIO ANALYSIS ................................................... PAGE 19 STOCHASTIC ANALYSIS ........................................................................ PAGE 21 APPENDIX 1: SUPPLEMENTAL STOCHASTIC EXHIBITS ........................... PAGE 44 APPENDIX 2: SENSITIVITY ANALYSIS: VOLATILITY ................................. PAGE 48 APPENDIX 3: SENSITIVITY ANALYSIS: CORRELATIONS........................... PAGE 51 APPENDIX 4: ASSUMPTIONS AND METHODS .......................................... PAGE 54

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Asset/Liability Study Texas Municipal Retirement System

Acknowledgements

PREPARED BY:

JAMES VOYTKO, SENIOR CONSULTANT, RVK, INC. RYAN SULLIVAN, CONSULTANT, RVK, INC. MATTHIAS BAUER, CONSULTANT, RVK, INC.

WITH THE COOPERATION OF:

DAVID DOUGHERTY, LLC (RVK CONSULTING ACTUARY) GABRIEL ROEDER SMITH & COMPANY (SYSTEM ACTUARY)

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Asset/Liability Study Texas Municipal Retirement System

Introduction

RVK, Inc. (RVK) has prepared this report for the Texas Municipal Retirement System (TMRS) to:

Present projected valuation results with respect to the funded status of the Plan.
Present projected benefit payments of the Plan.
Investigate asset mixes to determine those which best serve to protect and increase funding levels, while

providing adequate liquidity for benefit payments. The valuation projections are shown using both a deterministic and stochastic process. The deterministic process provides an open group analysis of projected valuation results based on a fixed set of future assumptions (see summary in the Assumptions and Methods section of this report). The stochastic process provides an open group analysis of projected valuation results under many capital market environments based on expected asset returns and inflation, and their expected volatility. Using a Monte Carlo simulation technique, both assets and liabilities are assumed to vary stochastically, linked together by changes in inflation. Expected values, variances of the returns and inflation, and correlations are used to generate 2,000 trials to produce a distribution of potential outcomes. A stochastic analysis can answer questions about the best/worst case outcomes along with the probability of such outcomes.

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Asset/Liability Study Texas Municipal Retirement System

Investment Policy Contribution Policy

Asset Liability Analysis

Benefit Policy

Introduction (continued)

What is an Asset/Liability Study?  Investment programs and the strategy they seek to implement (Investment Policy) do not exist in a vacuum. They seek to satisfy one or more investment objectives and operate within a plan framework that includes the investment objectives (Benefit Policy) and plan funding (Contribution Policy).  The purpose of an Asset/Liability Study is to examine how well alternative investment strategies (i.e., differing asset allocations) address the objectives served by the Plan—the Plan’s “liabilities” in the context of the Plan’s funding streams—the Plan’s Contribution Policy. It is the only standard analysis that fully links all three aspects of the Plan’s key financial drivers.  In doing so, it creates an important “guidepost” for the actual asset allocation for the Plan; the asset allocation chosen by the Plan’s fiduciaries will likely reflect the nature of the liabilities but also numerous other factors including risk preferences, liquidity, implementation constraints, etc.  For the TMRS Asset/Liability Study, we assume the objectives are:

1. Fund all participants’ benefits over time.
2. Assure sufficient liquidity to pay benefits at all times.
3. Foster a stable contribution stream consistent with objectives 1 and 2.
4. Achieve adequate returns without accepting unnecessary or imprudent levels of risk.

An Asset/Liability Study is NOT . . .  An actuarial study of the TMRS liabilities—that is the purview of the Plan’s actuary.  A prescription for Plan benefits—that is the purview of the elected representatives.  An assessment of the affordability of contribution levels—that is the purview of the elected officials and their constituents.  The sole determinant of the final asset allocation adopted for the Plan—there are a number of factors, including insights from an Asset/Liability Study, which will bear on the optimal asset allocation.

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Asset/Liability Study Texas Municipal Retirement System

Introduction (continued)

Asset/Liability Studies in Practice . . .

 Begin with a forecast of the financial liabilities (i.e., benefit obligations).  Include a baseline estimation of the financial contributions to the Plan over time.  Compare alternative investment strategies (i.e., total fund asset allocations to the Plan’s financial needs).  Draw conclusions regarding how well various investment strategies satisfy the Plan’s financial needs.

This Asset/Liability Study . . .

 Uses data from the December 31, 2015 TMRS Actuarial Valuation provided by the Gabriel Roeder Smith & Company (GRS) to project pension liabilities.  Uses the actuarial cost method and the actuarial assumptions described in the December 31, 2015 TMRS Actuarial Valuation prepared by GRS.  Compares these specific investment strategies—(A) the Current Allocation (as of April 30, 2016), (B) the Target Allocation, (C) a conservative illustrative portfolio (100% Fixed Income), (D) a diversified portfolio with reduced risk and a diversified portfolio with increased risk relative to the Target Allocation (Lower Risk and Higher Risk), and (E) an aggressive illustrative portfolio (100% Equity).  Assumes the Plan’s current benefit policy throughout the entire projection period—changes to the benefit policy are the purview of the elected representatives.  Note: Does not assume any actuarial adjustments that may take place in future years.

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Asset/Liability Study Texas Municipal Retirement System

Introduction (continued)

Key Takeaways

 Assets are available to cover 84% of the System’s liabilities as currently estimated by the System’s actuary.  This equates to a shortfall of approximately $4.7 billion.  The funding ratio on a market value basis is expected to gradually increase to approximately 98% by 2035 from the current value of 84%.  The present funding level is unquestionably a strong financial position relative to most other public pension plans.  This Study suggests that continued diversification in the investment strategy of the System’s assets is desirable.  This Study does not suggest changes to the current investment strategy in place.  This Study does not suggest changes to the long-term strategic target allocation. The incremental cost of additional volatility does not justify the potential increase in median outcomes.  Reducing volatility increases contributions and does not improve the median outcome.

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Asset/Liability Study Texas Municipal Retirement System

7 106,894 56,481 50,707 20,000 40,000 60,000 80,000 100,000 120,000 Active Retirees and Beneficiaries Inactive Vested Demographics $23.7 $28.4 $4.7 $0 $5 $10 $15 $20 $25 $30 $35 Market Value

f Assets

Actuarial Accrued Liability Deficit Billions Current Status As of December 31, 2015

Current Status

A summary of the Plan follows: Valuation Date December 31, 2015 Assumed Rate

f Return

6.75% Market Value

f Assets (MVA)

$23.7 billion Actuarial Value

f Assets (AVA)

$24.3 billion Actuarial Accrued Liability (AAL) $28.4 billion Market Value Funded Ratio (MVA/AAL) 84% Actuarial Value Funded Ratio (AVA/AAL) 86% Active 106,894 Retirees and Beneficiaries 56,481 Inactive Vested 50,707

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Asset/Liability Study Texas Municipal Retirement System

Deterministic Analysis

This section provides an analysis of the Plan’s assets, liabilities, funded status, and benefit payments based on a fixed set

f future assumptions. Each analysis that follows in this deterministic section rests on the critical assumptions below and

must be read and interpreted with them in mind—particularly assumptions #2, #3 and #4. The deterministic assumptions are as follows:

1. Current Plan provisions (see Summary of Benefit Provisions in Section 7 of the December 31, 2015 actuarial

valuation report prepared by GRS.)

2. The participant data used in the December 31, 2015 actuarial valuation prepared by GRS. Active participant data

was grouped to speed processing.

3. Actuarially assumed rate of return on Plan assets for all projection years: 6.75%.
4. For 2016, employer contributions were assumed equal to 12.63% of system-wide pay. For all other years of the

projection, employer contributions are assumed to equal: (1) normal cost less expected employee contributions, plus (2) an amortization of the unfunded actuarial accrued liability (UAAL). The unfunded liability as of December 31, 2015, was amortized over 21-years to approximate the Plan’s equivalent single amortization period of 20.6 years. New experience gains and losses were amortized over 23 years to approximate the Plan’s methodology that calculates costs by city, and includes offsetting of experience losses.

5. Asset Valuation Method Assumes a 10-year phase-in of actual versus expected returns.
6. Assumes demographic experience projected in accordance with the assumptions used in the December 31, 2015

actuarial valuation prepared by GRS.

7. Open group analysis: level active populations of Fire, Police, and Other subgroups. New active participants entering

the Plan are assumed to have similar characteristics to recently hired participants.

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Asset/Liability Study Texas Municipal Retirement System

Deterministic Analysis (continued)

Demographics Following are the projected number of active and inactive participants at the beginning of each Plan year from 2014 through 2035 (2015 is actual). These projections are based on an open group analysis. Using the actuary’s assumptions for death, termination, retirement, and disability, current participants are assumed to leave the Plan in the future. The number of total inactive participants (Retirees and Beneficiaries and Vested Inactive) increases by approximately 45% during the 20-year projection period shown.

50,000 100,000 150,000 200,000 250,000 300,000 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 At Plan Year Ending Projected Demographics Active Retirees and Beneficiaries Inactive Vested

Total Population 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Annual Percent Change N/A 2% 2% 2% 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 0% 1% 1% 0% 0%

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Asset/Liability Study Texas Municipal Retirement System

Deterministic Analysis (continued)

Benefit Payments The Plan’s projected annual benefit payments are shown in the chart below. The projected benefit payments are expected to increase by about 232% over the next 20 years. As a percentage of the market value of Plan assets, benefit payments are expected to remain roughly constant through the end of the projection period (see page 13).

$1.1 $1.3 $1.5 $1.6 $1.7 $1.7 $1.9 $2.0 $2.1 $2.2 $2.3 $2.5 $2.6 $2.8 $2.9 $3.0 $3.2 $3.4 $3.5 $3.6 $3.7 $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 $3.5 $4.0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Billions For the Plan Year Ending Projected Benefit Payments

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Asset/Liability Study Texas Municipal Retirement System

Deterministic Analysis (continued)

Contributions The Plan’s projected contributions, expressed as total dollar contributions, are shown in the chart below. The results assume the contribution policy remains unchanged, and that the Plan’s assets return precisely the actuarially assumed rate each year without exception for all projection years.

$1.1 $1.2 $1.2 $1.3 $1.3 $1.3 $1.4 $1.4 $1.4 $1.5 $1.5 $1.5 $1.6 $1.6 $1.7 $1.7 $1.7 $1.8 $1.8 $1.9 $1.9 $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Billions For the Plan Year Ending Projected Contributions Employer Contribution Employee Contribution

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Annual Percent Change N/A 6% 3% 2% 2% 3% 3% 3% 2% 3% 3% 2% 2% 2% 3% 3% 3% 2% 2% 3% 3%

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Asset/Liability Study Texas Municipal Retirement System

Deterministic Analysis (continued)

Contributions The Plan’s projected contributions, expressed as a weighted average percentage of salary, are shown in the chart below. The results assume the contribution policy remains unchanged, and that the Plan’s assets return precisely the actuarially assumed rate each year without exception for all projection years.

19% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 0% 5% 10% 15% 20% 25% 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 For the Plan Year Ending Projected Contributions (as a weighted average % of Salary) Employer Contribution Employee Contribution

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Asset/Liability Study Texas Municipal Retirement System

Deterministic Analysis (continued)

Payout Ratio (benefit payments/market value of assets) The Plan’s projected payout ratios are shown in the chart below. The payout ratio is expected to remain constant through the end of the projection period. The results assume the current contribution policy remains unchanged and that the Plan’s assets return precisely the actuarially assumed rate each year without exception for all projection years.

5% 5% 5% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 0% 2% 4% 6% 8% 10% 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 For the Plan Year Ending Projected Payout Ratio (Projected Benefit Payments/Projected Market Value of Assets)

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Asset/Liability Study Texas Municipal Retirement System

Deterministic Analysis (continued)

Benefit Payments/Contributions The Plan’s projected benefit payments divided by projected contributions are shown in the chart below. The results assume the contribution policy remains unchanged, and that the Plan’s assets return precisely the actuarially assumed rate each year without exception for all projection years.

98% 112% 118% 124% 128% 132% 137% 145% 150% 152% 155% 159% 167% 172% 173% 175% 181% 188% 189% 190% 190% 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 For the Plan Year Ending Projected Benefit Payments/Projected Contributions

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Asset/Liability Study Texas Municipal Retirement System

Deterministic Analysis (continued)

Actuarial Accrued Liabilities and Market Value of Assets The Plan’s projected actuarial accrued liabilities and market value of assets are shown in the chart below. The results assume the contribution policy remains unchanged, and that the Plan’s assets return precisely the actuarially assumed rate each year without exception for all projection years. The relative disparity between the market value of assets and Plan liabilities is expected to decrease by 70% through the end of the projection period. The funded ratio (based on market value

f assets) is expected to gradually increase to 98% by the end of the projection period. This is shown more clearly on the

following pages.

$0 $10 $20 $30 $40 $50 $60 $70 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Billions For the Plan Year Ending Projected Market Value of Assets and Projected Actuarial Liabilities Market Assets Actuarial Accrued Liability

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Asset/Liability Study Texas Municipal Retirement System

Deterministic Analysis (continued)

Deficit (market value of assets – actuarial accrued liabilities) The Plan’s projected deficit of assets is shown in the chart below. The results assume the contribution policy remains unchanged, and that the Plan’s assets return precisely the actuarially assumed rate each year without exception for all projection years. The disparity between the market value of assets and Plan liabilities is expected to decrease by the end

f the projection period by 70%.

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Asset/Liability Study Texas Municipal Retirement System

Deterministic Analysis (continued)

Actuarial Funded Ratio (actuarial value of assets/actuarial accrued liability) The Plan’s projected actuarial funded ratio is shown in the chart below. The Plan is expected to end the projection period at approximately 98% funded. The results assume the contribution policy remains unchanged, and that the Plan’s assets return precisely the actuarially assumed rate each year without exception for all projection years.

86% 87% 87% 88% 88% 88% 89% 89% 90% 90% 91% 91% 92% 92% 93% 94% 95% 95% 96% 97% 98% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 For the Plan Year Ending Projected Actuarial Funded Ratio

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Asset/Liability Study Texas Municipal Retirement System

Deterministic Analysis (continued)

Market Funded Ratio (market value of assets/actuarial accrued liability) The Plan’s projected market funded ratio is shown in the chart below. The Plan is expected to end the projection period at approximately 98% funded. The results assume the contribution policy remains unchanged, and that the Plan’s assets return precisely the actuarially assumed rate each year without exception for all projection years.

84% 85% 85% 86% 87% 87% 88% 88% 89% 90% 90% 91% 92% 92% 93% 94% 94% 95% 96% 97% 98% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 For the Plan Year Ending Projected Market Funded Ratio

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Asset/Liability Study Texas Municipal Retirement System

Deterministic Scenario Analysis

Full Funding Implied Returns The figure below shows the projected investment return for the total fund needed to bring the Plan to 100% funding (on a market value basis) in 10 and 20 years, respectively. The results assume all other actuarial assumptions are precisely met

ver the time periods shown and that these returns are earned for every year, without variance.

Actuarially assumed rate of return – 6.75%

7.9% 6.9% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10 Years 20 Years Projected Annual Rate of Return Needed to Reach Full Funding

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Asset/Liability Study Texas Municipal Retirement System

Deterministic Scenario Analysis (continued)

Sensitivity Analysis – Decreased Return Under the deterministic analysis presented in the preceding pages, the Plan is projected to have a market funded ratio of 98% in 20 years. The table below summarizes the projected funded ratio and other key statistics in 2035 assuming the Plan experiences an annualized investment return of 100 basis points lower (5.75%) than the current actuarially assumed rate

f return (6.75%). The values assume all other actuarial assumptions are exactly met. The original values are also presented

in the table for comparison.

Values in impact column may be impacted by rounding.

Actuarially Assumed Rate

f Return

Reduced Return (100 bps) Projected Payout Ratio 6% 7% 1%  Projected Employer Contributions (billions) $1.3 $1.8 $0.5  Projected Benefit Payments/Projected Total Contributions 190% 150%

 Projected Actuarial Accrued Liabilities (billions) $61.5 $61.5 $0.0  Projected Market Value of Assets (billions) $60.1 $50.8 ($9.3)  Projected Deficit (billions) $1.4 $10.6 $9.2  Projected Market Funded Ratio 98% 83%

 Projected Cumulative Employer Contributions (billions) $21.4 $24.8 $3.4  20 Year Cumulative Total Value in 2035 Impact of Reduced Return

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Asset/Liability Study Texas Municipal Retirement System

Stochastic Analysis

In the previous section of this report, we assumed the Plan operated going forward with certain knowledge of the future investment returns earned by the Plan’s assets. This section introduces the element of uncertainty in those future investment

returns. This part of the analysis examines Plan assets and liabilities under many capital market environments based on

expected future asset returns and inflation, and their expected volatility. Using a Monte Carlo simulation technique, both assets and liabilities are assumed to vary stochastically, linked together by changes in inflation. Using the current expected values and variances of the returns and inflation, along with their correlations, 2,000 trials are generated to produce a distribution of results. A stochastic analysis can answer questions about the best/worst case

utcomes along with the probability of such outcomes. This is contrasted with the deterministic analysis that provides an

expected value if all current Plan assumptions are exactly met.

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Asset/Liability Study Texas Municipal Retirement System

Stochastic Analysis (continued)

Long-Term Return and Risk Assumptions In order to perform a stochastic analysis and create asset allocation alternatives, it is necessary to estimate, for each asset class, its probable return and risk. The expected returns are our best estimates of the average annual percentage increases in values of each asset class over a prospective long period of time, and assumed to be normally distributed. The risk of an asset class is measured by its standard deviation, or volatility. If asset returns are normally distributed, two-thirds (67%) of all returns are expected to lie within one standard deviation on either side of the mean. For example, we expect Global Equity (50/50 Equity) to return, annually on average, 7.95% with a standard deviation of 18.40%, meaning that two-thirds

f the time we expect its return to lie between -10.45% (= 7.95 – 18.40) and 26.35% (= 7.95 + 18.40). Moreover, we expect

95% of all return outcomes to lie within two standard deviations of the mean return, implying only a one-in-twenty chance that the return on Global Equity will either fall below -28.85% or rise above 44.75%. The risk and return assumptions used in this study are outlined in the below table and chart: Asset Class Arithmetic Return Assumption Standard Deviation Assumption 50/50 Equity 7.95 18.40 Intermediate Duration Fixed Income 3.50 6.00 Non-Core Fixed Income 6.65 12.50 Custom Real Return 6.65 8.70 Custom Real Estate 7.25 14.00 Diversified Hedge Funds 6.50 9.50 Private Equity 10.25 25.50

0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 20.00 Airthmetic Return (Annualized, %) 0.00 3.00 6.00 9.00 12.00 15.00 18.00 21.00 24.00 27.00 30.00 33.00 Risk (Annualized Standard Deviation, %)

50/50 Equity Int FI Non-Core FI Custom RR Custom RE DHF

Priv. Eq.

