Deborah B. Goldberg, Treasurer and Receiver General, ChairMichael G. Trotsky, CFA, Executive Director and Chief Investment Officer

Presentation to the

Massachusetts Collectors & Treasurers AssociationSpring Meeting

“OPEB Issues and Concerns”

State Retiree Benefits Trust Fund

Wednesday, April 12, 2017

Presented byPaul W. Todisco, Senior Client Services Officer

Francesco Daniele, Senior Client Services Officer

State Retiree Benefits Trust Fund

(SRBTF)

2

Section 20 of Chapter 32B of the Massachusetts General laws provides a Road-Map for entities to establish an OPEB fund:

Effective November 7, 2016, governmental units setting up an OPEB fund must adopt Section 20, as amended by Chapter 218 of the Acts of 2016;

The Treasurer of the governmental unit shall be the custodian of the OPEB fund;

The governing body of the governmental unit shall designate a trustee or board of trustees, which shall have general supervision of the management, investment, and reinvestment of the OPEB fund;

Provides “turn-key” option to invest in SRBTF;

SRBTF Board Approval required.

Section 7 of Chapter 36 of the Acts of 2013 amended Mass. Gen. Laws c.32A, s. 24, requiring the SRBTF board of trustees to invest the SRBTF assets in the PRIT Fund.

Several outside sections of Chapter 165 of the Acts of 2014, the FY2015 state budget, repealed Mass. Gen. Laws c.29D, thereby abolishing the HCST and the HCST Board, and re-branding the HCST Board as the SRBTF Board. The former provisions of Mass. Gen. Laws c.29D, are now consolidated under Mass. Gen. Laws c.32A, s.24.

Summary of Legislation

3

Revisions to MGL, Chapter 32B, Section 20

4

Amended by Section 15 of the Municipal Modernization Bill, Chapter 218 of the Acts of 2016.

Total replacement of Section 20 of Chapter 32B; adds Section 20A.

All inclusive –any political subdivision of the Commonwealth.

The treasurer of the governmental unit shall be custodian.

Established “OPEB board of trustees”; an independent board of trustees selected by the governmental unit with investing authority for the OPEB fund.

Complemented by a “declaration of trust to be adopted by the trustee or board” where the trust is irrevocable.

The assets of which shall be held solely to meet the current and future liabilities of the governmental unit fir group health insurance benefits for retires and their dependents.

All monies held in the fund…shall not be subject to the claims of any general creditor of the governmental unit.

An actuarial valuation report shall be submitted no later than 90 days after receipt of such report (Section 20A of Chapter 32B)

Source: Mark D. Abrahams, CPA, The Abrahams Group

Revisions to MGL, Chapter 32B, Section 20, cont’d

5

Amended by Section 15 of the Municipal Modernization Bill, Chapter 218 of the Acts of 2016.

• Total replacement of Section 20 of Chapter 32B of the Massachusetts General Laws; adds Section 20A of Chapter 32B.

• All inclusive –any political subdivision of the Commonwealth.

• The treasurer of the governmental unit shall be custodian.

• Established “OPEB board of trustees”; an independent board of trustees selected by the governmental unit with investing authority for the OPEB fund.

• Complemented by a “declaration of trust to be adopted by the trustee or board” where the trust is irrevocable.

• The assets of which shall be held solely to meet the current and future liabilities of the governmental unit fir group health insurance benefits for retires and their dependents.

• All monies held in the fund…shall not be subject to the claims of any general creditor of the governmental unit.

• An actuarial valuation report shall be submitted no later than 90 days after receipt of such report (Section 20A of Chapter 32B).

• May be accepted in a city or town in the manner provided in Section 4 of Chapter 4 of the Massachusetts General Laws (by the legislative body); in a county, by a vote of the county commissioners; in a regional school district, by a vote of the regional school committee; and in a district or other governmental until, by vote of the district meeting or other appropriating body.

• Any city, town, district, municipal lighting plant or county that established an OPEB fund under Section 20 of Chapter 32B of the General Laws before the effective date of the act (November 6, 2016) shall continue it under the terms originally established, unless it reaccepts Section 20 of Chapter 32B after November 6, 2016.

Source: Mark D. Abrahams, CPA, The Abrahams Group

Who Manages the SRBTF?

The seven-member State Retiree Benefits Trust Fund (SRBTF) Board, established by Section 24 of Chapter 32A of the Massachusetts General Laws, is responsible for the administration and investment management of the SRBTF. The SRBTF Board is comprised of the Secretary of Administration & Finance or a designee, the Executive Director of the Group Insurance Commission or a designee, the Executive Director of the Public Employee Administration Commission (PERAC) or a designee, the State Treasurer or a designee, the Comptroller or a designee, an appointee of the Governor, and an appointee of the State Treasurer (both appointed members are required to have investment, financial management, legal, or public management experience).

In August 2011, the SRBTF Board (formerly the Health Care Security Trust (HCST) Board), voted to assign full investment management of the SRBTF assets to the nine-member Pension Reserves Investment Management (PRIM) Board, which manages the approximately $62 billion Pension Reserves Investment Trust (PRIT) Fund, the state pension fund. PRIM and PRIT were established in 1983 to address the Commonwealth’s unfunded pension liabilities.

6

Composition of the SRBTF Board of Trustees

Secretary of Administration & Finance or designee Kristen Lepore, Secretary of Administration & Finance

-Lauren Peters serves as Secretary Lepore’s Designee

State Treasurer or designee Deborah B. Goldberg, State Treasurer & Receiver-General

-Nicola Favorito serves as Treasurer Goldberg’s Designee and

is SRBTF Board Chair

State Comptroller or designee Thomas G. Shack III, Esq., State Comptroller

Executive Director, Group Insurance Commission or Roberta Herman M.D, Executive Director, GIC,

designee -Catherine Moore serves as Dr. Herman’s Designee

Executive Director, Public Employee Retirement Joseph E. Connarton, Executive Director, PERAC

Administration Commission or designee

Treasurer’s appointee Michael Tow, President & Founder, New Boston Financial

Governor’s appointee Terrence Finn, Edwards Angell Palmer & Dodge LLP

Five of the seven Trustees are Ex Officio Members. The two appointed Trustees serve five-year terms.

7

Downloadable Documents Posted to SRBTF Web Page

8

Website address: http://www.mass.gov/srbtf

• Investment Agreement Among the SRBT Fund Board and the OPEB Fund Trustees and the Governmental Unit.

• Sample Resolution of Governmental Unit (Exhibit A-1).

• Sample Resolution of OPEB Trustees (Exhibit A-2).

• Governmental Unit’s Incumbency Certificate.

• Trustees Incumbency Certificate.

• Form of Counsel Opinion.

• Exhibit B – Investment Services Agreement (ISA) between SRBTF and PRIM.

• Exhibit C – PRIM Operating Trust Agreement.

• Exhibit D – SRBTF and PRIM Administrative Services Agreement.

• Exhibit E – SRBTF Policies and Procedures.

Check List - Under Chapter 32B, §20

A. VOTES (see attached samples)

1. Samples of Votes to be Adopted by Governing Body of Governmental Unit

a. Accept statute – by Governing body (e.g. Town Meeting, City

Council, Aldermen) of Governmental Unit

b. Establish OPEB Fund

c. Appropriate funds for OPEB Fund

d. Statute designates Governmental Unit’s Treasurer as Custodian

e. Governing body appoints Trustees

f. Governing body authorizes execution of Investment Agreement

2. Samples of Votes to be Adopted by Trustees

a. Trustees adopt Declaration of Trust

b. Trustees authorize investment in SRBTF

[must be a post 7/1/11 vote]

c. Trustees authorize Investment Agreement

d. Trustees authorize Custodian to execute Investment Agreement,

write checks, wire funds, make withdrawals

B. INCUMBENCY CERTIFICATES (see attached samples)

1. Governmental Unit’s Certificate

2. Trustees’ Certificate

C. COUNSEL OPINION (see attached sample)

D. EXECUTED INVESTMENT AGREEMENT (see attached sample)

9

Sample Resolution – Legislative Body of the Governmental UnitSAMPLE RESOLUTION

TO BE ADOPTED BY THELEGISLATIVE BODY OF THE GOVERNMENTAL UNIT

For Acceptance of Chapter 32B, Section 20 (OPEB Fund)

“RESOLVED: That, [insert name of governmental unit] hereby accepts the provisions of Chapter 32B, Section 20 of the Massachusetts General Laws, as amended by Chapter 218, Section 15 of the Acts of 2016 (the “Act”), and establishes an Other Post-Employment Benefits Liability Trust Fund (the “OPEB Fund”);

RESOLVED: That, in accordance with the Act, [insert name of governmental unit] hereby designates the Treasurer of [insert name of governmental unit] to serve as Custodian of the OPEB Fund (the “Custodian”);

RESOLVED: That the sum of $____________ be appropriated as the initial investment into the OPEB Fund;

RESOLVED: That the following person(s) be designated as Trustee(s) of the OPEB Fund:

[Insert either:

(a) The Custodian of the OPEB Fund; OR

(a) The Retirement Board of [insert name of governmental unit]; OR

(a) The name of 5-13 individuals, at least one with investment experience, one citizen of the governmental unit, one employee of thegovernmental unit, one retiree of the governmental unit, and one officer of the governmental unit.]

