October 23, 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) – None

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

4.2

Oral Communications From the Public

5.0

Benefit & Actuarial Services

5.1

Adoption of Consent Calendar

5.2

Consideration of items removed from Consent Calendar

5.3

Public Hearing on Regulation authorizing Purchase of Upgrade of Plan 3 Service Credit

6.0

Investment Management Services & Investment Committee Report

6.1

Acceptance of Monthly Portfolio Performance Report

6.2

Acceptance of Strategic Investment Solutions’ Performance Analysis for periods ending June 30th

6.3

Annual Investment Manager Review – Barclays Global Investors

6.4

Approval of Schedule for Asset / Liability Modeling Study

6.5

Approval of Asset/Liability Modeling Study Phase One: Determination of Suitable Asset Classes, Constraints and Weighting Scheme for Integration of Sub-Classes

6.6

Acceptance of Report on San Mateo County Housing Finance Workshop

7.0

Board and Management Support Services & Audit Committee Report

7.1

Acceptance of William M. Mercer's Actuarial Valuation as of June 30, 2001

7.2

Approval of SamCERA Financial Statements & Accompanying Notes for Period Ending June 30,2001

7.3

Introduction of SamCERA's Comprehensive Annual Financial Report

7.4

Approval of Authorization to Solicit Proposals for Audit Services

7.5

Acceptance of Quarterly Administrative & Professional Services Budget Report

7.6

Approval of Recommendations of the Ad Hoc January Retreat Planning Committee

7.7

Approval of participation in meeting of the California Debt and Investment Advisory Commission

8.0

Approval or Acceptance of Reports

8.1

Report of Actions Taken in Closed Session – None

8.2

Chief Executive Officer's Report

8.3

County Counsel's Report – None

8.4

Investment & Finance Manager’s Report – None

8.5

Information Technology Manager’s Report

9.0

Adjournment

October 23, 2001 – Board Minutes, as corrected

Oral Communications From the Board: Ms. Stuart provided the Board with a written report on her participation in the California Retired County Employees’ Association’s meeting in Oakland. She requested that a new law sponsored by CRCEA authorizing Alternate Retiree Trustees be placed on the November Board agenda for consideration.

Mr. Hoffman resigned from the Audit Committee. Later in the meeting he indicated that he had advised the Board of Supervisors that he will resign from the Board on December 31^st due to the demands of his other commitments. On behalf of the Board, Mr. Cottle expressed appreciation for Mr. Hoffman’s contributions to SamCERA.

Mr. Cottle appointed Mr. Lewis to the Audit Committee and named him Chair of the Committee.

Adoption of Consent Calendar: Without objection, Mr. Cottle removed the applications of Judith Moore (Ms. Colson), Marya Vogt (Ms. Colson) and Kimberly Sullivan (Ms. Salas) from the Consent Calendar.

Mr. Cottle instructed staff to incorporate a statement in the staff recommendation that explains the procedural situation when individuals take a Service Retirement while waiting for a determination on their application for a disability retirement.

Motion by Hoffman, second by Bryan, carried unanimously, to adopt the Consent Calendar, as amended

Disability Retirements:

The Board finds that Eileen Barrie is unable to perform her usual and customary duties as a Sr. Library Assistant, finds that her disability is Non-service Connected, and grants her application for Non-service Connected Disability Retirement.

The Board finds that Gladys Kurzuk-Howard, is unable to perform her usual and customary duties as a Staff Nurse, finds that her disability is Non-service Connected, and grants her application for Non-service Connected Disability Retirement.

In response to questions from Ms. Colson, Dr. Fracchia noted that he had concluded that Ms. Moore never fully recovered from the trauma resulting from the multiple stab wounds she received in the course of performing her duties and Ms. Carlson noted that there is no time limit on how long a specific injury can be considered as the basis for granting a disability benefit.

Motion by Bryan, second by Salas, carried unanimously to find that Judith Moore, is unable to perform her usual and customary duties as a Mental Health Nurse, find that her disability is Service-connected, and grant her application for Service-connected Disability Retirement.

In response to questions from Ms. Colson, Dr. Fracchia noted that Ms. Vogt’s injuries did occur in the course of her duties, that she had fully followed the advice of her physicians and that she could no longer perform her duties as a Deputy Sheriff.

Motion by Hoffman, second by Stuart, carried unanimously, to find that Marya Vogt, is unable to perform her usual and customary duties as a Deputy Sheriff, find that her disability is Service-connected, and GRANT her application for Service-connected Disability Retirement.

In response to questions from Ms. Salas, Dr. Fracchia indicated that he was unable to determine the service-connected nexus of Ms. Sullivan’s disability, but that he did conclude that she could no longer perform her usual and customary duties. Ms. Salas and Mr. Bryan expressed a desire to have Ms. Sullivan appear before the Board to make her case.

Motion by Bryan, second by Salas, carried unanimously, to invite Kimberly Sullivan to appear before the Board on November 27^th to discuss her application for a Service-connected Disability.

Steve Perry, representing AFSCME, noted that AFSCME and the County agreed to support the purchases during the last round of collective bargaining and that the Board of Supervisors recently adopted a resolution authorizing the purchases. Mr. Perry urged the Board to adopt the new Regulation.

There being no further comments from the public, Mr. Cottle closed the Public Hearing and instructed Mr. McCausland to place the Regulation on the November 27^th Agenda for Adoption.

INVESTMENT MANAGEMENT SERVICES & INVESTMENT COMMITTEE REPORT: Ms. Colson presented the Investment Committee Report.

Acceptance of Monthly Portfolio Performance Report: Ms. Colson reported that SamCERA’s return for the 12-months ending September 30^th was –12.16% vs. –14.88% for the policy benchmark.

Market value and performance for the month ending September 30th were as follows:

Ms. Colson noted that the Investment Committee continues to review the ongoing disparity between the pricing sources used by Deutsche Asset Management and State Street in pricing the active fixed income portfolio. She also noted that staff had been instructed to investigate how the domestic equity portfolio in aggregate could have lagged the benchmark for the month by 12 basis points, while the individual components tracked the benchmark within 1 basis point. Mr. Clifton indicated that the timing of the rebalancing could account for the disparity.

Mr. Cottle noted that the five-year returns of 6.88% lags well below the Funds 8.25% actuarial interest assumption.

Acceptance of Strategic Investment Solutions’ Performance Analysis for periods ending June 30^th: Mr. Hoffman complimented SIS on the content and the format of the report. Ms. Colson noted that the June 30^th data was now ancient history, but that trustees should share their recommendations and requests with the consultant for incorporation into future quarterly reports.

Without objection, Mr. Cottle accepted the report.

As of June 30, 2001:

Annual Investment Manager Review – Barclays Global Investors: Barton Waring introduced Mark Friebel, who is assuming responsibility for the SamCERA relationship, and his associate Shaughnessy Glennon Pierce.

Mr. Friebel reviewed the three portfolios managed for SamCERA by BGI. He noted that the Russell 1000 Equity Index Fund fully replicates the index and managed $11.148 billion as of September 30^th. Since inception of the SamCERA portfolio on February 28, 1995, the R1000 Fund has generated an annualized return of 13.80%, with annualized risk of 16.28%. This compares to the R1000 Index return of 13.78% and risk of 16.32% over the same period.

The Russell 2000 Equity Index Fund is an optimized stratified sample of 1,852 securities and managed $1.448 billion as of September 30^th. Since inception of the SamCERA portfolio on May 31, 2000, the R2000 Fund has generated an annualized return of -10.17%, with annualized risk of 24.32%. This compares to the R2000 Index return of –10.22% and risk of 24.32% over the same period.

In response to questions from the Board, it was noted that BGI devotes a great deal of effort to minimize clients’ exposure during the reconstitution of the Russell indices. Mr. Waring noted that each time the Russell indices have been reconstituted, BGI has been able to add value to the portfolios. Mr. Friebel reminded the Board that their mandate is to track the performance of the indices with minimal tracking error.

The US Debt Index Fund managed $16.83 billion on September 30^th. On that date it held 2,953 of the 6,616 issues in the Lehman Brothers Aggregate Bond Index. While the government sector reflects nearly full replication, the other sectors are stratified. Since inception of the SamCERA portfolio on April 30, 1996, the US Debt Index Fund has generated an annual return of 8.08%, with annualized risk of 3.21%. This compares to the Lehman Index return of 8.00% and risk of 3.20% over the same period.

In response to questions from the Board, it was noted that BGI offers a Core-Active fund that has risk characteristics similar to the US Debt Index Fund, but which generates excess returns of 50 to 75 basis points through the modular use of high yield and or emerging market debt.

In response to questions from the Board, it was noted that a few Core-Active clients have elected to use the newer Universal Index due to its high yield component, but that most clients still use the Lehman Aggregate as their benchmark.

The Board reviewed the Semi-Annual Compliance Certification Statement and the responses to the Investment Manager Annual Review questions. In response to questions from the Board it was noted that two investment Principals had departed but that all senior professional staff remains in place. Mr. Waring noted that Will Geyer had assisted him with preparation of a recent BGI white paper.

In response to questions from the Board, it was noted that all BGI commingled funds utilize securities lending as an additional source of income. It was noted that clients had never been affected by a default, including the Barings’ default. Ms. Colson noted that it is very important for the Board to understand BGI’s securities lending criteria, since the Board rejected the use of securities lending by SamCERA’s custodian. BGI devotes significant resources to risk control and would welcome a visit from trustees to receive a briefing from members of the risk management team.

Approval of Schedule for Asset / Liability Modeling Study: Ms. Colson noted that the Investment Committee had not reached a consensus on the schedule for proceeding with the asset / liability modeling study. Mr. Buffington noted that the markets were in retreat and that the liabilities were in a state of flux that could be altered significantly by next year’s round of collective bargaining. He recommended delaying the study. Mr. Hoffman noted that things are always in a state of flux and that a study would be very timely in terms of reassessing the long term outlook for the capital markets in light of recent events. Ms. Colson noted that there are several new trustees since the last study and it is always good for all trustees to understand the inputs that go into the asset allocation process. Mr. Cottle noted that it would be very helpful for the Board to have the benefit of the consultant’s capital market assumptions. Mr. Buffington, Mr. Bryan, Ms. Stuart and Mr. McMahon expressed their desire to wait a year to let the current middle-of-the-road allocation have a run and the collective bargaining process and Ventura issues to run their course. Mr. Lewis noted that this is an important time to understand the additional risk the fund may need to assume in order to work its way out of the current hole. Mr. Hoffman noted a desire to have a fresh look at real estate and fixed income relative to stocks. Mr. Cottle noted that a 3-year cycle for an asset allocation study makes a lot of sense and the time will be up soon, but that it is appropriate to give the Board another month to evaluate the proposed schedule. Mr. Hoffman noted that the Board is paying a consultant for advice and it behooves the Board to make full use of the professional service for which it has paid. Ms. Salas expressed support for proceeding with a study so that the Board can more fully understand its options. Mr. Thomas noted that the process of going through the study provides an excellent educational forum for the trustees, regardless of whether or not the Board decides to make any changes as a result of the study. He indicated that SIS is more concerned with SamCERA’s manager structure than with its asset allocation.

Without objection, Mr. Cottle continued the Item to the November meeting.

Approval of Asset/Liability Modeling Study Phase One: Determination of Suitable Asset Classes, Constraints and Weighting Scheme for Integration of Sub-Classes: Without objection, Mr. Cottle continued the Item to the November meeting.

Acceptance of Report on San Mateo County Housing Finance Workshop: Ms. Colson reported that the Investment Committee had met with the County’s Housing Consultant and staff this morning. It was agreed that Mr. McCausland would serve as liaison to the County’s effort to find investment vehicles that would meet the Board’s fiduciary standards.

BOARD AND MANAGEMENT SUPPORT SERVICES & AUDIT COMMITTEE REPORT

Acceptance of William M. Mercer's Actuarial Valuation as of June 30, 2001: Mr. Andy Yeung and Ms. Marcia Chapman presented the results of the June 30^th Actuarial Valuation. Mr. Yeung reported that the contribution rates for next year would change very slightly, with the actuary estimating that the composite rate would decline by 14 basis points to 11.78%. Mr. McCausland noted that Plan 4 rates increase very slightly, while rates for Plans 1, 2 and 3 decline very slightly.

Mr. Yeung reported that the Funding Ratio improved from 98.4% last year to 98.6% this June 30^th.

Mr. Yeung reported that the five-year smoothing of the actuarial value of assets has dampened the negative market return of the past year. However, as of June 30^th the Total Deferred Return had swung from a positive $60.6 million last year to a negative $127.6 million this year. Consequently, SamCERA will be amortizing a significant negative deferred return each year for the next five years. It is probable that rates will need to be increased in future years unless investment returns over the period are well in excess of the actuarial interest assumption.

In response to a question from Mr. Cottle, Mr. Yeung reported that the actuary recommends that there be no changes to the actuarial assumptions or methodology at this time and that SamCERA’s practices are consistent with the actuary’s other clients.

Mr. Bryan noted that the County contribution had declined from 22% in 1995 to less than 12% this year as a result of the Board’s efforts to reduce the unfunded liability.

Motion by Bryan, second by Stuart, carried unanimously, to accept William M. Mercer’s Actuarial Valuation as of June 30, 2001.

Without objection, Mr. Cottle instructed Mr. McCausland to set the actuary’s recommended contribution rates for adoption on November 27th.

Approval of SamCERA Financial Statements & Accompanying Notes for Period Ending June 30,2001: Mr. Clifton presented the unaudited financial statements for the Board’s approval. He noted that the Audit Committee had reviewed the statements and forwarded them to the Board for approval. Mr. Cottle submitted several questions to Mr. Lewis regarding the contents of the notes to the financial statements. Mr. Clifton noted that the Audited Financial Statements should be available for the Board’s approval in November, which will then be incorporated into SamCERA’s Comprehensive Annual Financial Report.

Without objection, Mr. Cottle accepted the unaudited financial statements.

Introduction of SamCERA's Comprehensive Annual Financial Report: Mr. Clifton distributed a draft of SamCERA’s Comprehensive Annual Financial Report. He asked trustees to forward their questions and recommendations to him, so that he can incorporate them into the final draft that will be submitted to the Board for approval in November.

Approval of Authorization to Solicit Proposals for Audit Services: Mr. Clifton reported that the Audit Committee will continue to review the pros and cons of using County versus external audit services, but recommended against soliciting proposals for audit services at this time. Mr. Lewis noted that the Committee had instructed staff to conduct a survey of audit expenses incurred by other California public pension plans. Motion by Colson, second by Bryan, carried unanimously, not to issue a request for proposals at this time.

Acceptance of Quarterly Administrative & Professional Services Budget Report: Mr. Clifton reported that the Audit Committee had reviewed the budget report and forwarded it to the Board for approval.

Expenditures for Professional Services totaled $578,000 for the first quarter of the fiscal year, which is the equivalent of approximately 16.8 basis points on an annualized basis.

Expenditures for Administrative Services totaled $275,955 for the first quarter, or approximately 19.8% of the total annual budget. $166,606 was expended on Salaries & Benefits and $109,349 on Services & Supplies. Mr. Clifton noted that education expenses were running ahead of budget, due in part to pre-payment of annual dues and the Asilomar investment seminar. Mr. McCausland noted that salaries were probably running a little high due to overtime, though only 20.8% of the annual appropriation had been expended during the first quarter.

Following a general discussion, without objection, Mr. Cottle accepted the Quarterly Administrative & Professional Services Budget Report.

Approval of Recommendations of the Ad Hoc January Retreat Planning Committee: Mr. Lewis presented the recommendation of the committee. The Board will hold its Annual Planning Meeting on January 22^nd on the Franklin Templeton campus in San Mateo. Topics will include a California Economic Forecast from Gary Schlossberg of Wells Capital Management, an actuarial forecast from Andy Yeung of William M. Mercer, an asset allocation and manager structure educational session from Margaret Jadallah and Patrick Thomas of Strategic Investment Solutions, a post-retirement benefit education session from Paul Angelo of The Segal Company and an overview of SamCERA’s Business Plan from Mr. McCausland.

Following a general discussion, without objection, Mr. Cottle approved the recommendations of the Ad Hoc January Retreat Planning Committee.

Approval of participation in meeting of the California Debt and Investment Advisory Commission: Motion by Bryan, second by Salas, carried unanimously to approve Mr. McMahon’s participation in the Millbrae meeting of the California Debt and Investment Advisory Commission.

APPROVAL OR ACCEPTANCE OF REPORTS

Report of Actions Taken in Closed Session: None.

Chief Executive Officer's Report: Mr. McCausland encouraged trustees to forward a check to him for the personal premium for the non-recourse endorsement to SamCERA’s fiduciary liability policy, noting that the insurance carrier would not be in a position to issue invoices until the company had reconstructed records lost in the World Trade Center disaster.

Mr. McCausland noted that the SACRS Legislative Committee had distributed proposed legislation which if enacted would permit a Board of Supervisors to authorize members to purchase up to five years of "air time", so long as the member paid the full actuarial cost of the purchase. Following a general discussion, without objection, Mr. Cottle ruled that the Board would not take a position on the proposed legislation.

County Counsel's Report: None.

Investment & Finance Manager’s Report: None.

Information Technology Manager’s Report: Mr. Hood provided the Board with a written summary of current procedures utilized to insure that SamCERA can recover its data bases and applications in the event of a disaster.

Adjournment in Memory of the following Deceased Members: There being no further business, Mr. Cottle adjourned the meeting at 3:31 p.m. in memory of the following recently deceased members: