August 28, 2001 – Board Agenda & Minutes

August 28, 2001 – Board Agenda

Closed Session – The Board will meet in Closed Session prior to Adjournment for a Conference with Counsel on Litigation – Teamsters Local 856 vs. Board of Retirement (Coordinated Proceedings JCCP4049)

Public Session – The Board will meet in Public Session at 1:00 p.m.

1.0

Call to Order

2.0

Roll Call

3.0

Approval of the Minutes

4.0

Oral Communications

4.1	Oral Communications From the Board – None
4.2	Oral Communications From the Public – None

5.0

Benefit & Actuarial Services

5.1	Adoption of Consent Calendar
5.2	Consideration of items removed from Consent Calendar – None
5.3	Consideration of the Service-Connected Disability application of Anna Hazley

6.0

Investment Management Services & Investment Committee Report

6.1	Acceptance of Monthly Portfolio Performance Report
6.2	Selection of Investment Consultant
6.3	Annual Investment Manager Review - Deutsche Asset Management
6.4	Approval of Topics for Investment Manager Review – INVESCO Realty Advisors
6.5	Acceptance of Report on Performance Survey of CALAPRS member systems

7.0

Board and Management Support Services & Audit Committee Report

7.1	Acceptance of Auditor’s Report on the Review of Great Plains and the Procedures Manual
7.2	Auditors Entrance Interview for the June 30, 2001 Financial Audit
7.3	Annual Review of the Separate Property Value Optimization Reports
7.4	Approval of Amendment to Audit Committee Meeting Dates for Fiscal Year 2001/2002
7.5	Consideration of Topics for the January Planning Retreat
7.6	Approval of Participation in Institutional Investor Institutes’ Consultants Roundtable in Chicago

8.0

Approval or Acceptance of Reports

8.1	Report of Actions Taken in Closed Session
8.2	Chief Executive Officer's Report
8.3	County Counsel's Report – None
8.4	Investment & Finance Manager’s Report
8.5	Information Technology Manager’s Report

9.0

Adjournment

August 28, 2001 - Board Minutes, as corrected

0108.1

Call to Order: Mr. Cottle, Chair, called the Public Session of the Board of Retirement to order at 1:00 p.m., August 28, 2001 in SamCERA’s Board Room, Suite 280, 702 Marshall, Redwood City.

0108.2

Roll Call: Mr. Bryan, Mr. Buffington, Ms. Colson, Mr. Cottle, Mr. Hoffman, Mr. McMahon & Ms. Salas. Excused: Ms. Stuart. One vacancy. Staff: Mr. McCausland, Ms. Manning, Mr. Clifton & Mr. Hood. Counsel: Ms. Carlson. Medical Adviser: Dr. Fracchia. Consultants: Ms. Jaddalah, Mr. Thomas & Mr. Gleason. Retirees 8, Actives 2, County 2.

Mr. McCausland reported that Mr. Carberry considered his resignation effective June 30, 2001.

0108.3

Approval of the Minutes: Mr. McCausland submitted the following clarification to 0107.6.8 ¶2 line 4: "Mr. Hoffman spoke against the motion arguing that SamCERA is too small to need to own a headquarters building and it would not be a prudent or cost-effective use of Board or staff resources ~~politically prudent~~ to do so." Motion by Hoffman, second by Bryan, carried unanimously, to approve the Minutes of the Meeting of July 24, 2001, as amended.

Motion by Hoffman, second by Colson, carried unanimously to approve the Minutes of the Special Meeting of August 8, 2001, as submitted.

0108.4.1

Oral Communications From the Board: None

0108.4.2

Oral Communications From the Public: None

0108.5

Benefit & Actuarial Services:

0108.5.1

Adoption of Consent Calendar: Motion by Hoffman, second by Salas, carried unanimously, to adopt the Consent Calendar as submitted:

Disability Retirements:

(a ) The Board finds that Shiri Ram is unable to perform his usual and customary duties as a Storekeeper, denies his application for Service-connected Disability and grants him a Non-Service Connected Disability Retirement.

(b) The Board finds that Kenneth Lane is unable to perform his usual and customary duties as a Utility Worker II, finds that his disability is Service Connected and grants his application for Service Connected Disability Retirement.

