Callan finds plan liquidity manageable; outlines active risk budgeting framework

Callan presented two education modules to the board: a liquidity assessment and an active risk budgeting framework.

On liquidity, Callan framed a one‑year worst‑case shock (a 15% negative return at the 97.5 percentile) and showed that under the plan’s June 2025 actuarial numbers, a $118 million asset decline would lower funded status from roughly 80% to about 68%, and increase net outflows from roughly 1.06% to 1.25% of liquid assets. "By both of these measures, again, the punch line is that we do believe that your liquidity needs remain manageable," Callan said. The consultant noted that additional items not included in the baseline (administrative expenses, variable refunds and real‑estate capital calls) could raise net outflow assumptions and will be included in the upcoming asset‑liability study.

On active risk budgeting, Callan summarized a four‑part decision rubric — opportunity set, manager skill, portfolio benefit and cost/governance — and recommended concentrating active risk where markets are less efficient (small cap, emerging markets, certain fixed‑income and real assets) and using passive implementation where markets are deep and efficient (U.S. large cap, developed international). Callan also presented historical average gross excess return examples to illustrate how opportunity varies by segment and explained why mid‑cap has sometimes been a more challenging arena for active managers.

Trustees asked several questions about assumptions, administrative costs, the definition of illiquid real assets and the implications if contribution policy changes. Callan said the upcoming asset‑liability study will incorporate updated actuarial numbers and provide further guidance on liquidity targets and allocation tradeoffs.