May 24, 2005 – Board Agenda

Call to Order: Ms. Salas, Chair, called the Public Session of the Board of Retirement to order at 9:31 p.m., May 24, 2005, in SamCERA’s Board Room, Suite 125, 100 Marine Parkway, Redwood Shores.

0505.2

Roll Call: Ms. Salas, Mr. Bryan, Mr. Buffington (dep. 12:20 p.m.), Ms. Tashman, Ms. Stuart, Mr. Hooley, Ms. Colson, Mr. Lewis. The second seat on the Board is currently vacant. Board Alternate: Ms. Arnott served as Mr. Buffington’s alternate following his departure. Staff: Mr. Bailey, Mr. Clifton, Ms. Lamica, Ms. Wong & Ms. Dames. Counsel: Ms. Carlson. Consultants: Dr. Fracchia, Mr. Thomas & Mr. Summer. Retirees: 1, County: 2.

0505.3

Approval of the Minutes: John Murphy opined that comments made by Ms. Colson recorded under 0503.6.5 and two failed motions recorded under 0503.7.8 of the March board meeting minutes were misleading and should be struck from the record. He said that the entire board collectively shares the responsibility of maintaining a quorum. Mr. Murphy further stated that the addition of a retiree alternate position would have kept the quorum of the March meeting in tact.

Ms. Arnott submitted the following corrections to the minutes: 0504.5.1 under Service Retirements: “~~Kathleen McCloud~~ McCloud, Kathleen”, “Shockley, ~~Nanacy~~ Nancy”, “~~William Kirkpatrick~~ Kirkpatrick, William”, “~~Kathleen Colson~~ Colson, Kathleen”, “~~Stephen Boles~~ Boles, Stephen”, “~~Roy Seisa~~ Seisa, Roy”; Under Deferred Retirements: “Udo, Bernarde M.”.

Motion byBryan, second by Hooley, carried with 7 ayes (Bryan, Hooley, Salas, Tashman, Stuart, Buffington & Lewis) to one nay (Colson) to approve the board meeting minutes of April 26, 2005, as amended.

0505.4.1

Oral Communications From the Board: None.

0505.4.2

Oral Communications From the Public: Ms. Arnott noted that the board has never adjourned in the memory of Michael McMahon. She recommended that it was appropriate to add his name to the list of deceased members.

Ms. Salas then took up agenda item 6.1.

0505.5

Benefit & Actuarial Services

0505.5.1

Adoption of Consent Calendar: Ms. Salas removed the disability application of Loretta Keenan from the Consent Calendar for consideration under agenda item 5.2 in closed session.

The board will adopt May’s consent calendar at the June board meeting.

0505.5.2

Consideration of items removed from Consent Calendar: Ms. Salas convened the board in closed session at 1:07 p.m. with all trustees present for roll call in attendance. The board discussed the disability application of Loretta Keenan. There being no further business, Ms. Salas adjourned the Closed Session and reconvened the board in Public Session at 1:27 p.m.

Report on Actions taken in Closed Session: Ms. Carlson reported that, under Government Code §31534, the board unanimously accepted the findings of the hearing officer that Loretta Keenan is not disabled from performing her usual and customary duties as a Psychiatric Social Worker, and DENIES her application for a service-connected disability retirement.

Ms. Salas then took up agenda item 7.3.

0505.6

Investment Services

0505.6.1

Monthly Portfolio Performance Report: Mr. Clifton presented the monthly performance review for the period ending April 30, 2005. He noted SamCERA’s Total Fund Return for the month of April of -1.57% underperformed the Total Plan Policy Benchmark return of -1.29%. He reported that the Fund’s Fiscal YTD return of 5.99% is 63 basis points behind of the YTD Actuarial Discount Rate of 6.62% and that the association will not likely meet the actuarial assumption rate at the end of the fiscal year.

Asset Class

Market Value

1-Month

1-year TTWRR

5-year TTWRR

Domestic Equity

$777,698,391

-3.00%

7.81%

-1.34%

International Equity

251,460,621

-2.74%

13.00%

-0.84%

Total Equity

1,029,159,011

-2.94%

9.01%

-1.20%

Fixed Income

462,975,022

1.38%

5.80%

7.95%

Real Estate Aggregate

57,079,121

0.00%

20.16%

11.51%

Cash Equivalents

-1,465,998

0.23%

2.90%

3.30%

Total Fund

$1,547,747,156

-1.57%

8.51%

2.94%

Benchmark

-1.29%

8.46%

2.57%

0505.6.2

Quarterly Investment Performance Analysis for period ended March 31, 2005: Patrick Thomas from Strategic Investment Solutions provided a brief overview of the Appendix of SIS’ Quarterly Performance Report, including SamCERA’s investment managers’ investment strategy summaries, fee schedules, net performances and a capital market review. Mr. Lewis stated that he will add the topic of transaction cost analysis to a future Investment Committee agenda.

Mr. Thomas reported that, although the Fund was down by 80 basis points for the quarter, the Association is still 30 basis points over policy and in the top half of its universal peers. He reported good performances by Barclays Global Investors, Chartwell, the Fund’s new small cap growth manager, and by both of the Fund’s active bond managers, Western Asset Management and Deutsche Asset Management. Quarter results were hindered by underperformances by Brandes and Julius Baer.

Mr. Thomas gave a brief market overview, highlighting a slowing economy and the Fed’s actions to fight aggressive inflation which have resulted in negative equity returns and significantly hit distressed companies.

Mr. Lewis then said that the Investment Committee plans to discuss the active to passive ratio in the fixed income portfolio at the July Investment Committee meeting. The Committee will report to the board.

Motion by Bryan, carried unanimously, to add agenda item 7.0, the approval of a change in the June board meeting date, to the day’s board agenda.

Ms. Salas then took up agenda item 6.6.

0505.6.3

Adoption of Part One & Part Two of SamCERA's Investment Plan: Mr. Clifton presented the final version of Parts One and Two of SamCERA’s Investment Plan. Mr. Lewis noted that this was the third hearing of these parts.

Motion by Lewis, second by Bryan, carried unanimously to adopt Part One & Part Two of SamCERA’s Investment Plan.

0505.6.4

Acceptance of Amendments to Part Three & Four of SamCERA's Investment Plan: Mr. Lewis indicated that this was the second hearing of Parts Three and Four of SamCERA’s Investment Plan.

Mr. Clifton reviewed the proposed amendments to the two parts. He highlighted the significant change in the items under Section 9.2, specifying the definition of manager “underperformance.”

He noted the deletion of the language “four cumulative quarters” following a recommendation from SIS. Mr. Clifton said that “four cumulative quarters” is too short a time frame on which to base one’s judgment of a manager’s performance.

He then mentioned the addition of language at the end of the same section: “peer group manager performance will be reviewed more closely in periods when the manager’s style is out of favor.” He noted no other significant changes to Parts Three and Four of the Investment Plan. He said that the board will see a redline version of this item at the subsequent board meeting.

Ms. Colson questioned the time period provision of “any consecutive 8-quarter period.” After board discussion, staff indicated that the phrase would be changed to “any rolling 8-quarter period.”

0505.6.5

Introduction of Amendment to Appendix A-E and Glossary of SamCERA's Investment Plan: Mr. Lewis indicated that this was the first hearing of the amendments to Appendix A-E and the Glossary of SamCERA’s Investment Plan. He said that recent events will be added to complete the Appendix and requested that trustees relay any recommended changes to Mr. Clifton. Mr. Clifton said that staff will incorporate board comments and return to the June board meeting with an amended version for board review. The final version will be presented for approval on July 26, 2005.

Ms. Salas then took up agenda item 6.8.

0505.6.6

Annual Review: Deutsche Asset Management (approximately 9:45 a.m. May 24th): Mr. Clifton presented Christopher Gagnier, Managing Director & Portfolio Manager, and Heidi Walker, Managing Director—Head of Institutional Sales and Client Service, of Deutsche Asset Management. DAMI presented a 45-minute presentation providing a general overview of their organization, a market and portfolio review and addressed questions and concerns from trustees regarding the possible sale of their London Fixed Income Team and its potential impacts on the firm.

Mr. Gagnier provided a DAMI organizational update. He reported on the new head of asset management, Kevin Parker, appointed in late 2004. He said that Mr. Parker instituted a strategic review on all businesses within the firm. He stated that management had been focusing on its London business office due to the substantial underperformance of its equity side. In late December, management had laid out three possible options: (1) fix London’s equity business, (2) sell its equity business, or (3) sell the entire London business, including its fixed income business. Mr. Gagnier said that DAMI had hired an investment management advisor to advise DAMI on its potential sale and to explore the options concerning the London business.

In response to a question from Mr. Thomas, Mr. Gagnier could not speculate on the probability of execution of any of the options, however he indicated that all options are indeed open. He reported that management had ceased making announcements regarding the situation in early February. He did not wish to speculate on Philadelphia’s options pending the potential sale of the London business. He said that the fixed income group has made it clear to management about their views and made them aware of the heavy interaction between the Philadelphia and London fixed income offices, wishing to continue their joint business together.

In response to a question from Mr. Clifton, Mr. Gagnier detailed the interaction between the fixed income groups in Philadelphia and London. He stated that the Core Plus and global aggregate are jointly managed with the London office and that one-third of the fixed income assets are tied with the London business. In response to a question from Mr. Lewis, Mr. Gagnier asserted that DAMI’s Core mandate with SamCERA has no ties with the London business. Mr. Gagnier opined that the sale of the London business would, in fact, preoccupy a lot of the Philadelphia office’s time in terms of the Core Plus strategy especially his own time since he oversees that strategy. However, he does not foresee any tangible change in the Core side.

In response to a question from Ms. Tashman, Mr. Gagnier reported that there was no turnover in the fixed income team during the implementation of Mr. Parker’s strategic review.

Mr. Thomas then inquired on the status of incentive payments and contracts. Mr. Gagnier stated that contracts have remained the same and have not changed. He said that all items in the contracts are still enforced and operative; however, nothing in the contracts mandates that employees must stay with the firm. The restrictions about leaving are industry standard.

Ms. Tashman asked Mr. Gagnier about his confidence regarding the timeline of the decision. Mr. Gagnier indicated that management wishes to reach a decision relatively quickly due to the continual decline of the London equity business. He said that he will be contacting Mr. Clifton and SIS to report on any decisions as soon as they are made known.

Mr. Gagnier then provided a brief review of the mandate as well as discussed staff additions to the fixed income team.

0505.6.7

Annual Review: Western Asset Management (approximately 10:45 a.m. May 24th): Mr. Clifton presented Andre Cuerington, Client Service Executive, and Thomas McMahon, Product Specialist, of Western Asset Management. WAM presented a 45-minute presentation providing a general overview of their organization, a market and portfolio review and addressed questions and concerns from trustees.

Mr. Cuerington said that there were no major manager changes in the firm. Mr. McMahon then highlighted WAM’s team-based approach to a broad market portfolio.

In response to a question from Mr. Lewis, Mr. McMahon explained how a portfolio is created. He highlighted WAM’s top down approach determined by the firm’s investment strategic group of senior sector specialists including the CIO, Deputy CIO and senior portfolio managers, who meet on a monthly basis. He noted the top down view of SamCERA’s portfolio and indicated that portfolio managers take into account a client’s viewpoint on risk, its specific mandate and guidelines to each portfolio.

Mr. McMahon then provided a brief market overview. Mr. Cuerington then followed with a brief portfolio review.

Ms. Salas then took up agenda item 6.3.

0505.6.8

Approval of Topics for Investment Consultant Review – Strategic Investment Solutions: Mr. Clifton presented the topics for Strategic Investment Solutions’ annual review. He said that there were no recommended changes to the list of topics by the Investment Committee. He requested that trustees complete the evaluation and forward the results to him.

0505.6.9

Approval of Topics for Custodian Review – State Street Bank & Trust: Mr. Lewis reported that the Investment Committee recommended that the State Street Bank & Trust’s Custodial Review be delegated to staff due to their extensive interaction with the firm. Without objection, Mr. Lewis instructed staff to perform the annual custodian reviews for State Street Bank and Trust Company (SSB) and return to the board with a brief report, highlighting important details such as the multiple manager transitions that occurred during the year.

0505.6.10

Approval of Second Amendment (Revolving Credit Facility) to INVESCO Core Real Estate – USA, LLC: Mr. Lewis reported that the Investment Committee recommends the approval of the Second Amendment to the Agreement of INVESCO Core Real Estate – USA, LLC. He stated that INVESCO is requesting that they be able to obtain a revolving credit facility that will allow them the flexibility to close property acquisitions with a 90-day maximum borrowing period.

Motion by Bryan, second by Lewis, carried unanimously to approve the Second Amendment (Revolving Credit Facility) to INVESCO Core Real Estate – USA, LLC.

0505.7

Board & Management Support Services

0505.7.0

Approval of Change of June Board Meeting Date: The board briefly discussed the change in the June board meeting date and their individual availabilities. Motion by Bryan, second by Hooley, carried unanimously to change the date of the Board of Retirement meeting from June 28 to June 30, 2005, at 1:00 p.m.

0505.7.1

Monthly Financial Reports: Mr. Clifton presented the Preliminary Monthly Financial Report for the period ending April 30, 2005. He reported that SamCERA’s Net Assets totaled $1,546,125,554.

0505.7.2

Approval of SamCERA’s Sources, Uses & Budget for Fiscal Year 2005/2006: Mr. Clifton presented the budget and a list of initiatives for fiscal year 2005/2006.

Ms. Tashman suggested the implementation of a customer satisfaction survey, starting with the recent 126 March retirees. Mr. Bailey concurred with Ms. Tashman’s comments and said that staff will analyze the execution of customer satisfaction surveys during their strategic planning sessions.

Mr. Lewis then inquired on the decrease in the insurance budget and software and licensing budget and the vast increase in the educational spending budget. In response to Mr. Lewis’ concerns, Mr. Clifton indicated that they had overestimated the cost of insurance last fiscal year. He then stated that the budget for education has been increased primarily due to the fact that staff did not receive a full response for requests for education. The board’s resolution budgets $10,000 for old trustees and $5,000 for new trustees. Therefore staff provided the maximum permitted educational budget in order to be over-budgeted rather than under-budgeted. He also said that staff education is going up with the addition of new staff members. In terms of the software and licensing budget, staff had built in $50,000 for the EDMS imaging project last fiscal year. However, staff is now planning to work with an independent consultant to generate a comprehensive IT plan prior to embarking on such an extensive project. He then indicated that the increase in the budget for postage and printing is primarily due to the anticipated printing of hard copied customer satisfaction surveys as well as stamped return envelopes, quarterly newsletters, advices and checks for payroll.

Ms. Tashman then opined that it would be helpful to have a fiscal 2004/2005 projected expenses column. Mr. Clifton said that a more detailed document will be presented to the board when the budget is finalized. Staff will present SamCERA’s 2005/2006 budget to the County on June 29^th.

Motion by Hooley, second by Bryan, carried with five ayes (Hooley, Bryan, Colson, Salas & Stuart) to three nays (Buffington, Lewis & Tashman) to approve SamCERA’s Sources, Uses & Budget for Fiscal Year 2005/2006, adopting Resolution 04-05-28, as follows:

“Whereas, Government Code §31580.2 vests authority in the Board of Retirement to ...annually adopt a budget covering the entire expense of administration of the retirement system which expense shall be charged against the earnings of the retirement fund; and

“Whereas, Government Code §31580.2 requires that ...the expense incurred in any year shall not exceed eighteen-hundredths of 1 percent of the total assets of the retirement system; and

“Whereas, the Retirement Fund had total assets with a market value of approximately $1,546.1 million on April 30, 2005; and

“Whereas, the Investment & Finance Manager has recommended a budget for the next fiscal year, which the board has reviewed and revised as necessary. Therefore, be it

“Resolved, that the board hereby adopts the following budget to cover the entire expense of
the administration of the retirement system for the period specified, which expenses
shall be charged against the earnings of the retirement fund:

Budget Item	Fiscal 2005-2006	Basis Points
	(000)	(Information Only)
Salaries & Benefits	$1, 530.3
Services & Supplies	942.9
Fixed Assets	15.0
TOTAL	$2,488.2	~15.5 Estimate

“Resolved, that the Chief Executive Officer is hereby authorized to implement the expenditure of funds authorized by this approved budget in accordance with his Delegation of Authority; be it further

“Resolved, that, his Delegation of Authority notwithstanding, the Chief Executive Officer is hereby specifically authorized to approve the expenditure of funds from this budget for the annual maintenance and enhancement of PensionGold Version 1; be it further

“Resolved, that, his Delegation of Authority notwithstanding, the Chief Executive Officer is hereby specifically authorized to approve the expenditure of funds from this budget for the purchase of fiduciary liability insurance coverage with the assistance of the County’s Risk Manager; be it further

“Resolved, that the Controller or the Custodian is hereby authorized to disburse funds on
behalf of the board for expenditures which are in accordance with this adopted
budget.”

0505.7.3

Introduction to Experience Study and Valuation Report: Ira Summer, from Public Pension Professionals, was present to provide an overview of the experience study process. He reviewed basic actuarial concepts, economic and demographic assumptions, the development of these assumptions and how these assumptions compare to other 1937 Act systems. The board also discussed the County’s potential utilization of pension obligation bonds and its relative impact to the Fund.

0505.7.4

Report on Special Election to Fill a Vacancy in the Second Seat on the Board of Retirement: Mr. Clifton introduced Mabel Wong, Management Analyst, to the board. Ms. Wong provided a report on the status of the special election for the second seat on the board. She reported that the two candidates on the ballot are Paul Hackleman and Irene Welker. She said that most ballots have been mailed out to qualified voters. Ballots will be counted no earlier than June 14^th with the certification of the election to occur on June 17^th. In response to a question from Ms. Colson, Ms. Carlson said that the elected member will attend the June 30^th board meeting.

0505.7.5

Appointment of Ad Hoc Nominating Committee for Board Officers: Without objection, Ms. Salas appointed an Ad Hoc Nominating Committee of Mr. Hooley, Chair, Ms. Stuart, Ms. Colson and Mr. Bryan.

0505.8

Approval or Acceptance of Reports

0505.8.1

Chief Executive Officer's Report: Mr. Bailey reported on the events that occurred at the SACRS conference held a couple of weeks prior to the board meeting. He noted that all nominees were re-elected into office with no change in leadership. He also said that SACRS had passed the resolution opposing the legislative proposal to close defined benefit plans to future employees.

Mr. Bailey then reported that he received a notice from the Board of Supervisors that they had adopted §31479.1 of the 1937 Act allowing elected and appointed county officials to receive service credit for services rendered on a city council although that time had not been compensated.

He said that staff is still recruiting for the retirement benefits manager position. The process should be completed by the end of June or early July.

Mr. Bailey then reminded the board that staff shall present the newly approved budget to the Board of Supervisors on June 29^th.

0505.8.2

Investment & Finance Manager’s Report: Mr. Clifton noted that Deutche Bank is considering selling their London business. He then reported that Julius Baer is soft closing their product, permitting SamCERA the ability to increase their contributions while excluding others from doing so. He reported that Brandes is hard closing their product which will prohibit SamCERA’s ability to make additional contributions after October 31^st.

0505.8.3

County Counsel's Report: Ms. Carlson stated that she will not be able to attend the June board meeting; however, an alternate county counsel shall be present in her absence.

0505.9

Adjournment in Memory of the following Deceased Members: Ms. Salas adjourned the meeting at 2:40 p.m. in memory of the following deceased members:

Mcmahon, Michael

February 14, 2005

Assessor- County Clerk- Recorder

Mcmills, Frances

March 11, 2005

Chope Hospital

Gordon, Lucia

March 30, 2005

District Attorney’s Office

Bigot, Bernadette

April 2, 2005

General Services Department

Barbara, Philip

April 3, 2005

Department Of Public Works

Tucker, Jimmie

April 7, 2005

Crystal Springs Rehabilitation Center

Hold, Nancy

April 23, 2005

Department Of Social Services

Meda, Monte

April 25, 2005

Beneficiary Of Loretta

Wedsted, Mervyn

April 26, 2005

Beneficiary Of Lydia

Lowry, Pearl

May 1, 2005

Health And Human Services

Phillips, Sandra

May 8, 2005

Tax Collector’s Office

Meim, John

May 9, 2005

Superior Court

Benjamin, Beatrice

May 14, 2005

Beneficiary Of Arthur

Alma R. Salas, Chair

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