(c) The Board finds that Steven Semeniuk is unable to perform his usual and customary duties as a Correctional Officer, finds that his disability is Service Connected and grants his application for Service Connected Disability Retirement.

Service Retirements:

Bianchini, Carla

April 23, 2001 (from deferred)

Public Health Department

Holliday, Mary

May 4, 2001

General Hospital

Trezevant, Margaret

June 30, 2001

Mental Health Department

Nappi, Mary

July 1, 2001 (from deferred)

Treasurer’s Office

Bayer, Carol

July 15, 2001

General Hospital

Lahaderne, Lawrence

July 27, 2001

Probation Department

Walls, Harry

August 1, 2001

Probation Department

Williams, Diana

August 1, 2001 (redeposit/reciprocity)

Probation Department

Cuff, Carolyn

August 4, 2001

Probation Department

White, Mary

August 5, 2001

General Hospital

Santiago, Alfred

August 6, 2001

Public Works Department

Haas, Patricia

August 8, 2001

Human Services Agency

Radetich, Ronald

August 14, 2001

Sheriff’s Office

Flynn, Sharon

August 15, 2001

Public Health Department

Alvarez, Julio

August 25, 2001 (from deferred)

Treasurer’s Office

Barrie, Eileen

August 31, 2001

Library

Deferred Retirements:

Egan, Lewis

Reciprocity

Johnson, Cheryl

Reciprocity

Marengo, Edward

3/G2

Reciprocity

Thorsby, James

Reciprocity

Willsey, Stephanie

Reciprocity

Woo, Cynthia

Reciprocity

Clark, Stacey

Cook, Violet

Green, Lynda

3/G2

Parsons, William

Romero, Claudia

Schmiedel, Cheryl

3/G2

Strobeck, Marie

Mejia, Victoria

Withdrawal Refunds:

Madueno, Mauricio

G4 non-vested

156.09

Lupien, Lynnette

G4 non- vested

1,273.95

Loth, Kevin

G4 non-vested

1,891.21

Javier, Maria

G4 non-vested

3,496.28

Daley, Lynn

G2 vested

13,446.62

TOTAL FOR AUGUST:

$20,264.15

Withdrawal Rollover:

Yuen, Lissa

G4 non-vested

424.35

Pierluissi, Edgar

G2 vested

40,023.98

More, Terry

G4 non-vested

24,514.95

McGuire, Jeanne

G2 vested

11,518.13

McCubbin, Diane

G4 non-vested

289.33

Maerowitz, Valerie

G2 vested

14,730.00

Frisbie, Anne

Quadro

19,034.08

Berry, George

G2 vested

12,967.34

Alexanian, Herminee

G4 non-vested

14,251.99

TOTAL FOR AUGUST:

$137,754.15

0108.5.2

Consideration of items removed from Consent Calendar: None.

0108.5.3

Consideration of the Service-Connected Disability application of Anna Hazley: Dr. Fracchia reviewed Ms. Hazley’s disability application. Ms. Hazley reviewed her accident and symptoms for the Board. Mr. McMahon asked Ms. Hazley a number of questions regarding the injury to her finger vs. the injury to her elbow. Charlene Shores, President, AFSCME Local 829, noted that Ms. Hazley had worked for the County for 31 years in one of the County’s most physically demanding positions and reminded the Board of the applicable legal standards. Several trustees thanked Ms. Hazley for appearing and helping the Board understand the cause of her disability.

Motion by Colson, second by Hoffman, carried unanimously to find that Anna Hazley is unable to perform her usual and customary duties as a Medical Services Assistant, to find that her disability is Service Connected and to grant her application for Service Connected Disability Retirement.

0108.6

Investment Management Services & Investment Committee Report: Ms. Colson presented the Investment Committee Report.

0108.6.1

Acceptance of Monthly Portfolio Performance Report: Ms. Colson reported that SamCERA’s return for the 12-months ending July 31^st was –3.58% vs. –5.50% for the policy benchmark. (She noted that the numbers were reversed in the agenda item.)

