February 26, 2002 - Board Agenda

PUBLIC SESSION – The Board will meet in Public Session at 11:00 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 - None

5.0

Benefit Services

5.1

Adoption of Consent Calendar

5.2

Consideration of items removed from Consent Calendar - None.

6.0

Investment Management Services & Investment Committee Report

6.1

Acceptance of Monthly Portfolio Performance Report

6.2

Acceptance of SIS' Performance Analysis for periods ending 12/31/2001

6.3

Acceptance of Deutsche Asset Management's Compliance Certification Statement

6.4

Acceptance of Report on the Prepayment of the County's Contribution for FY 2002-2003

6.5

Introduction of Strategic Objectives Schedule for Fiscal Year 2002/2003

6.6

Review of the SamCERA's Capital Market and Inflation Assumptions

7.0

Board and Management Support Services & Audit Committee Report

7.01

Adoption of Cost of Living Allowance Resolution

7.02

Acceptance of Quarterly Administrative & Professional Services Budget Report

7.03

Annual Review of SamCERA's Mission, Goals & Objectives

7.04

Annual Review of SamCERA's Strategic Services Resolution

7.05

Introduction of Strategic Objectives Schedule for Fiscal Year 2002/2003

7.06

Introduction of SamCERA's FY 2002/2003 Budget

7.07

Annual Review and Revision of Code of Fiduciary Conduct

7.08

Annual Review and Revision of Conflict of Interest Code

7.09

Annual Review and Revision of Internal Controls Policy

7.10

Acceptance of Audit Services Survey

7.11

Acceptance of Real Estate Financial Reports and KPMG's Independent Auditor's Report Thereon

7.12

Authorization for Chief Executive Officer to contract for a Pension Management Software Study

7.13

Authorization for Special Actuarial Study of the Ventura Contingent Liability

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

8.4

Investment & Finance Manager's Report

8.5

Information Technology Manager's Report

9.0

Adjournment

February 26, 2002 - Board Minutes, as corrected

Approval of the Minutes: Motion by Stuart, second by Lewis, carried unanimously, to approve the Minutes of the January 8, 2002 Special Meeting of the Board of Retirement as submitted.

Motion by Stuart, second by Lewis, carried unanimously, to approve the Minutes of the January 15, 2002 Special Joint Closed Session Meeting of the Board of Retirement and Board of Supervisors as submitted.

Ms. Arnott submitted the following correction to 020122.d¶2, line 2 ""...in most respects it..." Motion by Stuart, second by Lewis, carried unanimously, to approve the Minutes of the January 22, 2002 Meeting of the Board of Retirement as corrected.

Oral Communications from the Board: Mr. McMahon reported that he had participated in the Winter Roundtable of the Pacific Pension Institute and found its off-the-record presentations by international experts to be extremely candid, insightful and informative.

• Ms. Salas reported that she had participated in the CALAPRS Trustees Roundtable and found the discussions on asset allocation and shareholder litigation very beneficial. She noted that LACERA recovers ~$2 million per year from class action suits.
• Ms. Colson noted that the National Association of Securities Professionals will be meeting in San Francisco in June and that she has been asked to be a presenter. Without objection, Mr. Cottle instructed Mr. McCausland to place the NASP meeting on the March Agenda for the Board's approval.

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

The Board (a) finds that Margarita Krebs is unable to perform her usual and customary duties as a Custodian, (b) denies her application for Service-connected Disability, and (3) grants her a Non-Service Connected Disability.

The Board ratifies the following actions taken by staff pursuant to the Board's Delegation of Authority and the Regulations of the Board of Retirement:

Consideration of items removed from Consent Calendar: None.

Review of SamCERA's Medicare Part-B Premium Reimbursement Policy: Mr. McCausland provided an overview of Agenda Items 5.3 - 5.7 for those in the audience. [See 020122.5.6 for a comprehensive overview.]

Paul Scannell, Assistant County Manager, noted that Agenda Items 5.3-5.7 represent a very intricate plan to preserve the Medicare Part-B Premium Reimbursement Program. He noted that the plan is complex, but that certain elements of the plan can be implemented now to preserve Medicare Part-B reimbursements for at least the next year.

Mr. Scannell reviewed the history of the Ventura Contingency Reserve. He noted that the funding for the Reserve was diverted from employer reserves and that all interest earned on those funds should also be treated as funds diverted from the employer reserves. He noted that it was the Board's explicit policy to use the Reserve to pay for the expenses related to Ventura and then to revert any balances to employer reserves. He noted that Agenda Items 5.3-5.7 represent a change in that policy by characterizing the Reserve as "excess earnings" that can be used for the payment of ad hoc benefits.

Mr. Scannell noted that he understands the statutory basis in the '37 Act for creating "excess earnings." However, he emphasized that he knows intuitively that there are no true excess earnings when the fund is falling well below its 8.25% actuarial interest rate target in the current investment environment.

Mr. Scannell noted that the disappointing investment returns of recent years will result in increases in the County's contributions as those less than expected returns work their way through the actuarial smoothing process. Consequently, anything that diverts funds from the actuarial valuation assets will exacerbate an already difficult problem. Mr. Yeung noted that actuarial smoothing should permit SamCERA to credit interest to all reserves, even when the current year's returns are negative. Mr. Scannell noted that smoothing would eventually catch up with SamCERA, which will force increases in the employers' contribution rates.

Mr. Scannell reviewed the history of the Medicare Part-B Premium Reimbursement Program. He noted that the resolution implementing the program in 1998 stated that the funding would not increase the cost to the County, yet the actions the Board must contemplate today will increase the cost to the County by approximately 0.06% per year through December 31, 2011.

Mr. Scannell also noted that retirees have come to rely on the Medicare Part-B Premium Reimbursement Program and that its discontinuance would create a significant hardship for many. Therefore, Mr. Scannell recommended that the Board transfer sufficient funds from the Ventura Contingency Reserve to continue the program for the coming year.

Mr. Scannell encouraged the Board to defer action on the other items until Ventura costs become clear and the markets are stronger. He urged the Board not to lock itself into a multi-year funding mechanism based on diverting funds from the Ventura Contingency Reserve.

Mr. McCausland noted that Mr. Scannell's analysis was very thoughtful. He noted that the Ventura Contingency Reserve is not a valuation asset and that if it is not credited with interest there will be more money to credit to employer reserves, which are valuation assets. Consequently, he urged the Board not to defer action on the Interest Crediting Policy resolution. Mr. McCausland noted that with modifications the Ventura Contingency Reserve Policy could accommodate Mr. Scannell's concerns. Mr. McCausland recommended that the Board table consideration of the creation of an Ad Hoc Benefits Reserve as an additional accommodation of Mr. Scannell's concerns.

Mr. Cottle then instructed Mr. McCausland to introduce Agenda Item 5.3 - Review of SamCERA's Medicare Part-B Premium Reimbursement Policy.

Mr. Cottle noted that the Board has received no negative comments regarding reaffirmation of the Board's Medicare Part-B Premium Reimbursement Policy. Mr. Bryan noted that Mr. Scannell had articulated a very responsible position and he agreed that the Board did not need to create a multi-year funding mechanism at this time. Ms. Stuart noted that this is a very important benefit to SamCERA's retirees.

Motion by Stuart, second by Bryan, carried unanimously to reaffirm the Board's Medicare Part-B Premium Reimbursement Policy as set forth in Resolution 97-98-11, Establishing a Retiree Medical Benefits Program, and to recommend that the Board of Supervisors appropriate funds to continue the program in fiscal year 2002-2003.

Ms. Stuart extended the thanks and gratitude of the retirees in attendance from SCORPA for the Board's continued support for the program.

Adoption of Amendments to SamCERA's Litigation Contingency Reserve Policy: Mr. McCausland submitted changes to the draft resolution (1) to delete reference to an Ad Hoc Benefits Reserve and (2) to provide for a transfer of one-year's Medicare Part-B Premium Reimbursement funding on June 30, 2002.

Mr. McCausland noted that, while he strongly recommends adoption of this policy, the Board does have the authority to simply continue its current practice and force-feed the 401(h) account per the terms of its Interest Crediting Policy.

Mr. Yeung noted that the proposed policy places less of a burden on the County, because rather than diverting funds from the current year's investment income stream, the 401(h) funding will come from prior year earnings. Consequently, the proposed policies permit an additional ~$1.3 million to flow through to the valuation assets.

In response to a question from Mr. Buffington, Mr. McCausland noted that the Ventura Contingency Reserve was created through the reversal of interest that had been credited to employer reserves, thereby recasting them as "excess earnings" per the '37 Act. In response to a question from Mr. Lewis, Mr. McCausland noted that the '37 Act only permits the payment of ad hoc benefits from "excess earnings," hence the finding in the resolution that the Ventura Contingency Reserve consists of excess earnings. In response to a question from Mr. Buffington, Mr. McCausland noted that the Board has the authority to credit 100% of excess earnings to employer reserves, if it has no intent to fund ad hoc benefits.

In response to a question from Ms. Colson, Mr. McCausland noted that the reason for suspending the crediting of interest to the Ventura Contingency Reserve is so that more funds will be available to credit to the valuation assets.

In response to a question from Ms. Tonsfeldt, Ms. Carlson noted that there was no new information on the Fund's Ventura exposure, but that the timing for the filing of briefs had been accelerated. Mr. Lewis noted that the actuarial study proposed in Agenda Item 7.13 would provide many of the answers that the Board would benefit from having before it today. On the recommendation of Ms. Colson, draft language relating to the cost of Ventura was deleted from the proposed resolution.

On instruction from Mr. Cottle, Mr. McCausland and the actuaries diagramed the flow of funds for the Board. Ms. Colson noted that the proposed resolution as amended suspends the crediting of interest to the Ventura Contingency Reserve, deletes reference to the cost of Ventura and makes a one-year appropriation to the Medicare Part-B Premium Reimbursement Program.

Mr. Scannell noted that at some point the piper will have to be paid, but he concurred with the amendments to the draft resolution, given Mr. Yeung's explanation of the benefits of the proposed policy. Mr. Bryan noted that the proposed policy is more explicit than the current policy.

Motion by Bryan, second by Salas, carried unanimously, to adopt Resolution 01-02-03, Ventura Contingency Reserve Policy, as follows:

WHEREAS, Board Resolution 99-00-08 established the Ventura Contingency Reserve, as follows:

Resolved that the Board hereby establishes a Litigation Contingency Reserve to receive any employer contributions received in excess of those required to actuarially fund the system as determined utilizing the actuarial assumptions adopted herein; such excess contributions to be credited against the actuarial liability incurred pursuant to the final judgement in Teamsters Local 856 vs the Board of Retirement. And

WHEREAS, William M. Mercer initiated the Ventura Contingency Reserve with a transfer of $32,145,000 effective with the June 30, 1999 Actuarial Valuation; and

WHEREAS, the $32,145,000 transferred to the Ventura Contingency Reserve was investment income that would have otherwise been credited as interest to employer reserves per Resolution 98-99-20, hence such funds constituted excess earnings as defined by GC§31592.2 & GC§31592.4; and

WHEREAS, interest has been credited to the Ventura Contingency Reserve since its inception; and

WHEREAS, the Ventura Contingency Reserve is not included within the Valuation Assets for the purpose of calculating required contribution rates or funding status and, therefore, has a negative impact on both; and

WHEREAS, the Board wishes to revise and clarify its Ventura Contingency Reserve Policy. Therefore, be it

RESOLVED that the Board hereby reaffirms that the Ventura Contingency Reserve is reserved for the exclusive purpose of providing funding for the payment of expenses and enhanced benefits resulting from compensation issues that remained unresolved following the Supreme Court's decision in Ventura County Deputy Sheriffs' Association v. Board of Retirement of Ventura County... Be it further

RESOLVED that the Board hereby suspends the crediting of contributions and interest to the Ventura Contingency Reserve. Be it further

RESOLVED that the Board hereby transfers on June 30, 2002 to the 401(h) Account the difference between $1,340,000 and the balance in said Account from interest credited to the Ventura Contingency Reserve prior to the adoption of this resolution. Be it further

RESOLVED that the Board hereby declares its intent to transfer any unencumbered balance of the Ventura Contingency Reserve to employer reserves upon final resolution of Teamsters Local 856 vs. the Board of Retirement. Be it further

RESOLVED that the Board hereby authorizes the Chief Executive Officer to implement the provisions of this resolution.

Adoption of Ad Hoc Benefits Reserve Policy: Without objection, Mr. Cottle indefinitely tabled consideration of the proposed ad hoc benefits reserve policy.

Adoption of Amendments to SamCERA's Interest Crediting Policy: Mr. McCausland revised the draft amendments to reflect the Board's actions in Agenda Items 5.3 and 5.4.

Mr. Buffington questioned the need to credit member reserves at the actuarial interest rate, since the only time the interest matters to members is if they withdraw their funds. Mr. Bryan reminded Mr. Buffington that the Board had earlier agreed to credit member reserves at the actuarial interest rate and to give the County the full benefit of all other earnings. Mr. McCausland noted that members have no control over the investment of their funds nor any access to the employer's contributions and that refunds for the last five years ranged between $1.6 million and $1.8 million, or ~0.14% of the Fund per year. Consequently, crediting member reserves with the actuarial interest rate has a nearly unquantifiable impact on the employer contribution rates.

In response to questions from Mr. Scannell, Mr. McCausland noted that the actuary has generated a spreadsheet that is used to estimate the December 31st smoothed return and that Steps (d) and (e) could be consolidated with no adverse impact on the employer reserves. Mr. Yeung noted that Step (d) is used to clearly identify whether or not a Fund has earned its actuarial interest rate. In other Counties Step (d) is critical to the funding of ongoing ad hoc benefit programs, but Step (d) is not that important to SamCERA where Step (c) provides the funding for Medicare Part-B.

In response to a question from Mr. Lewis, Mr. McCausland noted that Step (d) was the critical factor that caused him to evaluate the situation and prepare Agenda Items 5.3-5.7 for the Board's consideration. He noted that he had been concerned that, if all reserves were credited with 4.125% on December 31, 2001, there was a strong possibility that the amount credited would exceed the total earnings for the fiscal year, thereby eliminating any reasonable basis for finding that "excess earnings" were available for the continued funding of Medicare Part-B.

Motion by Stuart, second by Salas, carried unanimously, to amend Resolution 98-99-20, Interest Crediting Rate Policy, as follows:

WHEREAS, Government Code §31591 states, in part, that regular interest shall be credited semiannually on June 30th and December 31st to all contributions in the retirement fund which have been on deposit for six months immediately prior to such date...; &

WHEREAS, Government Code §31592 provides that earnings of the retirement fund during any year in excess of the total interest credited to contributions and reserves during such year shall remain in the fund as a reserve against deficiencies in interest earnings in other years, losses on investments and other contingencies...; &

WHEREAS, Government Code §31453 provides that with respect to the rates of interest to be credited to members and to the county or district, the board may, in its sound discretion, recommend a rate which is higher or lower than the interest assumption rate established by the actuarial survey; &

WHEREAS, The May 23, 1996 Board Minutes, provide for the implementation of Governmental Accounting Standard #25, as follows:

(1) to use the fair market value of assets for the Statement of Net Plan Assets, (2) to use the actuarial value of assets as the accounting basis for the '37 Act mandated reserves included in the required GAS 25 footnote, (3) to add a Market Stabilization item to the reserves footnote to balance with the fair market value of assets, (4) to set aside 1% of the fair market value of assets as the Unallocated Fund Balance at the end of each fiscal year, (5) to use the net earnings on the actuarial value of assets for the purpose of recommending to the Board the amount available for the crediting of "interest" to the reserves and (6) to credit all "interest" to all reserves on a dollar weighted basis; &

WHEREAS, the Board wishes to clarify its interest crediting policy as set forth in Resolution 97-98-21. Therefore, be it

RESOLVED that the Board hereby authorizes the Chief Executive Officer to calculate the net earnings of the Retirement Fund based upon the actuarially smoothed market value of assets as of June 30^th of each fiscal year. Be it further

RESOLVED that the Board hereby credits the net earnings of the Retirement Fund to the Reserves of the Association in the following order:

(a) First on June 30^th and December 31^st, to Member Reserves, interest at one-half of the per annum actuarial interest rate on contributions and interest on deposit for the preceding six months.

(b) Second on June 30th, to the Reserve for Deficiencies in Interest Earnings and Other Contingencies, established pursuant to GC§31592 Reserve for Deficiencies (Unallocated Fund Balance), the positive or negative amount necessary to maintain such Reserve at 1% of the fair market value of the assets in the Retirement Fund.

(c) Third on June 30th, to the Reserve for Deficiencies in Interest Earnings and Other Contingencies Employer Reserves, the amount necessary when added to the balance of the current fiscal year's allocation to equal the employer contributions estimated by the actuary for Medicare Part-B Premium Reimbursements in the coming fiscal year.

(d) Fourth on June 30^th and December 31st, to Employer Reserves, interest at one-half of the per annum actuarial interest rate on contributions and interest on deposit for the preceding six months, except that such credit shall be suspended during periods in which the estimated semi-annual return on the actuarially smoothed market value of assets is less than one-half of the per annum actuarial interest rate.

(e) Fifth on June 30th, to Employer Reserves, the positive or negative balance of net earnings. Be it further

Resolved that the Board hereby authorizes the Chief Executive Officer to implement the provisions of this resolution and to report semi-annually on the amounts so credited.

Adoption of Contribution Rates & 401(h) Reserve Contribution for Fiscal Year 2002/2003: Mr. McCausland recommended that the Board adopt the contribution rates and Medicare Part-B appropriation recommended by the actuary.

Motion by Bryan, second by Lewis, carried unanimously, to adopt Resolution 01-02-04, Fiscal Year 2002-2003 Contribution Rates, as follows:

WHEREAS, Government Code §31453 mandates the periodic actuarial valuation of the Retirement Fund and requires that the Board...shall, at least 45 days prior to the beginning of the succeeding fiscal year, recommend to the Board of Supervisors such changes in the rates of interest, in the rates of contributions of members, and in the county and district appropriations as are necessary...; and

WHEREAS, Resolution 97-98-11 as amended sets forth the policy & procedures for SamCERA's Medicare Part-B Premium Reimbursement Program; and

WHEREAS, the Board has received, reviewed and approved the reports and recommendations from its actuary, William M. Mercer, Incorporated, and the Chief Executive Officer setting forth the changes necessary to assure the actuarial soundness of the Retirement Fund. Therefore, be it

RESOLVED that the Board hereby adopts the actuary's recommended Employer Contribution Rates for Fiscal Year 2002-2003 for the County and Mosquito Abatement District in accordance with the following schedule, as a percentage of salaries, effective July 1, 2002:

Be it further

RESOLVED that the Board, pursuant to Resolution 97-98-11, hereby

(a) certifies that the actuarial funding ratio as of June 30, 2001 exceeded 80%;

(b) requests that the Board of Supervisors contribute $1,340,000 to the 401(h) Reserve for the continuation of the Medicare Part-B Premium Reimbursement Program through Fiscal Year 2002-2003;

(c) requests that the Board of Supervisors instruct the Controller to make such contribution as a one-time lump sum deduction from the first biweekly employer contributions paid in accordance with the contribution rates set forth above, in an amount equal to the difference between $1,340,000 and the balance remaining in the 401(h) Reserve on July 1, 2002, as certified by the Chief Executive Officer;

(d) requests that the Board of Supervisors instruct the Controller to specifically designate in writing at the time of such contribution that it is being made only to the 401(h) Reserve;

(e) instructs the Chief Executive Officer to transfer to the County Advance Reserve from excess interest earnings in the Reserve for Deficiencies in Interest Earnings and Other Contingencies an amount equal to the net amount contributed to the 401(h) Reserve;

(f) certifies to the Board of Supervisors that the provisions of Resolution 97-98-11 as amended shall govern the management of SamCERA's 401(h) Reserve program and all County contributions thereto.

Be it further

RESOLVED that the Chief Executive Officer is hereby authorized to transmit these rates, requests and certifications to the Board of Supervisors and to take all actions necessary to provide for their implementation effective July 1, 2002.

Mr. Cottle then took up Agenda Items 6.6, 7.1 and 7.13, which are reported below.

INVESTMENT MANAGEMENT SERVICES & INVESTMENT COMMITTEE REPORT

Acceptance of Monthly Portfolio Performance Report: Without objection, Mr. Cottle accepted Mr. Bryan's recommendation that the reconciliation of manager performance be moved to the end of the monthly report format.

Ms. Colson reported that SamCERA's return for January was -1.02%, as was its benchmark, while for the 12-months ending January 31st the return was -6.05% vs. -7.96% for the policy benchmark. Market value and performance for the month ending January 31^st were as follows:

Mr. Clifton noted that this month's report includes an analysis of the actual vs. target asset allocation. He reported that he needs to rebalance the BGI US Debt Fund as part of a program to generate funds to meet retiree payroll. He noted that he will need a second draw down as well before June 30^th, but he has not yet determined which account to tap. Without objection, Mr. Cottle accepted the report.

Acceptance of SIS' Performance Analysis for periods ending 12/31/2001: Ms. Jadallah and Mr. Thomas presented a summary of SamCERA's investment performance for periods ending December 31^st. Highlights in the Quarterly Report included the following:

The Quarterly Report noted that, with the exception of Bank of Ireland, SamCERA's managers outperformed their median peer managers for the quarter. This outperformance reflected the difficulty managers had in recovering from the market decline that followed the September 11^th terrorist attacks. Bank of Ireland trailed its peers due to its customary underweight in emerging markets, which experienced an exceptional quarter.

Ms. Colson noted that the Investment Committee had received a comprehensive presentation of the quarterly report from Ms. Jadallah and Mr. Thomas. Mr. Bryan thanked SIS for the timely and accurate report. Ms. Colson reported that the Investment Committee recommended that the Board accept the report. Without objection, Mr. Cottle accepted SIS' Performance Analysis for periods ending December 31, 2001.

Acceptance of Deutsche Asset Management's Compliance Certification Statement: Ms. Colson reported that the Investment Committee had reviewed Deutsche Asset Management's Compliance Certification Statement. She reported that the Committee had authorized Mr. Clifton to modify the form to allow managers to indicate when an entire block of questions is not applicable to their asset class or style. Ms. Colson reported that the Investment Committee recommended that the Board accept the statement. Without objection, Mr. Cottle accepted Deutsche Asset Management's Compliance Certification Statement.

Acceptance of Report on the Prepayment of the County's Contribution for FY 2002-2003: Ms. Colson reported that the Investment Committee had been advised that the County will be pre-paying its 2002-2003 contribution on July 12^th with a transfer of $32,600,403. Without objection, Mr. Cottle accepted the report.

Introduction of Strategic Objectives Schedule for Fiscal Year 2002/2003: Ms. Colson reported that the Investment Committee had adopted its schedule for the coming year after amending it to provide for preparation for the Annual Planning Meeting and the possible implementation of recommendations resulting from the asset / liability modeling study in the Spring of 2003. Without objection, Mr. Cottle accepted the report.

Review of the SamCERA's Capital Market and Inflation Assumptions: In response to an earlier request from Mr. Lewis, William M. Mercer and Strategic Investment Solutions submitted descriptions of their capital market assumptions. While the two firms real rate of return assumptions by asset class are similar, their inflation assumptions vary significantly. The actuary uses an assumption based on very long-term trends and currently recommends inflation assumptions between 3.5% and 4.5% to its clients. SamCERA's 4.25% inflation assumption is at the fiftieth percentile of twenty-four pension funds responding to the actuary's survey. On the other hand, the investment consultant projects annual inflation of 2.5% over the next decade. Without objection, Mr. Cottle accepted the reports.

BOARD AND MANAGEMENT SUPPORT SERVICES & AUDIT COMMITTEE REPORT:

Adoption of Cost of Living Allowance Resolution: Mr. McCausland noted that the actuary had reported a 5.38% increase in the Consumer Price Index in the San Francisco, Oakland, San Jose metropolitan statistical area, which rounds to 5.5% per the '37 Act. Mr. Yeung reviewed the history of CPI increases over the past five years. He noted that the calculation is based on the average annual change for the calendar year divided by the average annual change for the prior calendar year. Mr. Lewis reported that the Audit Committee had reviewed the actuary's report and recommended that the Board adopt the cost of living allowance resolution.

Motion by Bryan, second by Stuart, carried unanimously, to adopt Resolution 01-02-05, Cost of Living Adjustments effective April 1, 2002, as follows:

WHEREAS, Government Code §31870.1, §31870.2 and §31874.4 empower the Board to grant cost of living adjustments on an annual basis to recipients of SamCERA benefits; and

WHEREAS, the Board has retained William M. Mercer Incorporated to provide actuarial services to the Board; and

WHEREAS, William M. Mercer, by its letter of January 25, 2002 has reported that the appropriate annual cost of living adjustment to be effective April 1, 2002 is 5.5%; and

WHEREAS, William M. Mercer has transmitted an exhibit which sets forth a schedule of cost of living adjustments based upon applicable plan, date of retirement and the accumulated carry-over and changes thereto for those eligible. Therefore, be it

RESOLVED, that the Board hereby adopts a 5.5% cost of living adjustment effective April 1, 2002, be it further

RESOLVED, that the Board adopts the schedule of cost of living adjustments set forth in the William M. Mercer exhibit dated January 24, 2002 and entitled San Mateo County Cost of Living Adjustments as of April 1, 2002; be it further

RESOLVED, that the Chief Executive Officer is hereby empowered to take all actions necessary to provide for the payment of cost of living adjustments in accordance with the adopted schedule effective April 1, 2002.

Acceptance of Quarterly Administrative & Professional Services Budget Report: Mr. Lewis reported that the Audit Committee had reviewed the budgets in detail.

With 50% of the fiscal year completed, Administrative expenditures are as follows:

The $573,930 expended represents 41.1% of the total Administrative Budget of $1,395,000.

Professional Services expenditures totaled $1,179,830 through December 31st, with total expenditures for the fiscal year projected to be $2,470,000.

A Status Report on SamCERA's Budget Initiatives was included with the report. Without objection, Mr. Cottle accepted the report.

Annual Review of SamCERA's Mission, Goals & Objectives: Mr. Lewis reported that the Audit Committee had reviewed the resolution and found it adequate. Mr. Cottle noted that he finds it difficult to conceptualize how the Board can "manage" the actuarial liabilities and that the "effectiveness of our services" should be expanded to include delivery of services. Following a general discussion, Mr. Cottle recommended the amendment reflected below.

Motion by Cottle, second by Colson, carried eight ayes (Bryan, Buffington, Colson, Cottle, Lewis, Salas, Stuart & Tonsfeldt) to one no (McMahon), to amend Resolution 95-96-05, Mission and Goals, as follows:

WHEREAS, Article XVI, '17(a) of the Constitution of the State of California states in part that "the retirement board...shall have plenary authority and fiduciary responsibility for investment of monies and administration of the system...;" &

WHEREAS, Article XVI, '17(b) of the Constitution of the State of California states in part that "the members of the retirement board...shall discharge their duties...solely in the interest of, and for the exclusive purpose of providing benefits to, participants and their beneficiaries, minimizing employer contributions thereto, and defraying reasonable expenses of administering the system. A retirement board's duty to its participants and their beneficiaries shall take precedence over any other duty...;" &

Whereas, Article XVI, '17(c) of the Constitution of the State of California states in part that "the members of the retirement board...shall discharge their duties with respect to the system with the care, skill, prudence, and diligence...a prudent person acting in like capacity and familiar with these matters would use in the conduct of an enterprise of like character and with like aims;" &

WHEREAS, Government Code '31520 vests the management of SamCERA in the Board; &

WHEREAS, the Board wishes to define its mission and goals so as to direct its efforts and the efforts of its staff in concert with the spirit of the law. Now, therefore, be it

RESOLVED, that the Board hereby adopts the following:

Mission
SamCERA exists
to serve as Loyal Fiduciary for our Members, Retirees and Beneficiaries; &
to serve as Prudent Administrator of our County's Retirement System.

SamCERA's Goals
To provide caring, fair, accurate, timely and knowledgeable professional service
to our clients and our public.

To prudently manage the assets and appropriately fund the actuarial liabilities of
the Retirement System,
so as to minimize the costs to our County, while assuring our ability to pay all earned benefits.
To constantly improve the effectiveness of our services and the efficiency of our operations

Be it further

RESOLVED, that the Board hereby agrees, and directs the Retirement Administrator, to adhere to the principles set forth herein in the management of the resources of the Association.

Annual Review of SamCERA's Strategic Services Resolution: Mr. Lewis reported that the Audit Committee had reviewed the resolution and found it an adequate description of the roles of the Board and staff. Mr. Cottle expressed a desire to have the resolution reflect the fact that the Board "hires and evaluates investment managers, consultants and advisers." Following a general discussion, Ms. Tonsfeldt crafted Mr. Cottle's proposed amendment as reflected below.

Motion by Buffington, second by Cottle, carried unanimously, to amend Resolution 95-96-06, Strategic Services, as follows:

WHEREAS, Government Code '31520 vests the management of SamCERA in the Board; &

WHEREAS, Resolution 95-96-05 defines the Board's mission and goals; &

WHEREAS, the Board wishes to direct its efforts and the efforts of its staff in concert with the spirit of the law and the Board's Mission and Goals. Now, therefore, be it

RESOLVED, that the Board hereby adopts the following:

Board Responsibilities

• Grant Earned Benefits & Provide for the Disbursement of those Benefits
• Provide for the Investment & Safekeeping of Retirement Fund Assets
• Assure the Actuarial Soundness of the System
• Establish & Arrange for the Collection of Contributions
• Manage the Association & System in accordance with the Law
• Define Fiduciary & Ministerial Responsibilities and Effectively Delegate them to, & Monitor the Performance of,Designated Fiduciaries
• Select & Monitor the Performance of Designated Fiduciaries, including but not limited to investment managers, consultants and other advisors
• Approve & Monitor Internal Controls & Audit Programs
  

Strategic Staff Services

MEMBER BENEFIT & ACTUARIAL SERVICES

• Implement the Benefit Services Plan, including individual member counseling
• Establish Eligibility & Process Applications for Membership & Benefits
• Provide for & Monitor Payment of Benefits & Refunds
• Accurately Maintain & Monitor Member & Benefit Databases
• Provide Timely, Accurate & Useful Services, Reports & Recommendations for Members, Retirees, Beneficiaries & the Board
  

INVESTMENT MANAGEMENT SERVICES

• Implement the Investment Plan
• Monitor Manager & Custodial Activity
• Project & Monitor Retirement Fund Cash Flows
• Provide Timely, Accurate & Useful Reports & Recommendations to the Board
  

BOARD SUPPORT SERVICES

• Faithfully execute the Duties & Responsibilities Delegated by the Board
• Support the Board in its execution of its Powers & Duties
• Provide Timely, Accurate & Useful Information & Recommendations to the Board
• Direct the Benefits, Investments & Management Services Programs
• Provide Member Education, Public Information & Inter-Agency Services
• Propose, Implement & Monitor Internal Control Systems
  

MANAGEMENT SERVICES

• Implement the Management Services Plan, including Human Resources, Information Systems, Fiscal, Accounting, Analytical, Facilities & Support Services
• Manage Contracts
• Maintain liaison with providers of County support services
• Direct Catastrophe Recovery Planning
  

Be it further

RESOLVED, that the Board hereby expresses its intent to review annually the responsibilities and strategic services set forth herein.

Introduction of Strategic Objectives Schedule for Fiscal Year 2002/2003: Mr. Lewis reported that the Audit Committee had adopted its schedule for the coming year after amending it to include an annual review of all counsel relationships, a workshop with the actuary prior to the commencement of the triennial experience study, a preview of the actuarial valuation and a review of SamCERA's Risk Management Matrix. Mr. Lewis noted that the Audit Committee recommends that the Board instruct the actuary to perform the valuation using more than one actuarial interest rate. Mr. McCausland recommended that the Board ask for a valuation summary based on 7.75%, 8% and 8.25% interest assumptions. Without objection, Mr. Cottle accepted the report and instructed Mr. McCausland to put the interest assumption item on the March agenda.

Introduction of SamCERA's FY 2002/2003 Budget: Mr. Lewis reported that the Audit Committee had reviewed the basic ingredients for next fiscal year's budget, including staff's proposed budget initiatives. Mr. Lewis noted that Salaries & Benefits is projected to increase from $800,000 to $854,000; Services & Supplies is projected to increase from $575,000 to $706,000; and Fixed Assets is projected to increase from $20,000 to $40,000. Total expenditures are projected to increase from $1,395,000 to $1,600,000.

Mr. Lewis reported that the Committee had reviewed the Services & Supplies budget in detail and carefully examined the County Services budget of $251,800. It was noted that Employee & Public Services charges SamCERA for 75% of the time of the individual who manages the County's health benefit insurance enrollments, based on a claim that while active employees can enroll through their payroll clerks, all retirees receive all of their health benefits services from this one EPS employee. Mr. Lewis reported that the Committee had concluded that the law permits the Retirement Fund to be used for the payment of SamCERA benefits and the administrative costs associated with those SamCERA benefits. However, the law does not authorize expenditures from the Retirement Fund to pay for the administration of another County program. Mr. McCausland reported that he had advised the Director of EPS of the Audit Committee's concerns.

Mr. Clifton noted that Salaries & Benefits includes an upgrade of the Senior Accountant position to Financial Services Manager as well as overtime for special projects. However, it does not include funds for any contracts that may be negotiated in October with the unions. He noted that the fiduciary insurance premium had been based on a triennial premium, but will now be budgeted annually. He noted that the budget as submitted does not provide for relocation of the office. If the Board decides to relocate, a budget amendment will be required. Mr. McCausland noted that the Board only pays for medical evaluations when the Board or the Medical Adviser ask for one. Mr. Clifton noted that most trustees had completed their expensive education courses, so that the Education & Conference expense is projected to decline, though increased transportation and lodging costs offset that savings. Mr. Clifton advised the Board that he will be submitting the budget in a new comprehensive format that is more appropriate for a fund of SamCERA's size. Without objection, Mr. Cottle accepted the report.

Mr. Buffington left the meeting at this point and Ms. Arnott assumed his seat on the Board. [Mr. Buffington was present for 7.13 which was acted on earlier in the meeting.]

Annual Review and Revision of Code of Fiduciary Conduct: Mr. Lewis reported that the Committee was requesting that Counsel review the Code to see if she would recommend any amendments. Without objection, Mr. Cottle instructed Ms. Carlson to review the Code for the Board.

Annual Review and Revision of Conflict of Interest Code: Mr. Lewis reported that the Committee had reviewed the Code and recommends adoption of the amendment deleting Gray & Company from the list of designated fiduciaries. Motion by Colson, second by Salas, carried unanimously, to amend Resolution 98-99-15, as follows:

WHEREAS, the Board has adopted a Code of Fiduciary Conduct which requires among other things, that Trustees, the Chief Executive Officer, Consultants, Investment Managers and other professionals retained by the Board and SamCERA Staff shall comply with the provisions of the California Constitution; the Political Reform Act of 1974, as amended...and all other laws pertinent to the conduct of public pension fund fiduciaries; and

WHEREAS, Government Code §87300 mandates the adoption of a Conflict of Interest Code by independent public agencies; and

WHEREAS, the Board, by Resolution 96-97-03, adopted the Conflict of Interest Code provisions of California Fair Political Practices Commission (FPPC) Regulation 18730; and

WHEREAS, Government Code §87306.5 mandates that the Board review its designation of employees and disclosure categories from time to time. Therefore, be it

RESOLVED that the Board hereby redefines SamCERA's List of Designated Individuals and Disclosure Categories per FPPC Regulation 18730, to read as follows:

LIST OF DESIGNATED INDIVIDUALS AND APPLICABLE DISCLOSURE CATEGORIES

Each individual holding a Designated Position must file FPPC Form 700--Statement of Economic Interests disclosing the applicable financial interests indicated for the position in accordance with Government Code §87200, et seq.

Be it further

Category 1: Investments that may be materially affected by any decision made or participated in by the designated individual must be disclosed on Schedules A-1 &/or A-2 of Form 700.

Category 2: Interests in Real Property that may be materially affected by any decision made or participated in by the designated individual must be disclosed on Schedules B &/or C of Form 700. If the designated individual is a trustee, designated alternate trustee, or SamCERA Staff member, disclosure is only required on real property located in the County of San Mateo.

Category 3: Income that may be materially affected by any decision made or participated in by the designated individual must be disclosed on Schedules C, D, E, &/or F of Form 700.

Category 4: A Business Entity in which the designated individual is a director, officer, partner, trustee, or holds any position of management that may be materially affected by any decision made or participated in by the designated individual must be disclosed on Schedule C of FPPC Form 700. Be it further

RESOLVED that the Board, in concert with the opinion of the FPPC, defines as consultants specifically identified to file by the Board of Retirement "employees and principals who provide services to the Board, with influence over the investment decisions pertaining to the Retirement Fund and in positions that involve the making or participation in the making of decisions which may foreseeably have a material effect on any reportable financial interest". Be it further

RESOLVED that the Board hereby authorizes the Chief Executive Officer to instruct the following firms to identify employees and principals who meet the definition of consultant set forth above: Bank of Ireland Asset Management (U.S.) Limited, Barclays Global Investors, INVESCO Realty Advisors, Deutsche Asset Management, Gray & Company Investment Consulting and Strategic Investment Solutions. Be it further

RESOLVED that the Board hereby instructs the Chief Executive Officer to provide for annual disclosure by all individuals in the Designated Positions. Each individual holding a Designated Position must file the original Form 700 with the Chief Executive Officer who must make and retain a copy and forward the original to the County Clerk who must make and retain a copy and forward the original to the FPPC. Form 700 must be filed at the times and on the forms prescribed by law. Failure to file statements on time may result in penalties, including but not limited to late fines. Be it further

RESOLVED that the Board hereby instructs the Chief Executive Officer to implement a program to provide reasonable assurance that foreseeable potential conflict of interest situations will be disclosed and prevented and to provide each affected person with a clear and specific statement of his or her duties under the Conflict of Interest Code. Be it further

RESOLVED that the Board hereby instructs the Chief Executive Officer to supply the necessary forms and manuals, to monitor timely and complete filing compliance, to take action regarding late filings and to report apparent violations of the Conflict of Interest Code to the Board.

Annual Review and Revision of Internal Controls Policy: Mr. Lewis reported that the Committee had continued the review of the policy until its next meeting at his request, so that he might devote more time to its review.

Acceptance of Audit Services Survey: Mr. Lewis reported that the Audit Committee had accepted the results of the audit services survey. Mr. Clifton noted the survey indicated that most systems complete their financial statements between twelve and eighteen weeks following the end of the fiscal year. SamCERA's auditors want to be finished within eight weeks. He noted that staff would cooperate to the fullest extent, but could not complete portions of the financial statements until the information is available from the Board's managers, consultants and actuary.

Mr. Lewis reported that the Committee had expressed grave concerns about the fact that the auditor had contacted SamCERA's actuary directly and asked him if he could perform the actuarial valuation based on April 30^th rather than June 30^th data. Mr. Cottle expressed the Board's displeasure with the Controller's preferred schedule infringing on matters that are clearly under the Board's jurisdiction. Mr. Bryan recalled that last year the Committee had advised the Controller that it had concerns about the accelerated audit schedule. Mr. Lewis noted that the Committee had instructed him to send a letter to the Controller expressing the Committee's concern. Mr. Cottle agreed to co-sign the letter. Mr. Lewis also reported that the Committee had instructed staff to take control of the schedule. Mr. Clifton noted that last year's transition to the new audit team had gone smoothly, but that the audit manager has made it clear that the scope of the audit will be much narrower than SamCERA had come to expect in past years. Mr. Cottle noted that after this discussion, he would be quite surprised if the Board does not issue an RFP for the June 30, 2003 audit. Without objection, Mr. Cottle accepted the report.

Acceptance of Real Estate Financial Reports and KPMG's Independent Auditor's Report Thereon: Mr. Lewis reported that the Audit Committee had reviewed the annual financial statements of June 30, 2001 for each of SamCERA's properties. All were unqualified and standard. Mr. Lewis reported that the Audit Committee recommended that the Board accept the reports. Without objection, Mr. Cottle accepted the Real Estate Financial Reports and KPMG's Independent Auditor's Report Thereon.

Authorization for Chief Executive Officer to contract for a Pension Management Software Study: Mr. Lewis reported that the Audit Committee had reviewed the staff recommendation to retain Linea Solutions to evaluate SamCERA's benefits administration platform resources and needs. Mr. Hood reported that the study will evaluate the components of SamCERA's PensionGold Version 1 system and evaluate the pros and cons of migrating to Version 2 or another platform. Mr. Cottle observed that the Campbell proposal appeared to have more levels to the study and the Linea proposal seemed to stop short of evaluating Version 2. Mr. Hood noted that the two proposals get to the same deliverables via different routes. Ms. Carlson suggested that the contract language be amended to be more specific about what will be delivered.

Motion by Lewis, second by McMahon, carried unanimously, to authorize the Chief Executive Officer to enter into a contract with Linea Solutions for a cost not to exceed $9,500 subject to County Counsel's approval of the contract.

Authorization for Special Actuarial Study of the Ventura Contingent Liability: Mr. Lewis reported that Mr. Buffington had suggested during the January Planning Meeting that it might be appropriate to determine the cost of Teamsters Local 856 litigation based on the Superior Court ruling. Mr. Lewis noted that the Committee is bringing the item forward to the Board to see if the Board has an interest in conducting a study at this time.

In response to questions from Mr. Buffington and Mr. Cottle, Ms. Carlson noted that the Appellate briefing may be done by the end of 2002, but that there is no indication of when the item will be on the Court's calendar for oral argument.

Ms. Carlson indicated that the Board should decide what, if anything, it needs to determine at this point, since the Superior Court judgment has been stayed and, therefore, has neither force nor effect. She noted that in Counties that have settled Ventura, there has been no relationship between the cost of the judgment and the value of the settlement. Mr. Bryan indicated that he believed that a second study would be required to determine the cost of a settlement. Mr. McCausland noted that if the current ruling stands, a second study will not be needed because the population eligible for a retroactive benefit is clearly defined in the ruling.

Mr. McCausland noted that he found Mr. Buffington's suggestion intriguing because this may be the year when the Board will need to consider using surplus funds in the Ventura Contingency Reserve to help the County with a direct offset for the increased contributions that will be associated with the amortization of the negative balances in the market stabilization account. Mr. Scannell noted that if the Board would step up to the plate and help the County, he would support the study, otherwise it is likely to be a duplicate effort. Mr. Bryan noted that any action the Board takes would have to be in the best interest of the members. Mr. McCausland noted that there was no question about that, but that many ingredients go into looking out for the best interest of the members, and since this is a difficult time for both the Fund and the County unique opportunities may emerge.

Mr. Buffington noted that the study would pay for itself if it made it possible to decrease the amount of non-valuation assets while increasing the amount of valuation assets.

Motion by Lewis, second by Buffington, carried six ayes (Buffington, Colson, Cottle, Lewis, McMahon & Stuart) to three noes (Bryan, Salas & Tonsfeldt), to authorize William M. Mercer to perform a Special Actuarial Study of the Ventura Contingent Liability based upon the terms of the Superior Court ruling in Teamsters Local 856 for a cost not to exceed $25,000.

APPROVAL OR ACCEPTANCE OF REPORTS:

Report of Actions Taken in Closed Session: None.

Chief Executive Officer's Report: Mr. McCausland reported that all who retired on or after March 27, 2001 and who also participated in the County's Voluntary Time Off program will receive retroactive adjustments to their March 31, 2002 SamCERA benefit. He reported that Mr. Hood had successfully imported all VTO hours for active members since the 9/15/91 inception of the County's Personnel and Payroll Information System into PensionGold. He also reported that staff is completing its review of the individual files and selected microfiche records for 133 retirees who may be eligible for the VTO adjustment. As of this date 69 eligible retirees with VTO hours have been identified.

County Counsel's Report: Ms. Carlson reported that Judge Pollack had heard arguments regarding attorney's fees for the plaintiffs in Teamsters 856 and would issue his ruling soon. Mr. McCausland noted that the Board's authorization to file a Notice of Appeal of the ruling in the case extended to Ms. Carlson the authority to appeal the fees as well.

Ms. Carlson noted that she will forward a copy of the relevant sections of the Brown Act governing meetings to all trustees so that the Committees can be sure they conduct their meetings in accordance with the Act.

Investment & Finance Manager's Report: Mr. Clifton reminded the Board that FPPC Form 700 should be filed as soon as possible.

Information Technology Manager's Report: Mr. Hood reported that he had imported 130 years of VTO service credit with the initial download of historical PIPS records from 1991 forward. He noted that the last biweekly payroll included approximately 1,000 hours of VTO service for 77 members. He hopes that PensionGold will be able to accept the biweekly PIPS VTO hours automatically by the end of the next pay period.

Adjournment in Memory of the following Deceased Members: There being no further business, Mr. Cottle adjourned the meeting at 4:41 p.m. in memory of the following recently deceased members: