ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM BOARD OF RETIREMENT 2223 WELLINGTON AVENUE SANTA ANA, CALIFORNIA REGULAR MEETING DECEMBER 20, 2004 MINUTES

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1 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM BOARD OF RETIREMENT 2223 WELLINGTON AVENUE SANTA ANA, CALIFORNIA REGULAR MEETING DECEMBER 20, 2004 MINUTES The Chairman called the meeting to order at 8:39 a.m. and read the opening statement into the record. Attendance was as follows: Present: Reed L. Royalty, Chairman; Keith L. Concannon; Frank E. Eley; George W. Jeffries; Thomas J. Lightvoet; John M. W. Moorlach; Sharon L. Neebe, Vice-Chairman; Lisa Welch Silbar; David J. Thompson and Richard A. White, Jr. Also Present: Keith Bozarth, Chief Executive Officer; Tom Flanigan, Chief Investment Officer; Jim Buck, Assistant CEO, External Operations; Stephen Cadena, Assistant CEO, Internal Operations; Elaine Reagan, Staff Attorney; Shanta Chary, Investment Analyst; Lorelei Chao, Investment Analyst; Alicia Cavazos, Manager, Human Resources; Ricki Parker, Member Services Supervisor; Suzanne Jenike, Disability Investigator; Fred Messerer, Staff Attorney; Robert Kinsler, Communications; Anthony Beltran, Audio/Visual Technician and Diane Schumacher, Recording Secretary Harvey Leiderman, Steefel, Levitt & Weiss Paul Angelo, The Segal Company Mr. Eley left the room before the start of the meeting and returned at 9:07 a.m. Mr. Jeffries led the Pledge of Allegiance and Mr. White offered the invocation. Mr. Concannon reported that there is a rendition of the Pledge of Allegiance by Red Skelton in which he goes through and describe the Pledge of Allegiance and defines each word. He recommends hearing the rendition. It is a tremendous document. CONSENT AGENDA All matters on the Consent Agenda are to be approved by one action unless a Board Member or a member of the public requests separate action on a specific item. A motion was made by Mr. Moorlach, seconded by Ms. Neebe to approve the entire Consent Agenda. Motion carried unanimously. C-1 MATERIAL DISTRIBUTED Applications and Notices - f:board/agenda/ Board Minutes

2 Regular Board Meeting Minutes Page 2 Recommendation: Receive and file. C-2 BOARD MEETINGS AND COMMITTEE MEETINGS: Approval of Meetings and Minutes Special Board Meeting - November 10, 2004 Regular Board Meeting - November 15, 2004 Investment Committee Meeting - December 9, 2004 Recommendation: Authorize all meetings and approve all minutes. C-3 BOARD ELECTION UPDATE RETIREE AND GENERAL MEMBER Recommendation: Receive and file. C-4 ORANGE COUNTY PUBLIC LAW LIBRARY RMBR AGREEMENT Recommendation: Approve Amended and Restated Memorandum of Understanding Agreement Re: Additional Retiree Benefit Account. C-5 AMENDMENT TO THE CONFLICT OF INTEREST CODE Recommendation: Approve and adopt the amendment to the Conflict of Interest Code. * * * * * * END OF CONSENT CALENDAR * * * * * * INDIVIDUAL ITEMS AGENDA I-1 INDIVIDUAL ACTION ON ANY ITEM TRAILED FROM THE CONSENT AGENDA No Items pulled. I-2 CHIEF INVESTMENT OFFICER S REPORT Mr. Flanigan reviewed the CIO Report. Mr. Concannon was disappointed in the presentation, since it only contains October s numbers. He would like to have the numbers for November.

