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6.1.C. - Page 20 have no control over Ca1PERS' determinations and must pay all contribution increases mandated by CaIPERS.10 Importance of Rate of Return on Investment. As noted above, Returns on Investments are the primary funding source for meeting Benefits obligations. Accordingly, annual Returns on Investment achieved by Ca1PERS have a major impact on its ability to fund Benefits payments. As of June 30, 2017, Ca1PERS reported the following annualized net Returns on Investment over different periods of time:" • Past 3 years: 4.6 percent • Past 5 years: 8.8 percent • Past 10 years: 4.4 percent • Past 20 years: 6.6 percent Even small changes in Ca1PERS' annual Returns on Investments over the long-term can drive substantial changes in its ability to meet Benefit obligations. For example, if a pension plan had an obligation to pay Benefits of $150 million in 20 years and Ca1PERS projected that its annual Return on Investment over that time would average 7.5 percent, then Ca1PERS would need $35.5 million at the outset to meet that obligation. However, if the actual Return on Investment achieved by Ca1PERS over that period was only 6.5 percent instead of 7.5 percent, then the pension plan would only have $124.4 million available to pay Benefits in the 20th year, 12 a shortfall of more than $35 million on the $150 million obligation. Importance of Discount Rates. To determine the Funded Percentage of a pension plan, Ca1PERS compares the value of the pension plan's assets (Total Plan Assets) to the present value of the plan's Benefits payment obligations (Total Plan Liabilities). 13 If the present value of the Benefits obligations is larger than the current value of pension assets, then the plan is not fully funded and has an Unfunded Liability equal to the difference. In economic terms, the promise to make a future Benefit payment is worth less today than an immediate payment of the same amount. In order to compare the value of a promise to pay a March 2016, p. 1, <httr)://www.ici)mnetwork.com/wr)-content/uploads/2016/05/Rob-Buaer What-Is-the-Biegest- Challene-Faceina-Public-Plan-S_nonsors O_ntional._ndf>. 10 Interviews by Grand Jury. 11 CaIPERS, Investment & Pension Funding Facts at a Glance for Fiscal Year 2016-17, <httos://www. calDers. ca.2ov/docs/forms-publications/facts-investment-pension-fundin2.Ddf>. " The formula for the 7.5 percent Return on Investment example is: $150 million / ((1.0 +0.075)^20) _ $35,311,972. The formula for the 6.5 percent Return on Investment example is: $35,311,972 x (1.065^20) _ $124,426,856. 13 Biggs and Smetters, Understanding the Argument for Market Valuation, p. 1. 2017-2018 San Mateo County Civil Grand Jury 6