RESOLVED: That the Treasurer of [insert name of governmental unit], as Custodian of the OPEB Fund, be, and hereby is, authorized to execute and deliver the Investment Agreement with the State Retiree Benefits Trust Fund board of trustees on behalf of [insert name of governmental unit] for the purpose of making the representations and warranties, acknowledgements and agreements on the part of [insert name of governmental unit] to be made and performed thereunder.

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Sample Resolution – Trustee(s) of the OPEB Fund

SAMPLE RESOLUTIONTO BE ADOPTED BY THE

TRUSTEE(S) OF THE OPEB FUND OF[Insert Name of Governmental Unit]

RESOLVED: That the Declaration of Trust with regard to the [insert name of governmental unit] Other Post-Employment Benefits Liability Trust Fund (the “OPEB Fund”), dated ____________________, be, and it hereby is, adopted;

RESOLVED: That the Custodian of the OPEB Fund be, and hereby is, directed to invest the OPEB Fund with the State Retiree Benefits Trust Fund established pursuant to M.G.L. Chapter 32A, Section 24 (“SRBTF);

RESOLVED: That the Trustees of the OPEB Fund enter into the Investment Agreement with the SRBTF board of trustees in substantially the form filed with these resolutions (the “Investment Agreement”); and

RESOLVED: That the Custodian be, and hereby is, authorized to execute and deliver the Investment Agreement on behalf of the Trustees of the OPEB Fund, to sign checks and wire OPEB Fund monies to the SRBTF or to the Pension Reserves Investment Trust, or as it may otherwise be directed by the SRBTF board of trustees, and, upon certification by the Trustee(s) of the OPEB Fund that funds are available, to make withdrawals from the OPEB Fund, and to enter into such agreements and deliver such certificates and other documents as the SRBTF board of trustees or the Pension Reserves Investment Management board may direct.

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Governmental Units’ OPEB funds are invested the same way the Massachusetts Retirement System’s assets are managed.

The PRIT Fund’s General Allocation Account, aka PRIT Core, which holds ALL of PRIT’s investments.

Diversification, diversification, diversification!

Lowers overall portfolio risk.

Governmental Units’ OPEB funds gain access to PRIT’s alternative investments, which are unavailable to smaller investors due to cost and minimum investment requirements (i.e., Private Equity, Hedge Funds, Timber, Private Real Estate, Private Debt, and other low volatility strategies uncorrelated to equities).

Governmental Units’ OPEB funds are managed at a very low cost due to economies of scale.

53 basis points, based on PRIT’s most recent audit. This includes ALL expenses incurred by PRIM and PRIT.

Governmental Units receive a concise monthly capital account statement from PRIM identical to the one the Participating and Purchasing Retirement Systems receives each month.

PRIT Fund’s proven long-term investment performance track record. Since inception (1/31/1985), the annualized return of the PRIT Fund was 9.4%, as of February 28, 2017,

which is in line with the long-term returns of U.S. stocks.

Governmental Units, SRBTF, and PRIM’s interests are totally aligned.

There are no financial incentives for PRIM staff to “accumulate assets”, as is the case for most private investment and consulting firms.

Governmental Units have a responsive and dedicated client services team at PRIM representing their needs.

Benefit to Investing in the SRBTF

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How Are Fees Allocated to SRBTF Participants?The pro rata share of fees is approximately 53 basis points, which is PRIM’s management feeexpense and is the combination of the following:

Direct investment management fees paid to third party managers, paid by PRIM checkor wire.

Consultant and advisory fees paid to third party consultants and advisors, paid byPRIM check or wire.

Costs for maintaining and operating PRIM’s offices, paid by PRIM check or wire.

Indirect investment management fees which are charged against investments bycommingled funds and private investment managers (private equity, real estate.Hedge funds, etc.).

Each month-end, a participant in the PRIT Fund or SRBTF is allocated a share of these costsaccording to the percentage of the PRIT Fund/SRBTF that the participant owns. For example, ifa participant owns one-fifth-of-one-percent of the PRIT Fund/SRBTF, the management feeshown on the monthly capital account statement will reflect one-fifth-of-one-percent of PRIT’smonthly costs. In addition to PRIM fees, there is the shared cost among SRBTF participants infunding the operations of the SRBTF Board (the entity that oversees the SRBTF), which equatesto less than one basis point. Again, such fee is allocated on a pro rata basis, with the statepaying the largest share of that fee, as it is the largest participant in the SRBTF, with assets over$800 million.