3 Regular Board Meeting Minutes Page 3 Ms. Chary explained that the most current numbers are received following the Board book mail out. She can provide the most recent numbers, but the Board members would receive this report following the mail out. She asked for direction from the Board as to what they preferred. Mr. Lightvoet would like the numbers verified, he will not push the issue. Ms. Chary reported that staff is comfortable presenting the most recent month at the Board meeting. Mr. Flanigan reported that staff is working on a new reporting format. Following discussion, a motion was made by Mr. White, seconded by Mr. Lightvoet to receive and file the Chief Investment Officer s Report. Motion carried unanimously. I-3 RECOMMENDATIONS OF THE INVESTMENT COMMITTEE RESULTING FROM A MEETING ON DECEMBER 9, 2004 A. REVIEW DELAWARE INVESTMENT ADVISERS WATCH LIST Mr. Flanigan reviewed the Investment Committee s recommendation to terminate Delaware Investments Advisors. Mr. Moorlach inquired whether there was an exit interview with the manager and do we have recommendations for where the money will be moving. A motion was made by Ms. Silbar, seconded by Ms. Neebe to the Investment Committee s recommendation to terminate Delaware Investments Advisors. Motion carried unanimously. B. CAPITAL GUARDIAN EMERGING MARKETS - REVIEW OF PERFORMANCE AND WATCH LIST STATUS Mr. Lightvoet reported that his son-in-law works for Capital Guardian Trust Company and he would abstain from any discussion or voting on this item. Mr. Flanigan reviewed the committee s recommendation. Mr. Concannon questioned why Capital Guardian should be fired when they have a 7.5% return. Mr. Jeffries would like to see an agenda item for a full-scale discussion on hiring and firing of managers; long term vs. short term, and the general considerations of the engagements of managers.

4 Regular Board Meeting Minutes Page 4 Following further discussion, a motion was made by Mr. Moorlach, seconded by Mr. Jeffries to extend Capital Guardian on watch list for three (3) months. Motion failed, with the voting as follows: AYES NAYS ABSTAIN ABSENT Mr. Moorlach Mr. Concannon Mr. Lightvoet Ms. Neebe Mr. Eley Mr. Royalty Mr. Jeffries Mr. White Ms. Silbar Mr. Moorlach did not remember the Board voting on a policy regarding performancebased fees. Mr. Bozarth reported that the Board has had a number of discussions regarding performance-based fees, but no direct policy has been voted on. A motion was made by Mr. Eley, seconded by Ms. Silbar to terminate Capital Guardian. A roll call vote was taken. Motion failed, with the voting as follows: AYES NAYS ABSTAIN ABSENT Mr. Eley Mr. Concannon Mr. Lightvoet Mr. Jeffries Mr. Moorlach Ms. Silbar Ms. Neebe Mr. Royalty Mr. White The Chairman questioned what was needed now that both motions failed. Mr. Bozarth reported that there was no further action needed by the Board. Capital Guardian will remain on watch list and this will be revisited as appropriate. C. ARTISAN PARTNERS INVESTMENT GUIDELINES D. DUE DILIGENCE SCHEDULE FOR 2005 E. SECURITIES LITIGATION POLICY Recommendation: Approve the changes to the Securities Litigation Policy. Regarding Item I-3 E, Mr. White wanted to know what were the qualifications of the firms and how do they get paid? Mr. White also wanted to know what was determined regarding Closed Session deliberations? In response to Mr. White s questions, Mr. Bozarth commented that the statement do not employ lawyers is misleading; they do not seek legal business. The tracking firms may have lawyers on staff, but they do not take cases. They get paid for services rendered.

5 Regular Board Meeting Minutes Page 5 Regarding Closed Session deliberation, Mr. Bozarth responded any instance where a closed session is appropriate it can be scheduled on the agenda and the appropriate notices posted. Ms. Silbar questioned the language in paragraph seven (7). The new language is confusing, the securities litigation law firms will be selected by the Board of Retirement, and with the exception that the final approval of firms will rest with the Board of Retirement. Is that really an exception to the prior statement? Ms. Reagan responded, in the Service Provider Selection Policy, it does not require the Board to select investment counsel; it allows the CEO to select. We have made an exception to that rule by saying for investment counsel the Board will give final approval, and the exception applies to the Service Provider Selection Policy. Following discussion, a motion was made by Mr. Moorlach, seconded by Mr. Lightvoet to approve the Investment Committee recommendations for Items I-3 C; D and E. Motion carried unanimously. Board took a break at 9:58 a.m. Board reconvened at 10:10 a.m. DISABILITY APPLICATIONS AGENDA STAFF RECOMMENDATION TO GRANT SERVICE CONNECTED DISABILITY RETIREMENT WITH AN EFFECTIVE DATE OF 12/30/01 (General Member) (D-1) D-1 ALEXANDER CUMPIAN, OC Transportation Authority Service Worker II Application for service connected disability retirement A motion was made by Mr. Concannon, seconded by Ms. Neebe to grant service connected disability retirement with an effective date of 12/30/01. Motion carried unanimously. STAFF RECOMMENDATION TO DENY SERVICE AND NON-SERVICE CONNECTED DISABILITY RETIREMENT (General Member) (D-2) D-2 DONNA DUCHARM, City of San Juan Capistrano Accounting Technician Application for service and non-service connected disability retirement

