August 26, 2003 – Board Agenda

Closed Session:  None

Public Session

1.

Call to Order

2.

Roll Call

3.

Approval of the Minutes

4.

Oral Communications

4.1

Oral Communications From the Board

4.2

Oral Communications From the Public – None

5.

Benefit & Actuarial Services

5.1

Adoption of Consent Calendar

5.2

Consideration of items removed from Consent Calendar

5.3

Adoption of amendments to SamCERA’s Interest Crediting Policy

5.4

Adoption of amendments to SamCERA’s Market Stabilization Account Policy

5.5

Adoption of revised Safety Member & Employer Contribution Rates for current fiscal year

5.6

Appointment of Ad Hoc Medicare Part-B Premium Reimbursement Program Review Committee

6.

Investment Services

6.1

Acceptance of Monthly Portfolio Performance Report

6.2

Acceptance of Strategic Investment Solutions’ Quarterly Performance Report

6.3

Introduction to the Review of SamCERA’s Investment Manager Structure

6.4

Annual Investment Manager Review – Deutsche Asset Management

6.5

Approval of Topics for Investment Manager Review – INVESCO Realty Advisors

6.6

Adoption of a Commitment to INVESCO’s Commingled - Open End - Core Real Estate Fund

6.7

Review of Frank Russell Company’s Manager Research Capabilities & On-Site Due Diligence Processes

6.8

Adoption of Due Diligence Policy & Procedures – Over

6.9

Review, Revision & Reaffirmation of Investment Committee Charter – Over

7.

Board & Management Support Services

7.1

Acceptance of Monthly Financial Reports

7.2

Introduction of Amendments to the Regulations of the Board of Retirement

7.3

Consideration of Legislative Proposals for submission to SACRS

8.

Approval or Acceptance of Reports

8.1

 Chief Executive Officer's Report

8.2

 County Counsel's Report

8.3

 Investment & Finance Manager’s Report

8.4

 Assistant Executive Officers’ Report

9.

Adjournment

August 26, 2003 – Board Minutes, as corrected

0308.1

Call to Order:  Ms. Colson, Chair, called the Public Session of the Board of Retirement to order at 1:03 p.m., August 26, 2003 in SamCERA’s Board Room, Suite 125, 100 Marine Parkway, Redwood Shores.

0308.2

Roll Call:  Mr. Bryan, Mr. Buffington, Ms. Colson, Mr. Cottle, Mr. Lewis, Mr. McMahon, Ms. Salas & Ms. Stuart.  Excused:  Ms. Tonsfeldt (whose son was born August 18^th).  Alternate Board Member:  Ms. Arnott.  Staff:  Mr. McCausland, Mr. Clifton & Ms. Lamica.  Counsel:  Ms. Carlson.  Consultants:  Ms. Jadallah & Mr. Thomas.  Custodian:  Mr. Azfar, Actives: 1, County: 2, Public: 1.

0308.3

Approval of the Minutes:  Ms. Arnott submitted the following corrections:  0307.5.2 ¶1, L9: “…Robert Marsh, Jr’s a Nonservice Connected Disability…”;  0307.7.1 ¶2: “The Fair Market Value of the Retirement Fund increased $25.2 million between July 1, 2002 and June 30, 2003.  This increase reflects the net of Uses of  (1) $70.0 million in Benefit Payments, (23) $2.3 million in Professional Expenses & $1.8 million in Administrative Expenses versus Sources of (34) $36.0 million in Employer Contributions, (45) $25.7 million increase in the Market Value of the Investment Portfolio (56) $22.6 million in Member Contributions and (6) $16.4 million in Interest and Dividend income…”;  0307.7.4 ¶1, L2: $8,561 $8.561;

0307.7.6 ¶1, L9:  “…there is no need for a study at this time…”.  Mr. Hackleman requested that the Board incorporate Ms. Welch’s references to studies in 0307.7.6 ¶1, L12:  “…probably overdue.  Ms Welch reported that a study had been completed several years ago [November 1998] and that Mr. McCausland had been asked to submit supplemental justification information for a pending request for a new study [that he had filed in October 2002].… 

Mr. Hackleman sought assurance that Regulation 6.6.6 does not permit an individual who retired from another system to redeposit with SamCERA in order to establish reciprocity and collect benefits under the new benefit formulas.  Mr. McCausland reported that the ’37 Act does not permit post-retirement redeposit or post-retirement establishment of reciprocity.  In response to a question from Mr. Bryan, Ms. Carlson noted that the Supervisors’ resolutions limit the new benefit formulas to active and deferred members.

Motion Bryan, second by Cottle, carried unanimously, to approve the Minutes of the meeting of July 22, 2003, as corrected.

0308.4.1

Oral Communications From the Board:  Mr. Cottle reported that the September meeting of the Investment Committee will be held on September 19^th at 9:00 a.m.

0308.4.2

Oral Communications From the Public:  None.

0308.5

Benefit & Actuarial Services

0308.5.1

Adoption of Consent Calendar:  Without objection, Ms. Colson removed the application of Ms. de Gery (Salas) from the Consent Calendar for consideration under Agenda Item 5.2.  Motion by Lewis, second by Stuart, carried unanimously, to adopt the Consent Calendar as amended, as follows:

Disability Retirements: 

The Board finds that Robert Marsh Jr.is unable to perform the duties of an Equipment Operator/Mechanic, finds that his disability is Service-Connected and, grants him a Service-connected Disability.

The Board finds that Mary Givens-Snead is unable to perform the duties of a Welfare Fraud Investigator, finds that her disability is not Service-Connected, denies her application for Service-connected Disability, and grants her a Nonservice-connected Disability.

The Board finds that Diedra Bradshaw is unable to perform the duties of a Social Worker III and grants her a Nonservice-connected Disability.

Routine Actions:  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:

Service Retirements:

Price, Barbara

August 1, 2003 (from deferred)

Human Services Agency

McLarty, Robert

August 1, 2003

Food Services Department

Yates, Esther

August 1, 2003

Assessor’s Office

Busik, Stephan

August 2, 2003

County Medical Center

Green, Raymond

August 2, 2003

Mailroom Department

Pestano, Judith

August 2, 2003

Human Services Agency

Rubenstein, Clifford

August 3, 2003

Probation Department

Brown, Robert

August 6, 2003

Sheriff’sDepartment

Cua, Cresencianan

August 8, 2003

Controllers’ Office

Eagan, Terrance

August 8, 2003

Sheriff’s Department

Becker, Rahn

August 11, 2003 (from deferred)

County Manager’s Office

Serpa, Deborah

August 15, 2003

Environmental Services Dept

Young, Viki

August 16, 2003

Sheriff’s Department

Kaspar, James

August 17, 2003

Superior Court

Stevens, Irene

August 17, 2003

Human Services Agency

Barretto-Silva, Palmira

August 17, 2003

County Medical Center

Sibug, Gloria

August 18, 2003 (from deferred)

County Medical Center

Whitman, Claudia

August 30, 2003

Human Services Agency

Pacas, Oscar

August 31, 2003 (from deferred)

Chope Hospital

Continuance of Benefits:

Junge, Leslie

Beneficiary of Nancy

Laran, Helena

Beneficiary of Isidore

Rist, Leora

Beneficiary of George

Theodoropoulos, Jane

Beneficiary of Peter

Extended Purchases:

Miller, Marie

5 years 2 months 1.867 days

$16,281.78 @ 104 x 182.19

Deferred Retirements:

Rayward, Gerry

G2 vested

Whitfield, Derenda

G2 vested

Refunds for August 2003:

Burgos, Suzanne

G4 non vested

$6,370.71

Craig, Patricia

G2 vested

$46,177.21

Crawford, Benjamin

G4 non vested

$4,983.46

Dalby, Joanne

G4 non vested

$691.48

Gomez, Monica

G4 non vested

$1,544.81

Kilcrease, Calvin

G4 non vested

$11,021.60

Sanchez, Nancy

G2 vested

$24,944.22

Tsui, Cheryl

G4 non vested

$592.71

Watanabe, Garrett

G4 non vested

$10,830.70

Total Refunds for August

$112,156.90

Rollovers for August 2003

Greenberg, Michael

G2 vested

$29,611.44

Jacobs, Harriet

G4 non vested

$3,501.72

Jalal, Razia

G4 non vested

$2,788.54

Khilnani, Mahesh

G4 non vested

$1,148.16

Lashgari, Donna

G4 non vested

$2,540.80

Rosado, Clara

G4 non vested

$9,614.84

Urbina, Sylvia

G2 vested

$38,019.66

Ward Janette

G4 non vested

$7,633.39

Weigel, Laura

G4 non vested

$3,834.86

Total Rollovers for July 2003

$98,693.41

0308.5.2

Consideration of items removed from Consent Calendar:  Ms. Colson took up the application of Carole de Gery.  The Board reviewed the application with Dr. Fracchia and Ms. Carlson.  Dr. Fracchia reported that Ms. de Gery was disabled, but that he had been unable to determine that her disability was work related.  In response to questions from Mr. McMahon & Ms. Colson, Dr. Fracchia noted that there was no report filed regarding the incident and that the applicant had provided two different accounts of what had happened to two different medical providers; consequently, he did not find sufficient documentation to warrant a finding that the disability was work related.  Ms. Salas, Mr. Bryan & Ms. Carlson noted that her supervisors’ inability to recall the incident did not mean that Ms. de Gery was not injured during the training exercise.  Ms. Carlson also noted that if the incident exacerbated a preexisting condition, that would also be sufficient to find that the injury was work related. 

Mr. Bryan noted that a Workers’ Compensation judge had found that the injury was work related.  Dr. Fracchia noted that Ms. Carlson had advised him that the Board of Retirement is not required to consider Workers’ Compensation findings in its deliberations.  Ms. Carlson noted that because SamCERA is independent of the County, the Workers’ Compensation findings apply only to the County, not to SamCERA. 

Motion by McMahon, second by Buffington, carried five ayes (Buffington, Cottle, Lewis, McMahon & Stuart) to three noes (Bryan, Colson & Salas) to find that Carole de Gery is unable to perform her duties as a Deputy Sheriff, find that her disability is not Service-Connected, deny her application for Service-connected Disability and grant her a Nonservice-connected Disability.

0308.5.3

Adoption of amendments to SamCERA’s Interest Crediting Policy:  Mr. McCausland reviewed SamCERA’s Interest Crediting Policy, noting that it is the Board’s policy to credit all earnings to actuarial reserves other than 1% of assets dedicated to the Reserve for Deficiencies and the amount reserved to pay for the next year’s cost of the Medicare Part-B Premium Reimbursement Program.  He reported that he had failed to include a provision in the April amendments to the policy to credit interest to member accounts in years when the earnings fall below the actuarial interest rate.  He noted that the proposed amendments rectify the oversight. 

In response to questions from Mr. Buffington and Ms. Colson, Mr. McCausland reported that the Internal Revenue Service requires that the Board of Supervisors appropriate funds for the Medicare Part-B Premium Reimbursement Program each year, if they wish to continue the program. 

Mr. McCausland reported that the Board had amended the policy last year [February 26, 2002 – 0202.5.6 and again on April 22, 2003 – 0304.5.4] to provide priority funding:  first priority, to the 1% Reserve for Deficiencies; second priority, to the Medicare Part-B Premium Reimbursement Program; third priority, to employer reserves; and fourth priority, to member reserves.

Mr. Scannell recommended that the proposed amendment be referred to Ad Hoc Medicare Part-B Premium Reimbursement Program Review Committee for review.  Mr. Lewis asked for an impact analysis of a range of earning scenarios.

Following an extended discussion and appointment of the Ad Hoc Committee referred to in 0308.5.6, motion by Lewis, second by Buffington, carried five ayes (Buffington, Colson, Lewis, McMahon & Stuart) to three noes (Bryan, Cottle & Salas) to refer the Interest Crediting Policy to the Ad Hoc Medicare Part-B Premium Reimbursement Program Review Committee for evaluation and recommendations.

0308.5.4

Adoption of amendments to SamCERA’s Market Stabilization Account Policy:  Mr. McCausland noted that Mr. Buffington had suggested last month that positive returns be credited first to write down the negative balances in the account.  Mr. McCausland reported that he and the actuary analyzed the suggestion and recommend that the Board not alter its strategy for smoothing actuarial gains & losses over five years.  He reported that as part of the analysis he had assembled all of the Board’s prior decisions regarding the Market Stabilization Account into a single draft policy resolution, which he recommended the Board adopt.  Motion by Bryan, second by Salas, carried unanimously to adopt Resolution 03-04-01, as follows:

Whereas, Actuarial Standards Board Standard of Practice #4 mandated that the Actuarial Value of Assets should generally reflect some function of market value, which may include provisions for smoothing the effects of short-term volatility in market value; &

Whereas, effective January 1, 1993 the Board provided for the implementation of Actuarial Standards Board Standard of Practice #4 and adopted five-year smoothing of all returns for valuing actuarial assets and calculating the unfunded actuarial accrued liability; &

Whereas, Governmental Accounting Standard #25 mandated that the Statement of Net Plan Assets be based on the fair market value of assets; &

Whereas, effective June 30, 1997 the Board provided for the implementation of Governmental Accounting Standard #25 and authorized the creation of a Market Stabilization Account to reconcile differences between the Market Value of Assets and the Actuarial Value of Assets; &

Whereas, effective retroactive to June 30, 2002 the Board amended its Market Stabilization Account policy to limit the difference between the Market Value of Assets and the Actuarial Value of Assets to not more than ±20% of the Market Value; &

Whereas the Board’s objective in adopting this policy is to minimize the impact of short-term volatility in the market value of the Retirement Fund on employer and member contribution rates by smoothing market returns over a five year period.  Therefore be it

Resolved that the Investment & Finance Manager shall use the Fair Market Value of assets as the accounting basis for the GAS # 25 mandated Statement of Net Plan Assets.  Be it further

Resolved that the Investment & Finance Manager shall use the Actuarial Value of Assets as the accounting basis for the ’37 Act mandated reserves that must be disclosed in the GAS #25 required footnote.  Be it further

Resolved that the Investment & Finance Manager shall maintain a Market Stabilization Account to reconcile the difference between the Fair Market Value of Assets set forth in the GAS # 25 mandated Statement of Net Plan Assets and the Actuarial Value of Assets set forth in the GAS #25 required footnote.  Be it further

Resolved that the Investment & Finance Manager shall deposit the semi-annual difference between the Actual Market Return and the Expected Market Return as based on the Actuarial Interest Rate Assumption in the Market Stabilization Account on December 31^st and June 30^th of each year.  Be it further

Resolved that the Investment & Finance Manager shall transfer each semi-annual deposit from the Account to the Actuarial Balance Sheet in ten equal semi-annual installments, with the first installment being transferred on the date of deposit, except that the balance in the Account as of June 30, 2002 shall be transferred in nine equal installments beginning December 31, 2002 notwithstanding the date of deposit therein.  Be it further

Resolved that the Investment & Finance Manager shall not post a deposit to the Market Stabilization Account when the difference between the Fair Market Value of Assets and Actuarial Value of Assets, as measured on December 31^st and June 30^th, would exceed ±20% of the Fair Market Value of Assets, but shall post such difference in excess of 20% to the Actuarial Balance Sheet.

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

0308.5.5

Adoption of revised Safety Member & Employer Contribution Rates for current fiscal year:  Mr. McCausland reported that after the actuarial valuation was completed, SamCERA learned that the Deputy Sheriffs’ Association had agreed to the termination of the County pick-up of 15% of the member’s contribution on a nonrefundable basis.  Consequently, Mercer was asked to submit revised Safety contribution rates for the current fiscal year.  Motion by Salas, second by Bryan, carried unanimously, to adopt Resolution 03-04-02, 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, the County of San Mateo has entered into agreements to implement a new Safety Member benefit formula in Fiscal Year 2003-2004; and

Whereas, the Board received, reviewed and approved the reports and recommendations from its actuary, Mercer, and the Chief Executive Officer setting forth the changes necessary to assure the actuarial soundness of the Retirement Fund; and

Whereas, Board Resolution 02-03-11 and Board of Supervisors Resolution 66079 adopted the actuary’s recommended rates; and

Whereas, the County and Deputy Sheriff's have agreed to terminate the County pick-up of 15% of the Safety Members Contribution Rate; and

Whereas, Mercer has recommended revised rates that reflect the termination of the County pick-up of 15% of Safety Member Contribution Rates.  Therefore be it

Resolved that the Board hereby adopts the actuary's recommended revised Employer Contribution Rates for Fiscal Year 2003-2004 for the County Safety Members in accordance with the following schedule, as a percentage of covered salaries,

Plan 1

Plan 2

Plan 3

Plan 4

effective July 6, 2003:

Safety Member Rates:

Normal Cost

24.54%

21.06%

None

18.95%

Contribution to Unfunded Accrued Actuarial Liability

17.37%

12.12%

None

10.82%

Total Safety Member Rates

41.91%

33.18%

29.77%

Resolved that the Board hereby adopts the actuary's recommended Entry Age Member Contribution Rates for the County in accordance with the schedule set forth in the Attachment entitled Member Contribution Rates, as a percentage of covered salaries, effective July 6, 2003.

Member Contribution Rates

New Formula

No 15% Safety Member Pick-up

Entry
Age

S1/S2

S4

18

7.94%

7.55%

19

7.94%

7.55%

20

7.94%

7.56%

21

7.96%

7.58%

22

7.98%

7.60%

23

8.00%

7.61%

24

8.02%

7.64%

25

8.05%

7.66%

26

8.08%

7.69%

27

8.12%

7.73%

28

8.16%

7.76%

29

8.21%

7.81%

30

8.27%

7.87%

31

8.33%

7.93%

32

8.40%

7.99%

33

8.47%

8.06%

34

8.55%

8.14%

35

8.64%

8.22%

36

8.73%

8.31%

37

8.82%

8.40%

38

8.93%

8.49%

39

9.04%

8.60%

40

9.15%

8.71%

41

9.27%

8.82%

42

9.40%

8.94%

43

9.52%

9.06%

44

9.66%

9.19%

45

9.79%

9.32%

46

9.93%

9.45%

47

10.07%

9.59%

48

10.22%

9.98%

49+

10.38%

10.38%

0308.5.6

Appointment of Ad Hoc Medicare Part-B Premium Reimbursement Program Review Committee:  Mr. McCausland reminded the Board that during its last meeting it had determined that it was important to undertake a complete review of the Medicare Part-B Premium Reimbursement Program before the end of the current fiscal year.  Mr. McCausland reviewed the history of funding for the Part-B Program. 

Ms. Colson noted that the Board needs a thorough review of the Part-B Program, including the Interest Crediting Policy, so that the board will not find itself juggling the funding mechanism each year.  Mr. Buffington questioned the payment of Part-B when the fund is losing money.  Mr. Lewis recommended the use of an ad hoc committee to refine the method for determining the excess earnings residual.  Mr. Buffington compared the excess earnings question to the difference between defining a gross number and defining a net number.  Mr. McCausland noted that the fundamental policy question for the Board is does the Retirement Fund have to have positive returns before funds can be reserved for the Part-B Program.  Ms. Stuart suggested an income test for recipients in years of diminished earnings. 

Mr. Bryan noted an absence of support on the Board for a lowering of the 80% Funding Ratio threshold as a prerequisite for continuation of the Part-B program. 

Ms. Colson noted that it will be important to keep retirees informed of the status of the Part-B Program.  She noted that Mr. McCausland will be making a comprehensive presentation to SCORPA on August 27^th. 

Ms. Carlson noted that the Board could include nonmembers on an ad hoc committee, such as the actuary.  Ms. Colson stated that the committee would consist of Board members, but that the committee may call on others for advice as it deems necessary.  Ms. Colson asked for volunteers to serve on the Ad Hoc Committee. 

Without objection, Ms. Colson appointed Ms. Stuart (Chair), Mr. Buffington, Ms. Colson and Mr. Lewis to the Ad Hoc Medicare Part-B Premium Reimbursement Program Review Committee and charged the committee with the task of reviewing the Part-B Program issues set forth in Mr. McCausland’s SCORPA presentation and SamCERA’s Interest Crediting Policy and related questions raised by the Board.

0308.6

Investment Services

0308.6.1

Acceptance of Monthly Portfolio Performance Report:  Mr. Clifton presented the monthly performance report for periods ending July 31^st.  He reported that the fund had been rebalanced during the month with the investment of the County’s prepayment of the annual employer contribution.  

Asset Class

Market Value

1-Month

1-year TTWRR

5-year TTWRR

$  676,653,400

2.80%

13.18%

-0.39%

International Equity

    184,615,064

1.88%

2.77%

-2.19%

Total Equity

$  861,268,464

2.60%

10.68%

-1.75%

Fixed Income

365,642,744

-3.35%

5.23%

6.92%

Real Estate Aggregate

65,536,433

0.65%

15.07%

8.14%

Cash Equivalents

         3,759,268

0.21%

   2.36%

Total Fund

$1,296,206,908

0.74%

9.98%

2.12%

Benchmark

0.85%

10.66%

2.18%

Without objection, Ms. Colson accepted the report.

0308.6.2

Acceptance of Strategic Investment Solutions’ Quarterly Performance Report:  Mr. Thomas noted that the quarter ending June 30^th was very positive for equities, with riskier assets typically doing the best.  SamCERA’s returns were in the top quartile of large plans for the quarter.  Ms. Jadallah provided performance attribution data for each of the managers.

Asset Class

1-Quarter

1-year TTWRR

5-year TTWRR

Large Cap Equity

Small Cap Equity

International Equity

Total Equity

Passive Fixed Income

Active Fixed Income

Total Fixed Income

Real Estate w/ REITS

Cash Equivalents

Total Fund

Benchmark

12.32%

18

3.60%

60

1.76%

89

Without objection, Ms. Colson accepted the report.

0308.6.3

Introduction to the Review of SamCERA’s Investment Manager Structure:  Mr. Thomas reminded that Board that it had reaffirmed its existing asset allocation policy last month.  He reported that the Investment Committee has now begun its review of SamCERA’s investment manager structure.  Mr. Thomas noted that the management of risk is essential in making manager structure decisions.  SIS will recommend structures that maintain style neutral management at the total portfolio level.  SIS is evaluating a range of mixes of active and passive management.  The selection of skilled managers is necessary if active management is to outperform passive management.  The analyses will begin with U.S. equity, then move on to International Equity, then on to Fixed Income.  Ms. Colson noted that the Investment Committee will bring a series of recommendations forward for the Board’s review and approval.

This morning the Committee reviewed the consultant’s initial analysis of the U.S. equity universe and instructed SIS to provide the Committee with an array of active / passive risk controlled portfolio alternatives.  Without objection, Ms. Colson accepted the report.

0308.6.4

Annual Investment Manager Review – Deutsche Asset Management:  Christopher Gagnier, Managing Director & Portfolio Manager and Tony Freitas, Director-Client Investment Specialist, were available for the review.  Mr. Gagnier reviewed DAMI’s active fixed income investment management team.  He noted that there has been very little change in personnel over the past ten years. 

He reviewed investment returns over a range of periods since inception of the relationship and investment strategy.  He noted that DAMI’s long-term performance exceeds the benchmark, but he highlighted the underperformance in late 2002.  He noted that two factors contributed to the underperformance in 2002. 

He reported that DAMI’s investment in manufactured housing bonds, which represented 1% of SamCERA’s portfolio, cost a cumulative 77 basis points in underperformance prior to their sale.  In response to a question from Ms. Colson, Mr. Gagnier reported that DAMI had held onto the weaker manufactured housing bonds too long because of fraud with respect to the underlying quality of the manufactured housing portfolio by the dominant player, Green Tree, which became CONSECO.  The issuer was not adhering to the underwriting standards and the delinquency and foreclosure data submissions on the trusts were not accurate.  Consequently, DAMI overvalued the securities, up until the time that the fraud was discovered, CONSECO filed for bankruptcy and the market for manufactured housing bonds collapsed. 

In addition, he reported that volatility in the corporate bond market in 2002 had led DAMI to underweight lower grade bonds as many were being downgraded to junk status.  Consequently when those lower grade bonds rallied in the fourth quarter, DAMI’s conservative posture caused them to miss the rally in those bonds.  Mr. Buffington questioned whether on not the Lehman Aggregate is the correct index for judging DAMI’s performance, if DAMI security selection is not fully reflected in the index.  Mr. Gagnier noted that there are approximately 7,700 bonds in the Lehman Aggregate, but that no one really knows exactly how many bonds actually exist in the bond market.  He reported that Bloomberg maintains prices over three million fixed income securities.  So the index itself is not reflective of the total market.  Mr. Buffington recommended that DAMI propose an index that reflects its investment style.  Mr. Gagnier noted that if the Board’s mandate is for investment grade bonds, then the Lehman Aggregate is the best proxy even though it is not a match for the actual market.  He stated that there are indices that are based on larger universes, but they are also more volatile because they include more thinly traded securities.  He stated that if you want the index, then you should invest in an index fund.  If you want active return, then it is important to buy securities when they are cheap and to exit them when they are no longer cheap.  All securities selected for SamCERA’s portfolio are investment grade.  In fact, DAMI was avoiding the angels in danger of falling during 2002, which is why the portfolio missed the fourth quarter rally in the lower rated securities.  Mr. Freitas reaffirmed that fact that all securities purchased for SamCERA are investment grade securities, as reflected in the portfolio characteristics.

In response to a question from Ms. Colson, Mr. Gagnier stated that 95% of the client’s mandates use the Lehman Aggregate Index.  Clients’ out performance targets vary from 25 basis points to 100-150 basis points for Core Plus clients.  Core Plus clients may design custom benchmarks for their strategy.

In response to a question from Mr. Cottle, Mr. Gagnier noted that he is biased toward DAMI’s Core Plus product, which he manages, but that the allocation decision is usually dominated by where the market is in the credit cycle.  He stated that it appears that the market has just exited a very poor period for riskier assets such as high yield and emerging markets.  Consequently, though Core Plus has not done well during the three to five years prior to the last year; it has performed very well during the most recent year.  He projects good prospects for Core Plus due to improved relative performance for the higher yield, higher risk sectors of the market.  In response to a question from Mr. Bryan, Mr. Gagnier reported that DAMI has consistently performed in the top quartile of the Core Plus universe.  He noted that DAMI strives to keep both of its strategies in the lower-risk/higher-return quadrant in consultants’ performance universes, with less volatility but more alpha.  Diversification is a key to DAMI’s risk management strategy. 

In response to a question from Mr. Cottle, Mr. Gagnier stated that there in no difference in the fee schedule for the two strategies.  In response to a question from Mr. Lewis, Mr. Gagnier reported that the portfolio managers are paid out of revenues, with track record being the primary criteria.  He noted that the Philadelphia office has been able to control costs very effectively without interference from the parent company.

In response to a question from Mr. Cottle, Mr. Gagnier noted that the Chief Investment Officer designed and implemented the highly replicable investment strategy utilized by the firm.  For several years now he has focused his attention on the municipal bond sector.  Mr. Gagnier noted that the heir apparent possess the requisite set of skills required to manage the details that come with the growth of assets under management and to mange the larger staff that is required to manage the firm.

Over the past four years the six bond portfolio managers have evolved as a team that governs the investment strategy.  Security decisions are based on the consensus of the portfolio manager team.  In response to a question from Mr. Bryan, Mr. Gagnier noted that the team has been sequentially assembled over the years and remains very stable as everyone enjoys the success that they have achieved.  In response to a question from Ms. Colson, Mr. Gagnier stated that the investment team responds to market developments immediately. 

In response to a question from Mr. Thomas, Mr. Gagnier noted that DAMI’s stated goal is to grow 10%-15% per year, but that growth frequently hits 20%.  He noted that the product had been closed to new accounts last year as the team absorbed the 26% growth in assets related to the acquisition of Scudder.  The firm has now reopened it doors to new accounts.  If spreads narrow, the firm may restrict new business.  DAMI believes that it can grow at the same rate that the bond market grows, without losing its ability to exploit investment opportunities. 

In response to a question from Ms. Colson, Mr. Gagnier reported that the SEC is currently engaged in an audit of New York office of DAMI.  Mr. Gagnier noted his team does not engage in any trading activity that requires personal reporting and that there is a heightened awareness and level of attention to regulatory and compliance over the last two years.  He noted that he has attended at least five mandatory courses this year on compliance related subjects.  He reported the SEC enforcement action against the parent company regarding the Hewlett Packard – Compact merger vote, but noted there were no issues between the SEC and the fixed income investment management unit.

Ms. Colson asked Mr. Gagnier to advise the Board of the findings from their current SEC audit.  Without objection, Ms. Colson accepted the report.

0308.6.5

Approval of Topics for Investment Manager Review – INVESCO Realty Advisors:  Mr. Cottle reported that the Committee had not made any changes to the list of proposed topics.  Without objection, Ms. Colson accepted the report.

0308.6.6

Adoption of a Commitment to INVESCO’s Commingled - Open End - Core Real Estate Fund:  Mr. Cottle reported that the Committee identified a series of issues that need to be resolved prior to a formal commitment.  The Committee will forward a list of questions to INVESCO for their response. 

Mr. Lewis expressed concerns regarding the rules for reconstitution of the fund and the size of the fund as primary concerns.  Ms. Colson questioned pledging cash to the fund at its inception prior to INVESCO’s identification of specific properties.  She suggested that investing cash currently available for real estate into a fully diversified fund is an alternative that the Board should consider as a way to achieve immediate diversification.  Mr. Lewis asked for assurance that the Board would have further opportunities to evaluate and vote before funds are committed to INVESCO’s commingled fund.  Mr. Buffington and Mr. Cottle noted that the Investment Committee’s recommendation is to commit to the fund, subject to INVESCO resolving the contingencies raised by the Committee and the Board.

Following discussion, motion by Bryan, second by Buffington, carried unanimously to enter into a commitment to transfer SamCERA’s real estate investments to the proposed INVESCO Commingled Open-End Core Real Estate Fund, with provisos that there will be no redemptions during the first eighteen-months and satisfactory resolution of the issues raised by the Investment Committee.

0308.6.7

Review of Frank Russell Company’s Manager Research Capabilities & On-Site Due Diligence Processes:  Mr. Cottle reported that SIS had reviewed Frank Russell’s manager research capabilities with the Committee.  He noted that the Committee had raised a number of questions for SIS to research.  Without objection, Ms. Colson accepted the report.

0308.6.8

Adoption of Due Diligence Policy & Procedures:  Mr. Cottle reported that the Committee had put this item over.

0308.6.9

Review, Revision & Reaffirmation of Investment Committee Charter:  Mr. Cottle reported that the Committee had put this item over.

0308.7

Board & Management Support Services

0308.7.1

Acceptance of Monthly Financial Reports:  Mr. Clifton submitted the preliminary Monthly Financial Reports for July.  He noted that Net Assets had increased $55 million in July, due primarily to the County’s prepayment of annual employer contributions.  Without objection Ms. Colson accepted the report.

0308.7.2

Introduction of Amendments to the Regulations of the Board of Retirement:  Mr. McCausland reviewed the draft amendments, noting that they serve as a comprehensive cross-reference between the ’37 Act, Supervisors’ implementing resolutions and SamCERA’s policies and practices. 

In response to a question from Mr. Cottle, he noted that his objective is to provide a document that can be used in conjunction with the Business Continuity Plan to maintain continuity in the implementation of the ’37 Act following a disaster.  He noted that the document also provides the trustees and members with a way to determine which provision of the ’37 Act is applicable to a given issue.  Mr. Lewis asked about the risk of omission, but Mr. McCausland noted that the ’37 Act contains a provision that states that the law always supercedes the regulations.  Mr. Bryan and Ms. Stuart noted the value in having straightforward access to the relevant code sections.  The word “license” was changed to “authority” in 2.3.3 at Mr. Cottle’s request. 

Ms. Carlson noted that she had not had time to review the amendments due to the Ventura II proceedings, but that she will work with staff over the next month.  Ms. Carlson noted the value of providing clear direction to staff in the regulations.  She indicated that her review would concentrate on deleting provisions that do not need to be in the regulations.  In response to a question from Ms. Colson, Mr. McCausland urged the Board to distribute the document to interested parties as a working draft.  Ms. Colson recommended that trustees provide staff with feed back to the extent they are able.

Motion by Cottle, second by Bryan, (1) to distribute the draft amendments and cross-reference table to the County, Mosquito Abatement District and all employee unions; (2) to set the amendments for public hearing on September 23^rd and October 28^th; and (3) to set the amendments for adoption on November 25^th.  [The cross reference table may be viewed on www.samcera.org.]   

0308.7.3

Consideration of Legislative Proposals for submission to SACRS:  None.

0308.8

Approval or Acceptance of Reports

0308.8.1

Chief Executive Officer's Report:  Mr. McCausland reported that SamCERA operations continue to suffer from “brown out” related to the overload of purchases, unresolved community property issues and inquiries related to the implementation of the new benefit formulas.  He noted that the current problems have served as a wake-up call and that staff will be preparing plans for the implementation of an adverse Ventura II decision in 2004 and the additional new benefit formulas in 2005.  He reported that he would like to stay at SamCERA long enough to complete the successful implementation of Ventura II, the new benefit formulas and the completion of Mr. Hood’s probable tour of active military duty.  He reported that he is a candidate for the Half Moon Bay City Council and assured the Board that, if elected, he would not let that commitment interfere with his fiduciary duty to SamCERA.  Without objection Ms. Colson accepted the report.

0308.8.2

County Counsel's Report:  Ms. Carlson reported that she provided staff with copies of the joint petitions for review in Ventura II.  She reported that she had represented the Board in the attorney fee appeal.  Without objection Ms. Colson accepted the report.   

0308.8.3

Investment & Finance Manager’s Report:  Mr. Clifton reviewed five reports from Bank of Ireland Asset Management (including their proxy voting polices & procedures; two reports from Deutsche Asset Management and an update on Hunter’s Creek Plaza.  He reminded the Board that he now sells securities to fund monthly disbursements, rather than carrying significant amounts of short-term investments.  Without objection Ms. Colson accepted the report.   

0308.8.4

Assistant Executive Officers’ Report:  Ms. Colson noted that Mr. Hood is on two weeks military leave.

0308.9

Adjournment in Memory of the following Deceased Members:  There being no further business, Ms. Colson adjourned the meeting at 3:48 p.m. in memory of the following deceased members:

TOLOTTI, JOHN JR.

May 20, 2003 – Active – Plan S4

Sheriff’s Department

GHILARDI, ROSALIE

July 6, 2003

Beneficiary of Charles

ERICKSON, MILDRED

July 11, 2003

Mental Health Department

PATTERSON, FRANCES

July 13, 2003

Department of Public Works

METCALF, DEANE

July 14, 2003

Beneficiary of Harry

CRESTA, MERVIN

July 17, 2003

Agriculture Department

RACANSKY, IGOR

July 17, 2003 – active – plan 3

 Department of Human Services

SWARTZ, MARJORIE

July 18, 2003

Department of Social Services

LARAN, ISIDORE

July 19, 2003

Department of Social Services

SYCYLO, RAYMOND

July 25, 2003

CRAWFORD, NORMA

July 27, 2003

Department of Social Services

CUNNINGHAM, DONALD

July 28, 2003

Assessors’ Office

MANNING, EMMA

August 3, 2003

Chope Hospital

WIGGINS, RUSSELL

August 9, 2003

Office of Emergency Services