The Board of Retirement did not meet in December 2002

Call to Order: Mr. Bryan, Chair, called the Annual Planning Meeting to order at 9:10 a.m. and the Public Session of the Board of Retirement to order at 1:44 p.m., January 28, 2003 in the Franklin Templeton Board Room, One Franklin Parkway, San Mateo.

0301.2

Roll Call: Mr. Bryan, Ms. Colson, Mr. Cottle, Mr. Lewis, Mr. McMahon, Ms. Salas, Ms. Stuart & Ms. Tonsfeldt. Ms. Arnott for Mr. Buffington. Staff: Mr. McCausland, Mr. Clifton, Mr. Hood & Ms. Lamica. Counsel: Ms. Carlson. Consultants: Ms. Chapman, Dr. Fracchia, Ms. Jadallah, Mr. Roberts, Mr. Swango, Mr. Thomas & Mr. Yeung. Retirees: 1, County: 3.

0301.3

Approval of the Minutes: Mr. McMahon and Ms. Arnott questioned the wording of quotations from SamCERA’s Investment Plan in 0211.6.4 and SamCERA’s Education Policy in 0211.7.7, but Mr. McCausland noted that changes to those documents would have to be made when they were noticed for Board review and revision. Ms. Arnott submitted the following corrections: 0211.6.4 ¶3 line 1: “…enhancing returns and is it…”; 0211.7.1 line 6: “…investment income totaled $5.736 million…; line 7: “…professional expenses totaled $0.227 ~~$0..227~~ million.”; 0211.7.2 ¶8, line 3: “…would increase employer contribution rates an ~~and~~ additional ~1.94%…”; 0211.8.1 line 2: “…deliberation of committees upon which they do not serve…”; 0211.9.2 line 1: “…distributed copies of the Reply…”. Motion by Arnott, second by Stuart, carried unanimously to approve the Minutes as corrected.

0301.4.1

Oral Communications From the Board: Mr. McMahon reported that he had attended a conference on Indexing that included a number of impressive panels and presentations. He noted that representatives from the firms that structure the various indices provided presentations on the components and strengths of their indices. There was also a presentation on indexing by Professor Sharpe.

0301.4.2

Oral Communications From the Public: John Murphy expressed SCORPA’s appreciation for Linda Manning’s years of courteous and professional service to SamCERA’s active and retired members. He also expressed his personal thanks to Scott Hood for performing the Heimlich maneuver on Ms. Murphy during the SCORPA’s Christmas luncheon.

0301.5

Benefit Services

0301.5.1

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

Disability Retirements: The Board

(1) (a) Finds that Mark Frisbie is not capable of performing the duties of his job as a Deputy Sheriff, (b) finds that his disability is not Service-Connected, (c) denies his application for Service-Connected Disability, and (d) grants him a Non-Service Connected Disability Retirement.

(2) (a) Finds that Marlene Vanderpool is disabled from performing her usual and customary duties as Office Assistant (b) finds that her disability is Non-Service Connected, and (c) grants her application for Non-Service Connected Disability Retirement.

(3) Adopts the recommended decision of the Administrative Law Judge, which (a) finds that Maria Silva is disabled from performing her usual and customary duties as Medical Services Assistant (b) finds that her disability was not caused by her duties as a Medical Assistant, (c) denies her application for Service-Connected Disability, and (d) grants her a Non-Service Connected Disability Retirement.

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

Service Retirements:

Maloney, Jeanne

June 2, 2001 (from deferred)

Probation Department

Hedberg, Judith

September 1, 2002 (from deferred)

Public Health Department

Manning, Linda

November 9, 2002

Retirement Department

Kinnamon, John

November 12, 2002 (from deferred)

General Services Department

Sise, Lillian

December 21, 2002

Mental Health Department

Sezgen, Jerry

December 31, 2002 (pending SCD)

Sheriff’s Department

Souza, James

December 31, 2002 (from deferred)

General Services

Armanino, Elaine

January 1, 2003

District Attorney Office

Olazabal, Augusto “Tito”

January 1, 2003

Information Services Department

Mares, Milton

January 11, 2003

County Counsel

Caracciolo, Rose

January 25, 2002

Board of Supervisors

Continuance of Benefits:

Ho, Richard

Beneficiary of Evelyn

Multon, Ralph

Beneficiary of Ferne

Losee, Marilyn

Beneficiary of Jack

Reams, Dorothy

Beneficiary of David

Sailor, David

Beneficiary of Jeanne

Williams, Marjorie

Beneficiary of Walter

Deferred Retirements:

Balzon, Brenda

G4 non vested

Reciprocity

Cerelli, Robert

G2 vested

Reciprocity

Garcia, Andres

G4 non vested

Reciprocity

Magnusson, Chris

G4 non vested

Reciprocity

Noble, Teresa

G4 non vested

Reciprocity

Pineda, Julie

G4 non vested

Reciprocity

Toy, Lily

G4 non vested

Reciprocity

Whitt, Kameko

G4 non vested

Reciprocity

Weaver, Sue

G4 non vested

Reciprocity

Sisavath, Anong

3/G2 vested

REFUNDS FOR DECEMBER 2002

Michele Frey

S4 non-vested

$896.41

Stephan L’Angelo

G4 non-vested

$5,070.39

Matthew Mallet

G4 non-vested

$6,543.75

Barbara Price

G4 non-vested

$5,092.09

Bradley Shelton

G4 non-vested

$525.30

Michael Signorello

G4 non-vested

$607.18

Total Refunds for December 2002

$18,735.12

No Rollover processed during December 2002

REFUNDS FOR JANUARY 2003

Chinwekel Anudoken

G4 non-vested

$11,724.45

Eddie Engram

G4 non-vested

$11,354.26

Katherine Hansen

G4 non-vested

$1,169.44

Malinda Perez

G4 non-vested

$7,781.68

Reyhan Yazlik

G4 non-vested

$2,757.50

Roshawn Youngblood

G4 non-vested

$8,516.88

Total Refunds for January 2003

$43,304.21

ROLLOVERS FOR JANUARY 2003

Alba Diaz-Cuellar

G4 non-vested

$2,078.00

Michael Kaz

G4 non-vested

$3,485.64

Rachel Holt

G4 non-vested

$17,588.36

Janet Holmes

G4 non-vested

$5,461.34

Elizabeth Guevara

G4 non-vested

$1,097.66

Nannette Kolb

G4 non-vested

$13,638.77

Harumi Lee

G4 non-vested

$5,205.37

Michael Mahlmeister

G4 non-vested

$8,508.37

Peter Marti

G4 non-vested

$3,281.70

Shauna O’Leary

G4 non-vested

$2,807.78

Rolly Romero

G4 non-vested

$3,895.85

Claudio Ruiz Jr.

G4 non-vested

$2,790.25

Total Rollovers for January 2003

$69,839.09

0301.5.2

Consideration of items removed from Consent Calendar: None.

0301.6

Investment Services Report

0301.6.1

Acceptance of Monthly Portfolio Performance Report: Mr. Clifton noted that the Retirement Fund outperformed its Policy Benchmark by 0.40% over the trailing twelve months. For the trailing one year (1/1/02-12/31/02) the return was –9.60% vs. –10.00% for the policy benchmark. SamCERA’s return for December was -2.59%, while the policy benchmark return was –2.61%. Market value and performance for the month ending December 31^st were as follows:

Asset Class

Market Value

1-Month

1-year TTWRR

5-year TTWRR

Domestic Equity

$ 554,687,362

-5.62%

-21.43%

-1.53%

International Equity

158,978,248

-4.05%

-17.17%

-0.68%

Total Equity

$ 713,665,610

-5.28%

-20.57%

-2.18%

Fixed Income

352,767,092

1.99%

10.12%

7.59%

Real Estate Aggregate

63,184,044

2.70%

3.06%

7.47%

Cash Equivalents

28,689,811

0.17%

2.75%

Total Fund

$1,158,306,557

-2.59%

-9.60%

1.93%

Benchmark

-2.61%

-10.00%

1.71%

Mr. Clifton noted that Deutsche Asset Management attributes its underperformance to mortgage backed securities that were impacted by the CONSECO bankruptcy.

Without objection, Mr. Bryan accepted the report.

0301.6.2

Adoption of Resolution Authorizing Investment of Monies in the Local Agency Investment Fund: Mr. Clifton reported that the State Treasurer’s Office needs a current authorized signatories resolution. He noted that SamCERA has not utilized the State’s Local Agency Investment Fund since January 2000, but that staff wishes to retain the option to invest when advantageous.

Motion by Cottle, second by Lewis, carried unanimously to adopt Resolution 02-03-07, as follows:

Whereas, Pursuant to Chapter 730 of the Statutes of 1976 Section 16429.1 was added to the California Government Code to create a Local Agency Investment Fund in the State Treasury for the deposit of money of a local agency for purposes of investment by the State Treasurer; and

Whereas, the Board of Retirement does hereby find that the deposit and withdrawal of money in the Local Agency Investment Fund in accordance with the provisions of Section 16429.1 of the Government Code for the purpose of investment as stated therein is in the best interests of the San Mateo County Employees' Retirement Association. Therefore, be it

Resolved that the Board of Retirement does hereby authorize the deposit and withdrawal of San Mateo County Employees' Retirement Association monies in the Local Agency Investment Fund in the State Treasury in accordance with the provisions of Section 16429.1 of the Government Code for the purpose of investment as stated therein, and verification by the State Treasurer's Office of all banking information provided in that regard. Be it further

Resolved that the following San Mateo County Employees' Retirement Association Officers or their successors in office shall be authorized to order the deposit or withdrawal of monies in the Local Agency Investment Fund or transact other business as so required:

Gary L. Clifton, Investment & Finance Manager

Robin S. Hood, Assistant Executive Office

Sidney C. McCausland, Chief Executive Officer

Lee Buffington, Treasurer County of San Mateo Be it further

Resolved that the Board hereby designates the Chief Executive Officer (CEO) as its designee to perform those functions so identified in this resolution and hereby authorizes the CEO to take all actions necessary to initiate, implement and monitor assignments, approve transactions and provide the Board with timely reports regarding the progress and satisfactory completion of the assignments authorized pursuant to the resolution.

0301.6.3

Approval of INVESCO’s selection of firm to perform Triennial Real Estate Appraisals: Mr. Clifton noted that the Board’s contract with INVESCO requires that the Board “obtain an independent appraisal…not less than once every three years, with the first appraisal as of March 31, 2003.” He reported that INVESCO has solicited and reviewed proposals from three firms. In response to questions Mr. Swango reported that INVESCO has utilized the services of the low bidder for many years and highly recommends the firm to the Board. It was noted that Hunter’s Creek should be excluded from the appraisal process. Motion by Cottle, second by Tonsfeldt, carried unanimously, to authorize INVESCO to enter into a Master Agreement for Appraisal Services with their recommended appraiser, Crosson Dannis, and instruct INVESCO to exclude Hunter’s Creek from the scope of work to be performed by the appraiser.

0301.7

Board & Management Support Services

0301.7.1

Acceptance of Monthly Financial Reports: Mr. Clifton reviewed the comprehensive Monthly Financial Reports for periods ending December 31^st. Total assets declined during the first six months of the fiscal year. The County’s pre-payment of its $31.960 million annual employer contribution in July was more than offset by a net decline in the market value of investments of -$63.553 million between July 1^st and December 31^st. Through December 31^st member contributions totaled $10.362 million, investment income totaled $7.485 million, benefit payments totaled $34.226 million, refunds totaled $0.682 million, administrative expenses totaled $0.668 million and professional expenses totaled $0.655 million. The market value of assets has changed year-over-year, as reflected in the following table:

Market Value

June 30th

December 31^st

2001

$1,307,971,618

2002

$1,207,483,580

$1,157,524,867

Without objection, Mr. Bryan accepted the report.

0301.7.2

Acceptance of SamCERA’s Administrative & Professional Budgets Quarterly Reports: Mr. Clifton reported that with 50% of the fiscal year completed, Administrative expenditures to date represented 36.4% of the total $1,834,000 appropriated for the fiscal year.

Annual Planning Meeting Summary

0301.a

Economic Forecast: Mark Roberts, Director of Investment Research for INVESCO, reported that 2002 was a year of contradictions: with oil prices up, but inflation under control; with consumer confidence down, but consumer spending up; and with rising unemployment, but with home sales and home prices up.

The Global Economy: The global slowdown in 2002 was preceded by global deregulation, greater global competition, excess global manufacturing capacity, security threats and the devaluation of Asian currencies. In the US, real retail sales peaked in 1999, with declines registered in 2000 and 2001 as consumer confidence fell. Yet in 2002 retail sales improved significantly even as consumer confidence continued its decline. While inflation edged up in 2002, inflation in the developed countries remained at low levels. Low factory capacity utilization in the US contributed to the low levels of inflation. Mr. Roberts reported that it is unlikely that the US will see significant employment growth until capacity utilization increases. His current forecast is for 1%-2% increase in US employment in 2003.

Historically low inventory-to-sales ratios suggest that factory production may increase in the near future. In addition, business investment growth turned positive in the third quarter of 2002, after six quarters of decline and corporate debt has stopped growing. In 2002, consumers substituted mortgage debt, at low rates, for expensive consumer debt, with the decline in the growth of consumer debt mirroring the increased growth in mortgage debt. Mr. Roberts does not foresee any consumer pent-up demand in the near term.

In what Mr. Roberts describes as the “Euro-Zone” manufacturing growth is very low, while industrial confidence is also very low, but trending upward. Looking at data over the past four years, European monetary authorities have emphasized avoidance of excess growth, while in the US the Fed emphasized avoidance of excess inflation, according to Mr. Roberts.

In Japan, inflation is very low, however, over investment and heavy debt levels restrain growth. Gross Government Debt is forecast to be 152% of Gross Domestic Product in Japan by 2004, compared to an estimated 62.5% in the US. Japan’s excess capacity is driving price deflation, which is causing consumers to save rather than spend money. In addition, as the dollar weakens against the yen, Japan’s exports are expected to decline.

Mr. Roberts offered the following concluding observations on the Global Economy:

• High oil prices are arguably the greatest single risk to growth.

• The dollar was over-valued over the past several years and began to correct in 2002 – the dollar will not be the world’s safe haven in 2003.

• If the dollar declines in value, it will hurt consumers, but help exports.

• Countries with lower inflation are expected to see their currency appreciate relative to those with higher inflation, with China best positioned to take advantage of this phenomena.

• Banking reform is still very elusive in Japan, with high debt levels and persistent deflation hampering reform efforts.

• Japanese manufacturers are shifting operations to China.

• China’s WTO membership will lead to more foreign firms increasing direct investment in China and will result in continued growth in trade balances.

• Germany’s exports will suffer as the Euro appreciates and higher taxes contribute to slower growth.

• France’s low inflation and tax cuts may boost investor/consumer confidence, but high corporate debt will continue to restrain business investment.

• Italy’s price sensitive exports will suffer as the Euro continues to appreciate, but tax cuts are expected to improve consumer demand.

• The UK’s industrial production is down, but consumer spending is up due to a buoyant housing market.

• Canada’s capital gains tax cuts enacted in 2000 are expected to generate the highest growth rates among the G-7 nations.

• In the US, profit growth is expected to improve and tax cuts to provide stimulus. However, foreign policy concerns are expected to keep oil prices high. The weaker dollar will hurt consumers, but help exports.

California’s Economy:

• California, with a GDP of US$1,336 billion, has the seventh largest economy in the World, behind the US ($10,885 billion GDP), Japan ($3,942), Germany ($2,392), UK ($1, 771), France ($1,677) and Italy ($1,422). Canada ranks eighth with a GDP of US$793 billion.

• Only Switzerland, Norway and Denmark have higher GDP per person than California’s US$37,605.

• California’s projected State budget deficit has the potential to reduce GDP growth in California from 4.3% down to 2.8% in 2003.

• Since California constitutes 12.5% of the US economy, California’s deficit will reduce US GDP growth from 2.9% down to 2.7%.

• In general, California growth is expected to be on line with national growth, but will vary by region.

• The San Jose area experienced the greatest boom and bust volatility in GDP and employment.

• San Francisco and San Jose are expected to experience positive employment growth in 2003, after having suffered the deepest declines in 2001 and 2002.

• The Bay Area has been a leading exporter to South East Asia, with exports expected to grow 3.4% in 2003.

• Sacramento area employment is expected to decline in 2003. Employment increased as tax revenues increased; will now contract as revenues contract.

• Los Angeles will experience growth in all sectors except aircraft and defense.

• San Diego will benefit from expanding defense expenditures.

Mr. Bryan thanked Mr. Roberts for his presentation.

0301.b

In-Depth Review of Mercer’s Actuarial Valuation and Alternative Scenarios: Marcia Chapman and Andy Yeung of Mercer were present for the review. Ms. Chapman noted that the Valuation is in draft form because the final valuation cannot be completed until the Board adopts (1) an interest rate assumption, (2) funding period policy and (3) market stabilization account corridor policy. The final valuation will be presented to the Board in February.

She also noted that in November the Board had instructed Mercer to provide a cost analysis of various permutations of the assumptions awaiting Board action.

The base case draft valuation incorporates (a) the non-economic assumptions adopted by the Board in November, (b) the current economic assumptions, (c) an unconstrained Market Stabilization Account, (d) inclusion of the 1% Contingency Reserve in Actuarial Assets and (e) a funding period for the Unfunded Actuarial Accrued Liability ending December 31, 2011.

Under the Base Case the actuary estimates that the aggregate Employer Contribution Rate would increase from the current fiscal year’s ~11.66% to ~15.11% for fiscal year 2003-2004. The elements contributing to this increase include negative returns adding 1.44% and the new assumptions adding 1.94%. (The “actual” aggregate rate is dependent upon the distribution of payroll across each of SamCERA’s ten plans and can only be determined accurately after the fact.)

Under the Base Case the Funding Ratio declines from 98.6% to 94.0%.

The only circumstance under which the Base Case contribution rates would be implemented would be if (1) the unions representing General Members fail to agree to the terms of the AFSCME & SEIU benefit enhancements and (2) County-sponsored legislation to permit union-by-union implementation fails to become law.

Ms. Chapman and Mr. Yeung then reviewed Mercer’s ten-page evaluation of the alternatives identified by the Board in November.

After receiving a general overview, the Board focused its questions on the two pages analyzing the County’s proposed new 2% @ 55 benefit formula for General Members. The following table summarizes the data scrutinized by the Board:

Funding Period

No MSA Corridor

±20% Corridor

±10% Corridor

No MSA

2003-2004 Estimated Aggregate Employer Contribution Rate using an 8.25% Interest Assumption

9.5 years

19.0%

20.3%

25.3%

30.3%

16.5 years

16.7%

17.6%

20.9%

24.2%

20 years

16.0%

16.8%*

19.6%

22.5%

30 years

15.2%

15.8%

18.0%

20.2%

Funding Ratio

89.7%

87.8%

80.3%

72.8%

* Adopted by the Board under Agenda Item 0301.7.3.

2003-2004 Estimated Aggregate Employer Contribution Rate using an 8.00% Interest Assumption

9.5 years

21.6%

22.9%

27.9%

32.8%

16.5 years

18.7%

19.5%

22.8%

26.1%

20 years

17.8%

18.5%

21.3%

24.1%

30 years

16.7%

17.3%

19.4%

21.6%

Funding Ratio

87.2%

85.3%

78.0%

70.7%

Mr. Yeung and Ms. Chapman reviewed the fundamentals and pros and cons of the various funding periods with the Board. Mr. Yeung recommended that the Board attempt to avoid a 30-year funding period because the payments in the first two decades do not cover the full cost of the interest that is accruing. He noted that he preferred the 16.5-year alternative because it would never experience negative amortization. Mr. McCausland noted that the statute authorizes the Board to adopt any period, up to and including 30-year rolling periods.

Mr. Yeung and Ms. Chapman reviewed the fundamentals and the pros and cons of setting various corridors for the Market Stabilization Account with the Board. Mr. McCausland reported that without a change in funding period, the June 30, 2002 balance in the Market Stabilization Account would generate a doubling of the employer contribution rate with the next couple of years.

Mr. Yeung and Ms. Chapman reviewed the fundamentals and pros and cons of reducing the interest rate from 8.25% to 8% with the Board. Mr. McCausland noted that the present value of the future stream of benefits increases significantly when the interest rate is reduced, thereby creating a greater annual unfunded liability contribution. Currently the Market Stabilization Account is dampening the annual unfunded liability contribution since it takes five years of smoothing for investment shortfalls to be fully reflected on the actuarial balance sheet. The Board debated the pros and cons of reducing the assumption now, thereby increasing employer costs an additional 1.7% of payroll now, versus reducing them later, if returns do not improve significantly. There was a general consensus that 8.25% is an aggressive interest assumption, even though the Mercer survey indicates that the average assumption is 8.18%.

Paul Scannell, Assistant County Manager, reviewed the County’s fiscal problems. He also reviewed the status of collective bargaining, noting that the major General Member unions and the Sheriff’s Sergeants’ union had ratified new contracts, but that the smaller General Member unions, the Deputy Sheriffs & Correctional Officers union and the Probation Officers union had yet to settle. He noted that the current actuarial estimates do not include any enhanced benefits for Safety & Probation members.

Mr. Scannell encouraged the Board to keep the current 8.25% for the coming year, extend the funding period to 30-years and establish a Market Stabilization Account corridor of ±20%. He noted that the actuary’s survey indicated that average interest assumption is 8.18%. The Board debated the pros and cons of changing the actuarial interest assumption this year versus later. Mr. McCausland noted that the Board could wait until the completion of its asset / liability modeling study to review the interest assumption. He noted that the next valuation cycle will begin in five months. In response to questions from the Board, Mr. Dennis noted that the target portfolio has a projected return of 8.25%.

Ms. Stuart asked how to sustain the Medicare Part-B Premium Reimbursement program. Mr. McCausland noted that the funding ratio will drop below the threshold 80% under several of the future scenarios. 80% is the minimum level the Board of Supervisors and Board of Retirement originally agreed needed to be sustained to continue the reimbursement program.

Mr. Bryan noted that these matters would be considered further during the Business meeting [see 0301.7.3].

0301.c

SamCERA’s Asset / Liability Modeling Study – Phase One: Barry Dennis, Margaret Jadallah, and Patrick Thomas were present to introduce the Asset / Liability Modeling Study. Mr. Thomas noted that the asset allocation decision is the most important decision that a trustee makes.

Mr. Dennis reported that Strategic Investment Solutions has entered into an agreement with Frank Russell Company to sell 19.9% of SIS to Russell in the next couple of months, with a target to complete the sale of SIS to Russell within the next two years. The merger will provide SIS clients with access to all Russell resources and research.

Mr. Dennis provided an overview of the asset / liability modeling process. He stressed the importance of the Board becoming comfortable with each of the assumptions and inputs that go into the process. He noted that 80%-90% of the long-term investment return is determined by the asset allocation. The process focuses on portfolio management at its highest level and risk management at its most fundamental level. Risk is defined in the asset phase of the process as volatility of returns, but it is broadened to include the volatility of the contribution rate in the liability phase of the process. In real life, pension funding involves the analysis and disjointed management of multiple inputs and outputs.

SIS uses Lewis Kingsland’s asset / liability models. The models provide flexibility. Where the actuary’s valuation is based on a closed plan, the Kingsland models incorporate future workforce changes. Changes in earning assumptions over time can also be modeled. The models run Monte Carlo simulations with inflation being the first draw. Inflation is a very important input to the model. The model stresses trading off median outcomes versus worse case outcomes. There is a conservative bias built into the probabilistic outcomes, but there is no conservatism in the selection of assumptions for the inputs.

When setting assumptions for the model, SIS wants the client to focus on 10-15-20 year expectations for risk and return; hopefully spanning two or more full market cycles. The model then helps the Board determine the optimum mix of equity to debt over the long-term and provides bands around the long-term targets. Periodic review of the sub-components can incorporate recent capital market expectations.

Major decisions for the Board relate to defining which asset classes to include, which capital market expectations to utilize, including historical inflation, returns & risk, expected correlations and board imposed constraints. Mr. Thomas reviewed the asset classes available for consideration. SIS devotes substantial effort to setting its capital market expectations. After carefully analyzing available history, SIS looks two to three market cycles into the future. Among the resources they use are long-term economic forecasts, global manager surveys and historical monthly observations of return, risk and correlations. SIS expects there to be a tendency for reversion to the mean. They insist that their expectations behave in the optimization process, contributing to portfolios that make sense and maintain relatively stable efficient frontiers. Mr. Thomas reviewed the current SIS projections for each asset class, noting that these projections become the basic inputs for the Kingsland optimizer. Mr. Dennis noted that assets with high correlations tend to confuse the optimizer, so SIS enters them at market weights.

Ms. Jadallah discussed the benchmark proxies and target ranges proposed by SIS for use in its optimization process. Mr. Dennis noted that clients that do not use private markets are encouraged to over weight small cap stocks. Ms. Jadallah noted the challenges in developing expectations for real estate. Mr. Dennis noted that SIS takes the Beta of the NAREIT and applies that to the excess return of the large cap CAPM forecast adding that back to the cash return. Risk is set to keep real estate on the capital market line. Ms. Jadallah noted that SIS recommends private markets to most of its clients, but that SIS is sensitive to the Board’s past reluctance to consider the class. Mr. Thomas noted that there is other “lower lying fruit” for SamCERA to harvest before it needs to consider private markets. Ms. Jadallah reviewed the optimization constraints applied in the trial run for indexed investments gross of fees.

Using SamCERA’s current target asset allocation, the model projects a median return of 8.23% and risk of 11.74%. Ms. Jadallah then reviewed the results of six constrained optimization alternatives. Median returns/risk ranged between 7.37%/8.89% and 8.37%/12.18%. SIS encourages its clients to overweight international equity.

Mr. Dennis noted that SamCERA has a very median allocation compared with other clients, but that SamCERA’s implementation of that allocation differs significantly, with its emphasis on passive management. Mr. Dennis noted that most clients set their actuarial interest rate between 25 and 50 basis points below their consultant’s projected median portfolio return. Mr. Dennis noted that SamCERA’s funding problems are fairly typical of SIS’s other clients. But all things being equal, SamCERA’s in a position where it is appropriate to be more aggressive. He noted that the Board can consider a variety of funding objectives: meet the actuarial earnings rate, limit contribution rates, maintain a target funded status, etc. Unfortunately, all of these goals may be unattainable in a protracted bear market.

SIS encourages its clients to focus on “Ultimate Net Cost” which is equal to the present value of the projected unfunded liability at the investment horizon (5-7 years out) plus the normal cost to fund the plan to the investment horizon. Both the pay me now and the pay me later aspects are captured in this analysis.

Ms. Jadallah reviewed the tasks and tentative timetable for the asset / liability modeling study. Mr. Cottle recommended that the Investment Committee prepare assumption and constraint recommendations for the Board’s consideration in February.

0301.d

Board Post Disaster Business Continuity Exercise: Mr. Bryan presented the Board with a Business Continuity Scenario is which all SamCERA staff are hospitalized the day before the retiree payroll must be distributed. Mr. Bryan, Ms. Arnott and Ms. Salas then volunteered to attempt to generate the retiree payroll. The team utilized SamCERA’s emergency procedures documentation to generate the January retiree payroll on a laptop computer that contained all current PensionGold program and data base files. As they performed the operations, they provided staff with suggestions for improvements to the documentation for future use by someone with no PensionGold experience. The team successfully generated the January retiree payroll for transmittal to the Controller and to the Paying Agent. Mr. Bryan declared the disaster recovery exercise a success. He noted that under most circumstances the Board would elect to bring in outside expertise to perform the staff functions, but that it had been valuable to discover that the trustees were capable of performing this critical task in a time of dire need.

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The Board of Retirement did not meet in December 2002

January 28, 2003 – Board Agenda

January 28, 2003 – Board Minutes as corrected

Domestic Equity

Category

Annual Planning Meeting Summary