Public Session – The Committee met in Public Session at 10:07 a.m.

Minutes of SamCERA’s Audit Committee of the Board

1.0

Call to Order: Ms. Perroton called the Public Session of the Audit Committee of the Board of Retirement to order at 10:07 a.m., July 25, 2001, in SamCERA's Board Room, Suite 280, 702 Marshall Street, Redwood City, California.

2.0

Roll Call: Mr. Bryan, Mr. McMahon and Ms. Stuart - excused: Mr. Hoffman. Board Members in Attendance: None, Staff: Mr. Clifton, Mr. McCausland and Ms. Wong, Audit Staff: Mr. Adler, Hon. Mr. Huening, Ms. Levintov, Mr. Prasad and Ms. Rodriquez. Consultant: None, Public: None, Retirees:None

3.0

Action: By consensus the Committee approved the Minutes of the April 24th meeting of the Audit Committee.

4.0

Oral Communications from the Committee: None

5.0

Oral Communications from the Public: None

6.0

Investment and Finance Manager's Report

Board and Management Support Services & Audit Committee Report

Acceptance of Auditor's Report on the Review of Great Plains and the Procedures Manual.

The Audit Committee retained the Audit Division to review the Great Plains accounting system and a portion of SamCERA's draft emergency procedures manual as a follow up to prior audit recommendations relating to the same. Specifically, they were charged with reviewing the Great Plains system and the draft procedure manual to ensure that they will adequately support our annual audit.

• Mr. Prasad reviewed the report with the Committee.

The findings regarding Great Plains are: Internal Control/Security Features: The Great Plains system allows passwords for access to the set-up tables and access to the posting feature, which are currently not in place. Passwords prevent unauthorized use so that intentional or unintentional changes are not made to data. Further, the posting feature provides segregation of the duties of inputting and approving entries. We recommend that access to the set-up tables be allowed only to the Information Technology Manager and that posting access be given to the Investment & Finance Manager.

The findings regarding the procedure models are Controls in Procedures Manual: Staff members should be conscious of the importance of the control being performed for each procedure. Where appropriate, the staff member should document a review or match to supporting documents through a signature or initials to provide evidence of performance of procedures. This action should be noted in the write-up. Related Procedures: Procedures should be related to other staff members' corresponding procedures so that it is clear what the staff member is contributing to the big picture. If a staff member's procedure calls for preparation of a report, it is helpful to mention the ultimate use of the report in order to give it a purpose. Grouping of Procedures: Since timing of procedures may be an important consideration in a staff position, procedures should be grouped according to timing, or a separate timetable should be provided in order to provide an overall view of the frequency of procedures.

Mr. Clifton stated that staff agrees with and will implement the recommendations specified in the report. He thanked the Audit Division and Ms. Sullivan for their effort in completing the report. SamCERA will miss Ms. Sullivan, who accepted a position with the Audit Division of the City and County of San Francisco.

• Ms. Stuart wished to express her appreciation for Ms. Sullivan's attentiveness regarding SamCERA assignments over the past several years.

Action: Motion by Ms. McMahon, seconded by Mr. Bryan, to recommend to the Board that it accepts the findings of the auditors report, which is that the Great Plains system and the draft procedures manuals are adequate to support the annual audit.

7.2

Auditor's Entrance Interview for the June 30, 2001 Financial Audit. The Controller, Tom Huening, stated the Audit Division is sad to see last year's SamCERA audit team of Ms. Elisa Sullivan and Ms. Helen Vo accept positions with the City & County of San Francisco. He introduced the audit staff who will be working on this year's financial audit. They are Mr. Ramen Prasad, Audit Manager; Irene Levintov, Senior Auditor; and Ms. Claudia Rodriquez, Auditor.

• Mr. Clifton and Mr. McCausland stated that they have concerns regarding the aggressive schedule of the audit. Mr. Clifton offered that, in part, the aggressive schedule is to facilitate incorporating SamCERA's data into the County's Financial Statement. However, the auditor's schedule does not allow for receipt of manager and custodial statements.
• Mr. Huening expressed the value of timely financial statements. He suggested that as Global Custodian the State Street reports could be used to document the value of assets. Mr. Clifton reminded Mr. Huening that SamCERA assets are with multiple custodians. State Street is the custodian for SamCERA's active management and operational cash. The County Treasury has custody of a portion of the operational cash. Barclays Global Investors has custody of assets in the Indexed Funds. SamCERA's international equities are in a Group Trust with Bank of Ireland Asset Management for which Chase is custodian. Finally, documentation or custody for the real estate assets is with INVESCO Realty Advisors. Those entities are SamCERA source documentation for transactions posted to its trial balance. It is imperative their statements are received prior to closing SamCERA's Books.
• Mr. McCausland stated his concern is that Ms. Levintov and Ms. Rodriquez, as new auditors, be granted ample time to thoroughly examine SamCERA's records and compare them to the source documentation. He wants a well-researched and well thought out Management Letter.

Mr. McCausland is also concerned that the County improperly reflects SamCERA's assets on its books. The monies in SamCERA's Trust Fund should have separate visibility and not be commingled with County's monies. Mr. Huening agreed the County is showing ~$1.4 billion that appears to be County money. In the details it clearly isn't, but who gets into the details? The Controller's Office will consider methods of clarifying the presentation of that information.

Action: No action is required

7.3

Review of the Value Optimization Plans for Boca Colony Apartments, Highland Bank Building, and Hunter's Creek Plaza. Agenda Item 7.4 "Approval of Amendment to Audit Committee Meeting Dates for Fiscal Year 2001/2002." Was discussed prior to Item 7.3

7.4

Approval of Amendment to Audit Committee Meeting Dates for Fiscal Year 2001/2002.

With time being a consideration for Mr. Bryan, Item 7.4 was discussed Prior to Item 7.3.

In March of 2001 the Audit Committee adopted meeting dates and a strategic plan for the 2001/2002 Fiscal Year. The Audit Committee Chair requested an agenda item to reconsider the dates on which the Committee meets during the current Fiscal Year. After a brief discussion the amended dates and the tentative work plan were adopted as follows:

Action: The Audit Committee, by consensus, adopted the above amended dates and work plan for the Fiscal Year 2001/2002.

7.3

Review of the Value Optimization Plans for Boca Colony Apartments, Highland Bank Building, and Hunter's Creek Plaza.

Mr. Bryan suggested that the Committee ask INVESCO to explain how they determine which properties they wish to sell. He noted that the Fremont property might be a nice property to keep on the books, while Boca Colony Apartments may be one to get off the books.

• Mr. McMahon agrees California properties may do well. He sites Marin County that only invests in properties to which they can drive. Marin's return last year was ~30%.
• Mr. Bryan had a previous appointment and excused himself from the meeting.

The Audit Committee annually reviews the Value Optimization Plans (VOP) for SamCERA's institutional grade properties. A Value Optimization Plan is a property specific business plan prepared by the Asset Management department of INVESCO Realty Advisors'. The VOP is prepared within 90 days of the completion of an acquisition and then annually thereafter. The Value Optimization includes an exit/disposition strategy, current year operating budget, current and five-year capital expenditure plan, marketing/leasing plan and market position analysis. The VOP is evaluated regularly and if there were a significant event at a property that would make it obsolete, it would be amended.

The Committee chose three properties to review. They are Boca Colony Apartments, Highland Bank Building and Hunter's Creek Shopping Center. An executive summary of each follows:

Boca Colony Apartments: The 2001/2002 fiscal operating plan projects market rent to increase by 4% over the prior year rental income. The market has seen more development than in the past years, which will pose some challenges for the property. Aggressive marketing techniques, leasing concessions and strong resident retention programs will be implemented in an effort to remain competitive.

• The budget includes $157,506 in capital expenditures. Some of these include seal coating of the parking lot area and the installation of a fence at the tennis court. Capital expenditures in the individual units include carpet, vinyl and appliance replacement as needed. The operating budget is projected to have total revenue of $1,956,554, net operating income of $1,050,870 and a cash flow of $ $812,803.
• The disposition analysis anticipates a short-term holding period for Boca Colony Apartments. The current expectation of disposition is in the 2001/2002 time frame given the repositioning and renovations recently enacted at the property level as well as challenges in operating efficiency.

Highland Bank Building: The 2001/2002 fiscal year operating plan has a goal to be 100% leased by the end of the fiscal budget year, June 30, 2002. This requires new leases for five suites. Three of the suites are currently vacant. The other two suites are anticipated to become vacant during the year as a result of the tenants not renewing their leases.

• The current year capital budget totals $289,259. This includes $189,430 for tenant improvements, $56,829 for leasing commissions, and $43,000 for capital projects. The budget provides monies for common area upgrades of floors three and four. The west entrance will be the only area of the building that has not received common area upgrades. The operating budget projects total revenue of $1, 260,683, net operating income of $726, 025 and cash flow of $378,944.
• The disposition analysis notes the market supply is growing at a rate faster than can be immediately absorbed. Therefore, a mid term hold period for four to six years is recommended to allow the property to reach its full potential in occupancy and rental rates.
  

Hunter's Creek Plaza: Since the property is 100% leased and 97% occupied the emphasis of the 2001/2002 fiscal year operating plan will be on leasing the unoccupied area as well as improving the level of tenant satisfaction in order to maintain occupancy with potential lease expirations in the near term.

• The capital budget totals $117,420. This includes $49,920 for tenant improvements and commissions, $22,500 for seal-coating the parking lot area, $25,000 for painting the front and rear of center and $20,000 for new pylon signage. The operating budget projects total revenue of $962,818 net operating income of $701,784 and cash flow for the year of $528, 239.
• The disposition analysis notes that the center's excellent location and tenancy mix will provide stable income returns over the foreseeable future. Given the strength of the sub-market and the controlled growth sentiment, INVESCO expects to capture modest rental rate increases as leases roll to market beginning in 2004. These factors suggest a long-term hold of the property beyond 2003. INVESCO recommends a holding period of six to eight years for Hunter's Creek Plaza.

As the Committee reviewed the reports it made a conscious effort not to micro-manage. Although it is human nature to delve into the circumstance surrounding an expenditure or a business practice. The Committee thought the Value Optimization Plans were well prepared and provided a good amount of detail.

Action: By consensus the Committee accepted the Value Optimization Plans for Boca Colony Apartments, Highland Bank Building and Hunter's Creek Plaza.

The Committee thought the listed topics when combined with suggestions at yesterday's Board meeting were adequate for the retreat. If they were to add a topic, it would be the review of one VOP. After a brief discussion, the Committee decided to recommend that INVESCO review one VOP, Boca Colony Apartments, at its annual review.

Action: By Consensus, the Committee will recommend to the Board that INVESCO review Boca Colony Apartment's VOP with the Board during their annual review in September.

8.0

Other Business: There was no other business.

9.0

Adjournment: Ms. Stuart adjourned the Committee Meeting at 11:50.