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Asset/Liability Study Texas Municipal Retirement System

Stochastic Analysis (continued)

Correlation Between Asset Classes Creating a diversified portfolio of asset classes enables the investor to achieve a high rate of return while minimizing volatility

f the portfolio. As defined on the previous page, volatility is “risk” or standard deviation. By minimizing the volatility of a

portfolio, we produce asset returns that vary less from year to year. Diversification exists because the returns of different asset classes do not always move in the same direction, at the same time, or with the same magnitude. Correlation values are between 1.00 and –1.00. If returns of two asset classes rise or fall at the same time and in the same magnitude, they have a correlation value of 1.00. Conversely, two asset classes that simultaneously move in opposite directions, and in the same magnitude, have a correlation value of –1.00. A correlation of zero indicates no relationship between returns. The assumed correlations are largely based on historical index data, with some qualitative analysis applied. For instance, where appropriate, we have weighted current history more heavily. The correlation matrix used in this study is shown below: The fact that the correlations shown in the table are nearly all positive does not imply that these asset classes do not diversify one another. Their correlations are significantly less than 1.00, meaning we expect a measurable number of instances when the underperformance of one or more of the asset classes will be offset by the outperformance of others. This point is demonstrated on the following pages, which illustrate that diversification into less correlated asset classes can decrease the expected overall volatility of a portfolio.

50/50 Equity

Int. Duration

Fixed Income Non-Core Fixed Income Custom Real Return Custom Real Estate Diversified Hedge Funds Private Equity 50/50 Equity 1.00

0.01

0.83 0.52 0.29 0.70 0.79

Int. Duration Fixed Income
0.01

1.00 0.34 0.16

0.10

0.14

0.28

Non-Core Fixed Income 0.83 0.34 1.00 0.79 0.15 0.65 0.64 Custom Real Return 0.52 0.16 0.79 1.00 0.30 0.55 0.61 Custom Real Estate 0.29

0.10

0.15 0.30 1.00 0.27 0.57 Diversified Hedge Funds 0.70 0.14 0.65 0.55 0.27 1.00 0.70 Private Equity 0.79

0.28

0.64 0.61 0.57 0.70 1.00

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Asset/Liability Study Texas Municipal Retirement System

Stochastic Analysis (continued)

Efficient Portfolios Each frontier portfolio (optimal allocation) is created using target rates of return both above and below the projected rate of return for the current allocation. This range illustrates the trade-off between return and risk; additional return can only be achieved by undertaking additional risk. The table below shows the possible optimal allocations given the selected asset classes and their constraints listed under “Min” and “Max.” The table shows the Current (as of April 30, 2016) and Target Allocations and highlights four additional portfolios (100% Fixed Income, Lower Risk, Higher Risk, and 100% Equity) for consideration throughout this study.

The combination of Real Return, Real Estate, Diversified Hedge Funds, and Private Equity is limited to 50%.

Min Max 1 2 3 4 5 6 7 8 9 10 Current Allocation 100% Fixed Income Lower Risk Target Allocation Higher Risk 100% Equity

50/50 Equity 100 11 14 6 21 23 28 41 50 44 25 35 45 80

Int. Duration Fixed Income

100 65 50 39 26 8 29 100 20 10 5 Non-Core Fixed Income 100 10 36 29 27 22 9 7 20 20 15 Custom Real Return 100 14 22 28 27 16 17 6 6 10 10 5 Custom Real Estate 100 11 14 17 22 29 33 30 24 13 7 10 10 10 Diversified Hedge Funds 100 10 14 5 2 5 8 10 10 10 Private Equity 100 14 26 37 50 5 5 10 20 Total 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Capital Appreciation 11 24 42 50 64 76 87 100 51 50 60 70 100 Capital Preservation 65 50 39 26 8 29 100 20 10 5 Alpha 10 14 5 2 5 8 10 10 10 Inflation 25 36 45 48 45 50 36 24 13 12 20 20 15 Expected Return 4.65 5.14 5.64 6.13 6.63 7.12 7.62 8.11 8.61 9.10 6.35 3.50 6.57 7.02 7.48 8.41 Risk (Standard Deviation) 4.95 5.15 6.03 7.34 8.79 10.43 12.69 15.20 17.92 20.80 10.19 6.00 9.85 11.51 13.53 19.01 Return (Compound) 4.53 5.01 5.47 5.88 6.27 6.62 6.88 7.06 7.16 7.17 5.87 3.33 6.12 6.41 6.64 6.78 Return/Risk Ratio 0.94 1.00 0.94 0.84 0.75 0.68 0.60 0.53 0.48 0.44 0.62 0.58 0.67 0.61 0.55 0.44 RVK Expected Eq Beta (LCUS Eq = 1) 0.11 0.13 0.21 0.28 0.32 0.42 0.56 0.70 0.87 1.03 0.52 0.06 0.46 0.55 0.67 0.99 RVK Liquidity Metric (T-Bills = 100) 66 58 59 55 44 47 44 43 47 49 75 85 60 61 61 75

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Asset/Liability Study Texas Municipal Retirement System

Stochastic Analysis (continued)

Efficient Frontier The risk of each alternative allocation is plotted against the horizontal axis, while the return is measured on the vertical axis. The line connecting the points represents all the optimal portfolios subject to the given constraints and is known as the “efficient frontier.” The upward slope of the efficient frontier indicates the direct relationship between return and risk. Efficient Frontier

3.00 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00 7.50 8.00 8.50 9.00 9.50 10.00

Return (Annualized, %)

4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00 12.00 13.00 14.00 15.00 16.00 17.00 18.00 19.00 20.00 21.00 22.00

Risk (Annualized Standard Deviation, %)

1 2 3 4 5 6 7 8 9 10

Current Allocation 100% Fixed Income Lower Risk Target Allocation Higher Risk 100% Equity

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Asset/Liability Study Texas Municipal Retirement System

Stochastic Analysis (continued)

Asset Mixes Outlined below are the Current (as of April 30, 2016) and Target Allocations and four other mixes to be examined in this stochastic analysis. The expected return, expected risk (as measured by standard deviation), and RVK Liquidity Metric, for each is also shown.

Asset Class Current Allocation 100% Fixed Income Lower Risk Target Allocation Higher Risk 100% Equity

50/50 Equity 44% 0% 25% 35% 45% 80% Intermediate Duration Fixed Income 29% 100% 20% 10% 5% 0% Non-Core Fixed Income 7% 0% 20% 20% 15% 0% Custom Real Return 6% 0% 10% 10% 5% 0% Custom Real Estate 7% 0% 10% 10% 10% 0% Diversified Hedge Funds 8% 0% 10% 10% 10% 0% Private Equity 0% 0% 5% 5% 10% 20% Total Equity 44% 0% 30% 40% 55% 100% Expected Return 6.34% 3.50% 6.57% 7.02% 7.48% 8.41% Expected Risk 10.18% 6.00% 9.85% 11.51% 13.53% 19.01% RVK Liquidity Metric 75 85 60 61 61 75

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Asset/Liability Study Texas Municipal Retirement System

95th Percentile 75th Percentile Median 25th Percentile 5th Percentile

0% 50% 100% 150% 200% 250% 300% 350% 400% Current Allocation 100% Fixed Income Lower Risk Target Allocation Higher Risk 100% Equity Projected Actuarial Funded Ratio December 31, 2035

Unfunded Liability (Bil) Funded Ratio Unfunded Liability Funded Ratio Unfunded Liability (Bil) Funded Ratio Unfunded Liability (Bil) Funded Ratio Unfunded Liability (Bil) Funded Ratio Unfunded Liability (Bil) Funded Ratio 5th Percentile $26.1 56% $28.9 53% $24.6 58% $25.5 56% $26.8 54% $31.2 46% 25th Percentile $17.6 71% $23.7 61% $15.9 73% $15.5 73% $15.5 74% $16.6 72% Median $9.7 84% $20.0 67% $8.2 86% $5.9 90% $3.5 94% ($2.4) 104% 75th Percentile ($0.9) 101% $16.3 73% ($2.7) 104% ($9.0) 114% ($16.0) 125% ($35.8) 155% 95th Percentile ($28.1) 144% $9.0 86% ($31.6) 148% ($49.5) 174% ($71.5) 214% ($153.3) 342% Current Allocation Lower Risk Target Allocation 100% Fixed Income 100% Equity Higher Risk

Stochastic Analysis (continued)

Projected Actuarial Funded Ratio (actuarial value of assets/actuarial accrued liability); 20 Years The graph below shows the distribution of possible actuarial funded ratios twenty years from now, assuming the six different asset mixes highlighted on the prior pages. The results assume the current contribution policy remains unchanged for all projection years.

SLIDE 29

Asset/Liability Study Texas Municipal Retirement System

95th Percentile 75th Percentile Median 25th Percentile 5th Percentile

0% 50% 100% 150% 200% 250% 300% 350% 400% 450% Current Allocation 100% Fixed Income Lower Risk Target Allocation Higher Risk 100% Equity Projected Market Funded Ratio December 31, 2035

Unfunded Liability (Bil) Funded Ratio Unfunded Liability Funded Ratio Unfunded Liability (Bil) Funded Ratio Unfunded Liability (Bil) Funded Ratio Unfunded Liability (Bil) Funded Ratio Unfunded Liability (Bil) Funded Ratio 5th Percentile $30.4 48% $34.1 45% $29.1 50% $29.8 48% $31.5 46% $35.8 39% 25th Percentile $20.9 65% $28.3 53% $19.2 68% $18.2 70% $17.8 70% $18.9 69% 50th Percentile $11.2 82% $24.6 59% $9.4 85% $6.2 89% $3.4 95% ($3.7) 106% 75th Percentile ($2.4) 104% $20.7 67% ($4.5) 107% ($11.9) 118% ($19.7) 131% ($42.3) 166% 95th Percentile ($34.3) 151% $12.6 80% ($38.2) 156% ($58.2) 190% ($87.1) 234% ($182.3) 389% Current Allocation Lower Risk Target Allocation 100% Fixed Income 100% Equity Higher Risk

Stochastic Analysis (continued)

Projected Market Funded Ratio (market value of assets/actuarial accrued liability); 20 Years The graph below shows the distribution of possible market funded ratios twenty years from now, assuming the six different asset mixes highlighted on the prior pages. The results assume the current contribution policy remains unchanged for all projection years.

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Asset/Liability Study Texas Municipal Retirement System

Stochastic Analysis (continued)

Projected Market Funded Ratio and Maximum 1 Year Investment Loss (market value of assets/actuarial accrued liability) The tables below show the probability that the Plan will be at various funding levels for each of the six different asset mixes highlighted on the prior pages. The tables also illustrate the maximum 1 year investment loss each portfolio is expected to experience during the given time period. The results assume the current contribution policy remains unchanged for all projection years.

Current Allocation 17% 57% 7%

100% Fixed Income 1% 86% 5%

Lower Risk 18% 55% 5%

Target Allocation 23% 52% 8%

Higher Risk 28% 51% 10%

100% Equity 34% 49% 17%

5 Years Probability of Full Funding in 2020 Probability of < 84% (Current) Funding in 2020 Maximum 1 Year Investment Loss Probability of < 60% Funding in 2020 Current Allocation 23% 57% 14%

100% Fixed Income 1% 93% 29%

Lower Risk 25% 54% 13%

Target Allocation 31% 50% 14%

Higher Risk 35% 49% 16%

100% Equity 40% 46% 22%

Maximum 1 Year Investment Loss 10 Years Probability of Full Funding in 2025 Probability of < 84% (Current) Funding in 2025 Probability of < 60% Funding in 2025 Current Allocation 28% 53% 18%

100% Fixed Income 0% 97% 53%

Lower Risk 32% 49% 15%

Target Allocation 40% 44% 15%

Higher Risk 46% 40% 16%

100% Equity 54% 35% 18%

Probability of < 60% Funding in 2035 Probability of < 84% (Current) Funding in 2035 Probability of Full Funding in 2035 20 Years Maximum 1 Year Investment Loss

SLIDE 31

Asset/Liability Study Texas Municipal Retirement System

5th Percentile 25th Percentile Median 75th Percentile 95th Percentile

0% 5% 10% 15% 20%

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 For the Plan Year Ending

Projected Payout Ratio Current Allocation

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Median 5% 5% 6% 6% 6% 6% 6% 6% 6% 7% 7% 7% 7% 7% 7% 7% 7% 7% 7% 7% 7%

Stochastic Analysis (continued)

Projected Payout Ratio (expected benefit payments/market value of assets); Current Allocation The graph below displays the range of possible payout ratios over the next twenty years, assuming the Plan’s assets are allocated according to the Current Allocation. The results assume the current contribution policy remains unchanged for all projection years. The median annual benefit payment as percentage of the market value of assets is expected to range between 5% and 7%. The worst-case scenario could reach 13% or higher.

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Asset/Liability Study Texas Municipal Retirement System

5th Percentile 25th Percentile Median 75th Percentile 95th Percentile

0% 5% 10% 15% 20%

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 For the Plan Year Ending

Projected Payout Ratio 100% Fixed Income

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Median 5% 6% 6% 6% 6% 7% 7% 7% 8% 8% 8% 8% 9% 9% 9% 9% 10% 10% 10% 10% 10%

Stochastic Analysis (continued)

Projected Payout Ratio (expected benefit payments/market value of assets); 100% Fixed Income The graph below displays the range of possible payout ratios over the next twenty years, assuming the Plan’s assets are allocated according to the 100% Fixed Income portfolio. The results assume the current contribution policy remains unchanged for all projection years. The median annual benefit payment as percentage of the market value of assets is expected to range between 5% and 10%. The worst-case scenario could reach 13% or higher.

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Asset/Liability Study Texas Municipal Retirement System

5th Percentile 25th Percentile Median 75th Percentile 95th Percentile

0% 5% 10% 15% 20%

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 For the Plan Year Ending

Projected Payout Ratio Lower Risk

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Median 5% 5% 6% 6% 6% 6% 6% 6% 6% 6% 6% 7% 7% 7% 7% 7% 7% 7% 7% 7% 7%

Stochastic Analysis (continued)

Projected Payout Ratio (expected benefit payments/market value of assets); Lower Risk The graph below displays the range of possible payout ratios over the next twenty years, assuming the Plan’s assets are allocated according to the Lower Risk portfolio. The results assume the current contribution policy remains unchanged for all projection years. The median annual benefit payment as percentage of the market value of assets is expected to range between 5% and 7%. The worst-case scenario could reach 12% or higher.

SLIDE 34

Asset/Liability Study Texas Municipal Retirement System

5th Percentile 25th Percentile Median 75th Percentile 95th Percentile

0% 5% 10% 15% 20%

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 For the Plan Year Ending

Projected Payout Ratio Target Allocation

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Median 5% 5% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 7% 7% 7% 7% 7% 7% 7% 7%

Stochastic Analysis (continued)

Projected Payout Ratio (expected benefit payments/market value of assets); Target Allocation The graph below displays the range of possible payout ratios over the next twenty years, assuming the Plan’s assets are allocated according to the Target Allocation. The results assume the current contribution policy remains unchanged for all projection years. The median annual benefit payment as percentage of the market value of assets is expected to range between 5% and 7%. The worst-case scenario could reach 13% or higher.

SLIDE 35

Asset/Liability Study Texas Municipal Retirement System

5th Percentile 25th Percentile Median 75th Percentile 95th Percentile

0% 5% 10% 15% 20%

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 For the Plan Year Ending

Projected Payout Ratio Higher Risk

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Median 5% 5% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6%

Stochastic Analysis (continued)

Projected Payout Ratio (expected benefit payments/market value of assets); Higher Risk The graph below displays the range of possible payout ratios over the next twenty years, assuming the Plan’s assets are allocated according to the Higher Risk portfolio. The results assume the current contribution policy remains unchanged for all projection years. The median annual benefit payment as percentage of the market value of assets is expected to range between 5% and 6%. The worst-case scenario could reach 14% or higher.

SLIDE 36

Asset/Liability Study Texas Municipal Retirement System

5th Percentile 25th Percentile Median 75th Percentile 95th Percentile

0% 5% 10% 15% 20%

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 For the Plan Year Ending

Projected Payout Ratio 100% Equity

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Median 5% 5% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6%

Stochastic Analysis (continued)

Projected Payout Ratio (expected benefit payments/market value of assets); 100% Equity The graph below displays the range of possible payout ratios over the next twenty years, assuming the Plan’s assets are allocated according to the 100% Equity portfolio. The results assume the current contribution policy remains unchanged for all projection years. The median annual benefit payment as percentage of the market value of assets is expected to range between 5% and 6%. The worst-case scenario could reach 16% or higher.

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Asset/Liability Study Texas Municipal Retirement System

5th Percentile 25th Percentile Median 75th Percentile 95th Percentile

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

Billions

For the Plan Year Ending

Projected Cumulative Employer Contributions to Date Current Allocation

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 5th Percentile $0.7 $1.6 $2.5 $3.5 $4.6 $5.8 $7.1 $8.6 $10.1 $11.8 $13.6 $15.6 $17.5 $19.7 $22.1 $24.7 $27.4 $30.3 $33.3 $36.6 $40.1 25th Percentile $0.7 $1.6 $2.4 $3.3 $4.3 $5.3 $6.4 $7.6 $8.9 $10.3 $11.8 $13.4 $15.1 $16.8 $18.7 $20.7 $22.8 $24.9 $27.2 $29.7 $32.2 Median $0.7 $1.5 $2.4 $3.2 $4.1 $5.0 $6.0 $7.1 $8.2 $9.3 $10.5 $11.7 $13.0 $14.5 $15.9 $17.5 $19.1 $20.7 $22.5 $24.4 $26.2 75th Percentile $0.7 $1.5 $2.3 $3.1 $4.0 $4.8 $5.6 $6.5 $7.4 $8.3 $9.2 $10.2 $11.1 $12.1 $13.1 $14.0 $15.2 $16.1 $17.2 $18.3 $19.5 95th Percentile $0.7 $1.5 $2.3 $3.0 $3.8 $4.4 $5.1 $5.7 $6.3 $6.9 $7.6 $8.2 $8.8 $9.5 $10.1 $10.8 $11.4 $12.1 $12.9 $13.7 $14.4

Stochastic Analysis (continued)

Cumulative Contributions to Date; Current Allocation The graph and table below show the range of projected cumulative contributions over the next twenty years, assuming the Plan’s assets are allocated according to the Current Allocation (highlighted on the prior pages). The results assume the current contribution policy remains unchanged for all projection years.

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Asset/Liability Study Texas Municipal Retirement System

5th Percentile 25th Percentile Median 75th Percentile 95th Percentile

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

Billions

For the Plan Year Ending

Projected Cumulative Employer Contributions to Date 100% Fixed Income

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 5th Percentile $0.7 $1.6 $2.5 $3.4 $4.5 $5.7 $7.0 $8.4 $10.0 $11.6 $13.4 $15.4 $17.6 $19.9 $22.4 $25.1 $28.0 $31.1 $34.2 $37.7 $41.2 25th Percentile $0.7 $1.6 $2.4 $3.3 $4.3 $5.4 $6.5 $7.8 $9.1 $10.6 $12.2 $13.9 $15.8 $17.8 $20.0 $22.3 $24.8 $27.5 $30.2 $33.3 $36.5 Median $0.7 $1.5 $2.4 $3.2 $4.1 $5.1 $6.2 $7.3 $8.6 $9.9 $11.3 $12.9 $14.6 $16.4 $18.4 $20.5 $22.7 $25.1 $27.7 $30.4 $33.2 75th Percentile $0.7 $1.5 $2.3 $3.2 $4.0 $4.9 $5.9 $6.9 $8.0 $9.2 $10.5 $11.9 $13.4 $15.0 $16.7 $18.5 $20.4 $22.5 $24.7 $27.2 $29.8 95th Percentile $0.7 $1.5 $2.3 $3.1 $3.8 $4.6 $5.5 $6.4 $7.3 $8.3 $9.4 $10.5 $11.7 $13.0 $14.3 $15.8 $17.2 $18.9 $20.6 $22.5 $24.5

Stochastic Analysis (continued)

Cumulative Contributions to Date; 100% Fixed Income The graph and table below show the range of projected cumulative contributions over the next twenty years, assuming the Plan’s assets are allocated according to the 100% Fixed Income portfolio (highlighted on the prior pages). The results assume the current contribution policy remains unchanged for all projection years.

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Asset/Liability Study Texas Municipal Retirement System

5th Percentile 25th Percentile Median 75th Percentile 95th Percentile

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

Billions

For the Plan Year Ending

Projected Cumulative Employer Contributions to Date Lower Risk

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 5th Percentile $0.7 $1.6 $2.5 $3.5 $4.6 $5.7 $7.0 $8.4 $9.9 $11.6 $13.4 $15.2 $17.2 $19.3 $21.5 $23.9 $26.6 $29.4 $32.5 $35.3 $38.5 25th Percentile $0.7 $1.6 $2.4 $3.3 $4.3 $5.3 $6.4 $7.6 $8.8 $10.2 $11.6 $13.1 $14.7 $16.4 $18.2 $20.0 $22.0 $24.1 $26.3 $28.6 $31.1 Median $0.7 $1.5 $2.4 $3.2 $4.1 $5.0 $6.0 $7.0 $8.1 $9.2 $10.4 $11.6 $12.9 $14.2 $15.6 $17.1 $18.6 $20.2 $21.9 $23.6 $25.3 75th Percentile $0.7 $1.5 $2.3 $3.1 $4.0 $4.8 $5.6 $6.5 $7.4 $8.3 $9.2 $10.1 $11.0 $11.9 $12.8 $13.8 $14.7 $15.7 $16.6 $17.6 $18.6 95th Percentile $0.7 $1.5 $2.3 $3.0 $3.8 $4.5 $5.1 $5.8 $6.4 $7.0 $7.6 $8.2 $8.9 $9.5 $10.2 $10.8 $11.5 $12.2 $12.9 $13.7 $14.4

Stochastic Analysis (continued)

Cumulative Contributions to Date; Lower Risk The graph and table below show the range of projected cumulative contributions over the next twenty years, assuming the Plan’s assets are allocated according to the Lower Risk portfolio (highlighted on the prior pages). The results assume the current contribution policy remains unchanged for all projection years.

SLIDE 40

Asset/Liability Study Texas Municipal Retirement System

5th Percentile 25th Percentile Median 75th Percentile 95th Percentile

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

Billions

For the Plan Year Ending

Projected Cumulative Employer Contributions to Date Target Allocation

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 5th Percentile $0.7 $1.6 $2.5 $3.5 $4.6 $5.8 $7.2 $8.7 $10.2 $11.9 $13.7 $15.7 $17.7 $19.9 $22.2 $24.7 $27.5 $30.5 $33.4 $36.3 $39.6 25th Percentile $0.7 $1.6 $2.4 $3.3 $4.3 $5.3 $6.4 $7.6 $8.9 $10.2 $11.7 $13.2 $14.9 $16.6 $18.3 $20.2 $22.1 $24.1 $26.3 $28.6 $30.9 Median $0.7 $1.5 $2.4 $3.2 $4.1 $5.0 $6.0 $7.0 $8.0 $9.1 $10.3 $11.4 $12.6 $13.9 $15.3 $16.6 $18.1 $19.5 $21.1 $22.6 $24.1 75th Percentile $0.7 $1.5 $2.3 $3.1 $3.9 $4.7 $5.6 $6.4 $7.2 $8.0 $8.8 $9.6 $10.4 $11.2 $12.0 $12.8 $13.6 $14.6 $15.4 $16.3 $17.2 95th Percentile $0.7 $1.5 $2.3 $3.0 $3.7 $4.4 $5.0 $5.6 $6.1 $6.7 $7.4 $7.9 $8.6 $9.2 $9.8 $10.4 $11.1 $11.7 $12.4 $13.2 $13.9

Stochastic Analysis (continued)

Cumulative Contributions to Date; Target Allocation The graph and table below show the range of projected cumulative contributions over the next twenty years, assuming the Plan’s assets are allocated according to the Target Allocation (highlighted on the prior pages). The results assume the current contribution policy remains unchanged for all projection years.

SLIDE 41

Asset/Liability Study Texas Municipal Retirement System

5th Percentile 25th Percentile Median 75th Percentile 95th Percentile

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

Billions

For the Plan Year Ending

Projected Cumulative Employer Contributions to Date Higher Risk

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 5th Percentile $0.7 $1.6 $2.5 $3.6 $4.8 $6.0 $7.5 $9.0 $10.7 $12.4 $14.3 $16.3 $18.4 $20.7 $23.3 $26.0 $28.8 $31.7 $34.8 $37.9 $41.4 25th Percentile $0.7 $1.6 $2.4 $3.3 $4.3 $5.4 $6.5 $7.7 $9.0 $10.4 $11.9 $13.4 $15.1 $16.9 $18.6 $20.6 $22.5 $24.5 $26.6 $28.9 $31.2 Median $0.7 $1.5 $2.4 $3.2 $4.1 $5.0 $6.0 $7.0 $8.0 $9.1 $10.2 $11.3 $12.5 $13.7 $15.0 $16.3 $17.6 $19.0 $20.3 $21.7 $23.0 75th Percentile $0.7 $1.5 $2.3 $3.1 $3.9 $4.7 $5.5 $6.3 $7.0 $7.7 $8.5 $9.2 $10.0 $10.7 $11.4 $12.2 $13.0 $13.8 $14.6 $15.5 $16.4 95th Percentile $0.7 $1.5 $2.3 $3.0 $3.6 $4.3 $4.8 $5.4 $6.0 $6.6 $7.2 $7.8 $8.3 $9.0 $9.6 $10.2 $10.8 $11.5 $12.2 $12.9 $13.6

Stochastic Analysis (continued)

Cumulative Contributions to Date; Higher Risk The graph and table below show the range of projected cumulative contributions over the next twenty years, assuming the Plan’s assets are allocated according to the Higher Risk portfolio (highlighted on the prior pages). The results assume the current contribution policy remains unchanged for all projection years.