6 Regular Board Meeting Minutes Page 6 A motion was made by Ms. Silbar, seconded by Mr. Lightvoet to deny service connected and non-service disability retirement. Motion carried unanimously. STAFF RECOMMENDATION TO DENY SERVICE CONNECTED DISABILITY RETIREMENT (General Member) (D-3) D-3 MADALENE LAMAR, Health Care Agency Financial Counselor Application for service and connected disability retirement A motion was made by Mr. Lightvoet, seconded by Mr. Jeffries to deny service connected disability retirement. Motion carried unanimously. STAFF RECOMMENDATION TO DENY SERVICE AND NON-SERVICE CONNECTED DISABILITY RETIREMENT (General Member) (D-4) D-4 DEBBIE RANGEL, Social Services Agency Eligibility Specialist Application for service and non-service connected disability retirement A motion was made by Mr. Lightvoet, seconded by Ms. Silbar to deny service connected and non-service disability retirement. Motion carried unanimously. STAFF RECOMMENDATION TO DENY SERVICE CONNECTED DISABILITY RETIREMENT (General Member) (D-5) D-5 SHERRY ROBB, OC Public Library Storekeeper I Application for service connected disability retirement Mr. Concannon has concerns because the applicant is disabled and he requests the Board not to approve staff recommendation, but to find that she is a service connected disability. Ms. Reagan reported under the case law, a worker who can be accommodated to perform his/her usual duties is not disabled for purposes of the retirement law. There is no provision under the code to allow you to declare or find them disabled and eligible for a service connected disability benefit, but stay the payment unless you put them into a rehab position which does not apply in this case. You have to give her a disability retirement and take her off work or find that because of the accommodation she is not disabled from performing her usual job duties. Following further discussion, a motion was made by Ms. Silbar, seconded by Mr. Lightvoet to deny service connected disability retirement based on the ability of the employer to accommodate the condition. Motion carried unanimously.

7 Regular Board Meeting Minutes Page 7 APPROVE AND ADOPT HEARING OFFICER S RECOMMENDATION TO GRANT SERVICE CONNECTED DISABILITY RETIREMENT WITH AN EFFECTIVE DATE OF 02/20/2003 (General Member) (D-6) D-6 DENNIS MAZURIER, OC Sheriff Department Vocational Instructor Application for service connected disability retirement A motion was made by Mr. Moorlach, seconded by Mr. Jeffries to approve and adopt Hearing Officer s recommendation to grant service connected disability retirement with an effective date of 02/20/2003. Mark Singer, Attorney for applicant, addressed the Board. Motion carried 8 to 1, with Mr. White voting No. Mr. Concannon wanted to take a moment to commend Mr. Singer for the fine job he has done over the years representing many of the applicants. Mr. Singer has appeared before the Board on many occasions and there are many people who have received benefits today because of his fine work. Mr. Royalty commended Mr. Singer on his ability to follow the rules and to present his cases effectively and briefly. The Board appreciates it. * * * * * * * * END OF DISABILITY APPLICATIONS AGENDA * * * * * * * * * * * * * * * INDIVIDUAL ITEMS CONTINUED * * * * * * * * I-4 ACTUARIAL ISSUES Mr. Angelo reviewed the Actuarial issues. Item I-4 C was discussed first. C. Assumed Rate of Return Following discussion by the Board, a motion was made by Mr. White, seconded by Ms. Neebe to approve and maintain the 7.5% assumed rate of return applicable to future valuations. Ed Corser, Chief Financial Officer for the County of Orange, addressed the Board. He is very interested in the action the Board will take today. The County is very comfortable with the recommendation by the actuary, and would like to see the 7.5% assumed rate of return be maintained.

8 Regular Board Meeting Minutes Page 8 Mr. Leiderman pointed out to the Board, that if the Board approved the 18-month rule, the rate would be in effect until June 30, Following further discussion, roll call vote was taken. Motion carried 6 to 3, with the voting as follows: AYES NAYS ABSTAIN ABSENT Mr. Concannon Mr. Jeffries Mr. Eley Mr. Moorlach Mr. Lightvoet Mr. Royalty Ms. Neebe Ms. Silbar Mr. White B. Smoothing Method Mr. Angelo reviewed the smoothing method. Following discussion, a motion was made by Mr. Lightvoet, seconded by Mr. Moorlach to adopt a 5-year smoothing based on the market value, and set the initial actuarial value under the new method based on December 31, 2003 market value. A roll call vote was taken. Motion carried 9 to 0. A. Schedule for Implementing New Employer Contribution Rates Mr. Angelo explained the schedule for implementing the new Employer Contribution Rates. Following discussion, a motion was made by Mr. Jeffries, seconded by Mr. Lightvoet to 1) Apply new employer contribution rates 18 months after the close of the OCERS fiscal year, using an add-on factor to adjust for the delay; 2) Begin the new schedule with the December 31, 2004 valuation; and 3) Apply an additional contribution based on the Towers Perrin study to the July 2005 rates to recognize the change in benefit formulas. A roll call vote was taken. Motion carried 9 to 0. D. Amortization Policy for Liabilities, Plan Changes, Gains and Losses Mr. Angelo reviewed the amortization policy. Following discussion by the Board members, a motion was made by Mr. Moorlach, seconded by Mr. Jeffries to defer the amortization policy to April to allow the County to review the impact to the County. A motion was made by Ms. Silbar, seconded by Mr. Jeffries to adopt a 15 year amortization period for new benefits and use the level dollar approach to the funding. Mr. Eley commented that the 30 years schedule has been the policy for many years. The Board did not change when the safety formula was changed. Tier I has been underpaying for many years; but the Board didn t change anything then. Now if the Board changes the amortization period, the County will see a dramatic impact. The

9 Regular Board Meeting Minutes Page 9 Board will be putting the Plan Sponsors in a hole, by making them pay big numbers up front. The 30-year amortization has been set for a long time. Mr. Thompson is concerned that the Board is getting into the business of collective bargaining, and believes that the actions of this Board might impact the collective bargaining process. If the employers and employees are ok with existing method, he questioned whether the Board should be involved in it. Mr. Bozarth clarified that it has been the Board s policy to amortize over the various periods that Mr. Angelo laid out. The Board can change that policy, and what it applies to, but the effective date needs to be defined as part of any decision to change the amortization period. Mr. White is not sure a career is 15 years. A career is more like 30 years, and believes the 30-year amortization is fine. Mr. Moorlach believes the quicker you pay off debts, the lower the overall costs will be. The Auditor Controller sent a letter informing that the County can pay off the new benefits in four years. The Board of Supervisors has not had a chance to analyze what the policy is. Mr. Leiderman addressed two issues. Mr. Moorlach has alluded to the ARBA agreement and Mr. Thompson has asked about the collective bargaining issue. In the Revised Amended ARBA Agreement that this Board of Retirement and the County entered into earlier this year, the Board specifically reserved the right, and the County acknowledged the right, for the Board to change the amortization period for new benefits. The MOU reflected a 30-year amortization basis, but it recognized the amortization was within the province of this Board and may be different in actuality as this Board makes that decision.. Ed Corser, CEO/CFO addressed the Board. The suggestions on ways to finance this are worth looking into, but would prefer to look at these as a matter of flexibility where the County has a choice, as opposed to a matter of a new standard that is set for us. If forced into the change, it does not give the County that flexibility while they analyze their options. Kathy Sage, OCEA, addressed the Board. It takes 30 years to earn the full benefit under the plan. If the Board were concerned about having the employee pay for this, 30 years would be accurate. Tom Beckett, CEO/Public Finance, addressed the Board. One of the starting points when negotiating the MOUs, was that there would be no cost to the County. The employees would determine a way to pay for the benefit. The basis for the cost of the benefit was a Towers Perrin report that had a 30-year amortization period. Through multiple sources varying for each MOU, the cost would be covered one on the assumption of a 30-year amortization period. Each of the MOUs would have to be renegotiated.

10 Regular Board Meeting Minutes Page 10 Mr. Moorlach question whether Mr. Sundstrom s letter is correct. Mr. Corser responded it would take time to analyze this information. A substitute motion was made by Mr. Moorlach, seconded by Mr. Jeffries to defer this item for 60 days. Mr. Jeffries withdrew his second on the first motion. The motion died for a lack of a second. Follow further discussion, Mr. Moorlach amended the motion, seconded by Mr. Jeffries to revisit the amortization period by April 2005 to allow the County sufficient time to look at this information. Mr. Leiderman commented on an item of legal context. This Board is the only body that has authority to set an amortization period, and it has a statutory obligation to do so. Following further discussion, a roll call vote was taken. Motion carried to 8 to 1, with Mr. White voting No. Board recessed for lunch at 12:45 p.m. Mr. Lightvoet left at 1:30 p.m. Board reconvened at 1:30 p.m. I-5 BOARD SELF ASSESSMENT Presentation by Stephan Cadena Mr. Cadena reviewed the Board Self Assessment report. Mr. White still has some issues regarding the ability to conduct the Board Self Assessment in a closed session. Unless the self assessment can be conducted in closed session, spending this amount of money is not justified. Following discussion, a motion was made by Mr. White, seconded by Ms. Silbar to postpone action to determine whether the Board Self Assessment could be conducted in a Closed Session meeting. Mr. Leiderman answered No; a session of this kind has to be done in a public session. Mr. White withdrew his motion. Mr. Moorlach would like to interview two firms, PMW Associates and DHR. Mr. Concannon would like to see the Board engage Dr. Whisenand. He has been used in

11 Regular Board Meeting Minutes Page 11 the past and Mr. Concannon believes it would be very beneficial. A motion was made by Mr. Moorlach, seconded by Mr. Eley to interview PMW Associates and DHR. Mr. Leiderman clarified that a session of this kind has to be done in a public session. Individuals can address a facilitator, and then the facilitator reports their findings in a public session. Following further discussion, a substitute motion was made by Mr. Jeffries, seconded by Mr. Concannon to engage Paul Whisenand, Ph.D. and defer the exercise to allow the new Board member an opportunity to adjust to his duties. Mr. Moorlach will be voting No, not because of Dr. Whisenand, but because of the process. Ms. Silbar suggested this be delayed two or three months to let the new Board member coming on in January get acclimated. A roll call vote was taken. Motion carried 4 to 3, with the voting as follows: AYES NAYS ABSTAIN ABSENT Mr. Jeffries Mr. Eley Mr. Concannon Mr. Lightvoet Ms. Neebe Mr. Moorlach Mr. Royalty Mr. White Ms. Silbar Mr. White would like the record to reflect that he voted No, not against Dr. Whisenand, but in support of Mr. Moorlach s contention of hearing from the other firms. I-6 SACRS UNIFORM TRUSTEE APPOINTMENT POLICY Mr. Bozarth reviewed the SACRS Uniform Trustee Appointment Policy. Following discussion, a motion was made by Mr. Jeffries, seconded by Ms. Silbar to receive and file. A substitute motion was made by Mr. White, seconded by Mr. Eley to accept the SACRS recommended process and standards as Board policy. Mr. White withdrew his motion. Following a lengthy discussion, a substitute motion was made by Mr. Concannon, seconded by Ms. Neebe for the Board of Retirement to send a letter to the Board of Supervisors to refer the Supervisors to relevant sections of the CERL.