Market value and performance for the month ending July 31^st was as follows:

Asset Class

Market Value

1-month

1-year
TTWRR

5-year
TTWRR

Domestic Equity International Equity Total Equity Fixed Income Real Estate Cash Equivalents	$ 596,449,179 160,111,413 $ 756,560,592 439,163,369 106,663,776 33,372,222	-2.30% -2.08% -2.25% 2.36% 0.82% 0.35%	-11.96% -18.72% -13.55% 13.29% 14.07% 5.65%	12.95% 10.24% 7.41%

Total Fund Benchmark	$1,335,759,959	-0.48% -0.78%	-3.58% -5.50%	9.64% 9.09%

Ms. Colson reported that the Committee had reviewed the monthly reconciliation of returns, noting that there are still pricing issues to review with Deutsche Asset Management, but that the reconciliation process is working well.

Ms. Colson reported that staff had surveyed the treatment of tax reclaim accounts by other pension funds and noted that SamCERA’s treatment is consistent with other funds’. However, the title of the item on the State Street report will be changed from "Transitional Fund Aggregate" to "Tax Reclaim Account Receivable" for clarity.

Ms. Colson reported that, in accordance with §20 of SamCERA’s Investment Plan, Mr. Clifton will rebalance the Retirement Fund, as follows: From BGI US Debt Fund -$32 million, From DAMI- $24 million, From Cash -$17 million; To BGI Russell 1000 Fund +$56 million, To BIAM +$17 million. In response to a question from Mr. Hoffman, Ms. Colson noted that the Investment Committee had considered other alternative rebalancing scenarios, but accepted the staff recommendation to adhere to the rebalancing plan.

Before rebalancing, the Equity Portfolio is 8.81% below target, the Fixed Income Portfolio is 4.24% above target, the Real Estate Portfolio is 2.04% above target and Cash Equivalents is 2.53% above target. After rebalancing, the Equity Portfolio will be 3.31% below target, the Fixed Income Portfolio will be on target, the Real Estate Portfolio will still be 2.04% above target and the Cash Equivalents will be 1.25% above target.

Ms. Colson and Mr. Cottle noted that each of SamCERA’s active managers added value to the portfolio during the past year, adding 1.98% of return above their policy benchmarks.

0108.6.2

Selection of Investment Consultant: Ms. Colson reported that the Committee had reviewed Mr. Clifton’s analysis of the Strategic Investment Solutions (SIS) contracts with Alameda, Stanislaus and San Joaquin in contrast to SamCERA’s draft contract. It was noted that many of the items that are specifically spelled out in SamCERA’s draft contract are included within the general "full retainer services" in the other contracts. The Committee also reviewed the web-based sample performance report provided by Wurts & Associates (Wurts).

In response to a question from Mr. Bryan, Mr. McCausland noted that neither firm had proposed fee revisions since the August 8^th meeting. The Board reviewed the strengths and weaknesses of both the Wurts and SIS proposals and the trustee’s concerns regarding SIS’ fees.

Motion by McMahon, second by Buffington, failed three ayes (Buffington, McMahon & Bryan) to four noes (Colson, Cottle, Hoffman & Salas), to retain Wurts & Associates.

Mr. Bryan had sought to abstain noting that he supported the selection of SIS though he could not support the $200,000 per year proposed fee. However, Ms. Carlson advised him that he was required to vote.

Motion by Hoffman, second by Colson, failed four ayes (Colson, Cottle, Hoffman & Salas) to three noes (Buffington, McMahon & Bryan), to retain Strategic Investment Solutions subject to the following conditions: (1) the term of the contract shall be for three-years; (2) the contract shall be cancelable on thirty-days notice by either party; (3) the contract shall be subject to annual review of the scope of services, fees and performance and (4) the contract is acceptable to both parties.

Motion by Buffington, second by McMahon, failed two ayes (Buffington, McMahon) to five noes (Bryan, Colson, Cottle, Hoffman & Salas) to table the Selection of Investment Consultant.

Motion by Colson, second by Bryan, carried five ayes (Bryan, Colson, Cottle, Hoffman & Salas) to two noes (Buffington, McMahon), to retain Strategic Investment Solutions as the Board of Retirement’s Investment Consultant, subject to the following conditions: (1) SIS agrees that the fee for full retainer services shall not exceed $175,000 per year during the initial three-years; (2) the term of the contract shall be for three-years; (3) the contract shall be cancelable on thirty-days notice by either party; (4) the contract shall be subject to annual review of the scope of services, fees and performance and (5) the contract is acceptable to both parties.

0108.6.3

Annual Investment Manager Review – Deutsche Asset Management: Christopher Gagnier, Director & Portfolio Manager, and Jill Rasinski, Assistant Vice President Client Servicing made the presentation on behalf of Deutsche Asset Management, Inc. (DAMI). Ms. Rasinski reviewed DAMI’s efforts to strengthen support for their West Coast clients. She reviewed SamCERA’s active fixed income objective of outperforming the Lehman Aggregate Bond Index by 50 basis points per year net of fees, as well as the constraints set forth in SamCERA’s Investment Plan. Mr. Gagnier reviewed DAMI’s bottom-up investment philosophy and its sector-specialist-based investment management team. He noted that taxable municipals is an often neglected sector where DAMI is able to add value.

Mr. Gagnier noted that SamCERA’s DAMI return was strong last year even as spreads widened. DAMI’s security selections successfully offset the negative impact of widening spreads for the year. He emphasized that DAMI returns are largely income-based, rather than appreciation-based. Since inception, 56% of SamCERA’s DAMI return has come from coupon income.

He reviewed the composition of SamCERA’s portfolio and the changes that DAMI made to it over the year. He noted that DAMI’s risk controls require that the effective duration of the portfolio closely track the effective duration of the market. DAMI uses undervalued securities to add value. SamCERA’s AA portfolio reflects DAMI’s commitment to investing in high quality securities. He reviewed the quality and spread of a sample of securities in the portfolio.

In response to a question from Mr. Cottle, Mr. Gagnier stated that he would take responsibility for reviewing the pricing discrepancies between DAMI and State Street. He noted that they do use different pricing sources, but that the differences should not be significant.

In response to concerns raised by Mr. Cottle, Ms. Rasinski acknowledged that the semi-annual compliance certification statement had not been fully completed and that she would take responsibility for resubmitting the statement.

In response to a questions from Ms. Colson & Mr. Cottle, Mr. Gagnier reviewed the differences between DAMI’s Core and Core-Plus strategies, noting that DAMI caps the annual growth in Core-Plus assets so that the investment strategy will not be compromised. He noted that the goal for Core is to outperform the benchmark by 50 basis points per year on average. The Core-Plus has a more aggressive 100 – 150 basis points over a market cycle through the addition of high yield securities. Because of the use of lower grade securities, the Core-Plus portfolio will under perform the benchmark during periods when high yield securities under perform investment grade securities. In response to a question, Mr. Gagnier stated that fixed income is an asset class where active managers should be able to out perform passive managers fairly consistently, and tactically this is a good time to consider Core Plus because high yield has just gone through a period of under performance.

Mr. Cottle thanked Mr. Gagnier and Ms. Rasinski for their efforts.

0108.6.4

Approval of Topics for Investment Manager Review – INVESCO Realty Advisors: Ms. Colson reviewed the changes made by the Investment Committee and requested that other trustees share their questions with staff.

0108.6.5

Acceptance of Report on Performance Survey of CALAPRS member systems: Mr. McCausland noted that 26 California public pension funds had participated in the survey of returns for the period ending June 30th. He noted that Mr. Hoffman had requested the survey during the July meeting of the Board. He distributed charts detailing the results of the survey, which can be summarized as follows:

MEASURE	1-YEAR	3-YEAR	5-YEAR
# Of Observations	26	20	19
Range of TTWRR	18.32%	5.21%	3.87%
Median TTWRR	-4.10%	6.02%	10.73%
Mean TTWRR	-3.38%	5.93%	10.89%
Standard Deviation	3.75%	1.21%	1.12%
SamCERA Return	-4.25%	3.61%	9.03%
SamCERA Percentile	57^th	99^th	99^th

Mr. McCausland reported that 50% of the returns in the 1-year survey fell between the Mean (–3.38%) and –1 Standard Deviation (–7.13%). In a normal distribution only 34% of the observations would be expected to fall within this range. This finding indicates that the distribution of returns for the past year was negatively skewed.

He noted that the best performing fund for the year wound up with value stocks comprising 41% of the market value of their portfolio on June 30^th.

Mr. McCausland pointed out the typical narrowing of the dispersion of returns over the three and five year periods. He noted that there is an 18.32% spread between the highest and lowest one-year return, but only a 3.87% spread between the highest and lowest five-year return.

