ABOUT LACERA

BOARD OF INVESTMENTS MINUTES 6-10-09

PRESENT

• William R. Pryor, Chair
• Herman Santos, Vice Chair
• Diane Sandoval, Secretary
• John M. Barger
• Simon Russin
• Mark J. Saladino
• Michael Schneider
• Leonard Unger

ABSENT

• Paul C. Hudson

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. PUBLIC COMMENT

   None.

2. REPORT ON CLOSED SESSION ITEMS

   None.

3. ACTION ITEMS
   1. Recommendation as submitted by Gregg Rademacher, Chief Executive Officer: Approve attendance of Board members, and staff as designated by the Chief Executive Officer, to attend the 2009 Real Estate Investment World Latin America, to be held at The Biltmore Hotel, in Coral Gables, Florida, and approve reimbursement of all travel costs incurred in accordance with LACERA’s Education and Travel Policy. Placed on the Agenda at the request of Mr. Santos. (Memo dated June 2, 2009.)

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

      The motion carried by unanimous vote.

   2. Recommendation as submitted by Gregg Rademacher, Chief Executive Officer: Approve attendance of Board members and staff as designated by the Chief Executive Officer at the World Pension Forum State of the States Conference, to be held at The St. Regis Hotel, in Laguna Beach, California, and approve reimbursement of all travel costs incurred in accordance with LACERA’s Education and Travel Policy. Placed on the Agenda at the request of Mr. Santos. (Memo dated June 3, 2009.)

      A motion was made by Mr. Santos, seconded by Mr. Unger, to approve the recommendation with an additional requirement that reimbursement for hotel expenses be limited to the government rate.

      The motion carried by unanimous vote.

   3. Recommendation as submitted by Gregg Rademacher, Chief Executive Officer: Adopt the LACERA Fiscal Year 2009-2010 Administrative and Retiree Health Care Benefits Budgets. (Memo dated May 26, 2009.)

      Mr. Rademacher gave an executive summary on LACERA’s Administrative and Retiree Health Care Benefits Budgets for Fiscal Year 2009 – 2010 and a detailed presentation on the budget process. He reported that no changes were made to the spending plan as a result of the budget hearings. He commended Shamila Alam, Kaelyn Ung, Judy Chadderdon and Robert Whitten, LACERA’s budget team, for their hard work and dedication in putting together the Budget and Mr. Hill who served as a process mentor. He also recognized and thanked Communications team for improving the graphics and design of the budget book. A brief discussion followed.

      A motion was made by Ms. Sandoval, seconded by Mr. Unger, to approve the adoption of the LACERA Fiscal Year 2009-2010 Administrative and Retiree Health Care Benefits Budgets.

      The motion carried by unanimous vote.

   4. Recommendation as submitted by Lisa Mazzocco Chief Investment Officer: Adopt Alternative Two (Table Two on page seven) as LACERA’s new Asset Allocation Policy, which reduces LACERA’s fixed income exposure by two percent and increases the global equity and commodity allocations by one percent each. (Memo dated June 1, 2009.)

      Ms. Mazzocco provided a brief summary of the recommendation and introduced Messrs. Bensur and Marshall of Wilshire Consulting (LACERA’s Consultants) who followed with a presentation on LACERA’s proposed new Asset Allocation Policy. Wilshire reported on the asset-liability relationship as of April 1, 2009, and recommends that plan sponsors conduct an asset – liability analysis every three to five years.

      The asset-liability study was conducted in two parts. In Part One, the model inputs were reviewed to ensure they were appropriate for LACERA’s requirements. Key factors considered during this part of the process included: eliminating the “home country bias” to create a global public equity portfolio, and determining the currency hedging policy. In an effort to maintain adequate liquidity to meet LACERA’s promised benefits, the private market allocations were retained at their current allocations.

      In Part two, three alternative portfolios with varying degrees of risk/return scenarios were simulated to assess their impact on employer cost and the funded ratio. LACERA’s current Asset Allocation Policy portfolio was also modeled to provide a frame of reference.

      The Proposed changes to the asset allocation will change the asset return component of the employer cost. Portfolios with higher expected return will lower expected contributions, but may have a higher cost in a worse-case outcome and portfolios with lower expected volatility (and lower expected return) will improve the security of benefits in a worse-case outcome, but potentially require higher than expected contributions. Wilshire also believes that the core mission of a defined benefit plan is to fund the benefits promised to participants and the role of asset allocation is to manage the risk to that core mission. The primary goal of asset allocation is to maximize the safety of promised benefits and minimize the cost of funding these benefits. Overall LACERA has a well established, broadly diversified investment program. Wilshire Consultants and staff recommend only minor changes which entail decreasing the fixed income allocation by two percent while increasing the equity and commodity allocations by one percent each. This change will slightly improve the Fund’s risk-adjusted return. A brief discussion followed with emphasis on volatility and liquidity concerns.

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

      The motion carried by unanimous vote. Mr. Santos left at 11:30 a.m., after making the motion, but prior to the Board voting on the motion.

   5. Recommendation as submitted by Vache Mahseredjian, Principal Investment Officer, Robert Z. Santos, Investment Officer, Fixed Income, and Shannon O’Connell, Senior Investment Analyst, Fixed Income: Hire Goldman Sachs Agency Lending (GSAL) to provide agency-based securities lending services for LACERA’s U.S. Equity and Corporate Bond Portfolios. (Memo dated June 3, 2009.)

      Mr. Mahseredjian gave a brief presentation on the proposed recommendation. He reported that the current contracts with Goldman Sachs & Co. (“GSAL”) for lending U.S. equities and corporate bonds will expire in June of 2009. Staff had negotiated an extension of the current contracts through July of 2009, in order to facilitate the smooth transition to a new securities lending provider.

      Staff had issued a Request for Proposal (“RFPs”) to major securities lending service providers in order to identify the most competitive program for lending these securities. Staff received RFP responses from 11 securities lending service providers and after conducting a thorough evaluation and scoring of the proposals, staff selected the three highest-scoring candidates for further evaluation. After considering all of the information all of the information gathered via the RFP responses and the interviews, staff recommends that your Board hire GSAL under an agency lending agreement for both U.S. Equities and corporate bonds. Although all three finalists are highly regarded, Staff believes GSAL is the best choice for LACERA.

      Mr. Mahseredjian reported the other two finalists, BNY Mellon and State Street, are among the world’s largest custodial banks and the majority of their securities lending business derives from and is driven by lending the large volume of securities in their custody. In contrast, Goldman is not in the custody business, so their lending model is based on capturing value and in staff’s view, the value-based model is preferred because it concentrates on capturing the intrinsic value of securities in the lending market, rather than attempting to generate income by reinvesting collateral. GSAL has offered LACERA the highest revenue split 87%, versus BNY Mellon’s offer of 85%, and State Street’s 80%. A brief discussion followed.

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

      The motion carried by unanimous vote.

   6. Recommendation as submitted by Cynthia Lau, Legislative Affairs Officer: Adopt a “Support” position on AB 1584, which relates to conflicts of interest. (Memo dated May 28, 2009.)

      Ms. Lau provided a brief overview on AB 1584 and reported that the Board had adopted a “Support” position on AB 246 in 2007. AB 246, a conflict of interest bill that became law prohibits ’37 Act board members and employees from selling investment products that would be considered an asset of the fund to their own, or any other, ’37 Act retirement system. AB 1584, if enacted would prohibit ’37 Act board members and employees from selling investment products to any public retirement system in the state. In addition, the Bill: (i) would impose two year revolving door provisions on ’37 Act board members and certain executive, legal, and investment officers; (ii) would require all public pension systems in the state to adopt a placement agent disclosure policy, and would bar violators from doing business with a system for two years; and (iii) would require placement agents seeking to do business with a system to disclose campaign contributions to elected members of the system’s board.

      A motion to Adopt a “Support” position on AB 1584, was made by Mr. Pryor, seconded by Mr. Unger.

      The motion carried by unanimous vote.

      Chair Pryor indicated that Executive Session Item V. A. would be handled at this time.

4. REPORTS
   1. Manager Review - Dodge & Cox Robert Z. Santos, Investment Officer, Fixed Income (Memo dated May 29, 2009.)

      Dodge & Cox
      Dana M. Emery, Executive Vice President
      Kent E. Radspinner, Vice President

      Robert Santos provided a brief overview on Dodge & Cox’s (“Dodge”) 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 (the performance bands for core mandates are -15 basis points to +100 basis points). He introduced Ms. Emery, Executive Vice President and Mr. Radspinner, Vice President of Dodge & Cox. Dodge has managed a core fixed income portfolio for LACERA since March 1997.

      Ms. Emery and Mr. Radspinner gave a presentation on Dodge’s performance, their investment strategy and philosophy. The core strategy primarily invests in domestic investment grade bonds, but may tactically invest up to 10% of the portfolio in domestic high yield bonds. Their investment process begins with the generation of investment ideas by the firm’s fixed income analysts, traders, portfolio managers and in-house research analysts. All primary research and analysis is performed by experienced industry analysts and fixed income portfolio managers/analysts. This structure allows for a long-term perspective in making investment decisions and gives them greater confidence in the research justifying these decisions.

      It has been challenging for non-Treasury fixed income sectors as the sub-prime mortgage crisis severely impacted financial markets. The non-Treasury fixed income markets continued to perform poorly from July 2007 through March 2009. Fixed income investors flocked to the safety of Treasury securities through the first quarter of 2009. Treasurys outperformed all non-Treasury sectors, returning a positive 7.48% for the one year ended March 2009.

      Since March, the performance of non-Treasury sectors has improved. Dodge’s core fixed income portfolio underperformed the BC Aggregate by 228 bps on a one year, net-of-fee basis. This was the result of the portfolio’s poor returns from the third quarter of 2007 to the first quarter of 2009. The financials segment of the investment grade corporate sector returned a negative 6.62% relative to duration equivalent Treasurys for the one year ended March 2009. In comparison, the entire investment grade Corporate sector returned a negative 0.21% for this same time period. Dodge believes that the credit crises and economic downturn have provided opportunities to invest in strong, difficult-to-replace franchises at attractive spreads. The stimulus package and foreclosure relief should have positive implications for general corporate and consumer creditworthiness and help stabilize loan and securities values over time.

      A brief discussion followed and the Report was received and filed.

   2. Private Equity Annual Report Christopher J. Wagner, Senior Investment Officer, Private Equity (Memo dated June 3, 2009.)

      Chair Pryor reported that the Private Equity Annual Report would be deferred to the next regularly scheduled meeting of the Board of Investments, to be held on July 8, 2009.

5. EXECUTIVE SESSION
   1. CONFERENCE WITH LABOR NEGOTIATORS (Government Code Section 54957.6)

      Agency designated representatives:
      Gregg Rademacher, Chief Executive Officer
      Janice Golden, Assistant Executive Officer
      Robert Hill, Assistant Executive Officer
      Robert Proctor, Director of Human Resources
      David Muir, Chief Counsel

      Employee organization:
      Service Employees International Union (SEIU), Local 721

      Mr. Rademacher reported that the Board met in Executive Session pursuant to Government Code Section 54957.6 to discuss labor negotiations with Service Employees International Union (SEIU), Local 721, and indicated there was nothing to report at this time.

      Chair Pryor reported that the meeting would return to its regular order of business.

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

   The Board expressed their concerns on the current and future position of the markets and issues relating to pension fund transparency. Mr. Rademacher reported that the next valuation cycle would include an analysis and investigation of LACERA’s assumptions which will include both the demographic and econmic return assumptions.

   Mr. Rademacher reported that Margaret Shuler of the Legal Office would retire on June 30, 2009. She has worked for the County over 25 years and helped the Investment Office with the title holding corporations, in the real estate area. He extended his good wishes on her retirement. He also reported that Mr. Muir’s last day would be on July 1, 2009, and extended good wishes to Mr. Muir as well.

   Mr.Rademacher indicated that the incoming Chief Counsel Robb Van Der Volgen is looking forward to joining LACERA. He offers a wealth of experience on both the Investment and Retirement aspects of the system and said he is looking forward to working with the Boards.

   Informational Items

   1. Memo dated June 3, 2009, from Richard Bendall, Chief Internal Auditor and Ted Granger, Senior Internal Auditor, regarding Actuarial Audit Services Agreement – One Year Extension.
   2. Memo dated June 3, 2009, from Richard Bendall, Chief Internal Auditor and Ted Granger, Senior Internal Auditor, regarding the Fiduciary Review by Ennis Knupp and Associates – 2009 “Supplemental” Report.

   Green Folder Items

   1. Copy of revised travel memo relating to Action Item III. B. from Herman Santos, dated June 3, 2009.
   2. Chief Executive Officer’s Report dated June 3, 2009.
   3. Copy of Memo from Gregg Rademacher, Chief Executive Officer, dated June 8 2009 regarding Successful Search for Chief Counsel.
7. ADJOURNMENT

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.