12 Regular Board Meeting Minutes Page 12 Mr. Bozarth suggested the Board of Retirement forward to the Board of Supervisors the Trustee Education Policy, the Board of Retirement Charter along with the SACRS recommended process and standards letting them know that this is good background information as you consider appointments in the future. A roll call vote was taken on the substitute motion. Motion carried 8 to 0, with Mr. Lightvoet absent. A roll call vote was taken on the original motion to receive and file. Motion carried 8 to 0, with Mr. Lightvoet absent. * * * * * * * * END INDIVIDUAL ITEM AGENDA * * * * * * * * Board went into Closed Session at 2:40 p.m. Board returned from Closed Session at 3:53 p.m. CLOSED SESSION AGENDA E-1 PUBLIC EMPLOYEE PERFORMANCE EVALUATION PURSUANT TO GOVERNMENT CODE SECTION Position to be evaluated: Chief Executive Officer Recommendation: Take appropriate action and report in open session as necessary. The Chairman stated that no reportable action was taken on Item E-1. E-2 CONFERENCE WITH LABOR NEGOTIATORS The Board will hold a closed session pursuant to Government Code Section Agency designated representative: Mr. Eley and Ms. Silbar of the Board of Retirement Unrepresented employees: Chief Executive Officer; Assistant CEO, External Operations; Assistant CEO, Internal Operations; Chief Investment Officer; General Counsel; Chief Financial Officer; Admin/Human Resources Manager; Retirement Investment Analysts; Senior Internal Auditor; Public Relations Analyst; Senior Accountant/Auditors; Admin/Human Resources Analyst The Chairman stated that no reportable action was taken on Item E-2

13 Regular Board Meeting Minutes Page 13 PUBLIC COMMENTS: Kathy Sage thanked Mr. Concannon for all the work he did while on the Board of Retirement, it is appreciated. BOARD MEMBERS COMMENTS: Mr. Concannon is very sorry he will no longer be serving on the Board. He has had the support of first the active employees and now the retirees. Commended the Board for doing a great job, please continue. Mr. Jeffries stated that it has been his pleasure to work with Mr. Concannon. He is passionate, consistent and Mr. Jeffries has the greatest respect for Mr. Concannon and wishes him well. Mr. Moorlach commented that Mr. Concannon has been on the Board for thirty-nine years. He also wanted to congratulate Mr. Lightvoet on his new grandchild. Mr. White thanked Mr. Concannon for his guidance. Mr. White also commended Mr. Royalty for the great job he has done as Chairman. Mr. Eley thanked Mr. Concannon for his years on the Board. He is a great mentor and a great guy. So many people owe him and do not even know it. Mr. Royalty thanked Mr. Concannon for being the first person to welcome him on the Board. He has nothing but profound respect for Mr. Concannon s service, guidance and leadership. CHIEF EXECUTIVE OFFICER/STAFF COMMENTS: Mr. Bozarth thanked Mr. Concannon and looked forward to continuing telephone calls with him. Mr. Buck thanked Mr. Concannon and told him he would be missed. COUNSEL COMMENTS: Mr. Leiderman thanked Mr. Concannon for teaching him the human side of the law. ADJOURNMENT: (IN MEMORY OF THE ACTIVE MEMBERS, RETIRED MEMBERS, AND SURVIVING SPOUSES WHO PASSED AWAY THIS PAST MONTH) Active Members: None

14 Regular Board Meeting Minutes Page 14 Retired Members: Surviving Spouses: Josephine Cain; James Carlisle; Consuelo Castro; Walter Cox; Dennis Ford; Nancy Hill; Virginia Hughes; Robert Klemmis; Robert Kish; Dorothy Kofron; Jacqueline Langston; Mary Liakos; Frank Lopez; Arthur Marcotte; Alejandro Oviedo; Muriel Peterson; Aurelio Ramos; Theodore Wall; Jacqueline Webster; Ilga Zinbergs Peter April; Frances Brown There being no further business to bring before the Board, a motion was made by Ms. Neebe, seconded by Mr. Eley to adjourn the meeting. The motion carried unanimously. Meeting adjourned at 3:56 p.m. Submitted by: Approved by: Keith Bozarth Secretary to the Board Reed L. Royalty Chairman