13

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Evolution of the SRBTF 1999 - MGL Chapter 29D enacted and signed into law as part of the FY 2000 GAA (section 43 of Chapter 127 of the Acts of

1999), creating the Health Care Security Trust ("HCST"), into which the Master Settlement annual payments are to be deposited, and also creating the HCST Board of Trustees, a 7-member Board charged with the supervision and management of the HCST and the MSA funds therein. Significant features of Chapter 29D include: 7-member Board appointed by Governor (5), Treasurer (1) and AG (1); 70/30 % schedule of saving/spending ratio established for annual MSA payments to be received in subsequent fiscal years, with the 30% for spending to be "for health related and tobacco control purposes".

2004 - The GASB (Governmental Accounting Standards Board) issues Standards 43 and 45, requiring all (non-federal) government employers to take steps to define and disclose actuarial liability for retirees' non-pension post-employment benefits (aka "Other Post-Employment Benefits" or "OPEB"), and to determine the actuarial liability for those OPEB benefits.

2007 - The State Retiree Benefits Trust Fund (SRBTF) is legislatively created to address and administer OPEB state retiree benefits; composition of the SRBTF Board is "PRIM plus 2", i.e., the existing PRIM Board members plus A&G and GIC (Section 8 of Chapter 61 of the Acts of 2007 states: " There shall be set up on the books of the commonwealth a fund to be known as the State Retiree Benefits Trust Fund … The pension reserves investment management board … shall be the trustee of and shall administer the fund. For the purposes of this section the secretary of the executive office of administration and finance, or his designee, and the executive director of the group insurance commission … shall be members of the [PRIM] board ... The purpose of said [SRBTF] fund shall be for depositing, investing and disbursing amounts set aside solely to meet liabilities of the state employees’ retirement system for health care and other non-pension benefits for retired members of the system ..."). The legislation also abolished the HCST.

2007 – Special Commission is legislatively established to study and report on numerous issues associated with GASB 43 and 45 and OPEB liability -- said Special Commission issues its report in 2008, and many of its recommendations are subsequently filed as legislative proposals, and some subsequently enacted and signed into law.

2008 - "Interim" outside section is enacted and signed into law stating that the HCST shall manage the SRBTF while the legislature considers the recommendations of the special OPEB study commission (See section 12 of Chapter 235 of the Acts of 2008: "… in order to minimize investment fees and maximize returns through continuity of investment management of the [SRBTF] … while the general court considers the recommendations of the [special] commission … investments of the trust shall be held and managed by the [HCST] board of trustees … until legislation is enacted confirming management of the [SRBTF]").

2009 - Interim status of HCST management of SRBTF becomes permanent, and HCST Board is reconfigured.

14

SRBT Fund Performance

As of February 28, 2017

15

Total SRBT Fund Returns (Net of Fees) - $1.24 Billion*Annualized Returns as of February 28, 2017

3.3%

7.2%

13.9%

6.0%

8.0%

5.7%

9.4%

7.0%

3.3%

7.8%

15.5%

5.5%

7.1%

4.9%

6.5% 6.5%

0.0%-0.6%

-1.6%

0.5% 0.9% 0.7%

2.9%

0.5%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

CYTD FYTD 1 Year 3 Years 5 Years 10 Years Inception10/31/11**

Inception11/30/01***

Total Fund Return - ex cash Policy Benchmark Value Added

*Participant assets, excluding Mass State Retirees, were $320 million as of February 28, 2017.

*** The inception date for the TOTAL FUND was 11/30/2001. This ITD value reflects the true inception-to-date return for all SRBTF assets including legacy separate account investments as well as the PRIT GA investments.

**The inception date for the SRBTF's investment in the PRIT Fund General Allocation Account (PRIT GA) was 10/31/2011, when 82% of the fund was transitioned from separate accounts to PRIT GA. The remaining 18% of separate account assets were transitioned over the following 14 months with 100% of assets invested in PRIT GA by 12/31/2012. The ITD return of 9.6% reflects the inception-to-date return for PRIT GA assets only.

16

Pension Reserves Investment Management Board

and

Pension Reserves Investment Trust Fund

17

PRIM is a $64 billion investment fund that invests public employee pension benefits. PRIM does not administer benefits.

PRIM has a highly talented, experienced and focused investment staff.

PRIM’s Mission is to relieve the pension funding burden by the taxpayer. PRIM is a self-funded agency that generates asset returns for Massachusetts.

In the past five years, PRIM’s returns have contributed approximately $29 billion to pension funding.

The Project SAVE initiative is producing more than $100+ million in annual value for the fund.

PRIM is independent and governed by a nine member Board of Trustees. The Massachusetts State Treasurer is the Chair of the PRIM Board.

A robust committee structure lends advice and recommends investments.

Mission

18

PRIT Fund Overview (February 28, 2017)

Oversight and staffing:• 9 appointed and elected trustees• 4 advisory committees consisting of 37 industry

professionals and board members• Staff of 40 professionals

Core Fund Facts $64.3 billion AUM as of 2/28/2017 40 public markets portfolios 14 real estate, timber and REIT managers 100+ private equity managers; 200+ partnerships 29 hedge fund managers

18 asset classes: U.S. Large Cap Equity U.S. SMID Cap Equity Developed International Equity Emerging Markets Equity Core Bonds 20+ Year STRIPS U.S. TIPS Global Inflation-Linked Bonds High Yield Bank Loans Emerging Markets Debt Private Debt Private Equity Hedge Funds Private Real Estate REITS Timberland Portfolio Completion Strategies

Key PRIM Initiatives:• Project SAVE: More than $100 million in annual fee savings

realized; honored as a national model of public fund innovation. Next phase is exploration of internal management.

• Bold and timely move to de-risk portfolio

• Improved manager selection focusing on alpha

• Hedge fund replication and managed accounts – we pay fees only for alpha

• Portfolio completion strategies seeking equities-like return and fixed income-level risk

• Private equity repeatedly #1 or #2 in U.S.

• Michael Trotsky, CFA, Executive Director and Chief Investment Officer, awarded Chief Investment Officer Magazine’s “CIO Innovation Award.” (Dec. 2015)

PRIT Fund Target Allocation

19

ChairState Treasurer andReceiver-General,

Commonwealth of Massachusetts

Deborah B. Goldberg

Appointee of the State Treasurer (4 years)

Ruth Ellen Fitch

Designee of the Governor,Ex Officio Member

James B.G. Hearty

Appointee of the Governor,

Non-State Employee or

Official(4 years)

Peter Monaco

Appointee of the Governor, Public Safety

(4 years)

Carly Rose

State Retirement

Board Member (SRB)

(3 years)

Theresa F. McGoldrick,

Esquire

Teachers’ Retirement

Board Member (TRB)

(3 years)

Dennis J. Naughton

Elected Representative State Teachers’

Retirement System

(3 years)

Robert L. Brousseau

Elected Representative

State Employees Retirement

System

(3 years)

Paul E. Shanley, Esquire

PRIM Board Membership

20

Committee Membership

21

Investment Committee(12 Members)

1. Deborah B. Goldberg, Chair 2. Joseph Bonfiglio 3. C. LaRoy Brantley4. Michael Even, CFA5. Constance M. Everson, CFA6. Ruth Ellen Fitch7. James B.G. Hearty 8. Edward W. Kane9. Peter Monaco10. Paul E. Shanley, Esq.11. Glenn P. Strehle, CFA12. Timothy L. Vaill

Real Estate & Timberland Committee (9 Members)

1. Jill S. Hatton, CRE, Chair2. Lydia Chesnik, Esq.3. Robert Gifford4. Deborah B. Goldberg5. Anthony E. Hubbard, Esq.6. Jack Lutz, Ph.D.7. William F. McCall, Jr., CRE8. Garlan Morse, Jr., CRE9. Peter F. O’Connell10. Carly Rose

Administration & Audit Committee (11 Members)

1. Robert L. Brousseau, Chair2. Ted C. Alexiades, CFPO3. Patrick E. Brock4. Joseph Connolly 5. Karen E. Gershman, CPA6. Eileen Glovsky 7. Deborah B. Goldberg8. James B.G. Hearty 9. Theresa F. McGoldrick, Esq.10. Dennis J. Naughton11. Michele A. Whitman, Esq.

Compensation Committee(5 Members)

1. Michele A. Whitman, Esq., Chair2. Patrick E. Brock3. Robert L. Brousseau4. Joseph Connolly5. Deborah B. Goldberg

Total PRIT Fund Fiscal Year Market Value ($Billions)

$36.3

$41.9

$50.4 $50.6

$37.7$41.3

$50.2 $48.8

$53.2

$60.6 $61.2 $60.7$64.3

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 2/28/2017

AUM (bil)

22

External Advisors

Fund Advisors:

• NEPC - Asset Allocation

• Callan Associates - Public Markets

• Aberdeen/Arden - Hedge Fund Investments

• Hamilton Lane - Private Equity

• The Townsend Group- Real Estate & Timber

Independent Auditors:

• KPMG, LLP - PRIM Board and PRIT Fund, Real Estate, Timber, and SASE 16 Reviews

• Deloitte & Touche, LLP – PRIM Board tax Consultant

Custodian:

• BNY Mellon Corporation

23

PRIM Target2016

Expected 5-7 Yr. Return1

2017 Expected 5-7

Yr. ReturnDifference

Large Cap Equities 14.5% 6.00% 5.75% -0.25%

Small/Mid Cap Equities 3.5% 6.25% 6.00% -0.25%

Int'l Equities2 16% 7.32% 7.30% -0.02%

Emerging Int'l Equities2 6% 9.82% 9.59% -0.23%

Global Equity 40%

Core Bonds 5% 2.46% 2.65% 0.19%

20+ Yr. Treasury STRIPS 5% 2.00% 1.50% -0.50%

TIPS 3% 2.50% 3.00% 0.50%

Core Fixed Income 13%

High-Yield Bonds 1.5% 5.25% 4.75% -0.50%

Bank Loans 1.5% 5.50% 5.25% -0.25%

EMD (External) 1% 4.75% 4.75% 0.00%

EMD (Local Currency) 2% 6.50% 6.75% 0.25%

Distressed Debt3 4% 8.27% 8.02% -0.25%

Other Credit Opportunities4 0% 6.47% 6.33% -0.14%

Value-Added Fixed Income 10%

Private Equity 10% 8.50% 8.25% -0.25%

Real Estate 10% 6.50% 6.00% -0.50%

Timberland5 4% 5.75% 6.00% 0.25%

Hedge Funds6 & Portfolio Completion (PCS)7 13% 5.94% 5.92% -0.02%

Expected Return 5-7 Yr. 6.9% 6.8% -0.11%

Expected Return 30 Yr. 7.8% 7.8% 0.00%

Standard Deviation 12.2% 12.2% 0.08%

Sharpe Ratio (30 Yr.) 0.39 0.39 0.00

1: 2016 return and risk assumptions revised to reflect updated methodology detailed below

2: Assumes a 90% allocation to broad market equities and 10% allocation to small cap equities

3: Distressed Debt modeled as 50% Private Debt and 50% Private Equity; 2016 assumption based on 100% Private Debt

4: Other Credit Opportunities modeled as 50% Private Debt, 50% HF Credit

5: Timberland is modeled as Private Real Assets Non-Energy; 2016 assumption based on 50% Commodities and 50% Private Real Assets

6: Hedge Funds modeled as 33% HF Equity, 33% HF Credit, 33% HF Macro, 2016 assumption based on broad based Hedge Fund exposure

7: Modeled as 90% PCS (33% HF Equity, 33% HF Credit, 33% HF Macro), 10% Hedged Equity Overlay; 2016 assumption based on 50% Hedge Fund (Credit) and 50% GAA

PRIM Asset Allocation Policy Target: 2017 v. 2016

24Source: NEPC

Asset Allocation 2017: Approved February 14, 2017

*90% Portfolio Completion Strategies, 10% Hedged Equity Overlay

Key Takeaways by Theme

•Theme #1: Maintain Global Equity Allocation at 40%, but evaluate alternative equity hedging strategies.

•Theme #2: Reposition Core Fixed Income to mitigate inflation risk.

•Theme #3: Restructure Value-Add Fixed Income allocation: introduce Other Credit Opportunities, increase Bank Loans and eliminate EMD Local.

•Theme #4: Increase Private Equity.

•Theme #5: Combine Hedge Funds and Portfolio Completion Strategies (PCS) into single allocation to focus on diversifying assets uncorrelated to equities.

Asset Class Current Proposed Change

Global Equities 40% 40% --

U.S. Large Cap 14.5% 14.5% --

U.S. SMID Cap 3.5% 3.5% --

Developed International 16% 16% --

Emerging Markets 6% 6% --

Core Fixed Income 13% 12% -1%

STRIPS 5% 2% -3%

Barclays Agg 5% 5% --

Inflation-Linked Bonds 3% 5% +2%

Value-Add Fixed Income 10% 10% --

High Yield 1.5% 1.5% --

Bank Loans 1.5% 2.5% +1%

EMD $ 1% 1% --

EMD Local 2% 0% -2%

Distressed Debt 4% 3% -1%

Other Credit Opportunities 0% 2% +2%

Private Equity 10% 11% +1%

Real Estate 10% 10% --

Timber 4% 4% --

Hedge Funds 9%13% --

Portfolio Completion Strategies* 4%

Themes 1 & 2

Theme 3

Theme 4

Themes 1 & 5

2017 PRIM Approved Asset Allocation Mixes

26

PRIMTarget

New TargetChange vs.

Target

Large Cap Equities 14.5% 14.5% -

Small/Mid Cap Equities 3.5% 3.5% -

Int'l Equities1 16% 16% -

Emerging Int'l Equities1 6% 6% -

Global Equity 40% 40% -

Core Bonds 5% 5% -

20+ Yr. Treasury STRIPS 5% 2% -3%

TIPS 3% 5% 2%

Core Fixed Income 13% 12% -1%

High-Yield Bonds 1.5% 1.5% -

Bank Loans 1.5% 2.5% 1%

EMD (External) 1% 1% -

EMD (Local Currency) 2% 0% -2%

Distressed Debt2 4% 3% -1%

Other Credit Opportunities3 0% 2% 2%

Value-Added Fixed Income 10% 10% -

Private Equity 10% 11% 1%

Real Estate 10% 10% -

Timberland4 4% 4% -

Hedge Funds5 & PCS6 13% 13% -

Expected Return 5-7 Yr.7 6.8% 6.8% 0.0%

Expected Return 30 Yr.7 7.8% 7.8% 0.0%

Standard Deviation7 12.2% 12.4% 0.1%

Sharpe Ratio (30 Yr.)7 0.39 0.38 -0.01

1: Assumes a 90% allocation to broad market equities and 10% allocation to small cap equities

2: Distressed Debt modeled as 50% Private Debt and 50% Private Equity

3: Other Credit Opportunities modeled as 50% Private Debt, 50% HF Credit

4: Timberland is modeled as Private Real Assets Non-Energy

5: Hedge Funds modeled as 33% HF Equity, 33% HF Credit, 33% HF Macro

6: Modeled as 90% Portfolio Completion Strategies (33% HF Equity, 33% HF Credit, 33% HF Macro), 10% Hedged Equity Overlay

7: Return and risk assumptions revised to reflect updated methodology detailed on the prior page

Source: NEPC

PRIT Fund Performance

As of February 28, 2017

27

Asset Class Performance Summary

One Year Ended February 28, 2017 (Gross of Fees)

Source: BNY Mellon, FactSet.All performance figures reflected are PRIT Fund Asset Class returns.*MSCI ACWI/Barclays Aggregate is derived from a 60/40 combination of index returns.

31.3% 30.2%

25.0%

21.1%

18.0%15.6%

14.4% 14.2% 13.8%12.4% 11.4%

9.8% 9.5%7.2% 6.9% 5.9%

2.7%

-6.6%-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

28

Total PRIT Fund Returns

Annualized Returns as of February 28, 2017 (Gross of Fees)

14.4%

6.5%

8.6%

5.3%

15.5%

5.5%

7.1%

4.9%

-1.1%

1.0%1.4%

0.4%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

1 Year 3 Years 5 Years 10 Years

Ret

urn

s

Total Fund Return Total Core Benchmark Value AddedTotal Core Benchmark includes private equity benchmark. Source: BNY Mellon.

29

PRIT Asset Class Performance One Year Ended February 28, 2017 (Gross of Fees)

22

.7%

14

.2%

12

.6%

9.8

%

9.5

%

7.2

%

0.1

%

23

.0%

14

.2%

25

.6%

10

.1%

6.5

%

3.3

%

-0.4

%

-0.3

%

0.0

%

-13

.0%

-0.3

%

3.0

%

4.0

%

0.5

%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Total GlobalEquity

Total PrivateEquity*

Total ValueAdded Fixed

Income

Total RealEstate

Total HedgeFunds**

Total Timber Total Core FixedIncome

Ret

urn

s

Asset Class Benchmark Value Added*Benchmark is actual performance. **Hedge Fund returns are net of fees.Source: BNY Mellon. Totals may not add due to rounding.

30

PRIT Asset Class PerformanceAnnualized Returns as of February 28, 2017 (Gross of Fees)

1 Year 3 Year 5 Year 10 Year

GLOBAL EQUITY 22.7%

PRIVATE EQUITY 16.9%

PRIVATE EQUITY 17.4%

PRIVATE EQUITY 14.1%

PRIVATE EQUITY 14.2%

REAL ESTATE 11.5%

REAL ESTATE 11.5%

TIMBER 7.0%

VALUE-ADDED FIXED INCOME

12.6%

TIMBER 5.8%

GLOBAL EQUITY 8.8%

VALUE-ADDED FIXED INCOME

6.5%

REAL ESTATE 9.8%

CORE FIXED INCOME

5.3%

TIMBER 6.8%

REAL ESTATE 6.5%

HEDGE FUNDS (NET OF FEES)

9.5%

GLOBAL EQUITY 4.9%

HEDGE FUNDS (NET OF FEES)

5.5%

CORE FIXED INCOME

5.0%

TIMBER 7.2%

VALUE-ADDED FIXED INCOME

3.4%

VALUE-ADDED FIXED INCOME

5.1%

GLOBAL EQUITY 4.4%

CORE FIXED INCOME

0.1%

HEDGE FUNDS (NET OF FEES)

2.7%

CORE FIXED INCOME

4.0%

HEDGE FUNDS (NET OF FEES)

3.2%

31

Asset Classes & Regimes – One Year Ended February 28, 2017

Gro

wth

Inflation HighLow

Falli

ng

Ris

ing

Large Cap US Equities

+25%

High Yield+18%

Emerging Market Equities

+31%

International Equities

+16%EMD $+21%

Inflation-Linked Bonds

+7%

Barclays Agg+3%

Timber +7%

Long US Treasuries

-7%

REITs+14%

Private Real Estate+9%

Private Equity+14%

Hedge Funds+9%

SMID Cap US Equities

+30%

• GDP Growth: +1.9%.

• Core CPI: +2.2%.

• 30yr yields: +38 bps.

Return >10%Return 0%-5%Return -10%-5%Return <-10%

LEGEND: One Year Return Ended February 28, 2017

Return -5%-0% Return 5%-10%

EMD Local+12%

Bank Loans+11%

PRIT Fund+14%

Private Debt+6%

Asset class returns represent PRIM’s actual returns, gross of management fees (with the exception of hedge funds, which are net of fees).

32

PRIT Fund Ratio of Expenses in Basis Points

43 43 42

52

63

54 52 5154

50 5055 55 53 53

0

10

20

30

40

50

60

70

80

90

100

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

33

SRBTF Clients

PRIT Fund Clients

34

Governmental Entities Participating in the SRBTF1. Town of Acton

2. Town of Amherst

3. Town of Ayer

4. Town of Bedford

5. BiCounty Educational Collaborative, Franklin, MA

6. Town of Blackstone

7. Boston Redevelopment Authority

8. Town of Boxford

9. Town of Braintree

10. Town of Brewster

11. Town of Brookline

12. Town of Burlington

13. Town of Chelmsford

14. Concord Area Special Education (CASE) Collaborative

15. Town of Cohasset

16. Town of Dedham

17. City of Fitchburg

18. Town of Franklin

19. Town of Harvard

20. Town of Hingham

21. Town of Holliston

22. Town of Ipswich

23. Town of Lancaster

24. Lawrence Housing Authority

25. Town of Lenox

26. City of Leominster

27. Town of Lincoln

28. Lincoln-Sudbury Regional School District

29. Lowell Regional Transit Authority (LRTA)

30. Lower Pioneer Valley Educational Collaborative

31. Town of Manchester-By-The-Sea

32. Manchester Essex Regional School District

33. Town of Marblehead

34. Marblehead Municipal Light Department

35. Massachusetts School Building Authority

36. Mass State Retirees

37. Mass Water Resources Authority

38. Town of Medfield

39. Town of Middleton

40. Town of Milton

41. Town of Montague

42. Town of Needham

43. City of New Bedford

44. City of Newburyport

45. City of Newton

46. Town of North Andover

47. Town of Northborough

48. Town of Orleans

49. Pilgrim Area Collaborative (PAC), Pembroke, MA

50. Town of Provincetown

51. Shawsheen Valley Technical High School, Billerica, MA

52. Town of Sherborn

53. Town of Stockbridge

54. Town of Tewksbury

55. Town of Wakefield

56. Wakefield Municipal Gas & Light Department

57. Town of Wayland

58. Town of Wellesley

59. Town of Westwood

60. Town of Wilmington

35

39 Participating Retirement SystemsAmesburyBarnstable CountyBerkshire CountyBlue Hills RegionalChelseaDedhamEasthamptonEverettFairhavenFall RiverFitchburgGardnerGloucesterLawrenceLowellLynnMassachusetts State College Building Authority

Massachusetts Turnpike Authority(part of State Employees)

MelroseMethuen

Middlesex CountyMiltonMinuteman Regional School DistrictMontagueNeedhamNorthbridgePeabodyPittsfieldReadingSaugusSalemSouthbridgeSpringfieldState-Boston/TeachersState EmployeesState Retiree Benefits Trust (OPEB)*State TeachersWakefieldWinthropWorcester Regional

*There are currently 60 entities that participate in the SRBT Fund

36

53 Purchasing/Segmented Retirement Systems*Andover (Full Purchasing)Arlington (Full Purchasing)AttleboroBelmontBeverly (Full Purchasing)BraintreeBristol CountyBrooklineCambridgeChicopeeClintonConcordDanversDukes CountyEssex Regional (Full Purchasing)FalmouthFramingham (Full Purchasing)Franklin CountyGreenfield (Full Purchasing)Hampden County (Full Purchasing)Hampshire CountyHaverhillHinghamHull (Full Purchasing)LeominsterMarblehead (Full Purchasing)

Massachusetts Port AuthorityMaynardMedfordMilford (Full Purchasing)Massachusetts Water Resources AuthorityNatickNewburyport (Full Purchasing)Newton (Full Purchasing)Norfolk CountyNorth AdamsNorthamptonNorwoodPlymouthQuincyRevere (Full Purchasing)ShrewsburyStonehamSwampscottWalthamWatertownWebsterWellesley (Full Purchasing)WestfieldWeymouthWinchesterWoburnWorcester, City of

*All Systems are Segmented unless otherwise noted

37