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6.A. - Page 97 of 191 CITY OF REDWOOD CITY NOTES TO THE BASIC FINANCIAL STATEMENTS For the Fiscal Year Ended June 30, 2019 NOTE 9 — EMPLOYEE BENEFITS (CONTINUED) A. Pension Plan, Continued Change of Assumptions — For the measurement date of June 30, 2018, the inflation rate reduced from 2.75% to 2.50%. Discount Rate — The discount rate used to measure the total pension liability for each Plan was 7.15%. The projection of cash flows used to determine the discount rate for each Plan assumed that contributions from all plan members in the Public Employees Retirement Fund (PERF) will be made at the current member contribution rates and that contributions from employers will be made at statutorily required rates, actuarially determined. Based on those assumptions, each Plan's fiduciary net position was projected to be available to make all projected future benefit payments of current plan members for all plans in the PERF. Therefore, the long-term expected rate of return on plan investments was applied to all periods of projected benefit payments to determine the total pension liability for each Plan. The long-term expected rate of return on pension plan investments was determined using a building- block method in which best -estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. In determining the long-term expected rate of return, Ca1PERS took into account both short-term and long- term market return expectations as well as the expected pension fund cash flows. Using historical returns of all the funds' asset classes, expected compound geometric returns were calculated over the short-term (first 10 years) and the long-term (11+ years) using a building-block approach. Using the expected nominal returns for both short-term and long-term, the present value of benefits was calculated for each fund. The expected rate of return was set by calculating the single equivalent expected return that arrives at the same present value of benefits for cash flows as the one calculated using both short-term and long-term returns. The expected rate of return was then set equivalent to the single equivalent rate calculated above and adjusted to account for assumed administrative expenses. The table below reflects the long-term expected real rate of return by asset class. The rate of return was calculated using the capital market assumptions applied to determine the discount rate and asset allocation. These geometric rates of return are net of administrative expenses. New Strategic Real Return Real Return Asset Class (a) Allocation Years 1 - 10(b) Years ll+(c) Global Equity 50.00% 4.80% 5.98% Fixed Income 28.00% 1.00% 2.62% Inflation Assets 0.00% 0.77% 1.81% Private Equity 8.00% 6.30% 7.23% Real Assets 13.00% 3.75% 4.93% Liquidity 1.00% 0.00% -0.92% Total 100% (a) In the CalPERS CAFR, Fixed income is included in Global Debt Securities; Liquidity is included in Short-term investments; Inflation assets are included in both Global equity securities and global debt securities. (b) An expected inflation of 2.0% used for this period. (c ) An expected inflation of 2.92% used for this period. 69 104