August 23, 2005 – Board Agenda

Call to Order: Mr. Lewis, Chair, called the Public Session of the Board of Retirement to order at 1:00 p.m., August 23, 2005, in SamCERA’s Board Room, Suite 125, 100 Marine Parkway, Redwood Shores.

0508.2

Roll Call: Ms. Salas, Mr. Bryan, Mr. Lewis, Mr. Hooley, Ms. Stuart, Ms. Tashman and Mr. Hackleman. Ms. Arnott for Mr. Buffington. Excused: Ms. Colson. Staff: Mr. Bailey, Mr. Clifton, Ms. Lamica, Ms. Palu, Mr. Ali and Ms. Dames. Consultants: Mr. Thomas, Mr. Meier, Mr. Summer, Ms. Van Valer, Dr. Fracchia and Ms. Carlson. Retirees: 0, County: 1.

0508.3

Approval of the Minutes: Ms. Tashman submitted the following correction to the July board meeting minutes: 0507.2.3: “~~Ms.~~ Mr. Lewis appointed Ms. Colson…”. Motion by Bryan, second by Salas, carried unanimously to approve the board meeting minutes of July 25, 2005, as amended.

0508.4.1

Oral Communications From the Board: Mr. Hackleman reported on the progress of his new trustee training. He stated that he received an overview of SamCERA’s investment structure from Mr. Clifton and Mr. Bailey, a legal overview from Ms. Carlson and an actuarial overview from Mr. Summer. He extended his gratitude to these individuals for their time and effort.

Ms. Stuart stated that SCORPA was experiencing a severe drop in membership. She said that a mass mailing was performed recently in an attempt to increase membership. She noted that the mailing has resulted in 68 new members, bringing total membership to 745 retirees. SCORPA has annual dues of $12. She also invited trustees to attend SCORPA’s picnic to be held at Red Morton Park on September 28^th.

0508.4.2

Oral Communications From the Public: None.

0508.5

Benefit & Actuarial Services

0508.5.1

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

Disability Retirements:

The board finds that Daniel Cronin is disabledfrom performing his usual and customary duties as a Road Maintenance Worker and GRANTS his application for a service-connected disability.

The board finds that Sena King is disabledfrom performing her usual and customary duties as a Telephone Services Supervisor andGRANTS her application for a service-connected disability.

Under Government Code §31534, the board approves and adopts the proposed findings and recommendations of the referee, that Nancy Feldstein is not disabled from the performance of the modified work schedule offered by her employer.

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

Service Retirements:

Rico, Manuel

July 23, 2005

San Mateo Medical Center

Salvador, Maryann

July 30, 2005

Assessor’s Office

Hori, Althea

August 13, 2005

Probation Department

Radcliffe, Gail

August 17, 2005

Department of Public Works

Borden, Charles

August 18, 2005

Information Service Department

Graham III, John

August 20, 2005

Department of Mental Health

Joyner, Richard

August 20, 2005

Department of Public Works

Higgins, Patricia

August 31, 2005

Probation Department

Continuance of Benefits:

McKillip, Kelly

Beneficiary of Richard

Cagle, Susan

Beneficiary of Russell

Platt, Nancy

Beneficiary of Richard

McCarthy, Marianne

Beneficiary of Kenneth

Catalano, Teresa

Beneficiary of Francis

Warwick, Marsha

Beneficiary of Barry

Deferred Retirements:

Carrillo, Yolanda A.

G2 vested

Per Section 31700

Flores, John M.

S2 vested

Per Section 31700

Johnson, Joyce E.

3/G2 vested

Mazzei-Bordin, Cristina

G4 vested

Mitchell, Yolanda A.

G2 vested

Per Section 31700

Poole, Gary A.

G2 vested

Per Section 31700

Shih, Irene

G2 vested

Valera, Josie P.

G2 vested

Refunds For August 2005:

Anderson, Kathleen R.

G4 non-vested

Atkinson, Katrina

G4 non-vested

Bagares, Joseph

G4 non-vested

Bridges, Arthur

G4 non-vested

Durbin, Christine M.

G4 non-vested

Gum, Ivan

G4 non-vested

Gutierrez, Janet

G4 non-vested

Khader, Shakeel

G4 non-vested

Lopez, Claudia R.

G2 vested

McCray, William

G4 non-vested

Morrissey, Michael

G4 non-vested

Wright, Erlinda

G4 non-vested

Rollovers for August 2005:

Brennan, Agnes

G4 non-vested

Delgado, Irene

G4 non-vested

Gildea, Cynthia

G4 non-vested

Hendricks, Rebecca

G4 non-vested

Huang, Yao-Hsuan

G4 non-vested

Hung, Susan

G4 non-vested

Langford, Aisha

G4 non-vested

Munn, Robert

G4 non-vested

Nevarez, Sandra

G4 non-vested

Pacheco, Renee

G4 vested

Paniza, Dorie

G2 vested

Renick, Beverly

G4 non-vested

Sherr, Steve

G4 non-vested

Suayan, Anna

G4 non-vested

Vega, Agnes

G4 non-vested

0508.5.2

Consideration of items removed from Consent Calendar: None.

0508.5.3

Acceptance of SamCERA’s Actuarial Experience Study: Ira Summer of Public Pension Professionals presented the results of the triennial experience analysis. He performed a brief overview of the experience study report, recommending revisions to the actuarial assumptions in areas in which the actual experience seems to indicate that the assumptions are overstating or understating an actuarial exposure.

The actuary recommended revisions to the following assumptions:

Economic Assumptions:

Reducing the inflation assumption from 4.0% to 3.75% to reflect the downward trend of the rate of inflation.
Reducing the rate of return assumption from 8.00% annually to 7.61% compounded semi-annually with an effective gross rate of 7.75% of investment return.
Changing the salary increase assumption to rates based on service to better match plan experience.

Demographic Assumptions:

Increasing termination rates slightly to reflect plan experience.
Adjusting the incidences of disabilities at various ages for General members to reflect plan experience.
Slightly increasing retirement rates for General Tier 3 members.
Changing to a newer mortality table (RP-2000) for post-retirement mortality.
Changing the rate of service-connected deaths to 0.1% for Safety members and 0% for General members and the use of the RP-2000 for non-service connected mortality.
Slightly reducing the percentage of retiring members assumed to be married to reflect plan experience.

Motion by Bryan, second by Hackleman, carried unanimously to accept the Analysis of Plan Experience report presented by Public Pension Professionals.

0508.5.4

Introduction to Valuation Report Process and Adoption of Actuarial Assumptions: Mr. Summer then introduced the actuarial valuation process.

Regarding the recommended changes in actuarial assumptions, Mr. Bailey indicated that all changes seem reasonable. He stated that an approximate $9 million increase to the employer contribution rates will result from the board’s lowering of the earnings rate to 7.75%. He has informed the county concerning the board’s probability of lowering this rate.

Motion by Bryan, second by Stuart, carried unanimously to adopt Resolution 05-06-01, adopting the actuarial assumptions for use in the June 30, 2005 Actuarial Valuation, 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 certain economic and demographic assumptions for use in the June 30, 2005 Actuarial Valuation. Therefore, be it

Resolved that the board hereby amends SamCERA's economic actuarial assumptions as follows:

· the inflation assumption shall be 3.75%.

· the nominal rate of investment return assumption shall be 7.61, compounding semi-annually and creating an effective rate of return assumption of 7.75%.

· the employee contribution interest crediting rate assumption shall be 7.75% per year (7.61% nominal, compounded semi-annually).

the salary increase, total payroll assumption shall be 3.75 % per year.
the salary increase, individual assumption, shall be based on rates varying by service, for General and Safety members, as shown in Schedule 18 of the Public Pension Professionals’, Analysis of Plan Experience for the period from July 1, 2000, through June 30, 2005, produced for the San Mateo County Employees' Retirement Association.

Be it further

Resolved that the board hereby amends SamCERA’s demographic actuarial assumptions as described in the Public Pension Professionals, Analysis of Plan Experience for the period from July 1, 2000 through June 30, 2005, pages 54 through 57 and related schedules, produced for the San Mateo County Employees' Retirement Association.

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, 2005.

0508.5.5

Approval of Topics for Annual Actuarial Review: Mr. Clifton reviewed the list of topics for the annual actuarial review. He stated that Mr. Bailey, Ms. Wong and himself will also complete the actuarial questionnaire. Staff will compile the trustee responses and compare them to the actuary‘s for next month’s board meeting.

0508.6

Investment Services

0508.6.1

Monthly Portfolio Performance Report: Mr. Clifton presented the monthly performance report for the period ending July 31, 2005. SamCERA’s Fiscal Year to Date return of 2.58% is 194 basis points ahead of the Actuarial Discount Rate of 0.64% and 10 basis points ahead of SamCERA’s Total Plan Policy Benchmark of 2.48%.

Asset Class

Market Value

1-Month

1-year TTWRR

5-year TTWRR

Domestic Equity

$842,089,340

4.46%

19.43%

1.18%

International Equity

$269,382,353

3.84%

23.24%

0.63%

Total Equity

$1,111,471,692

4.31%

20.28%

1.02%

Fixed Income

$467,548,241

-0.71%

5.62%

7.51%

Real Estate Aggregate

$59,252,513

0.00%

22.56%

11.94%

Cash Equivalents

$71,166,211

0.25%

3.10%

3.26%

Total Fund

$1,709,438,658

2.58%

15.72%

4.33%

Benchmark

2.48%

15.15%

3.84%

0508.6.2

Quarterly Investment Performance Analysis for Period Ended June 30, 2005: Mr. Clifton reported that Patrick Thomas of SIS conducted a detailed analysis of the quarterly investment performance report in front of the Investment Committee. Mr. Thomas then provided a brief overview of the fund’s investment performance to the board. He stated that SamCERA performed well, performing in the top half amongst its peers despite lagging 20 basis points behind policy index. He indicated that all managers performed well within expectations. He noted Brandes’ underperformance, ranking in the bottom two percent among small cap value managers. Mr. Thomas reminded the board of Brandes’ high tracking error to its benchmark and that, over time, the firm should have highly positive quarters.

0508.6.3

Semi-Annual Capital Market & Inflation Assumption Review (held over from May 2005): Mr. Clifton reported that Mr. Thomas and John Meier of SIS had met with the Investment Committee to thoroughly discuss the capital market and inflation assumption generation process. Mr. Thomas then performed a quick review for the board. He stated that SIS uses as many good inputs as it can to come up with these expectations. He opined that SamCERA is currently implementing a fairly efficient investment mix. He stated that SIS is a big believer in private equity as it will add attractive attributes to a plan but noted the difficulty in holding private equity. Mr. Thomas noted that capital market and inflation expectations have not changed much since they were last discussed.

0508.6.4

Approval of Criteria for Manager Search – Domestic Fixed Income Enhanced Product: Mr. Clifton presented SIS’ recommended search screens for the domestic fixed income enhanced manager search. He said that SIS will return with approximately six semi-finalists for analysis at next month’s board meeting.

Motion by Bryan, second by Hooley, carried unanimously to approve the search criteria for the domestic fixed income enhanced manager search.

0508.6.5

Annual Review: INVESCO Realty Advisors: Mr. Clifton presented Max Swango and Bill Grubbs of INVESCO Realty Advisors. Mr. Swango presented a brief organizational update as well as an update on fund performance.

Mr. Grubbs presented a detailed overview on the Core fund’s performance. He reviewed the fund’s property type mix. He stated that 40% of investment return derived from selecting an appropriate property sector allocation, followed by the impacts of good geographic selection as well as correctly selecting property within that particular market. In order to outperform NCREIF in the long term, the fund is overweight in industrial and multi-family, even-weight to retail and underweight in office.

In response to a concern from trustees, Mr. Grubbs discussed the appraisal process. He stated that each property is appraised once a year in order to provide fair market value for these properties for interested buyers and sellers. Twenty-five percent of the properties are appraised every quarter under an appraisal schedule. He stated that Price Waterhouse Coopers helps manage the appraisal process. PWC attains a third party appraiser within the region of the particular property and, in conjunction with PWC, INVESCO reviews that appraisal. In response to a question from Mr. Clifton, during each quarter, the remaining seventy-five percent are not appraised internally. Mr. Grubbs stated that properties not scheduled for appraisal in any given quarter are run through PWC’s scoring system. If a property pops up in the scoring process due to unexpected leases, tenant bankruptcies or other unanticipated factual changes, INVESCO will assign that property to a limited updated appraisal before its next scheduled valuation.

0508.6.6

Educational Presentation on Real Estate: Laura Gaylord and Asieh Mansour from RREEF and Joel Damon, Amy Cummings and Victoria Grissom from JP Morgan were present to provide an educational presentation on real estate. The presenters discussed the expansion of opportunity sets, characteristics of the feasible products (Core, Core Plus, Value Enhanced, Opportunistic, closed-ended, open-ended) and their corresponding position on the risk/reward spectrum.

Mr. Lewis then took up agenda 6.10.

0508.6.7

Approval of Topics for Manager Review – Brandes Investment Partners: Motion by Bryan, second by Lewis, carried unanimously, to approve the list of topics for Brandes Investment Partners Annual Investment Manager Review for the domestic small cap value mandate.

0508.6.8

Approval of Topics for Manager Review – Chartwell Investment Partners: Motion by Bryan, second by Lewis, carried unanimously, to approve the list of topics for Chartwell Investment Partners Annual Investment Manager Review for the small cap growth mandate.

0508.6.9

Approval of Topics for Manager Review – Goldman Sachs Asset Management: Motion by Bryan, second by Lewis, carried unanimously, to approve the list of topics for Goldman Sachs Asset Management Annual Investment Manager Review for the small cap enhanced index mandate.

Mr. Lewis then took up agenda item 7.1.

0508.6.10

Approval of Extension of INVESCO Core Real Estate U.S.A., LLC Subscription Period: Motion by Bryan, second by Lewis, carried unanimously to approve Resolution 05-06-02, approving the extension of INVESCO Core Real Estate Subscription Period Agreement for new Capital Contributions, as follows:

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 managers “. . . in connection with administration of the Board's investment program . . . "; and

Whereas, On September 30, 2004, the Board of Retirement executed subscription documents for the INVESCO Core Real Estate – U.S.A., LLC Fund; and

Whereas, In February 2005 the Board reviewed various real estate products by manager, type and availability and determined to bring SamCERA’s real estate allocation to approximately full funding by contributing $40,000,000 to the INVESCO Core Real Estate – U.S.A., LLC Fund; and

Whereas, On March 22, 2005, the Board of Retirement adopted Resolution 04-05-29, which authorized the chair to execute amended subscription documents for the INVESCO Core Real Estate – U.S.A., LLC Fund, providing for a six-month subscription period, which shall expire on September 22, 2005; and

Whereas, the Board of Retirement wishes to extend the subscription period for the INVESCO Core Real Estate – U.S.A., LLC Fund through July 6, 2006; and

Whereas, County Counsel has approved the extension of subscription period document as to form and the Investment and Finance Manager has recommended approval of the documents. Therefore, be it

Resolved that the Board hereby approves the INVESCO Core Real Estate – U.S.A., LLC Fund extension of subscription document. Be it further

Resolved that the Board hereby delegates full discretionary authority to the INVESCO Core Real Estate – U.S.A., LLC Fund to manage the assets of the Retirement Fund as allocated by the Board in accordance with the terms of the Limited Liability Company Agreement (the “Operating Agreement”) of INVESCO Core Real Estate – U.S.A., LLC. Be it further

Resolved that the Board hereby approves the fees as specified in the Investment Management Fee Side Letter dated September 30, 2004, and authorizes the disbursement of funds as provided for in GC §31596.1 in accordance with SamCERA's internal controls. Be it further

Resolved that the Board hereby authorizes the Chair, to execute the Subscription Documents 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 Fund documentation 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 Fund Document.

Mr. Lewis then took up agenda item 7.3.

0508.7

Board & Management Support Services

0508.7.1

Monthly Financial Reports: Mr. Clifton submitted the preliminary monthly financial report for the period ending July 31, 2005. He reported that SamCERA’s Net Assets as of July 31, 2005 totaled $1,707,601,816. He also stated that the Association had received $74,721,583 in county prepaid contributions on July 8^th.

0508.7.2

Approval of Questions and Evaluation Form for Annual Review of SamCERA’s Attorneys: Mr. Clifton presented the list of topics for the annual review of SamCERA’s legal counsels, Raymond Swope and Brenda Carlson. Mr. Bailey requested that Mr. Clifton, Ms. Palu and himself also complete the questionnaire forms. Motion by Salas, second by Hackleman, carried unanimously to approve the list of questions and evaluation form for the annual review of SamCERA’s attorneys.

Mr. Lewis then took up agenda item 8.1.

0508.7.3

Approval of County Data Connection Proposal: Mr. Bailey stated that nightly backups of SamCERA data are progressively taking longer due to the increasing amount of data that must by transmitted to the county offices in Redwood City via land line. He also indicated that a replica server must be located offsite in the event that SamCERA’s main server fails. Tariq Ali, Information Technology Manager, was present to respond to trustee questions.

Motion by Bryan, second by Salas, carried unanimously to approve an upgrade of SamCERA’s current county data connection (Option 5: Licensed Wireless) as recommended by staff.

Mr. Lewis then took up agenda item 6.7.

0508.8

Approval or Acceptance of Reports

0508.8.1

Chief Executive Officer's Report: Mr. Bailey noted Mr. Summer’s letter reviewing the impact of additional county contributions and the manner in which they could be handled under the current funding methodology. The letter briefly outlined alternative approaches to handling additional voluntary contributions. The letter will be forwarded to the county manager’s office.

Mr. Bailey provided an update on staff’s strategic planning process. He anticipated that a draft plan will be brought before the board at the October board meeting. He stated that approximately five major strategic categories will be presented with roughly thirty sub-projects scheduled to be completed within one year. Some projects, such as the process of updating publications and researching the distribution of customer satisfaction surveys, have already been initiated.

He then requested that trustees notify him of any necessary changes to the board and staff’s confidential contact information card as well as the board information sheet distributed to the public.

Lastly, Mr. Bailey stated that he is working on a revision to the resolution regarding collections of member overpayments and underpayments.

0508.8.2

Investment & Finance Manager’s Report: Mr. Clifton noted that INVESCO’s Core fund quarterly report was available to the board. He then stated he is in receipt of an appointment agreement from Aberdeen Asset Management which has acquired Deutsche Bank’s UK and Philadelphia-based fixed income business. Mr. Clifton has forwarded the agreement to Ms. Carlson for review. He then stated that Mondrian Investment Partners has sent a report of its use of soft dollars this past year. Mondrian has since ceased the practice of using soft dollars. Mr. Clifton also said that Chartwell has added a new portfolio manager who had worked for thirteen years at Delaware Investments. Lastly, he said that Western Asset Management provided him an update on its LeggMason/CitiGroup brokerage business.

0508.8.3

County Counsel's Report: None.

0508.9

Adjournment in Memory of the following Deceased Members: There being no further business, Mr. Lewis adjourned the meeting at 4:54 p.m. in memory of the following deceased members:

Siemssen, Rudolph

February 2, 2005

Sheriff’s Department

Eiland, James

July 3, 2005

Chope Hospital

Mc Killip, Richard

July 5, 2005

Sheriff’s Department

Cagle, Russell

July 6, 2005

General Services Administration

Mackon, John

July 13, 2005

General Services Administration

Yost, Harold

July 13, 2005

Beneficiary Of Betty

Platt, Richard

July 19, 2005

Sheriff’s Department

Southwick, Bert

July 19, 2005

Beneficiary Of Virginia

Mccarthy, Kenneth

July 21, 2005

Probation Department

Catalano, Francis

July 25, 2005

Department Of Health Services

Warwick, Barry

July 28, 2005

Sheriff’s Department

Balzarini, Erma C.

July 29, 2005

Tax Collector

Swain, Mary

August 1, 2005

Crystal Springs Rehabilitation Center

Talt, Daniel

August 1, 2005

Department Of Public Works

Meister, Charles

August 5, 2005

Buildings And Grounds Department

Zietz, Geraldine

August 10, 2005

Library

Kenneth A. Lewis, Chair

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