Fresno County Employees Retirement Association Asset Allocation Study

Fresno County Employees’ Retirement Association Asset Allocation Study March 1, 2006 Jeffrey Mac. Lean Chief Executive Officer SEATTLE LOS ANGELES 999 Third Avenue Suite 3650 Seattle, Washington 98104 206. 622. 3700 telephone 206. 622. 0548 facsimile 2321 Rosecrans Avenue Suite 2250 El Segundo, California 90245 310. 297. 1777 telephone 310. 297. 0878 facsimile

Overview of Presentation I. Inputs & Assumptions II. Analysis & Results WURTS & ASSOCIATES 2

SECTION I Inputs & Assumptions WURTS & ASSOCIATES 3

Consensus Expectations - Returns Asset Class Large Cap U. S. Equity Consultant 1 Consultant 2 Consultant 3 Consultant 4 Consultant 5 Consultant 6 Consultant 7 Goldman Sachs SSGA 7. 70% 8. 50% 8. 00% 8. 85% 8. 40% 8. 00% 7. 50% 9. 85% 9. 00% 9. 25% 9. 50% Small/Mid Cap U. S. Equity International Large 7. 70% 8. 50% 8. 70% 8. 80% 8. 00% International Small 9. 80% 5. 00% 4. 80% 6. 10% 5. 25% 5. 40% 4. 75% High Yield Fixed Income 10. 50% 8. 00% 9. 90% 4. 50% 5. 00% 4. 50% 4. 40% Foreign bonds 5. 10% Real Estate 7. 30% 7. 00% 7. 50% REIT's 7. 10% 7. 50% 7. 20% Hedge Funds/Abs Return 8. 50% Timber 9. 40% 7. 60% 7. 20% 4. 70% 6. 00% 6. 80% 5. 80% 6. 50% Commodities Cash 9. 10% 6. 80% TIPS Private Equity / Venture Capital 8. 00% 10. 00% Emerging Markets U. S. Core Fixed Income 7. 70% 7. 00% 4. 5 -7. 0% 10. 60% 11. 70% 12. 80% 3. 10% 11. 00% 4. 20% Inflation. Notes: Compound Returns. Investment Consultant 3. 00% 3. 10% by Ennis Knupp, whom performed 2. 90% 1, 2, & 3 were provided the survey. 3. 25% 3. 50% 2. 60% 2. 90% 7. 30% 11. 00% 2. 50% WURTS & ASSOCIATES 4

Building Block Approach: Description Wurts & Associates utilizes a combination of fundamental analysis and a building block approach to construct projected returns for key asset classes. International Stocks: The historical relationship between returns for international and U. S. stocks is examined to determine if a premium should exist for international stocks. An overlay of fundamental analysis is applied for minor adjustments. U. S. Stocks: We estimate an Equity Risk Premium based upon the historic range of premia. This is fine-tuned with fundamental returns decomposition. Bonds: We believe that a bond’s yield is an unbiased measure of market expectations regarding future returns. Given historically low rates and the high level of fiscal and monetary stimulus, we believe rates will rise over time, and the current yield should be adjusted as a predictor of future returns. Cash: We examine the historic premium of cash instruments to inflation and compare to the current yield and inflation rate. A qualitative judgment is made about the size and sustainability of the premium given today’s environment. Inflation: We utilize the break-even inflation rate between the tenyear TIPS and conventional Treasuries as a starting point. Adjustments are made based upon our view of the macroeconomic environment. Cash International Stocks U. S. Stocks Bonds Expected Rate of Inflation WURTS & ASSOCIATES 5

Return Assumptions: Inflation Market Implied 10 Year Inflation Estimate: • Market expects inflation of 2. 4% over next ten years. • We believe that this measure is too low: • Fiscal and monetary stimulus • Need to “reflate away” large public and private debt levels. • We leave the inflation forecast unchanged of 2. 70%. As of January 3, 2006. WURTS & ASSOCIATES 6

Return Assumptions: Cash Source: Ibbotson. Data ending 12/31/2005. Current Yield on T-bill matures Feb 3, 2006: WSJ. WURTS & ASSOCIATES 7

Return Assumptions: Bonds Starting bond yield is an excellent predictor of subsequent ten-year performance: Source: Ibbotson. Data ending 12/31/2005. 12/31/2004. 10 Year Govt Bond Return: 50% Intermediate Gov’t & 50 LT Gov’t. Starting 10 Year Govt Bond Yield: 50% Int Govt Yield & 50% LT Govt Yield. WURTS & ASSOCIATES 8

Return Assumptions: Bonds Relationship also holds for Lehman Aggregate Index over shorter time period: Source: Ibbotson. Data ending 12/31/2005. WURTS & ASSOCIATES 9

Return Assumptions - Bonds Yield to Maturity: • We believe the yields will rise moderately in response to inflation. • Higher reinvestment rate will, over latter portion of next ten years, compensate for shorterterm price losses. • We estimate a 5. 25% return for (Lehman Aggregate Index) core bonds. Source: Ibbotson. Data as of 12/30/2005. WURTS & ASSOCIATES 10

Return Assumptions - Equity The equity risk premium is the most important number in investing. • Stocks are inherently more risky than bonds. In order to be a valid investment choice, stocks must offer a higher rate of return than bonds to attract investor capital. • This demanded incremental difference in return is the equity risk premium and is typically defined as the long run (ten years in this case ) return difference between US equities and US government bonds. • • Since 1926, this number has averaged approximately 6. 0%. We begin our 2006 estimate with a historic look at the premium over time. The following chart displays the starting yield of a ten-year government bond and the subsequent ten years of stock performance as measured by the S & P 500: WURTS & ASSOCIATES 11

Return Assumptions - Equity We estimate a 7. 9% nominal return for stocks. This implies an equity risk premium of about 3. 5% over a starting 10 -Year Treasury bond yield¹. • • About 200 basis points less than 6. 0% average of last 76 years. Lower end of historical risk premium distribution. Breakdown of the Return Composition: Dividends: Our total dividend estimate is 2. 7% - 1. 8% current yield, 0. 3% “repurchase yield”, and 0. 6% for a rising payout ratio. Real Earnings Growth: over the 1990’s averaged 5. 5% and 2. 5% from 1950 -2000. We feel the moderately higher 3. 0% is appropriate and in line with a reasonable rate of real GDP growth. P/E Contraction: Ratios increased from 10 to 30 over the last 76 years. Most of the increase occurred in the last 20 years. Last year, we assumed no change in valuation levels over the next ten years. P/E’s have subsequently risen causing us to project some contraction in equity prices. Therefore, we assume a contraction of 0. 5% which we feel will be cushioned by lower tax rates and inflation levels. 1. 10 -Year Yield as of 12/30/05 was 4. 4%. WURTS & ASSOCIATES 12

Return Assumptions - Equity Stocks usually (but not always) reward investors for their greater volatility: Source: Ibbotson. Data ending 12/31/2005. Starting 10 Year Govt Bond Yield: 50% Int Govt Yield & 50% LT Govt Yield. WURTS & ASSOCIATES 13

Return Assumptions - Equity The distribution of the ten-year equity risk premium around a starting government bond yield can vary widely. Valuations, dividend yields, investor behavior and a number of other factors can cause the number over any ten-year period to dramatically deviate from the 6% average. Equity Risk Premium: Is the arithmetic difference of the S&P 500 10 year return and the 10 year starting yield. Our preference over the next ten years is towards the lower end of the distribution due to high valuations and low dividend yields. However, we need a more precise estimate to model. Therefore, we will look at key fundamental components of long run stock returns. WURTS & ASSOCIATES 14

Return Assumptions – Equity To better understand where the risk premium will fall over the next ten years, it is important to decompose the average return of the stock market over the last 78 years: 1980’s 1990’s 20062014 Est. 4. 0 % 4. 6 % 2. 7% 2. 9 % 2. 3 % 0. 2 % 5. 2 % 3. 0% 9. 4 % -1. 0 % -7. 7 % 7. 6 % 7. 3 % -0. 5% 3. 0% 2. 2 % 2. 5 % 7. 4 % 5. 1 % 2. 9 % 2. 7% 10. 4% 19. 4% 7. 8 % 5. 9 % 17. 6 % 18. 2 % 7. 9% 19262003 1950’s 1960’s 1970’s 4. 3% 5. 3% 3. 3 % 2. 0% 1. 7 % P/E Expansion/Contraction 0. 9% Inflation Total Dividends Real Earnings Growth Source: Ibbotson, Standard & Poor’s, Haver, Robert Shiller, and Morgan Stanley Research. Historical data is rounded. WURTS & ASSOCIATES 15

Return Assumptions – Small Stocks Small stocks have historically displayed a risk premium of their own to large cap stocks given their historical higher volatility. Source: Ibbotson. Data ending 12/31/2005. U. S. Small Stock Premium: The historical small stock premium is derived as the geometric difference between U. S. Small Stocks total returns and S&P 500 total returns. US Small Stock index: The Small Company Stock return series is the total return achieved by the Dimensional Fund Advisors (DFA) Small Company 9/10 (for ninth and tenth deciles) Fund. The Fund invests in a broadly diversified cross section of small companies. WURTS & ASSOCIATES 16

Return Assumptions – Small Stocks Small stocks have historically displayed a risk premium of their own to large cap stocks given their historical higher volatility. 5 Year Compound Average Small Stock Premium Small Stock Subsequent 10 Year Compound Average Performance Quartiles Range Low Median Max 1 st -19. 6 to -4. 6 -6. 4 3. 7 16. 6 2 nd -4. 5 to 1. 5 -2. 9 4. 6 12. 0 3 rd 1. 5 to 8. 5 -3. 8 4. 2 13. 3 4 th 8. 9 to 26. 2 -5. 8 -0. 9 10. 9 5 Year Compound Average for Small Stock Premium ending 12/31/05 = 15. 8% Source: Ibbotson. Data ending 12/31/2005. Table was derived using quarterly observations. U. S. Small Stock Premium: The historical small stock premium is derived as the geometric difference between U. S. Small Stocks total returns and S&P 500 total returns. WURTS & ASSOCIATES 17

Return Assumptions – International Large Previously, we examined long term (20 years) results of international and domestic stocks that showed no distinct premium. However, when measured in 10 -year periods, international stocks and U. S. stocks show shifting leadership characteristics. Source: Ibbotson. Data ending 12/31/2005. WURTS & ASSOCIATES 18

Return Assumptions – International Large We begin our assessment of relative performance differential over the next ten years by looking at the difference in dividend yields. Beginning in the late 90’s, international stocks began to show a distinct premium in annual dividend yields. Source: GMO WURTS & ASSOCIATES 19

Return Assumptions – International Large What impact does a starting dividend premium have on the next ten years of performance? We compared the 10 -year performance ( between the MSCI EAFE and S&P 500) and the starting dividend yield differential (EAFE dividend yield minus S&P 500 dividend yield). The table below summarizes: Dividend Advantage (EAFE over S&P) % Time EAFE Outperformed the S&P 500 Average Return Differential Over. 75% 100% 4. 6% . 74% to. 25% 88% 2. 9% . 24% to (-. 25%) 48% (-. 26%) to (-. 75%) 54% (-. 76%) to (-1. 25%) 48% (-1. 26%) to (1. 75%) 37% Under (-1. 76%) 52% Notes: The first observation compared the 10 year, January 1970 to December 1979, annualized return differential (MSCI EAFE minus S&P 500) with the 12/31/1969 dividend yield differential (EAFE dividend yield minus S&P 500 dividend yield). The second observation compared the 10 year performance, February 1970 to January 1980, with the 1/31/70 dividend yield differential. Data as of 12/31/2005. For the next ten years, we believe it will be in the 0. 7% ballpark translating to a nominal return expectation of 8. 6%. WURTS & ASSOCIATES 20

Return Assumptions – Emerging Markets Given the lack of historical data for emerging markets, we measured rolling 5 -year periods. Emerging markets and U. S. stocks show shifting leadership characteristics. Source: Ibbotson and MSCI. Data ending 12/31/2005. WURTS & ASSOCIATES 21

Return Assumptions – Real Estate • • • Source: SSR Realty Advisors, NCREIF Majority of real estate returns come from income return. – NCREIF income return stood at 8. 0% ending June 2005 Price appreciation of properties roughly lags the inflation rate. – U. S. Inflation averaged 4. 2% from 1978 – 2005 (ending June) We estimate a 6. 1% ten-year return for private, core real estate portfolios. – Pricing risk caused by continued low interest rates and increased institutional demand for that asset class will lead to values appreciating slower than our inflation estimate – 2. 7% – Leading to a realized income return from real estate in the 4. 5% range WURTS & ASSOCIATES 22

Historical Risk Period Standard Deviation Wurts’ 2006 Assumptions S&P 500 1945 -2004 16. 8% 16. 0% Ibbotson U. S. Small Stock 1945 - 2004 26. 6% Russell 2000 1979 -2004 24. 5% International Large MSCI EAFE 1970 -2004 20. 7% 19. 0% International Small MSCI EAFE Small Cap 1993 -2004 20. 1% 28. 0% Emerging Markets MSCI Emerging 1988 -2004 30. 8% 35. 0% Ibbotson U. S. LT Corporates 1945 -2004 9. 1% LB Aggregate 1970 -2004 7. 5% High Yield Fixed Income LB High Yield 1983 -2004 8. 9% 10. 0% TIPS ML Inflation-linked Securities 1998 -2004 4. 6% 5. 0% Real Estate NCREIF Property 1978 -2003 6. 2% 12. 0% REIT’s NAREIT 1972 -2003 18. 7% 15. 0% Liquid Alternatives / Hedge Funds HFRI Fund of Funds Composite 1990 -2004 9. 5% 8. 0% Private Equity / Venture Capital Cambridge Private Equity 1987 -2003 12. 9% 35. 0% Cash U. S. 30 day T-Bill 1945 -2004 1. 5% 1. 50% Inflation U. S. Inflation (CPI) 1945 -2004 2. 3% 2. 0% Asset Class Large Cap U. S. Equity Small / Mid Cap U. S. Equity U. S. Core Fixed Income Proxy 22. 0% 6. 0% WURTS & ASSOCIATES Source: Ibbotson, Hedge Fund Research, and Cambridge. Return observations are annual. 23

ity ds Large US Equity 1. 00 Small/Mid US Equity 0. 79 1. 00 International Large 0. 69 0. 54 1. 00 International Small 0. 52 0. 61 0. 83 1. 00 Emerging Markets 0. 61 0. 70 0. 56 0. 62 1. 00 US Core Fixed Income 0. 25 0. 15 0. 23 -0. 30 -0. 17 1. 00 High Yield Fixed Income 0. 53 0. 54 0. 42 0. 34 0. 50 0. 37 1. 00 TIPS -0. 60 -0. 34 -0. 49 -0. 25 -0. 31 0. 72 -0. 24 1. 00 Real Estate -0. 03 -0. 08 0. 04 -0. 23 -0. 16 -0. 15 -0. 20 1. 00 REITs 0. 59 0. 71 0. 49 0. 32 0. 43 0. 55 0. 13 -0. 07 1. 00 Hedge Funds 0. 45 0. 55 0. 36 0. 41 0. 59 -0. 09 0. 24 -0. 18 -0. 22 0. 20 1. 00 Private Equity/Venture 0. 66 0. 60 0. 48 0. 42 0. 40 -0. 13 0. 28 -0. 38 0. 09 0. 25 0. 60 1. 00 Cash -0. 08 -0. 06 -0. 11 -0. 38 -0. 10 0. 12 -0. 06 0. 43 -0. 10 0. 11 -0. 04 1. 00 Inflation (CPI) -0. 23 -0. 14 -0. 25 0. 02 -0. 15 -0. 19 0. 24 0. 33 -0. 19 0. 10 -0. 12 0. 33 WURTS & ASSOCIATES Note: The history used to calculate correlation is the common date range between the pair of asset classes. (The previous page shows date ranges for all asset classes. ). Correlation is calculated using quarterly returns. 24 I) (CP Ca sh qu Pri vat e. E e. F dg He ITs RE al E sta Re PS TI un te FI Yi gh Hi US Co r e. F eld I M Em erg ing Sm a t’l In na ti ter In ll l on a id /M all Sm La rg e. U S US kts Historical Correlations 1. 00

Consensus Expectations - Returns 10 Year Estimates Asset Class Historical Returns (Period) Avg. Consensus Returns 2006 Wurts’ Standard Deviation Large Cap U. S. Equity 10. 4% (1926 -2005) 8. 24% 7. 90% 16. 0% Small/Mid Cap U. S. Equity 12. 6% (1926 -2005) 8. 85% 8. 50% 22. 0% International Large 11. 2% (1970 -2005) 8. 62% 8. 60% 19. 0% International Small 7. 0% (1993 -2005) n/a 9. 10% 28. 0% Emerging Markets 14. 3% (1988 -2005) 9. 55% 9. 60% 35. 0% U. S. Core Fixed Income 5. 3% (1926 -2005) 5. 03% 5. 30% 6. 0% High Yield Fixed Income 9. 6% (1984 -2005) n/a 6. 50% 10. 0% TIPS 7. 9% (1998 -2005) n/a 4. 70% 5. 0% Real Estate 9. 5% (1978 -2004) 7. 13% 6. 10% 12. 0% REIT’s 10. 7% (1972 -2004) 6. 92% 6. 60% 15. 0% Liquid Alternatives/Hedge Funds 9. 9% (1990 -2005) 7. 33% 7. 50% 8. 0% Private Equity/Venture Capital 13. 7% (1987 -2004) 11. 47% 10. 90% 35. 0% Timber 15. 4% (1991 -2005) n/a 8. 30% 14. 0% Commodities 7. 8% (1991 -2005) n/a 6. 50% 12. 5% Cash 3. 7% (1926 -2004) 3. 51% 3. 50% 1. 5% Inflation 3. 0% (1926 -2004) 2. 83% 2. 70% 2. 0% Notes: Compound Returns. Investment Consultant 1, 2, & 3 were provided by Ennis Knupp, whom performed the survey. WURTS & ASSOCIATES 25

ity Large US Equity 1. 00 Small/Mid US Equity 0. 80 1. 00 International Large 0. 70 0. 55 1. 00 International Small 0. 55 0. 60 0. 85 1. 00 Emerging Markets 0. 65 0. 70 0. 55 0. 60 1. 00 US Core Fixed Income 0. 25 0. 10 0. 20 0. 00 1. 00 High Yield Fixed Income 0. 55 0. 40 0. 35 0. 50 0. 30 1. 00 TIPS 0. 00 0. 70 -0. 10 1. 00 Real Estate -0. 05 -0. 10 0. 05 -0. 25 -0. 15 -0. 20 1. 00 REITs 0. 60 0. 70 0. 50 0. 40 0. 30 0. 45 0. 55 0. 15 -0. 10 1. 00 Liquid Alts / Hedge Funds 0. 45 0. 55 0. 35 0. 40 0. 60 -0. 10 0. 25 -0. 20 1. 00 Private Equity/Venture 0. 70 0. 60 0. 50 0. 40 -0. 20 0. 30 -0. 30 0. 10 0. 25 0. 60 1. 00 Cash -0. 10 -0. 15 -0. 40 -0. 10 0. 15 -0. 10 0. 45 -0. 10 -0. 05 1. 00 Inflation (CPI) -0. 25 -0. 15 -0. 30 -0. 20 0. 25 0. 35 -0. 20 0. 10 -0. 15 0. 35 WURTS & ASSOCIATES Note: The history used to calculate correlation is the common date range between the pair of asset classes. (The previous page shows date ranges for all asset classes. ). Correlation is calculated using quarterly returns. 26 I) (CP Ca sh qu Pri vat e. E Alt uid Liq ITs RE al E sta Re PS TI s te FI Yi gh Hi US Co r e. F eld I M Em erg ing Sm a t’l In na ti ter In ll l on a id /M all Sm La rg e. U S US kts Wurts’ Expected Correlation Assumptions 1. 00

Wurts’ Expected Alpha Assumptions Ten Year ICC Universe Median Return (A) Ten Year Benchmark Return (B) Average Mgmt. Fee (C) Alpha¹ = Excess Net Return (=A-B-C) Ten Year Forecasts of Active Mgmt. Alpha Large Core US Equity 9. 19% 9. 28% 0. 60% -0. 69% 0. 50% Small/Mid Core US Equity 15. 22% 9. 26% 0. 85% 5. 11% 2. 00% International Equity 11. 05% 6. 18% 0. 75% 4. 12% 1. 25% Emerging Markets 8. 10% 6. 98% 1. 25% -0. 13% 2. 50% International Small Cap² 14. 50% 5. 10% 1. 25% 8. 15% 2. 00% US Core Fixed Income 6. 50% 6. 16% 0. 35% -0. 01% 0. 25% Real Estate 12. 11% 12. 09% 1. 00% -0. 98% 0. 00% Hedge Funds³ n/a 1. 0 -2. 0% n/a 0. 00% Private Equity³ n/a 1. 0 -2. 0% n/a 0. 00% Asset Class Data as of 12/31/2005. 1. Alpha is the excess return of a portfolio calculated as Portfolio Return – Benchmark Return. For this analysis, Small/Mid Cap Equity and International Equity alpha figures adjusted to 1. 50% and 1. 00%, respectively, to match assumptions of other Avista Corp. benefit plans. 2. International small cap is over 5 years. International small universe data is from e. Vestment Alliance. 3. Fund of funds level. Excess net return is not applicable since the index return and median return are the same. WURTS & ASSOCIATES 27

Wurts’ Expected Alpha Assumptions *Independent Consultants Cooperative Universe Median net of expected fees versus comparable index - a result above 0. 00% indicates the median manager in the asset class added value. Data for small cap equity goes back to 1990. WURTS & ASSOCIATES 28

SECTION II Analysis & Results WURTS & ASSOCIATES 29

Allocation Manager Allocation Investment Policy As of 12/31/05 Market Value: $2. 479 Billion WURTS & ASSOCIATES 30

Projected Return: 10 Year Forecast Asset Class Policy Large Cap U. S. Equity 28% Small/Mid Cap U. S. Equity 10% International Large Cap Equity 12% Emerging Markets Equity 6% U. S. Core Fixed Income 30% Global Fixed Income 3% Private Equity 6% Real Estate 5% Expected Return 8. 15% Standard Deviation 11. 53% Sharpe Ratio 0. 40 Active Alpha¹ 0. 69% Return with Active Alpha 8. 84% I. Active Alpha (0. 69%) = (22% x 0. 50%) (Large Cap U. S. Active) + (10% x 2. 0%) (Small Cap U. S. Active) + (12% x 1. 25%) (Int’l. Large Cap) + (6% x 2. 5%) (Emerging Mkts. ) + (30% x 0. 25%) (U. S. Core Fixed Income). 0% Active Alpha for Global Fixed Income, Private Equity, and Real Estate. WURTS & ASSOCIATES 31

Best/Worst Case Scenarios Percentile 1 Year 3 Year 5 Year 10 Year 5 th 28. 7% 19. 58% 16. 90% 14. 27% 25 th 16. 15% 12. 70% 11. 66% 10. 62% 50 th 8. 15% 75 th 0. 71% 3. 79% 4. 76% 5. 74% 95 th -9. 11% -2. 18% 0. 06% 2. 37% WURTS & ASSOCIATES 32