SLIDE 42

Asset/Liability Study Texas Municipal Retirement System

5th Percentile 25th Percentile Median 75th Percentile 95th Percentile

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

Billions

For the Plan Year Ending

Projected Cumulative Employer Contributions to Date 100% Equity

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 5th Percentile $0.7 $1.6 $2.6 $3.8 $5.2 $6.6 $8.2 $10.0 $11.8 $13.9 $16.0 $18.2 $20.6 $23.3 $26.0 $29.0 $32.1 $35.4 $38.8 $42.4 $45.8 25th Percentile $0.7 $1.6 $2.4 $3.4 $4.4 $5.6 $6.8 $8.1 $9.4 $10.9 $12.5 $14.2 $15.9 $17.8 $19.8 $21.8 $23.8 $25.9 $28.1 $30.4 $32.9 Median $0.7 $1.5 $2.4 $3.2 $4.1 $5.0 $6.0 $7.0 $8.0 $9.0 $10.1 $11.2 $12.3 $13.5 $14.7 $15.8 $16.9 $18.1 $19.3 $20.6 $21.7 75th Percentile $0.7 $1.5 $2.3 $3.1 $3.8 $4.6 $5.2 $5.9 $6.6 $7.2 $7.9 $8.6 $9.3 $10.0 $10.7 $11.5 $12.3 $13.1 $13.9 $14.8 $15.6 95th Percentile $0.7 $1.5 $2.2 $2.9 $3.5 $4.0 $4.6 $5.2 $5.7 $6.3 $6.9 $7.5 $8.1 $8.7 $9.3 $9.9 $10.5 $11.1 $11.8 $12.5 $13.1

Stochastic Analysis (continued)

Cumulative Contributions to Date; 100% Equity The graph and table below show the range of projected cumulative contributions over the next twenty years, assuming the Plan’s assets are allocated according to the 100% Equity portfolio (highlighted on the prior pages). The results assume the current contribution policy remains unchanged for all projection years.

SLIDE 43

Asset/Liability Study Texas Municipal Retirement System

Stochastic Analysis (continued)

Employer Contributions (as a weighted average percentage of salary) The tables below show the range of required employer contributions (as a weighted average percentage of salary) assuming the six different asset mixes highlighted on the prior pages. The results assume the current contribution policy remains unchanged for all projection years.

5th 25th 50th 75th 95th Current Allocation 20% 16% 14% 13% 11% 100% Fixed Income 19% 16% 15% 14% 13% Lower Risk 20% 15% 14% 13% 11% Target Allocation 21% 16% 14% 13% 9% Higher Risk 22% 16% 14% 12% 9% 100% Equity 25% 17% 14% 11% 8% 5 Years Required Employer Contribution for Plan Year Ending 2020 5th 25th 50th 75th 95th Current Allocation 27% 20% 16% 12% 8% 100% Fixed Income 27% 22% 19% 17% 14% Lower Risk 26% 20% 16% 12% 8% Target Allocation 27% 20% 16% 10% 8% Higher Risk 29% 20% 15% 9% 8% 100% Equity 33% 22% 15% 8% 7% 10 Years Required Employer Contribution for Plan Year Ending 2025 5th 25th 50th 75th 95th Current Allocation 39% 29% 20% 8% 7% 100% Fixed Income 42% 35% 30% 26% 19% Lower Risk 38% 28% 19% 8% 7% Target Allocation 39% 27% 17% 7% 7% Higher Risk 40% 28% 14% 7% 7% 100% Equity 45% 28% 8% 7% 7% Required Employer Contribution for Plan Year Ending 2035 20 Years

SLIDE 44

Asset/Liability Study Texas Municipal Retirement System

Stochastic Analysis (continued)

Drawing Inferences The tables below compare the projected market funded ratios five, ten, and twenty years from now, under the median (50th percentile), worst-case (5th percentile), and best-case (95th percentile) scenarios, assuming the six different asset mixes highlighted on the prior pages. The table also displays for comparative purposes the median, peak, and trough projected payout ratios and cumulative employer contributions for the six asset mixes being examined.

50th 5th 95th Peak Trough Current Allocation 80% 58% 115% $5.0 $5.8 $4.4 6% 8% 4% 100% Fixed Income 74% 60% 90% $5.1 $5.7 $4.6 7% 8% 5% Lower Risk 82% 59% 116% $5.0 $5.7 $4.5 6% 8% 4% Target Allocation 83% 57% 124% $5.0 $5.8 $4.4 6% 9% 4% Higher Risk 84% 55% 134% $5.0 $6.0 $4.3 6% 9% 4% 100% Equity 85% 47% 163% $5.0 $6.6 $4.0 6% 10% 3% 5 Years Market Funded Ratio in Year 5 Cumulative Employer Contributions in Year 5 (Billions) Payout Ratios 50th 5th 95th Year 5 Median Years 1 to 5 50th 5th 95th Peak Trough Current Allocation 79% 52% 130% $10.5 $13.6 $7.6 7% 10% 4% 100% Fixed Income 65% 51% 86% $11.3 $13.4 $9.4 8% 10% 5% Lower Risk 82% 54% 130% $10.4 $13.4 $7.6 6% 10% 4% Target Allocation 84% 51% 146% $10.3 $13.7 $7.4 6% 10% 4% Higher Risk 86% 49% 165% $10.2 $14.3 $7.2 6% 11% 3% 100% Equity 88% 42% 222% $10.1 $16.0 $6.9 6% 13% 2% 10 Years Market Funded Ratio in Year 10 Cumulative Employer Contributions in Year 10 (Billions) Payout Ratios 50th 5th 95th Year 10 Median Years 1 to 10 50th 5th 95th Peak Trough Current Allocation 82% 48% 151% $26.2 $40.1 $14.4 7% 13% 4% 100% Fixed Income 59% 45% 80% $33.2 $41.2 $24.5 10% 13% 5% Lower Risk 85% 50% 156% $25.3 $38.5 $14.4 7% 12% 4% Target Allocation 89% 48% 190% $24.1 $39.6 $13.9 7% 13% 3% Higher Risk 95% 46% 234% $23.0 $41.4 $13.6 6% 14% 3% 100% Equity 106% 39% 389% $21.7 $45.8 $13.1 6% 16% 2% 20 Years Market Funded Ratio in Year 20 Payout Ratios 50th 5th 95th Cumulative Employer Contributions in Year 20 (Billions) Year 20 Median Years 1 to 20

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Asset/Liability Study Texas Municipal Retirement System

95th Percentile 75th Percentile Median 25th Percentile 5th Percentile

0% 25% 50% 75% 100% 125% 150% Current Allocation 100% Fixed Income Lower Risk Target Allocation Higher Risk 100% Equity Projected Actuarial Funded Ratio December 31, 2020

Unfunded Liability (Bil) Funded Ratio Unfunded Liability Funded Ratio Unfunded Liability (Bil) Funded Ratio Unfunded Liability (Bil) Funded Ratio Unfunded Liability (Bil) Funded Ratio Unfunded Liability (Bil) Funded Ratio 5th Percentile $11.0 69% $10.2 71% $10.6 70% $11.4 68% $12.5 64% $15.6 56% 25th Percentile $7.0 81% $7.7 79% $6.7 81% $6.9 81% $7.1 80% $8.1 77% Median $5.0 86% $6.2 83% $4.8 86% $4.7 87% $4.6 87% $4.5 88% 75th Percentile $3.1 91% $4.8 86% $3.1 91% $2.7 93% $2.1 94% $0.3 99% 95th Percentile $0.1 100% $3.2 91% $0.3 99% ($1.4) 104% ($4.0) 111% ($12.6) 133% 100% Equity Higher Risk Current Allocation Lower Risk Target Allocation 100% Fixed Income

Appendix 1: Supplemental Stochastic Exhibits

Projected Actuarial Funded Ratio (actuarial value of assets/actuarial accrued liability); 5 Years The graph below shows the distribution of possible actuarial funded ratios five years from now, assuming the six different asset mixes highlighted on the prior pages. The results assume the current contribution policy remains unchanged for all projection years.

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Asset/Liability Study Texas Municipal Retirement System

95th Percentile 75th Percentile Median 25th Percentile 5th Percentile

0% 25% 50% 75% 100% 125% 150% 175% Current Allocation 100% Fixed Income Lower Risk Target Allocation Higher Risk 100% Equity Projected Market Funded Ratio December 31, 2020

Unfunded Liability (Bil) Funded Ratio Unfunded Liability Funded Ratio Unfunded Liability (Bil) Funded Ratio Unfunded Liability (Bil) Funded Ratio Unfunded Liability (Bil) Funded Ratio Unfunded Liability (Bil) Funded Ratio 5th Percentile $14.8 58% $14.0 60% $14.2 59% $15.0 57% $16.1 55% $18.7 47% 25th Percentile $10.5 70% $11.5 68% $10.2 72% $10.3 71% $10.6 70% $11.8 66% 50th Percentile $7.0 80% $9.4 74% $6.6 82% $6.2 83% $5.8 84% $5.4 85% 75th Percentile $2.2 94% $7.2 80% $2.0 94% $0.6 98% ($0.9) 103% ($4.5) 113% 95th Percentile ($5.6) 115% $3.9 90% ($6.0) 116% ($9.0) 124% ($12.9) 134% ($23.7) 163% 100% Equity Higher Risk Current Allocation Lower Risk Target Allocation 100% Fixed Income

Appendix 1: Supplemental Stochastic Exhibits (continued)

Projected Market Funded Ratio (market value of assets/actuarial accrued liability); 5 Years The graph below shows the distribution of possible market funded ratios five years from now, assuming the six different asset mixes highlighted on the prior pages. The results assume the current contribution policy remains unchanged for all projection years.

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Asset/Liability Study Texas Municipal Retirement System

95th Percentile 75th Percentile Median 25th Percentile 5th Percentile

0% 25% 50% 75% 100% 125% 150% 175% 200% Current Allocation 100% Fixed Income Lower Risk Target Allocation Higher Risk 100% Equity Projected Actuarial Funded Ratio December 31, 2025

Unfunded Liability (Bil) Funded Ratio Unfunded Liability Funded Ratio Unfunded Liability (Bil) Funded Ratio Unfunded Liability (Bil) Funded Ratio Unfunded Liability (Bil) Funded Ratio Unfunded Liability (Bil) Funded Ratio 5th Percentile $17.1 61% $17.4 60% $16.2 63% $17.2 60% $18.4 57% $22.1 49% 25th Percentile $11.6 74% $13.9 69% $10.9 75% $11.0 75% $11.3 74% $12.8 71% Median $7.3 83% $11.3 75% $6.9 85% $6.3 86% $5.9 87% $5.3 88% 75th Percentile $2.6 94% $8.7 80% $2.1 95% $0.3 99% ($1.8) 104% ($7.9) 118% 95th Percentile ($6.8) 116% $4.5 90% ($7.0) 116% ($12.1) 126% ($18.5) 141% ($38.3) 187% 100% Equity Higher Risk 100% Fixed Income Current Allocation Lower Risk Target Allocation

Appendix 1: Supplemental Stochastic Exhibits (continued)

Projected Actuarial Funded Ratio (actuarial value of assets/actuarial accrued liability); 10 Years The graph below shows the distribution of possible actuarial funded ratios ten years from now, assuming the six different asset mixes highlighted on the prior pages. The results assume the current contribution policy remains unchanged for all projection years.

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Asset/Liability Study Texas Municipal Retirement System

95th Percentile 75th Percentile Median 25th Percentile 5th Percentile

0% 25% 50% 75% 100% 125% 150% 175% 200% 225% 250% Current Allocation 100% Fixed Income Lower Risk Target Allocation Higher Risk 100% Equity Projected Market Funded Ratio December 31, 2025

Unfunded Liability (Bil) Funded Ratio Unfunded Liability Funded Ratio Unfunded Liability (Bil) Funded Ratio Unfunded Liability (Bil) Funded Ratio Unfunded Liability (Bil) Funded Ratio Unfunded Liability (Bil) Funded Ratio 5th Percentile $20.6 52% $21.4 51% $19.9 54% $20.7 51% $21.7 49% $25.2 42% 25th Percentile $14.9 66% $18.0 59% $14.3 67% $14.4 67% $14.7 66% $15.9 63% 50th Percentile $9.1 79% $15.2 65% $8.1 82% $7.1 84% $6.3 86% $5.1 88% 75th Percentile $0.9 98% $11.9 73% $0.2 100% ($2.9) 107% ($6.0) 113% ($14.1) 131% 95th Percentile ($13.8) 130% $6.5 86% ($14.7) 130% ($21.4) 146% ($28.8) 165% ($55.8) 222% 100% Equity Higher Risk 100% Fixed Income Current Allocation Lower Risk Target Allocation

Appendix 1: Supplemental Stochastic Exhibits (continued)

Projected Market Funded Ratio (market value of assets/actuarial accrued liability); 10 Years The graph below shows the distribution of possible market funded ratios ten years from now, assuming the six different asset mixes highlighted on the prior pages. The results assume the current contribution policy remains unchanged for all projection years.

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Appendix 2: Sensitivity Analysis: “Effect of Higher Volatility”

This section provides a sensitivity analysis of the original stochastic projections by assuming the risk (as measured by standard deviation) of each asset class is doubled. These modified assumptions are outlined in the table below, compared to the original values: RVK supports the recommendations based on the original assumptions shown in the Stochastic Analysis section of this

report. However, this stress-testing illustrates that potential increased capital market volatility does not change the asset

allocation recommendations, based on the current status of the Plan. Instead it simply widens the range of potential results, exacerbating the potential best and worst-case scenarios. Asset Class Arithmetic Return Assumption Standard Deviation Assumption Standard Deviation Assumption Doubled 50/50 Equity 7.95 18.40 36.80 Intermediate Duration Fixed Income 3.50 6.00 12.00 Non-Core Fixed Income 6.65 12.50 25.00 Custom Real Return 6.65 8.70 17.40 Custom Real Estate 7.25 14.00 28.00 Diversified Hedge Funds 6.50 9.50 19.00 Private Equity 10.25 25.50 51.00

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Appendix 2: Sensitivity Analysis: “Effect of Higher Volatility” (continued)

Current Allocation 31% 55% 23%

100% Fixed Income 11% 71% 20%

Lower Risk 31% 54% 22%

Target Allocation 35% 52% 24%

Higher Risk 37% 51% 27%

100% Equity 41% 50% 33%

5 Years Probability of Full Funding in 2020 Probability of < 84% (Current) Funding in 2020 Maximum 1 Year Investment Loss Probability of < 60% Funding in 2020 Current Allocation 34% 53% 30%

100% Fixed Income 11% 77% 39%

Lower Risk 36% 51% 28%

Target Allocation 40% 50% 30%

Higher Risk 42% 49% 31%

100% Equity 45% 48% 34%

Maximum 1 Year Investment Loss 10 Years Probability of Full Funding in 2025 Probability of < 84% (Current) Funding in 2025 Probability of < 60% Funding in 2025 Current Allocation 43% 47% 27%

100% Fixed Income 9% 81% 47%

Lower Risk 44% 46% 25%

Target Allocation 49% 42% 25%

Higher Risk 52% 40% 25%

100% Equity 57% 36% 26%

Probability of < 84% (Current) Funding in 2035 Probability of Full Funding in 2035 20 Years Maximum 1 Year Investment Loss Probability of < 60% Funding in 2035

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Appendix 2: Sensitivity Analysis: “Effect of Higher Volatility” (continued)

50th 5th 95th Peak Trough Current Allocation 79% 43% 159% $5.2 $7.0 $4.0 6% 12% 3% 100% Fixed Income 74% 50% 109% $5.3 $6.6 $4.3 7% 10% 4% Lower Risk 81% 44% 161% $5.2 $6.8 $4.0 6% 11% 3% Target Allocation 82% 40% 182% $5.2 $7.1 $3.9 6% 12% 3% Higher Risk 82% 37% 210% $5.2 $7.4 $3.8 6% 14% 2% 100% Equity 83% 28% 300% $5.2 $8.3 $3.7 6% 18% 2% 5 Years Market Funded Ratio in Year 5 Cumulative Employer Contributions in Year 5 (Billions) Payout Ratios 50th 5th 95th Year 5 Median Years 1 to 5 50th 5th 95th Peak Trough Current Allocation 80% 36% 211% $11.0 $17.3 $6.8 7% 15% 2% 100% Fixed Income 66% 41% 112% $11.9 $16.2 $7.9 8% 13% 4% Lower Risk 82% 37% 205% $10.8 $16.8 $6.8 6% 15% 2% Target Allocation 85% 34% 251% $10.7 $17.4 $6.7 6% 16% 2% Higher Risk 86% 30% 312% $10.7 $18.3 $6.6 6% 18% 2% 100% Equity 89% 23% 516% $10.8 $20.3 $6.5 6% 24% 1% Years 1 to 10 10 Years Market Funded Ratio in Year 10 Cumulative Employer Contributions in Year 10 (Billions) Payout Ratios 50th 5th 95th Year 10 Median 50th 5th 95th Peak Trough Current Allocation 88% 33% 310% $26.7 $51.8 $13.1 7% 19% 2% 100% Fixed Income 62% 37% 115% $34.5 $52.6 $16.8 10% 17% 4% Lower Risk 91% 34% 320% $25.7 $50.3 $13.2 7% 18% 2% Target Allocation 98% 32% 435% $25.1 $52.3 $13.0 6% 19% 1% Higher Risk 106% 29% 598% $24.8 $54.5 $12.7 6% 21% 1% 100% Equity 124% 23% 1400% $24.4 $60.0 $12.5 5% 28% 0% Year 20 Median Years 1 to 20 20 Years Market Funded Ratio in Year 20 Payout Ratios 50th 5th 95th Cumulative Employer Contributions in Year 20 (Billions)

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Appendix 3: Sensitivity Analysis: “Effect of Higher Correlations”

This section provides a sensitivity analysis of the original stochastic projections by assuming that all asset classes are perfectly positively correlated (i.e. correlation = 1.00). A correlation matrix reflecting these modified assumptions is provided below: RVK supports the recommendations based on the original assumptions shown in the Stochastic Analysis section of this

report. However, this stress-testing illustrates that converging correlations across capital markets does not change the asset

allocation recommendations, based on the current status of the Plan. Instead it simply widens the range of potential results, indicating higher risk for all asset mixes given the dampened effects of total fund diversification.

50/50 Equity

Int. Duration

Fixed Income Non-Core Fixed Income Custom Real Return Custom Real Estate Diversified Hedge Funds Private Equity 50/50 Equity 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Int. Duration Fixed Income

1.00 1.00 1.00 1.00 1.00 1.00 1.00 Non-Core Fixed Income 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Custom Real Return 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Custom Real Estate 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Diversified Hedge Funds 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Private Equity 1.00 1.00 1.00 1.00 1.00 1.00 1.00

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Appendix 3: Sensitivity Analysis: “Effect of Higher Correlations” (continued)

Current Allocation 25% 54% 16%

100% Fixed Income 3% 79% 11%

Lower Risk 26% 53% 15%

Target Allocation 30% 51% 15%

Higher Risk 33% 50% 16%

100% Equity 37% 49% 20%

5 Years Probability of Full Funding in 2020 Probability of < 84% (Current) Funding in 2020 Maximum 1 Year Investment Loss Probability of < 60% Funding in 2020 Current Allocation 31% 53% 24%

100% Fixed Income 3% 86% 33%

Lower Risk 33% 51% 21%

Target Allocation 37% 48% 21%

Higher Risk 39% 46% 22%

100% Equity 44% 44% 25%

Maximum 1 Year Investment Loss 10 Years Probability of Full Funding in 2025 Probability of < 84% (Current) Funding in 2025 Probability of < 60% Funding in 2025 Current Allocation 38% 50% 24%

100% Fixed Income 3% 88% 49%

Lower Risk 40% 47% 21%

Target Allocation 45% 43% 20%

Higher Risk 48% 40% 20%

100% Equity 54% 37% 21%

Probability of < 84% (Current) Funding in 2035 Probability of Full Funding in 2035 20 Years Maximum 1 Year Investment Loss Probability of < 60% Funding in 2035

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Appendix 3: Sensitivity Analysis: “Effect of Higher Correlations” (continued)

50th 5th 95th Peak Trough Current Allocation 81% 49% 132% $5.0 $6.1 $4.6 6% 10% 4% 100% Fixed Income 73% 56% 96% $5.2 $5.5 $5.0 7% 9% 5% Lower Risk 82% 50% 133% $5.0 $6.0 $4.6 6% 10% 4% Target Allocation 83% 49% 140% $5.0 $6.1 $4.4 6% 10% 3% Higher Risk 84% 47% 150% $5.0 $6.3 $4.3 6% 11% 3% 100% Equity 86% 42% 174% $5.0 $6.6 $4.2 6% 12% 3% 5 Years Market Funded Ratio in Year 5 Cumulative Employer Contributions in Year 5 (Billions) Payout Ratios 50th 5th 95th Year 5 Median Years 1 to 5 50th 5th 95th Peak Trough Current Allocation 82% 43% 159% $10.5 $14.2 $7.8 6% 13% 3% 100% Fixed Income 66% 47% 96% $11.4 $13.2 $10.5 8% 12% 5% Lower Risk 83% 44% 161% $10.3 $14.1 $7.8 6% 12% 3% Target Allocation 86% 43% 176% $10.2 $14.3 $7.6 6% 13% 3% Higher Risk 88% 41% 196% $10.1 $14.7 $7.5 6% 13% 3% 100% Equity 92% 37% 247% $9.9 $15.6 $7.3 6% 15% 2% Years 1 to 10 10 Years Market Funded Ratio in Year 10 Cumulative Employer Contributions in Year 10 (Billions) Payout Ratios 50th 5th 95th Year 10 Median 50th 5th 95th Peak Trough Current Allocation 84% 40% 225% $25.7 $40.1 $15.4 7% 16% 3% 100% Fixed Income 60% 41% 94% $33.3 $38.5 $25.7 10% 15% 5% Lower Risk 87% 41% 233% $24.7 $39.5 $15.3 7% 16% 2% Target Allocation 93% 40% 273% $23.3 $39.9 $15.0 6% 16% 2% Higher Risk 97% 39% 326% $22.4 $40.8 $14.7 6% 16% 2% 100% Equity 106% 35% 483% $21.3 $43.0 $14.4 6% 18% 1% Year 20 Median Years 1 to 20 20 Years Market Funded Ratio in Year 20 Payout Ratios 50th 5th 95th Cumulative Employer Contributions in Year 20 (Billions)

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Appendix 4: Assumptions and Methods

Actuarial Valuation Assumptions and Methods: At the beginning of each projection year, an actuarial valuation is performed to determine employer contributions. The assumptions used in the December 31, 2015 actuarial valuation prepared by Gabriel Roeder Smith & Company were utilized in all years. These methods and assumptions are summarized below: Actuarial Cost Method Entry-Age Normal (level % of pay). Funding policies and methods are described in the December 31, 2015 actuarial valuation prepared by Gabriel Roeder Smith & Company. Liability Discount Rate 6.75% per year, compounded annually. Expenses No explicit assumption. The assumed investment return is net of all investment and administrative expenses. Inflation General inflation of 2.50% per year, compounded annually. Payroll Growth Overall payroll growth of 3.00% per year. Future Pay Increases Future pay increases as described on page 3 of Section 6 of the December 31, 2015 actuarial valuation prepared by Gabriel Roeder Smith & Company. Retirement Rates of retirement as described on pages 7-8 of Section 6 of the December 31, 2015 actuarial valuation prepared by Gabriel Roeder Smith & Company. Mortality Rates of mortality as described on page 6 of Section 6 of the December 31, 2015 actuarial valuation prepared by Gabriel Roeder Smith & Company. Disability Rates of disability as described on page 7 of Section 6 of the December 31, 2015 actuarial valuation prepared by Gabriel Roeder Smith & Company. Withdrawal Rates of withdrawal as described on pages 4-5 of Section 6 of the December 31, 2015 actuarial valuation prepared by Gabriel Roeder Smith & Company.

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Appendix 4: Assumptions and Methods (continued)

Actuarial Valuation Assumptions and Methods: (continued) COLA Annuity increases as described on page 3 of Section 6 of the December 31, 2015 actuarial valuation. Annuity Purchase Rates Rates for determining the monthly benefit at retirement are described on page 6 of Section 6 of the December 31, 2015 actuarial valuation prepared by Gabriel Roeder Smith & Company. Asset Valuation Method 10-Year phase-in of actual versus expected returns. The asset valuation method is described on page 8 of Section 6 of the December 31, 2015 actuarial valuation prepared by Gabriel Roeder Smith & Company. Amortization Policy The amortization policy for large and small cities is described on page 9 of Section 6 of the December 31, 2015 actuarial valuation prepared by Gabriel Roeder Smith & Company. Contribution Policy The methods for determining employer contributions are described on pages 8-10 of Section 6 of the December 31, 2015 actuarial valuation prepared by Gabriel Roeder Smith & Company. Normal cost and actuarial accrued liability are calculated under the Entry Age Normal cost method (level percent of pay).

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Appendix 4: Assumptions and Methods (continued)

Projection Assumptions (used in the deterministic and stochastic asset/liability projections): These projections begin with the Plan's participant population as of December 31, 2015, as provided by Gabriel Roeder Smith & Company. The Plan's population is projected forward and assumed to change as a result of employment separation, death, disability, and retirement, as predicted by the assumptions used in the December 31, 2015 actuarial valuation prepared by Gabriel Roeder Smith & Company (and described on the prior pages). New members are assumed to enter the Plan such that the active populations of Fire, Police and Other members remain level throughout the projection. Employee compensation is projected into the future in accordance with the assumptions described on the prior pages. Investment returns are projected into the future in accordance with the assumptions described below. Employer Contributions For 2016, employer contributions were assumed equal to 12.63% of system-wide pay. For all other years of the projection, employer contributions are assumed to equal: (1) normal cost less expected employee contributions, plus (2) an amortization of the unfunded actuarial accrued liability (UAAL). The unfunded liability as of December 31, 2015, was amortized over 21 years to approximate the Plan’s equivalent single amortization period of 20.6 years. New experience gains and losses were amortized over 23 years to approximate the Plan’s methodology that calculates costs by city, and includes offsetting of experience losses. Member Contributions Member contributions are determined based on current rates, and projected pay. New Entrants New employees are assumed to join the Plan such that the active populations of the Fire, Police, and Other employee subgroups remain level throughout the projection. New employees entering the Plan are assumed to have characteristics similar to recently hired participants. Rate of Return on Assets Deterministic Analysis: 6.75%, compounded annually. Stochastic Analysis: Returns on the portfolio are based on the expected returns of each asset class and the correlations between each class which are detailed in the Stochastic Analysis section of this report.

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Appendix 4: Assumptions and Methods (continued)

Cash Balance Interest Credits Deterministic Analysis: 5.00% per year. Stochastic Analysis: Interest credits are based on the expected returns of a benchmark portfolio designed to mirror the overall portfolio return. Base Wages Deterministic Analysis: in accordance with actuarial assumptions. Stochastic Analysis: Increases that vary with inflation. Inflation 2.50% per year with a standard deviation of 3.00%. Other All other projection assumptions and methods are the same as those used in the December 31, 2015 actuarial valuation prepared by Gabriel Roeder Smith & Company, with some exceptions. Due to system restraints, certain assumptions and methods used by Gabriel Roeder Smith & Company in their actuarial valuation as of December 31, 2015, were ignored or

approximated. For example, the immediate recognition of offsetting gains and losses in

the actuarial value of assets method could not be replicated. An 18% hard corridor around the market value of plan assets was used to approximate the Plan’s 15% soft corridor. Employer and employee contributions were determined on a system-wide basis. The active participant data provided by Gabriel Roeder Smith & Company was grouped to speed processing. The inactive participant data provided by Gabriel Roeder Smith & Company was used without grouping.