July 27, 2004 – Board Agenda

Call to Order: Ms. Colson, Chair, called the Public Session of the Board of Retirement to order at 1:00pm., July 27, 2004 in SamCERA’s Board Room, Suite 125, 100 Marine Parkway, Redwood Shores.

0407.2

Board Business

0407.2.1

Roll Call: Ms. Colson, Mr. Buffington, Mr. Hooley, Mr. Lewis, Mr. McMahon, Ms. Salas & Ms. Stuart. Excused: Mr. Bryan & Ms. Tashman. Ms. Arnott was also in attendance. Staff: Mr. McCausland, Mr. Hood & Mr. Clifton. Counsel: Ms. Carlson. Consultants: Mr. Summer & Ms. Jadallah. Retirees: 1, County: 1.

0407.2.2

Acceptance of Certifications: Mr. Hood reported that, pursuant to Regulation 3.16, David Tom, County Elections Officer, certified and declared on June 18^th Bette Perroton Stuart the winner in the election for the Eighth Member position on the Board. Also in accordance to Regulation 3.16, Mr. Tom, certified and declared Tom E. Bryan the winner in the election for the Third Member position on the Board. Without objection, Ms. Colson accepted the County Elections Officer’s certification of election results. Mr. Hood also reported that the Board of Supervisors had reappointed Donna Wills Colson and Kenneth A. Lewis to their seats on the Board of Retirement.

0407.2.3

Swearing-in of Trustees: Ms. Stuart, Ms. Colson and Mr. Lewis swore to serve as faithful fiduciaries for all members, retirees and beneficiaries; to serve as prudent administrators of the County's Retirement System; and to support, defend and bear true faith and allegiance to the Constitutions of the United States of America and the State of California in accordance with Regulation 3.20. Mr. Bryan was not present at the Board meeting to be sworn-in.

0407.2.4

Election of Officers: Ms. Colson presented the report of the Ad Hoc Nominating Committee. She reported that Ms. Stuart, Mr. Bryan, Ms. Colson and Ms. Arnott had met on June 22^nd and nominated the proposed slate of officers for the new fiscal year. Motion by Stuart, second by McMahon, carried unanimously, to elect Ms. Salas, Chair; Mr. Lewis, Vice Chair and Mr. Bryan, Secretary, per Regulation 1. Ms. Colson presented the gavel to Ms. Salas.

0407.2.5

Appointment of Committees: Ms. Salas deferred the appointment of Committees until the August Board meeting so all trustees can be present.

0407.3

Approval of the Minutes: Ms. Colson submitted the following correction to the June Board Minutes: 0406.6.2 ¶7 “…carried five ayes (Arnott, Stuart, Bryan, ~~Salas~~ Lewis and Hooley) to three noes (Colson, McMahon and ~~Lewis~~ Salas)”. Ms. Arnott submitted the following corrections to the Board Minutes: 0406.5.3 ¶2: “…adopting a new Interest Crediting Policy, s as follows…”; 0406.5.3 ¶6: “~~WHEREAS~~RESOLVED that the Board hereby rescinds… ”; 0406.5.3 ¶7: “~~WHEREAS~~ RESOLVED that the Board hereby authorizes…”; 0406.6.4: “Mr. Clifton then stated that he and ~~Mrs.~~ Ms. Carlson…”. Motion by Ms. Colson, second by Mr. Buffington, carried unanimously to approve the Board Meeting Minutes of June 22^nd as amended.

0407.4.1

Oral Communications From the Board: Ms. Stuart noted the letter dated July 21, 2004 from San Mateo County Manager, John Maltbie, concerning the lack of funding for the Medicare Part-B Reimbursement Program. She asserted that it was very unfortunate that the Board of Supervisors determined that funding the supplemental benefit was unsuitable at this time. She stated that it was very difficult for many current retirees to afford the escalating costs of health insurance especially now given the suspension of the Medicare Part-B Reimbursement Program. Ms. Stuart also reported that she had received a call from Merced County and was informed that they were planning on increasing their $1000 death benefit to $2000. She noted that the only counties that do not provide death benefits are Fresno, Sonoma and San Mateo. She stated that the Medicare Part-B Program has proven itself to be essential to retirees and she believes the Board should immediately reconsider the continuation of the program when excess earnings do arise. Ms. Stuart then noted Mr. Maltbie’s expected retirement early next year. She stated that with the enhanced retirement benefits negotiated for current County employees, Mr. Maltbie’s retirement benefit has increased by approximately 31%.

Mr. Lewis, on behalf of the entire Board, expressed his gratitude to Ms. Colson for her service as Chair this past year.

0407.4.2

Oral Communications From the Public: Beverly Skalisky, representing SCORPA, reported that she will still carry on her campaign to continue the funding for the Medicare Part-B Reimbursement Program. She asked for reassurance regarding the future of the program. Mr. McCausland stated that the Board had merely suspended the payments of the program and that its rules are still in effect. He noted that the Resolution states that the payments can be restarted when the Association has both excess earnings and a funding ratio of 80%.

0407.5

Benefit & Actuarial Services

0407.5.1

Adoption of Consent Calendar: Without objection, Ms. Salas requested that agenda item 7.4 and 7.5 be added to the Consent Calendar. Motion by Buffington, second by Colson, carried unanimously, to reaffirm Resolution 02-03-02 the Board’s Code of Fiduciary Conduct, amend Resolution 98-99-12 the Board’s Education Policy and adopt the Consent Calendar, as follows:

Disability Retirements: None.

Routine Actions taken by staff pursuant to the Board's Delegation of Authority and the Regulations of the Board of Retirement:

Service Retirements:

Hardy, Penny

July 1, 2004 (from deferred)

Board of Supervisors

Shavies, Dorothy

July 1, 2004

Department of Human Services Agency

Munley, Richard

July 3, 2004 (from deferred)

Department of Human Services Agency

Bowler, Leona

July 31, 2004

Department of Social Services

Petagara, Ernest

July 31, 2004

Sheriffs’ Department

Schreibstein, Deborah

July 31, 2004

Department of Human Services Agency

Continuance of Benefits:

Behrens, Richard

Beneficiary of Jean

Meyer, Virginia

Beneficiary of Alexander

Deferred Retirements:

Siddiqui, Elaine

G4 vested

Burket, Randi

G2 vested

Dee, Josefina

G2 vested

Pedersen, Brenda

G2 vested

Yang, Yuchi

G4 vested

Arias, Jesse

G2 vested

Reciprocity

Francisco, Rachel

G4 non vested

Reciprocity

Harper, Cynthia

G4 non vested

Reciprocity

Parker, Brian

G4 non vested

Reciprocity

Parks, Michelle

G2 vested

Reciprocity

Applin, Elaine

G4 non vested

Diffenbaugh, Daniel

G4 non vested

Roberts, Sonja

G4 non vested

Berlanga, Leah

G2 vested

Per Section 31700

Harper, Steven

G2/3 vested

Per Section 31700

Valdez, Robert

G2 vested

Per Section 31700

Ramdas, Raksha

G4 vested

Per Section 37100

Hogan, Michael

G4 vested

Per Section 31700

Carter, Denise

G2 vested

Per Section 31700

Houston, George

S4 vested

Per Section 31700

Brenes, Roberta

G2 vested

Per Section 31700

Jovel, Mirna

Plan 3 vested

Per Section 31700

Bergeson, Wendy

G2 vested

Per Section 31700

Refunds For July 2004:

Bansil, Ila

G4 non vested

$986.08

Harthun, Kimberly

G4 non vested

$3,631.75

Maharaj, Sheena

G4 non vested

$578.50

Tolentino, Juliana

G4 non vested

$176.51

Wilkins, Kyla

G4 non vested

$7,240.94

Total Refunds July 2004:

$12,613.78

Rollovers For July 2004:

None.

Resolution 02-03-02

Code of Fiduciary Conduct, as reaffirmed July 27, 2004

WHEREAS Article XVI, §17 of the Constitution of the State of California was amended by the electorate in 1992 to read, in pertinent part, as follows:

Notwithstanding any other provisions of law or this Constitution to the contrary, the retirement board of a public pension or retirement system shall have plenary authority and fiduciary responsibility for investment of moneys and administration of the system, subject to all of the following:

(a) The retirement board-shall have the sole and exclusive fiduciary responsibility over the assets of the ... system. The retirement board shall also have sole and exclusive responsibility to administer the system in a manner that will assure prompt delivery of benefits and related services to the participants and their beneficiaries. The assets ... are trust funds and shall be held for the exclusive purposes of providing benefits to participants ... and their beneficiaries and defraying reasonable expenses of administering the system.

(b) The members of the retirement board ... shall discharge their duties with respect to the system solely in the interest of, and for the exclusive purposes 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.

(c) The members of the retirement board ... shall discharge their duties with respect to the system with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims.

(d) The members of the retirement board...shall diversify the investments of the system so as to minimize the risk of loss and to maximize the rate of return, unless under the circumstances it is clearly not prudent to do so.

(e) The retirement board..., consistent with the exclusive fiduciary responsibilities vested in it, shall have the sole and exclusive power to provide for actuarial services in order to assure the competency of the assets of the system .. ; &

WHEREAS Chief Judge Benjamin Cardozo, in 1928, set forth the standard for fiduciary conduct, as follows:

A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the "disintegrating erosion" of particular exceptions. Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd ... ; &

WHEREAS the National Conference on Public Employee Retirement Systems has published NCPERS’ Model Code of Ethics, the Guiding Principles of which are as follows:

1. Service to the beneficiaries of public pension funds is the primary function of public pension fund trustees.

2. The beneficiaries of public pension funds are sovereign and the trustees of those funds are ultimately responsible to them.

3. In those situations where the law is not clear, the best interests of the fund beneficiaries
must be served. Conscience is critical. Good ends never justify immoral means.

4. Efficient and effective administration and investment management is basic to public pension funds. Misuse of influence, fraud, waste or abuse is unacceptable conduct.

5. Safeguarding the trust of fund beneficiaries is paramount. Conflicts of interest, bribes, gifts or favors which subordinate fund trustees to private gains are unacceptable.

6. Service to public pension fund beneficiaries demands special sensitivity to the qualities of justice, courage, honesty, equity, competence and compassion.

7. Timely and energetic execution of fiduciary responsibilities is to be pursued at all times bypension fund trustees. &

WHEREAS the Political Reform Act of 1974 sets forth specific circumstances which require public officials to disqualify themselves from making, participating in, or attempting to influence governmental decisions which may affect any of their financial interests. Therefore, Be it

RESOLVED that the Board hereby adopts the following Code of Fiduciary Conduct:

PREAMBLE

The San Mateo County Employees Retirement Association (SamCERA) is a public pension plan organized under the County Employees Retirement Law of 1937. (California Government Code Section 31450, et seq.)

The management of SamCERA is vested in the Board of Retirement.

Members of the Board hold positions of public trust. Article XVI, Section 17 of the California Constitution charges SamCERA Board members with the responsibility of administering the affairs of SamCERA “in a manner that will assure prompt delivery of benefits and related services to SamCERA’s participants and their beneficiaries,” and further mandates SamCERA Board members to “discharge their duties with respect to the system solely in the interest of, and for the exclusive purposes of providing benefits to, participants and their beneficiaries.”

The members of SamCERA’s Board are mindful of the positions of trust and confidence held by them. They adopt this Code to ensure the proper administration of SamCERA, and to foster unquestioned public confidence in SamCERA’s institutional integrity as a prudently managed and fiduciarily governed public pension system, operated for the sole and exclusive purpose of providing benefits to SamCERA’s participants and beneficiaries.

SamCERA’s Code of Fiduciary Conduct, Educational Policy, and Conflict of Interest Code provide a comprehensive fiduciary framework for the proper conduct of SamCERA’s affairs.

1. Fiduciary Duty:

The Fund is a trust fund to be administered solely in the interest of the participants and their beneficiaries.

As required by the California Constitution, each member of SamCERA’s Board shall discharge his or her duties solely in the interest of, and for the exclusive purposes of providing benefits to, participants and their beneficiaries.

Each member of SamCERA’s Board, Chief Executive Officer, Consultants, Investment Managers, other professionals retained by the Board and SamCERA Staff shall execute their duties as set forth in the County Employees' Retirement Law of 1937, as amended, with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims.

Each member of SamCERA’s Board shall diligently attend to the business of the Board and shall not leave to the other members of the Board control over the administration of the affairs of the Board.

Each member of SamCERA’s Board shall comply with SamCERA’s Code of Fiduciary Conduct.

2. Adherence to SamCERA’s Investment Plan:

The Members of SamCERA’s Board shall not authorize the making of any investment which is not contemplated in SamCERA's Investment Plan. SamCERA's Investment Plan may be amended at any properly noticed meeting of the Board, but only after considering the written recommendations and comments of the Chief Executive Officer, Consultants and Investment Managers, which shall be promptly submitted upon request of the trustees.

3. Investment Authority:

The investment authority vested in the Board shall not be delegated to any committees of the Board, except by formal resolution. Such resolutions shall specify the limits of the authority delegated and require that all actions be reported to the Board for approval.

4. Investment Signature Authority:

Investment Signature Authority shall be limited to individuals identified by formal resolution which shall specify the limits of the authority delegated and require that all actions be reported to the Board for ratification.

5. Due Diligence Mandatory:

Due diligence shall be completed prior to the execution of any Board initiated investment transaction. Due diligence will be performed in accordance with established guidelines and procedures by persons with expertise relevant to the transaction under evaluation.

6. Direct equity investments:

Direct equity investments shall be made only after considering the written recommendations and comments of the Chief Executive Officer and Consultants.

7. Adherence to Related Laws:

Each member of SamCERA’s Board, the Chief Executive Officer, Consultants, Investment Managers, 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; the Ralph M. Brown Act, relating to public meetings, as amended; and all other California laws pertinent to the conduct of public pension fund fiduciaries.

Each member of SamCERA’s Board shall comply with SamCERA’s Conflict of Interest Code, California Government Code Section 87100 and Fair Political Practices Commission Regulation 81730, which prohibit a SamCERA Board member from attempting in any way to influence a SamCERA decision in which the Board member has a financial interest. A SamCERA Board member is deemed to have a financial interest if all of the following are present:

• It is reasonably foreseeable that the decision will have a financial effect;
• The anticipated financial effect is on a financial interest of the Board member;
• The anticipated financial effect is material; and
• The decision's financial effect on the Board member's financial interest is distinguishable from its effect on the public generally.

Each member of SamCERA’s Board shall abide by the provisions of California Government Code Sections 1090 through 1097, which prohibit a SamCERA Board member from being financially interested in any contract made by the Board.

A member of SamCERA’s Board shall not engage in any employment, activity, or enterprise for compensation which is inconsistent, incompatible, in conflict with, or inimical to his or her duties as a member of SamCERA’s Board, or with the duties, functions, or responsibilities of SamCERA’s Board.

A member of SamCERA’s Board shall not perform any work, service, or counsel for compensation outside his or her Board responsibilities where any part of his or her efforts will be subject to approval by any other member of the Board on which he or she serves.

In keeping with the provisions of the Government Code, a member or employee of the Board shall not become an endorser, surety, or obligor on, or have any personal interest, direct or indirect, in the making of any investment for the Board, or in the gains or profits accruing therefrom. These people are prohibited from having any financial interest in any contract made by them in their official capacity and from making or influencing official decisions in which they have a financial interest.

8. Limitation on the Acceptance of Gifts:

Each member of SamCERA’s Board shall comply with the gift limitation provisions of the Ethics in Government Act of 1990. (California Government Code Section 89500, et seq.)

9. Prohibition on Acceptance of Honoraria:

Each member of SamCERA’s Board shall comply with the provisions of the Ethics in Government Act of 1990 (California Government Code Section 89500, et seq.) prohibiting the acceptance of honoraria.

10. Public Disclosure of Economic Interests:

Each member of SamCERA’s Board shall comply with Article 2 (commencing with California Government Code Section 87200) of the California Political Reform Act of 1974, requiring the public disclosure of economic interests.

11. Communications with Service Providers and Other Non-SAMCERA Persons and Entities:

A Board member shall not correspond with a non-SamCERA person or entity using SamCERA letterhead unless the communication is authorized by the Board. Copies of all written communications from a Board member to a current service provider, or person or entity related to a current service provider, relating to SamCERA’s business (other than purely personal or social correspondence) shall be provided to the Chief Executive Officer for subsequent distribution to all members of the Board.

A copy of any written communication (other than purely personal or social correspondence, routine announcements, generally distributed newsletters, and the like) received by a Board member from a current SamCERA service provider, or person or entity related to a current service provider, shall be forwarded to the Chief Executive Officer for subsequent distribution to all members of the Board.

12. Accountability:

Members of SamCERA’s Board, the Chief Executive Officer, Consultants, Investment Managers, other professionals retained by the Board and SamCERA Staff shall be accountable for recognizing a potential conflict of interest and for disqualifying themselves from making, participating in, or attempting to influence Board decisions which may affect any of their financial interests. They shall disclose their potential conflict, either in writing to the Chairman of the Board, with a copy to all trustees and the Chief Executive Officer, or during a noticed meeting of the Board or its Committees, and shall explain their conflict of interest and refrain from participating in any further deliberations on the matter.

13. The Board shall pursue all of its legal remedies against any who violate the provisions of this Code.

Resolution 98-99-12

Education Policy as amended July 27, 2004

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...that 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; and

Whereas, Government Code §31520 vests the management of SamCERA in the Board; and

Whereas, the Board acknowledges the vital importance of making informed judgments on all matters which come before it and has adopted a Code of Fiduciary Conduct to guide its actions; and

Whereas, Associations and institutes exist which offer specialized training for pension fund trustees and staff; and

Whereas, the Board wishes to encourage its trustees and staff to become as expert as is cost-effective in the matters of pension fund investments, service and disability retirements and plan administration. Now, therefore, be it

Resolved, that the Board hereby stipulates that all trustees and staff shall participate to the fullest extent possible in approved educational activities, and that each trustee and staff member shall be expected to complete at least three endorsed educational activities each year. Be it further

Resolved, that the Board hereby authorizes the participation of trustees and staff in the educational activities of the State Association of County Retirement Systems (SACRS), the California Association of Public Retirement Systems (CALAPRS), the Government Finance Officers Association (GFOA), the Institute for Fiduciary Education (IFE), International Foundation of Employee Benefit Plans (IFEBP), ~~The City of Fresno Retirement Systems’ Education Conference~~, the California Retired County Employees’ Association, the Pacific Pension Institute (PPI) and the Wharton program for pension fiduciaries, to the extent that the budget provides funds for such participation. Be it further

Resolved, that the Board hereby approves the following recommended progression of courses for new trustees to complete within their first three-year term: (1) SACRS Fall or Spring Conference &/or CALAPRS General Assembly, (2) CALAPRS’ Trustee Roundtables, (3) CALAPRS @ Stanford Principles of Pension Management, (4) IFEBP Certificates of Achievement in Public Plan Policy and (5) Wharton Pension Fund and Investment Management Program. Be it further

Resolved, that the Board hereby also approves the following programs for trustees with the recommendation that trustees complete the programs listed above in the 3^rd Resolve Clause prior to participation in the following: Fiduciary Institute @ Stanford, IFEBP Public Funds Annual Conference, GFOA Annual Conference, Frank Russell Company, Milliman USA and US-based programs of IFE & PPI. Be it further

Resolved, that the Board hereby authorizes the participation of trustees and staff in the educational activities of the Institute for International Research, the Public Pension Fund Forum, Investors Press, the Investment Risk Institute, the Institutional Investor Institute, the Information Management Network, and Opal Financial Group , to the extent that the budget provides funds for such participation. Be it further

Resolved, that participants shall provide the Board with a summary oral report on the content of educational activities, including a recommendation regarding SamCERA's participation in future activities offered by the same sponsor. Be it further

Resolved, that, in addition to the organizations listed above, other educational activities which may be counted toward the Board's educational requirement are subscriptions to Pensions & Investments, the Public Retirement Journal, or other pension, investment or financial publications; completion of recommended readings from SACRS or SamCERA reading lists; participation in due diligence activities to meet with and monitor service providers; and/or participation in SACRS or SamCERA sponsored mentoring programs. Be it further,

Resolved, that the Board authorizes the Chief Executive Officer to enroll SamCERA as a pension fund member of the organizations set forth above and the National Conference of Public Employees Retirement Systems and to submit recommendations to the Board for additional educational activities, to the extent that the budget provides funds for such activities. Be it further,

Resolved, that the Board hereby authorizes the Chief Executive Officer to allocate $10,000 for each new trustee’s education during each of his or her first two years in office and $5,000 for each trustee’s education during each subsequent year. Trustees who wish to exceed these allocations may request Board approval for their participation in additional educational activities when placed on the agenda of a public meeting of the Board. Be it further

Resolved, that the Board hereby authorizes the Chairman to approve the participation and associated travel for trustees, the Treasurer’s Constitutional alternate and the Chief Executive Officer in the educational activities of the organizations set forth above, to the extent that the budget provides funds for such activities. Be it further,

Resolved, that the Board hereby authorizes the Chief Executive Officer to approve a progression of courses for staff, to approve the participation and associated travel of staff in the educational activities of the organizations set forth above, to the extent that the Chief Executive Officer finds that such participation will contribute to the staff member’s ability to perform her or his duties and the budget provides funds for such activities. Be it further

Resolved, that the Board may approve participation in additional educational activities when placed on the agenda of a public meeting of the Board.

0407.5.2

Consideration of items removed from Consent Calendar: None.

0407.5.3

Approval of amendment to Actuarial Services contract with Public Pension Professionals: Mr. Hood reminded the Board that it had approved a contract with Public Pension Professionals, subject to resolution of the issue regarding the fact that the Request for Proposals required $10 million in professional liability insurance, while PPP had only $5 million in coverage. Mr.McMahon noted that the fees associated with PPP’s contract along with the supplemental cost needed for the excess insurance coverage from $5 to $10 million dollars far exceeded the amount the Board would have paid if it had chosen Milliman USA as the actuary. Mr. McMahon also noted that Milliman had excess liability insurance for $100 million versus PPP’s $5 million.

Ms. Colson pointed out that Mercer, SamCERA’s former actuary, also had a $5 million Errors & Omissions Insurance limit and that other consultants she researched had limits ranging from $2 to 4 million. Therefore, Ms. Colson opined that the $5 million insurance limit that Public Pension Professionals has in place seems adequate enough given that they have dealt with that amount in the past. In response to a question from Ms. Colson regarding the increased insurance limit from $5 to $10 million in the RFP, Mr. Hood stated that he had taken that amount from an example from Contra Costa County as well as in light of recent litigation. Ms. Carlson noted that purchasing insurance is always a gamble and that there have not been a sufficient number of actuarial claims to make an educated guess on the average value of those claims. Mr. Buffington opined that the difference between $5 and $10 million is not a large amount compared with the size of SamCERA’s total fund and that the supplemental $5 million would not be worth the extra cost. Mr. Hood also stated that if the Board elects to pay for the excess coverage, Public Pension Professional’s other clients would reap the benefit of it, therefore SamCERA would also be paying for the excess coverage for PPP’s other clients. Mr. McCausland opined that $5 million was adequate and that it is more important to urge PPP to get on schedule with the actuarial valuation than it is to prolong the contract negotiations.

Motion by Colson, second by Buffington, carried with six ayes (Colson, Buffington, Salas, Hooley, Stuart and Lewis) and one no (McMahon) to amend Paragraph 4 of Exhibit A of the Contract with Public Pension Professionals as follows: “A Professional Liability Policy covering Consultant’s employees and agents of not less than five million dollars ($5,000,000) ~~ten million dollars ($10,000,000)~~.”

0407.5.4

Consideration and Adoption of Undistributed Earnings Policy: Ira Summer from Public Pension Professionals conducted a workshop outlining a draft undistributed earnings policy prepared per the Board’s direction at the June meeting. In the event of solid returns under SamCERA’s interest crediting policy, the smoothed earnings in excess of the actuarial interest rate would then be utilized to (1) meet statutory interest crediting requirements, (2) guarantee assured benefits for retirees and beneficiaries, (3) limit volatility in the crediting of interest and (4) allow supplemental benefits when certain funding requirements and excess earnings hold true. In response to a question from Ms. Colson regarding the determination to pay a supplemental benefit, Mr. Summer indicated that the determination is dependent on the rules the Board adopts for the benefit. If the benefit is granted on a taxable basis, the Board of Retirement can determine the supplemental benefit without the approval of the Board of Supervisors. If created on a non-taxable basis, then the approval of the Board of Supervisors would be required. Ms. Stuart then inquired on the status of any excess funds set aside for the Ventura Implementation. Mr. McCausland responded that the Board resolution creating the Ventura Contingency Reserve states that any surplus funds are to be credited to the County Advance Reserve. Mr. Lewis recommended that the Board defer further discussion of the draft undistributed earnings policy to a future Board meeting in order to give Mr. Summer adequate time to focus his attention on SamCERA’s June 30, 2004 Actuarial Valuation. Without objection, Ms. Salas made the undistributed earnings policy a topic for the Board’s January workshop.

0407.5.5

Consideration and Adoption of Assumptions for June 30, 2004 Actuarial Valuation: Mr. Summer presented an overview of the process for the setting of economic assumptions and compared the assumptions currently utilized by the ‘37 Act Counties. Mr. Summer recommended that the Board raise the current inflation assumption from 3% to 4% while lowering the real investment return from 5% to 3.9%, with a total Nominal Investment Return of 7.9%. Mr. Summer indicated that the -0.1% difference in Nominal Investment Return will increase the amount of the Association’s liabilities thereby increasing the amount of contributions. Mr. Lewis and Mr. Buffington opined that they prefer not to change the total Nominal Investment Return and maintain it at 8.0%.

Motion by Lewis, second by Colson, carried unanimously to adopt Resolution 04-05-01 , as amended as follows:

Whereas, Government Code §31453 mandates that...an actuarial valuation shall be made...at intervals not to exceed three years. The valuation shall be conducted under the supervision of an actuary and shall cover the mortality, service, and compensation experience of the members and beneficiaries...; and

Whereas, the Board's Actuary, Public Pension Professionals, Inc has recommended that the Board amend its inflation assumption from 3% to 4% and its interest assumption from 8% to 7.9%. Therefore, be it

Resolved that the Board hereby amends SamCERA's economic actuarial assumptions, as follows: the inflation assumption shall be 4.00%, the real rate of investment return assumption shall be 4.00%; Be it further

Resolved that the Board hereby instructs its Chief Executive Officer and the actuary to take all steps necessary to effectuate the intent of this resolution; Be it further

Resolved that Public Pension Professionals, Inc is hereby authorized to utilize the new actuarial assumptions in the preparation of the Actuarial Valuation of June 30, 2004.

0407.5.6

Consideration of issuance of subpoena duces tecum regarding application of David Zahradnik: Staff withdrew this agenda item in view of the fact that Mr. Zahradnik has signed the necessary medical record release forms.

0407.6

Investment Services

0407.6.1

Acceptance of Monthly Portfolio Performance Report: Mr. Clifton presented the monthly performance report for the period ending June 30, 2004. SamCERA’s Total Fund Return of 15.56% for the fiscal year trailed the Fund’s Policy Benchmark of 16.28% by 72 basis points, due mainly to the relative underperformance of SamCERA’s international equity manager. Mr. Clifton noted a handout illustrating the current versus proposed manager structure allocation as well as a handout documenting the rebalanced portfolio. Mr. Clifton then reported that the Investment Committee requested that Staff provide explanations whenever there is a variance of more than 10 basis points between a manager’s and the custodian’s calculation of performance. He noted that the Committee continues to be concerned with the pricing related performance variances between the custodian and Deutsche Asset Management, Inc.

Asset Class

Market Value

1-Month

1-year TTWRR

5-year TTWRR

Domestic Equity

$768,511,724

2.33%

22.28%

0.13%

International Equity

226,682,546

1.44%

25.09%

0.65%

Total Equity

995,194,271

2.13%

22.89%

0.02%

Fixed Income

381,545,976

0.54%

0.85%

7.17%

Real Estate Aggregate

59,241,450

1.27%

8.63%

9.24%

Cash Equivalents

4,817,941

0.18%

2.29%

3.74%

Total Fund

$1,440,799,637

1.67%

15.56%

3.56%

Benchmark

1.79%

16.28%

2.97%

Without objection, Ms. Salas accepted the report.

0407.6.2

Annual Review, Revision & Reaffirmation of Investment Committee Charter: Ms. Colson indicated that this agenda item will be deferred until the September Board Meeting.

0407.6.3

Selection of Finalists for SamCERA’s Core Plus Fixed Income Manager: Ms. Colson reported that the Investment Committee had discussed and reviewed the pros and cons of each of the six semi-finalists for the Core Plus Fixed Income Mandate. Strategic Investment Solutions was instructed to prepare a transition cost analysis of each of the semi-finalists. Mr. Clifton, requesting a clarification on the extent of the analysis, stated that SIS believes they would be able to derive an accurate projected transition cost based on managers’ past transitions without having to exchange portfolios. Ms. Colson opined that the managers would know best regarding the transition cost and that the exchange of portfolio information would be more prudent. The finalists will be selected at the September Board meeting.

0407.6.4

Approval of Independent Fiduciary Agreement with Chadwick Saylor Capital Management, Inc.: Ms. Colson reported that the Investment Committee had met with John McClelland, Chadwick Saylor Capital Management’s President. Ms. Colson re-iterated concerns which she had raised at the Investment Committee. Ms. Carlson then discussed the issue of the term “solely” that is indicated in the Independent Fiduciary Agreement. The sentence in question states that SamCERA appoints CS Capital Management as an agent to act solely on the behalf of SamCERA. Ms. Carlson opined that it is prudent to hold CS Capital Management to this standard in order to protect SamCERA’s interests. Should the Independent Fiduciary perform an action beneficial to its other members but detrimental to SamCERA, Chadwick could be held liable for any losses incurred. In response to a comment by Ms. Colson, Ms. Carlson indicated that the Board should not feel obligated to hire Chadwick Saylor and could enter into an agreement with another independent fiduciary. Mr. Clifton stated that he had reviewed the selection process and found that Chadwick Saylor was the best candidate.

Motion by Buffington, second by Lewis, carried unanimously, to adopt Resolution 04-05-02 , entering into a contract for independent fiduciary services with Chadwick Saylor Capital Management, Inc.:

Whereas, Article XVI §17 of the Constitution of the State of California vests the Board with "plenary authority and fiduciary responsibility for the investment of moneys and the administration of the system"; and

Whereas, Government Code §31595 vests in the Board ". . . exclusive control of the investment of the employees retirement fund"; and

Whereas, Government Code §31596.1 (d) authorizes the Board to retain investment consultants ". . . in connection with administration of the Board's investment program . . ."; and

Whereas, the Board, in the course of its most recent asset / liability modeling study, resolved to change its real estate mandate from the ownership of separate properties to the ownership of units in one or more core commingled real estate funds; and

Whereas, after considering alternative core commingled real estate funds, the Board, on June 22, 2004, resolved to transfer ownership of its separate properties to the INVESCO Core Real Estate-U.S., LLC Fund, which provides significant advantages for SamCERA as a “Founding Investor”, in exchange for ownership of units of the Fund; and

Whereas, the Board finds it prudent to hire an Independent Fiduciary to represent and advise it with respect to the due diligence related to the INVESCO Core Real Estate-U.S., LLC Fund, including: (i) evaluating the value of all pre-closing portfolio transfers to the Fund and issuing a fairness opinion; (ii) Negotiating, preparing, and delivering a Contribution Agreement; (iii) Presenting a summary of its valuation conclusions and recommendation to the Board and (iv) such other assignments as set forth in the contract; and

Whereas, INVESCO Realty Advisors performed due diligence on three firms qualified to serve as Independent Fiduciary for the Founding Investors and selected CS Capital Management for the assignment; and

Whereas, SamCERA’s Investment & Finance Manager evaluated INVESCO’s selection, with the assistance of other Founding Investors, and recommends that the Board retain CS Capital Management, Inc. to serve as its Independent Fiduciary; and

Whereas, County Counsel has approved the contract as to form. Therefore, be it

Resolved that the Board hereby approves the contract between the Board and CS Capital Management, Inc. Be it further

Resolved that the Board hereby approves the fees as specified in the contract and authorizes the disbursement of funds as provided for in Government Code §31596.1 in accordance with SamCERA's internal controls. Be it further

Resolved that the Board hereby authorizes the Chair, to execute the contract on behalf of the Board. Be it further

Resolved that the Board hereby designates the Investment & Finance Manager as its designee to perform those functions so identified in the contract and hereby authorizes the Investment & Finance Manager to take all actions necessary to initiate, implement and monitor assignments, approve payments and provide the Board with timely reports regarding the progress and satisfactory completion of the assignments authorized pursuant to the contract.

0407.6.5

Approval of Extension to Strategic Investment Solutions’ Agreement: Ms. Colson reported that the Investment Committee recommends that the Board approve the contract extension, but reject the proposed amendment requiring that SamCERA reimburse SIS for extraordinary copying expenses. Mr. Clifton highlighted Section 6 of the Agreement which requires that SIS reveal any potential conflicts of interest in conjunction with consultant and manager annual reviews and searches.

Motion by Buffington, second by Lewis, carried unanimously to approve Resolution 04-05-03, extending the Investment Consultant Agreement between SamCERA and Strategic Investment Solutions.

Whereas, Article XVI, §17 of the Constitution of the State of California vests the Board with "plenary authority and fiduciary responsibility for the investment of moneys and the administration of the system"; and

Whereas, Government Code §31595 vests in the Board ". . . exclusive control of the investment of the employees retirement fund."; and

Whereas, Government Code §31596.1 (d) authorizes the Board to retain investment consultants ". . . in connection with administration of the Board's investment program . . . "; and

Whereas, On August 8, 2001 the Board reviewed proposals and interviewed representatives from Wurts Associates and Strategic Investment Solutions, Inc., as the finalists proposing to perform investment consulting services for the Board; and

Whereas, on August 28, 2001, the Board selected Strategic Investment Solutions as the successful candidate for a full retainer investment consultant relationship; and

Whereas, County Counsel has approved the contract as to form and the Investment and Finance Manager has recommended approval of the contract; and

Whereas, the Board reviewed Strategic Investment Solutions’ performance and wishes to extend the investment consultant contract for another three year period. Therefore, be it

Resolved that the Board hereby approves the contract between the Board and Strategic Investment Solutions, Inc. for a term of three years, cancelable by either party on thirty days notice. Be it further

Resolved that the Board hereby authorizes the Chair, to execute the contract on behalf of the Board. Be it further

Resolved that the Board hereby reserves to itself sole authority to accept, modify, or reject the recommendations that the investment consultant may present from time to time pursuant to the provisions of the contract.

0407.7

Board & Management Support Services

0407.7.1

Acceptance of Monthly Financial Reports: Mr. Clifton reported that the County closed its books on July 23^rd. He also reported that SamCERA’s Net Assets increased by $201,136,079 the past fiscal year with a year end balance of $1,434,407,618. He noted that the Net Appreciation in Fair Value of Investments of $184,592,243 constituted the largest component of the increase in Net Assets.

0407.7.2

Acceptance of Fourth Quarter 2003-2004 Administrative & Professional Budget Reports: Mr. Clifton reported on the professional services and administrative budget for the fourth quarter 2003-2004. He noted that the Association has accrued an expense of $2,268,622 in professional services contract fees and with a market value within 16.91 basis points, slightly less than projected. Mr. Clifton then noted that SamCERA administratively went slightly under budget. In response to a question from Mr. Lewis, Mr. Clifton stated that the slight over-budget in salaries could have partly been due to the Extra Help hired for the Ventura Implementation or merit increases that were not factored in correctly. Ms. Stuart then inquired about the over-budget amount in County Services. Mr. Clifton indicated that SamCERA had asked the County to assist in the creation of a database that would be utilized for Ventura and will effectively save SamCERA money in the long run. Regarding SamCERA’s Budget Iniatives, Mr. Clifton stated that all iniatives were met except for the Reserve Modeling and Scenario Analysis which was delayed due to the hiring of new managers.

0407.7.3

Acceptance of Report on Entrance Interview for the June 30, 2004 Financial Audit: Mr. Clifton recommended that the Board maintain an active role in the auditing process, expressing any concerns they may have regarding SamCERA’s accounting, reporting or internal controls and to direct the auditors as they feel necessary. He then presented Mr. Andy Paulden, Principal & CPA, and Ms. Amanda Wilson, Audit Manager & CPA, representing SamCERA’s external auditor Brown Armstrong Paulden McCown Starbuck & Keeter to the Board. Mr. Paulden then presented his firm’s June 30, 2004 Audit Plan to the Board, reviewing the objectives and scope of the audit, the audit process and significant audit areas. Brown Armstrong will review SamCERA’s internal controls, financial transactions and statements in order to ensure that they meet acceptable accounting procedures. In response to a question by Mr. Buffington, Mr. Paulden indicated that the current engagement letter does not require him to offer an opinion on SamCERA’s internal controls. His auditing team reviews SamCERA’s internal controls as a means to render an opinion on its financial statements. Mr. Paulden then stated that the evaluation of internal controls requires a different letter of engagement. Mr. McCausland asked the auditor to provide a report on the testing that is performed as a part of the audit, so that the trustees can gain a better understanding of how SamCERA’s internal controls enter into the audit process.

0407.7.4

Annual Review and Revision of SamCERA’s Code of Fiduciary Conduct: (See Consent Calendar.)

0407.7.5

Annual Review & Revision of SamCERA’s Education Policy: (See Consent Calendar.)

0407.7.6

Approval of Employee and Public Service’s Recruitment Plan for Chief Executive Officer: Mary Welch, Director of Employee and Public Services, discussed the current status of SamCERA’s CEO Recruitment Plan as well as reviewed its timetable with the Board. Ms. Welch reported that print and internet advertisements for the position have been published and that she has been contacting possible interested candidates who have been recommended to her. Should trustees have any potential candidates in mind, Ms. Welch requested that the trustees notify her soon so that she can initiate the contacts. She stated that the Subcommittee heading the CEO Recruitment will receive resume materials the week of September 16^th and will need to meet for approximately 2 hours on September 23^rd to select the semi-finalists. The semi-finalists will then be interviewed by the Subcommittee on October 7^th. Ms. Welch recommended reserving the Airport Marriott for the entire day for the purposes of conducting the interviews. The finalists will then be interviewed by the full Board on October 26^th. Ms. Welch was then instructed to reserve the Marriott on that date to conduct the interviews in closed session as well as to hold the rest of the Board meeting.

0407.7.7

Public Hearing on the Deletion of Paragraph 4.12 from the Regulations of the Board of Retirement: Mr. Hood presented the change to the Regulations of the Board Retirement which will allow terminated non-vested members to earn interest on funds left on deposit.

0407.8

Approval or Acceptance of Reports

0407.8.1

Chief Executive Officer's Report: Mr. McCausland reported that the Board must submit proposals for legislation to be sponsored by SACRS by August 30^th. Mr. McCausland noted that the Board of Supervisors has postponed action on AB55, under which members would be able to purchase 5 years of service credit for time not worked, pending further discussions with the unions.

Mr. McCausland then noted Ms. Carlson’s Venturastatus report, highlighting the fact that 721 retiree records have been researched to date, 171 records ahead of schedule.

0407.8.2

Assistant Executive Officers’ Report: Mr. Hood reported that the VenturaImplementation Plan is moving along better than expected. He stated that SamCERA was able to enter into a sublease agreement with the LPS Group, acquiring 3 cubicles and a conference room just adjacent to the Board room. Mr. Hood then thanked Lilibeth Dames for her efforts with the VenturaImplementation. Ms. Dames has developed a research pattern that has allowed the project to move along quite well. He informed the Board that his responsibility was to take the information derived from the research and insert it into Mr. McCausland’s Ventura Calculator which has been verified by the actuary. He stated that because the research is ahead of schedule, Staff has added an extra step of pay code verification prior to payment. Mr. Hood also informed the Board that ISD has developed a computer database with approximately 7 years worth of PIPS data records that will prove quite beneficial for Ventura research.

0407.8.3

Investment & Finance Manager’s Report: Mr. Clifton distributed reports on Deutsche Asset Management, Bank of Ireland Asset Management, Barclays Global Investors and Strategic Investment Solutions. He then extended an invitation to Mr. Hooley to a site visit to BGI on August 4^th.

0407.8.4

County Counsel's Report: None.

0407.9

Adjournment in Memory of the following Deceased Members: There being no further business, Ms. Salas adjourned the meeting at 4:28pm, in memory of the following deceased members:

Morahan, Kathleen

June 7, 2004

Sheriffs’ Department

Gordon, Mary

June 8, 2004

Beneficiary Of Leonard

Kroll, June

June 10, 2004

San Mateo County General Hospital

Small, Walter

June 11, 2004

Beneficiary Of Mona

Robinson, Frances

June 14, 2004

Central Municipal Court

Lude, Angela

June 15, 2004

Beneficiary Of Theodore

Ferguson, Wallace

June 17, 2004

Chope Hospital

Meyer, Alexander

June 22, 2004

Department Of Social Services

Behrens, Jean

June 25, 2004

Controller’s Office

Balzarini, Eleanor

June 25, 2004

Planning Commission Department

Flores, Jose

June 27, 2004

Canyon Hospital

ALMA R. SALAS, Chair

Top
Minutes Index