Mr. Cottle noted that SamCERA did reasonably well during the past year, but lagged behind the survey participants over the three and five year horizons.

Without objection, Mr. Cottle accepted the report.

0108.7.0

Board and Management Support Services & Audit Committee Report: Mr. Clifton reported that the Audit Committee met on July 25^th.

0108.7.1

Acceptance of Auditor’s Report on the Review of Great Plains and the Procedures Manual: Mr. Clifton reported that the Audit Committee met with the County Auditor and his staff to review the final report of the special audits that the Board had requested. He noted that the audit concluded that the Great Plains software was adequate for SamCERA’s needs and met the auditor’s needs. The audit recommends implementation of the password protection and function segregation features of Great Plains. He also reported that the audit concluded that the Procedures Manuals project was adequate for SamCERA’s needs and met the auditor’s needs. The audit recommends that the manuals highlight internal control steps and cross-reference and group related procedures. Staff concurs with the audit recommendations and will be implementing them. Without objection, Mr. Cottle accepted the report.

0108.7.2

Auditors Entrance Interview for the June 30, 2001 Financial Audit: Mr. Clifton reported that the Audit Committee had met with the County Auditor and the new audit team for SamCERA. The Auditor and SamCERA’s staff agreed to work together to provide the County with the information needed to close its books quickly, but to do so without jeopardizing the quality of SamCERA’s audit. The Committee received assurances that sufficient time would be devoted to the audit to produce a well thought out Management Letter. The Committee also reviewed the fact that the County’s financial statements treat the Retirement Fund as an unencumbered asset of the County, rather than as a trust fund. Mr. Huening indicated to the Committee that he wishes to present the Retirement Fund balances more clearly in this year’s statements. Without objection, Mr. Cottle accepted the report.

0108.7.3

Annual Review of the Separate Property Value Optimization Reports: Mr. Clifton reported that the Committee had previously selected three properties for review. Members of the Committee were provided with copies of the Value Optimization Plans for Boca Colony Apartments, Highland Bank Building and Hunter’s Creek Shopping Center. The Committee reviewed each of the plans in detail. The Committee concluded that the plans were well prepared and provided a good amount of detail. Without objection, Mr. Cottle accepted the report.

The Committee expressed a desire to better understand INVESCO’s investment, optimization and disposition strategies. The Committee did recommend that the Board review the Boca Colony Apartments’ Value Optimization Plan with INVESCO during the manager’s annual review on September 25^th. The Board considered the Committee’s recommendation and concluded that it is the Committee’s role to perform the review of Value Optimization Plans. Without objection, Mr. Cottle tabled the Committee’s recommendation.

0108.7.4

Approval of Amendment to Audit Committee Meeting Dates for Fiscal Year 2001/2002: Mr. Clifton reported that Audit Committee had adopted its work plan and meeting schedule for the year. Without objection, Mr. Cottled accepted the report.

0108.7.5

Consideration of Topics for the January Planning Retreat: Mr. Clifton reported that the Committee did not propose any additional items for the January Planning Retreat.

In response to a suggestion from Ms. Colson and following a general discussion, it was agreed that the discussion of SamCERA’s funded status will be recast to encompass SamCERA’s current and future actuarial funding challenges, such as Ventura II, annual benefit payments that exceed annual contributions, collective bargaining for improved benefit formulas and retiree cost of living issues.

0108.7.6

Approval of Participation in Institutional Investor Institute’s Consultants’ Roundtable in Chicago: Mr. Hoffman requested permission to participate in the Consultants’ Roundtable. The Board reviewed other programs sponsored by III that trustees had found valuable. Motion by Colson, second by Buffington, carried unanimously to approve Mr. Hoffman’s participation in the Institutional Investor Institute’s Consultants’ Roundtable in Chicago.

0108.8

Approval or Acceptance of Reports:

0108.8.1

Report of Actions Taken in Closed Session: Mr. McCausland reported that Mr. Cottle convened the Board in Closed Session at 3:30 p.m. Ms. Carlson reviewed the outstanding "Ventura II" issues raised by Judge Pollak’s preliminary decision and the procedural steps that will precede his issuance of a final decision. The Board took no action in Closed Session. There being no further business, Mr. Cottle adjourned the Closed Session at 3:54 p.m.

