SUPPLEMENTAL MATERIAL MATERIAL REGULAR MEETING 3-17-26

SUPPLEMENTAL MATERIAL 4 7. What are the risks associated with pension obligation bonds and the assessment required to consider them? A. Pension obligation bonds (POB) do carry risk and savings is not guaranteed. Actual savings is dependent on future CalPERS returns. A POB issuer is more susceptible to market downturns, especially in the years following the POB issuance, given that more assets have been invested at one point in the market cycle. Whether an agency issues a POB or not, CalPERS underperformance will drive up the Unfunded Accrued Liability (UAL) in both cases. An agency that issues a POB would see a higher increase in UAL than it would have had it not issued one. This “additional cost” would then offset some of the “projected savings” (the assumed savings of POB interest rate vs. the CalPERS rate). Whether or not this underperformance (whether sustained over time – for example, 5% over time instead of 6.8%, or all at once, like a 2008 recession type event right after issuance) outweighs the expected savings (thus making an agency worse off after POB issuance) would need to be analyzed. This type of stress testing or risk quantification requires significant technical rigor. Scenarios can be analyzed to depict the future impacts of pension costs with and without a POB, under any scenario of future CalPERS returns that one would like to see. Ultimately, this would provide the risk assessment and cost/benefit analysis that a decision maker would need to properly evaluate this complex strategy. This requires significant actuarial and financial analysis.