ABOUT LACERA

BOARD OF INVESTMENTS MINUTES 5-27-09

PRESENT

• Herman Santos, Vice Chair
• Diane Sandoval, Secretary
• John M. Barger
• Simon Russin
• Anthony Yakimowich for (Mark J. Saladino)
• Michael Schneider
• Leonard Unger

ABSENT

• Paul C. Hudson
• William R. Pryor, Chair

STAFF, ADVISORS, PARTICIPANTS

• Gregg Rademacher, Chief Executive Officer
• Robert Hill, Assistant Executive Officer
• Janice Golden, Assistant Executive Officer
• Lisa Mazzocco, Chief Investment Officer
• John McClelland, CRE, Principal Investment Officer, Real Estate
• Vache Mahseredjian, CFA, Principal Investment Officer
• Christopher J. Wagner, Senior Investment Officer, Private Equity
• June Kim, Senior Investment Officer, Equities
• Trina Sanders, Investment Officer, Real Estate
• Robert Z. Santos, Investment Officer, Fixed Income
• Gerald Flintoft, Investment Officer, Private Equity
• Stuart Mesnik, Senior Investment Analyst
• Shelly P. Tilaye, Senior Investment Analyst, Private Equity
• Shannon O’Connell, Senior Investment Analyst
• Dale Johnson, Senior Investment Analyst, Equities
• David L. Muir, Chief Counsel
• Earl W. Buehner, Senior Staff Counsel
• Johanna M. Fontenot, Senior Staff Counsel
• Michael D. Herrera, Senior Staff Counsel
• Cynthia Lau, Legislative Affairs Officer

1. APPROVAL OF THE MINUTES
   1. APPROVAL OF THE MINUTES OF THE SPECIAL MEETING OF THE BOARD OF INVESTMENTS OF APRIL 22, 2009.

      A motion was made by Mr. Santos, seconded by Mr. Russin, to approve the Minutes of the special meeting of the Board of Investments of April 22, 2009. The motion carried with Mr. Unger abstaining

2. PUBLIC COMMENT

   None.

3. REPORT ON CLOSED SESSION ITEMS

   None.

4. ACTION ITEMS

   1. Recommendation as submitted by Lisa Mazzocco, Chief Investment Officer, and Christopher J. Wagner, Senior Investment Officer, Private Equity: Approve the attached Investment Policy Statement for the Disclosure of Placement Agent Fees. (Memo dated May 19, 2009.)

      Mr. Wagner provided an executive summary on the Investment Policy Statement for the Disclosure of Placement Agent Fees and reported the purpose of this Policy is to bring transparency to placement agent activity in connection with LACERA’s investments and to help ensure that all investment decisions are made solely on the merits and in a manner consistent with the Board of Investment fiduciary duties. Recent news reports alleging that placement agents have made illicit payments to public fund officials for new business have called into question the legitimacy of placement agents in the investment process. Investment managers hire placement agents to find new sources of capital. The investment manager usually pays a placement agent one or two percent of the capital invested. Placement agents are generally not used when an investment manager has an existing relationship with an investor.

      Staff believes it would be prudent to review LACERA’s Disclosure Guidelines on Placement Agents and establish an Investment Policy Statement covering placement agents. Currently the managers are required to provide the following information: The name of the placement agent; the fees payable to the Placement Agent; and a representation that LACERA or the partnership is not responsible for the fee.

      Staff would like to expand the disclosure to include the following: the names of all current or former LACERA Board Members, employees, or consultants or members of the immediate family of any such person that are either employed or receiving compensation from the placement agent; the names of any current or former LACERA Board Members, employees, or consultants who suggested the retention of the placement agent; and the regulatory agencies, that the placement agent or any of its affiliates are registered with, such as the SEC, FINRA, or any similar regulatory agency. A brief discussion followed.

      A motion to approve the recommendation was made by Mr. Unger, seconded by Ms. Sandoval.

      An amendment to the recommendation was made by Mr. Unger , seconded by Ms. Sandoval to include the following in the body of the Placement Agent Policy the following language defining a placement agent, which language was footnoted in the staff recommendation: “Any person or entity hired by or acting on behalf of an investment manager to market, solicit, or raise money either directly or indirectly from LACERA.” The amendment carried by unanimous vote.

      The action motion as amended passed unanimously.

   2. Recommendation as submitted by the Corporate Governance Committee: Adopt LACERA’s revised Corporate Governance Committee Policy Statement. (Memo dated May 13, 2009.)

      Mr. Johnson gave a brief summary on LACERA’s proposed Corporate Governance Committee Policy Statement. A motion to approve the recommendation was made by Ms. Sandoval, seconded by Mr. Russin. The motion carried by unanimous vote.

   3. Recommendation as submitted by the Travel Policy Committee: Adopt the proposed revisions to the Education and Travel Policy, as reflected in the attached black-lined version.

      Mr. Buehner provided a brief overview on the changes to the proposed Education and Travel Policy. He reported that the Travel Policy met and had minor substantive changes to the Policy as follows: first, to permit business class travel on red eye flights; second, to create a “Transportation” category, subdivided into “Airline Travel” and “Other Common Carrier Travel.” Thereby allowing travelers the option of using common carriers other than airlines for “long distance travel” when the traveler has special travel needs or concerns; and third, to make all conferences pre-approved for attendance by members of one Board pre-approved for attendance by members of each Board. Mr. Buehner also noted that two new conferences had been added to the list of pre-approved conferences.

      A motion to approve the recommendation was made by Mr. Unger, seconded by Mr. Russin. The motion carried by unanimous vote.

      Vice Chair Santos indicated there was a need to handle item V. A. under Reports at this time.

   4. Recommendation as submitted by June H. Kim, Senior Investment Officer, Equities: Provide Staff with direction regarding the U.S. Equity 130/30 mandate. (Memo dated May 19, 2009.)

      Ms. Mazzocco and Ms. Kim provided a brief summary on the proposed U.S. Equity 130/30 mandate, prompted mainly by concerns about the issue of external custody expressed by LACERA’s general consultant Wilshire Associates. The primary reason to invest in a 130/30 strategy is that it should help diversify LACERA’s U.S. equity composite, and thus improve the composite’s risk/return profile. However, these potential benefits must be weighed against the potential risks associated with external custody. In June of 2008 the Board selected Analytic Investors (“Analytic”) for LACERA’s first large cap U.S. equity 130/30 mandate. Analytic’s funding was initially delayed due to the serious nature of the financial crisis in September 2008 and the resulting extreme market volatility. As the U.S. equity market showed some signs of stabilization at the end of the first quarter 2009, the funding of the mandate was put back on track. However, some investment scandals (not involving LACERA) then made headline news which contributed to another delay in funding. Staff has provided additional information relating to the structure of Analytic’s fund and the safeguards in place for the mandate. Staff seeks Board direction regarding the funding of the U.S. equity 130/30 mandate. A brief discussion followed.

      A motion to terminate the 130/30 strategy was made by Mr. Russin, seconded by Ms. Sandoval. The motion failed with Mr. Russin and Ms. Sandoval voting yes and with Messrs. Unger, Yakimowich, Schneider, Barger and Vice Chair Santos voting no.

      A second motion was made by Mr. Unger, seconded by Mr. Schneider to take a watch position for a period of six months and take action after the six month period. The motion carried by unanimous vote.

5. REPORTS

   1. Operational Risks of External Custody
      Lisa Mazzocco, Chief Investment Officer
      (Memo dated May 21, 2009.)

      Ms. Mazzocco and Ms. Kim provided a brief overview on the standard of care provisions associated with each of the fund structures employed and the operational risks of external custody. These include risks associated with investments that require custody by a firm other than LACERA’s custodian, BNY Mellon Trust. Recent cases of alleged operational risk by money managers prompted staff to review these risks with the Board. They identified three broad categories of risk associated with managing LACERA’s Investment portfolio: Market risk, implementation risk and operational risks.

      Under the custody arrangements for LACERA’s Investments two entities maintain custody for the majority of LACERA’s assets: BNY Mellon Trust “BNY Mellon” and Barclays Global Investors “BGI”. BNY Mellon, LACERA’s custodian, maintains asset custody for the majority of the Trust’s actively managed public fund investments. BGI has custodial responsibility for all of the Trust’s passively managed assets. Other public markets assets, such as emerging markets and equity activist funds are maintained by custodians selected by the management firms responsible for investing and assets on LACERA’s behalf. Staff also provided an overview on the basic investment fund structures LACERA employs, the monitoring process for the various fund structures, and the fiduciary duty obligations that LACERA’s custodian and investment managers owe to the Trust.

      In conclusion, staff reported they would prefer all asset custody be performed by BNY Mellon because it provides LACERA with the greatest degree of control and safeguards; however given the depth and breadth of LACERA’s investment program, this is not feasible. While external custody can introduce varying degrees of risk, these risks can be mitigated to some extent as follows: retain investment managers (or general partners) with established track records for assets that necessitate external custody; required third party due diligence reports to supplement staff’s work; require an independent third party firm to be responsible for asset custody when investing in public markets commingled funds; request that the annual audited financial statements are prepared by qualified auditors; require transparency for public markets assets that are externally maintained and require a third party administer when a prime broker is used. Staff noted that some managers may provide transparency with a lag time to ensure their trading positions remain confidential. Notwithstanding these safeguards, staff recommends that LACERA consider periodically auditing the public markets commingled fund managers.

      In the future, mandates requiring external custody will require an additional level of due diligence. A brief discussion followed on valuation concerns. The Board expressed the need to revisit this item in the near future. They commended staff on their Report, which was received and filed.

      Vice Chair Santos indicated the meeting would return to the regular order of business.

   2. Manager Review – Western Asset Management Company
      Robert Z. Santos, Investment Officer, Fixed Income
      (Memo dated May 18. 2009.)

      Western Asset Management Company
      Joseph C. Carieri, Client Service Executive
      Stephen A. Walsh, Chief Investment Officer

      Mr. Robert Santos provided a brief overview on Western Asset Management Company’s (“Western”) performance . He reported that pursuant to LACERA’s Manager Monitoring and Review Policy, investment managers must conduct formal presentations when their one-year rolling excess returns are outside pre-determined performance bands for three consecutive quarters. He introduced Mr. Carieri and Mr. Walsh who followed with a brief summary on Western’s performance, their investment strategy and philosophy. Western is headquartered in Pasadena, California, and was founded in 1971. It was acquired by Legg Mason in 1986 as a wholly-owned subsidiary and ranks as one of the largest fixed income managers in the world. The firm manages $473.4 billion in total assets, with approximately $118.5 billion in Core-Plus and $9.9 billion in Enhanced Cash strategies. Western was originally retained by LACERA to manage a core-plus fixed income portfolio which is Western’s “flagship” product. The strategy primarily invests in domestic investment grade bonds, while tactically investing in extended sectors. These sectors include domestic high yield bonds, international investment grade (corporate) bonds, and emerging market debt securities.

      Messrs. Carieri and Walsh reported that due to the continued underperformance of the non-treasury fixed income markets, investors flocked to the safety of Treasury securities through the first quarter of 2009. Mortgage-related losses, de-leveraging of hedge funds and the evaporation of liquidity have all contributed to the market’s extraordinary underperformance. Western’s performance objective is 80 basis points (bps) annualized, net of fees, above the Barclays Capital Aggregate Bond Index (“BC Aggregate”). Western’s core-plus fixed income portfolio underperformed the BC Aggregate on a one year, net-of-fee basis. This underperformance accounted for the portfolio’s poor results from the second quarter of 2007 to the first quarter of 2009.

      Western asserted that given the current environment, its investment strategy will ultimately produce long-term out-performance as demonstrated by the portfolio’s strong performance in April. A brief discussion followed and the Report was received and filed.

   3. Investing in Timber (Memo dated May 20, 2009.)
      John D. McClelland, Principal Investment Officer, Real Estate
      Amit Aggarwal, Investment Officer, Real Estate

      Mr. McClelland and Mr. Aggarwal gave a presentation on the risks and rewards associated with timber investments in both the private and public sector, including the historical perspective and a description of the return characteristics.

      They offered a brief outline on ways LACERA could access or invest in this sector.

      Staff believes that even though there are some attractive aspects to timber investing, a separate program is not merited at this time. Performance of timber related investments is suffering a downturn, significantly related to the homebuilding industry, which is expected to continue for several years; private timber investments remain relatively illiquid; and publicly-traded timber investments are already included in the portfolio. As a result, no recommendation for action was presented as this time and the Report was received and filed.

   4. Real Estate Performance Measurement for Quarter
      Ended December 31, 2009
      John McClelland, Principal Investment Officer, Real Estate
      (Memo) dated May 12, 2009.)

      The Townsend Group
      Micolyn Yalonis - Principal
      Nakeyshia Kendall - Consultant

      Mr. McCelland introduced Ms. Yalonis and Ms. Kendall of The Townsend Group, LACERA’s Real Estate Consultant. They followed with a presentation on the Real Estate fund’s performance.

      They reported that the real estate portfolio’s equity market value as of December 2008, was $3.9 billion or 12.5% of LACERA’s total assets. The real estate portfolio delivered a five-year net real rate of return of 7.5%, outperforming the return objective of 5.4% by 210 basis points (bps). For the quarter ended December 2008, LACERA’s total real estate portfolio return of -10.0% gross (comprised of -0.1% income and 9.9% appreciation) was below the NCREIF (NPI) Index by 170 bps due to the slow-down in the housing market. LACERA’s real estate portfolio generated a one-year total return of -10.6% gross (-10.0% net), below the NPI gross return by 410 basis point due to the dramatic downturn in the housing market. The portfolio generated a one-year income return of 1.8% compared to NPI income return of 5.1%. Appreciation for the same period was -12.2% for LACERA and -11.2% for NPI. The core-one-year income return of 5.8% outperformed the NPI by 70 basis points. A brief discussion followed and the Report was received and filed.

   5. Performance Review as of March 31, 2009
      Lisa Mazzocco, Chief Investment Officer
      (For information only.)

      LACERA’s Performance review as of March 31, 2009, is for information only and was received and filed.

6. EXECUTIVE SESSION
   1. Conference with Legal Counsel – Anticipated Litigation (Subdivision (b) of California Government Code Section 54956.9)

      1. Recommendation as submitted by David L. Muir, Chief Counsel:
         Ratify the Legal Office’s approval to join as a representative plaintiff in the Merrill Lynch Securities Class Action entitled “Public Employees’ Retirement System of Mississippi, et al., v. Merrill Lynch & Co., Inc. et al.,” U.S. District Court, Southern District of New York, Civil Action No. 08 CIV. 10841.

      2. Recommendation as submitted by David L. Muir, Chief Counsel:
         Authorize the Legal Office to file a letter with the U.S. District Court of Oklahoma County in the case entitled “Louisiana Police Employee Retirement System v. Chesapeake Energy Corp.”, Case No. CJ-2009-2870, in support of a petition to compel inspection of corporate books and records related to the awarding of a $75 million bonus to Chesapeake Energy’s CEO and co-founder, Aubrey McClendon.

      Mr. Muir reported that the Board met in Executive Session to discuss two items of anticipated litigation with legal counsel. In the matter of Public Employees’ Retirement System of Mississippi, et al., v. Merrill Lynch & Co., Inc. et al. the Board ratified the Legal Offices consent to agree to be a co-plaintiff in the case on a motion by Mr. Schneider, seconded by Mr. Russin, with Mr. Barger abstaining.

      In the matter of Louisiana Police Employee Retirement System v. Chesapeake Energy Corp. the Board approved counsel’s recommendation to file a letter of support in a petition to force inspection of books and records. This was on a motion by Mr. Russin, seconded by Mr. Unger and unanimously adopted.

7. GOOD OF THE ORDER (For discussion purposes only.)

   Ms. Sandoval reported she attended the IFEBP Investment Institute in New Orleans and conveyed that the session was informative, but they favored the Taft-Hartley Plan; however, she does recommend attending IFEBP’s National Conferences. Mr. Santos reported that the SACRS conference was extremely informative and educational and encouraged Trustees attend future SACRS conferences.

   Mr. Rademacher reported that the California Foundation for Fiscal Responsibility has been submitting Public Records Act requests to various pension plans asking for the names and pension benefit amounts of all pensioners or survivors who make over $8,333.00 per month. CalPERS as well as a couple of 37 Act Counties have responded to these requests, providing names and amounts. LACERA staff counsel believe the 37 Act is very specific wherein it states that: “records of members shall be confidential and shall not be disclosed to anyone except insofar as may be necessary for the administration of [the retirement law] or upon order of a court of competent jurisdiction, or upon written authorization by the member.” Mr. Rademacher indicated that even though LACERA believes in transparency, LACERA is actually precluded from disclosing said information at this time. He did however provide the requesting organization with LACERA’s Actuarial Report which does provide summary data. He will continue to work with them should they revise their request.

   Additionally, Mr. Rademacher reported that rumors had surfaced among the membership, due to current financial concerns, that the County is considering work furloughs or a “golden hand shake”. He indicated there have been no discussions with LACERA concerning either at this time.

   Ms. Mazzocco reported that fixed-income managers would be presenting for the July 2009 meeting.

   Informational Items

   1. Chief Investment Officer’s April 2009 Report. (Memo dated May 20, 2009.)

   2. Memo dated May 13, 2009, from Dale Johnson, Senior Investment Analyst, regarding the Corporate Governance Quarterly Review Volume 5, Issue # 1; January 1, 2009 – March 31, 2009.

   Green Folder Items

   1. Memo dated May 22, 2009, from Lisa Mazzocco, Chief Investment Officer, regarding Pacific Pension Institute 2009 Summer Roundtable.

   2. Chief Executive Officer’s Report.

   3. Memo dated May 18, 2009, from Vache Mahseredjian, Principal Investment Officer and Earl W. Buehner, Senior Staff Counsel, regarding Consent to Assignment of Investment Management Agreement with Lehman Brothers Asset Management LLC.

   4. Article from The Sacramento Bee dated May 6, 2009, entitled Pension Probe Targets Firm Controlled by Sacramento Lobbyist.

   5. Copy of letter dated May 18, 2009, to the Honorable Bryan C. Dixon of the Oklahoma County Courthouse from Jeff Mahoney, General Counsel for the Council of Institutional Investors regarding the Louisiana Municipal Police Employees Retirement System’s Petition for Writ of Mandate requiring Chesapeake Energy Corp. to comply with the fund’s books and records request.

   6. Copy of brochure from Phil Schaefer of the World Pension Forum regarding the upcoming State of the States Conference on August 2-5, 2009, in Laguna Beach, California.

8. ADJOURNMENT

   There being no further business, the meeting adjourned at 12.50 p.m.

Documents subject to public disclosure that relate to an agenda item for an open session of the Board of Investments that are distributed to members of the Board of Investments less than 72 hours prior to the meeting will be available for public inspection at the time they are distributed to a majority of the Board of Investments Members at LACERA’s offices at 300 N. Lake Avenue, Suite 820, Pasadena, CA 91101, during normal business hours of 9:00 a.m. to 5:00 p.m. Monday through Friday.

Listening Devices are available at days notice before the meeting date. Persons requiring an alternative format of this public notice pursuant to Section 202 of the Americans with Disabilities Act of 1990 may request one by contacting Cynthia Guider at (626) 564-6000, x3327 from 8:30 a.m. to 5:00 p.m. Monday through Friday, but no later than 48 hours prior to the time the meeting is to commence.