0108.8.2

Chief Executive Officer's Report: Mr. McCausland reviewed several educational programs with the Board.

He distributed an article from the Economist which reports that this is the first investment driven global recession since World War II; all of the other recessions have been the result of inflation-fighting interest rate increases. Consequently, traditional recovery stimulating strategies may be less effective in the current environment.

0108.8.3

County Counsel's Report: None.

0108.8.4

Investment & Finance Manager’s Report: Mr. Clifton reported that INVESCO Realty Advisers is considering a second offer for the Fremont property. •He distributed copies of the R.V. Kuhns December 31, 2000 Public Fund Universe Analysis Report. •He reported that final year-end charges had been received from County Counsel, Controller’s Office and the Information Services Department, which increased expenditures $17,898 above the amount reported last month.

0108.8.5

Information Technology Manager’s Report: Mr. Hood reported that he has begun his analysis of the pros and cons of upgrading to PensionGold Version 2. He provided preliminary results of his survey of PensionGold maintenance costs. SamCERA currently pays approximately $30,000 for Version 1. Version 2 user Santa Barbara (a smaller system) is currently paying approximately $35,000, while San Jose (a larger system) expects to pay $65,000 this year. LRS uses membership as a reference point for calculating cost to maintain the system.

At this point it appears that one of the main attractions of Version 2 would be enhanced speed for remote users. Since the County’s retiree health benefits program is administered from a remote site, this feature has great appeal. However, that factor alone will not be sufficient to justify an upgrade to Version 2. Mr. Hood will continue to provide the Board with progress reports on his cost-effectiveness analysis.

Mr. Hood reported that he had attended an Executive Summit hosted by LRS on the future of Information Technology. One concept that he found attractive is LRS’ interest in developing a data warehouse model that would provide SamCERA with the ability to conduct trend analyses and other in depth research studies using its PensionGold data.

0108.9

Adjournment in Memory of the following Deceased Members: There being no further business, Mr. Cottle adjourned the meeting at 3:55 p.m. in memory of the following recently Deceased Members:

THOMPSON, JOHN

MAY 16, 2001

ENVIRONMENTA HEALTH

KIMBLE, MARIAN

JUNE 6, 2001

LIBRARY

PERSSON, LARRY

JUNE 25, 2001

DEPARTMENT OF SOCIAL SERVICES

JOHNSON, LOIS

JULY 1, 2001

CRYSTAL SPRINGS REHAB CENTER

MORGAN, ELENORE

JULY 7, 2001

RECORDER'S OFFICE

VAN SANDT, CURTIS

JULY 8, 2001

AGRICULTURAL COMMISSIONER

JONES, JEANETTE

JULY 10, 2001

BENEFICIARY OF JACK

SOUTHWICK, VIRGINIA

JULY 13, 2001

CRYSTAL SPRINGS REHAB CENTER

RAUCH, ESSIE

JULY 15, 2001

LIBRARY & BENEFICIARY OF WILLIAM

SULLIVAN, CATHERINE

JULY 16, 2001

DEPARTMENT OF SOCIAL SERVICES

THOMAS, RICHARD

JULY 17, 2001

MOSQUITO ABATEMENT

FALLSTEAD, ELEANOR

JULY 18, 2001

BENEFICIARY OF CORAL

CARR, DONALD

JULY 20, 2001

BENEFICIARY OF KATHRYN

COONEY, RUSSELL

JULY 20, 2001

CIVIL SERVICE COMMISSION

O'LEARY, MICHAEL

JULY 21, 2001

SHERIFF'S DEPARTMENT

CAROL, DENIS

JULY 22, 2001

SHERIFF'S DEPARTMENT

MILLER, JAMES

JULY 31, 2001

PARK & RECREATION

NUTTALL, JEAN

AUGUST 1, 2001

HEALTH & WELFARE

MEYER, CHESTER

AUGUST 2, 2001

BENEFICIARY OF JOAN

SCHMIDT, ORABELLE

AUGUST 4, 2001

TREASURER'S OFFICE

TRIAS, GERVACIO

AUGUST 5, 2001

CONTROLLER'S OFFICE

STARR, HOWARD

AUGUST 9, 2001

BENEFICIARY OF JEAN

WILLIAM R. COTTLE, Chair

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