August 16, 2012 1

CITY OF PHOENIX EMPLOYEES’ RETIREMENT BOARD 200 W. Washington, 10th Floor Phoenix, Arizona 85003 August 16, 2012

MEMBERS PRESENT: Ms. Linda Reidenbach, Chairperson Ms. Elizabeth Bissa, Vice Chairperson

Mr. Jeff DeWitt, Board Member Ms. Cathleen Gleason, Board Member

Mr. Rick Naimark, Board Member Mr. Randy Piotrowski, Board Member

Ms. Janet Smith, Board Member ABSENT: Mr. David Hensley, Board Member

Mr. Leslie Scott, Board Member ALSO PRESENT: Ms. Donna Buelow, Retirement Program Administrator Ms. Paula Whisel, Recording Secretary

Ms. Jackie Temple, City of Phoenix Employees’ Retirement System (COPERS)

Mr. Greg Fitchet, COPERS Ms. Anna Martinez, COPERS Ms. Lollita Cordova, COPERS Ms. Marla Hummel, Grant Thornton Mr. Ralph Nefdt, Grant Thornton Mr. Chris Raab, Grant Thornton Mr. Michael Ford, R.V. Kuhns & Associates Mr. Spencer Hunter, R.V. Kuhns & Associates Mr. Jeremy Miller, R.V. Kuhns & Associates Mr. Roman Nemtsov, R.V. Kuhns & Associates Mr. Jim Voytko, R.V. Kuhns & Associates Mr. Bill Hallmark, Cheiron, Inc. (participated via telephone) Mr. Ken Kent, Cheiron, Inc. (participated via telephone)

Ms. Barbara Coppage, City Auditor Department Ms. Jodi Nicholson, Finance Department

Ms. Kim Grant, Finance Department Ms. D’Ann O’Bannon, Administrative Supervisory Professional &

Technical Employees Association (ASPTEA)

The City of Phoenix Employees’ Retirement Board met at 17 S. 2nd Avenue, 2nd Floor Subcommittee Room, Phoenix, Arizona on August 16, 2012, at 2:30 p.m., to conduct regular business.

1. Call to Order

Chairperson Reidenbach called the meeting to order at 2:37 p.m. She stated Mr. Hensley and Mr. Scott were unable to attend the meeting.

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2. Approval of Meeting Minutes of:

Mr. Naimark moved approval of the minutes of the May 17, 2012, Charter Amendments/Policies & Procedures Committee meeting, the June 14, 2012, Legal Review Committee meeting and the June 21, 2012, and the July 11, 2012, Retirement Board meetings. Ms. Bissa seconded the motion. The motion carried unanimously. a) Charter Amendments/Policies & Procedures Committee – May 17, 2012 b) Legal Review Committee – June 14, 2012 c) Retirement Board – June 21, 2012 d) Retirement Board – July 11, 2012

3. Presentation of Audit Plan by Grant Thornton LLP Ms. Marla Hummel, Mr. Ralph Nefdt and Mr. Chris Raab approached the table.

Ms. Hummel stated she was a Director with Grant Thornton and will be handling all aspects of the City of Phoenix audit engagement including the pension plan. Mr. Nefdt stated he was the Managing Partner of Grant Thornton’s local Phoenix office. He stated he was the Relationship Partner in connection with the City of Phoenix engagement. Mr. Raab stated he was the Engagement Manager for the COPERS audit. Ms. Hummel stated Mr. Raab was the Benefit Plan Specialist in the Phoenix Office. She stated Ms. Linnette Klinedinst, an Engagement Senior, who was scheduled to attend the meeting had been recently promoted to Manager. She stated Ms. Klinedinst was at manager training. Ms. Hummel stated the presentation provided information regarding Grant Thornton’s values and responsibilities. Ms. Hummel stated Grant Thornton will be performing the audit under generally accepted auditing standards. She stated they will form an opinion by reading the information including the management discussion and analysis and all other information which comprises the Comprehensive Annual Financial Report (CAFR). Ms. Hummel stated Grant Thornton has had the kick-off meeting with management. She stated Grant Thornton has done some preliminary planning and risk assessments. She stated Grant Thornton will be onsite beginning the fieldwork in September 2012. She stated they expect to be able to issue the report before Christmas 2012. Mr. Raab stated Grant Thornton conducts risk based auditing. He stated during the planning processes Grant Thornton will identify and evaluate the risks and develop the audit plan for the retirement plan. He stated Grant Thornton will be using net assets, which they think is the most appropriate benchmark, for the retirement plan. He stated Grant Thornton will be using a quantitative scope, but will also focus on certain qualitative factors. He stated Grant Thornton will focus the audit procedures on investments, contributions and benefit payments, as well as participant data. Ms. Hummel stated in the material Grant Thornton summarized the new accounting pronouncements for the Board. She stated the most significant pronouncement for the Plan, Governmental Accounting Standards Board (GASB) 67, was issued last month.

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Ms. Hummel asked the Board to advise Grant Thornton if there were any areas of concern regarding suspected fraud, errors or concerns regarding the control structure. Ms. Janet Smith entered the room. Ms. Hummel stated contact information had been included in the presentation. She stated contact information for Mr. Ben Kohnle, an Engagement Partner, had also been included. She stated Mr. Kohnle would attend the next meeting with the Board. She stated Mr. Kohnle was on several panels involved in the writing of GASB 67 and 68.

Ms. Hummel, Mr. Nefdt and Mr. Raab left the room. 4. Consideration of Excess Benefit Arrangement Trust Report Chairperson Reidenbach stated the report was informational. 5. Consideration of Excess Benefit Arrangement Asset Listing and Review of

Investment Policy Statement

Chairperson Reidenbach stated the asset listing was informational. She stated there were no requested changes to the Investment Policy from R.V. Kuhns & Associates (Kuhns) nor the Finance Department.

6. Consideration of Commission Recapture Statements for March 2012, April 2012,

May 2012 and June 2012 Chairperson Reidenbach stated this item was informational. 7. Consideration of Continuation of Contractual Agreement with JP Morgan Ms. Buelow stated JP Morgan is a core real estate manager under contract with the Plan

since 2007. She stated JP Morgan has approximately 3.5% of Plan assets or $63 million under management for COPERS. She stated JP Morgan’s current contract is effective through the middle of October 2012. She stated staff would recommend extension of JP Morgan’s contract.

Ms. Gleason asked if any future agreement would be at the current fee structure.

Mr. Fitchet stated any future agreement would be at the current fee structure because it was a commingled fund.

Ms. Gleason moved to direct staff to extend the contract agreement for three years with

JP Morgan. Mr. Piotrowski seconded the motion. The motion carried unanimously. 8. Consideration of Continuation of Contractual Agreement with Morgan Stanley Ms. Buelow stated Morgan Stanley was a core real estate manager who has been under

contract with the Plan since 2007. She stated Morgan Stanley has about 4.3% of Plan assets or $77 million under management for COPERS. She stated staff recommends a continuation of the agreement with Morgan Stanley for a three year period. She stated this was also a commingled fund.

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Ms. Gleason moved to direct staff to extend the agreement for three years with Morgan Stanley. Ms. Smith seconded the motion. The motion carried unanimously.

9. Consideration of Securities Lending Earnings Report of 2nd Quarter 2012 Chairperson Reidenbach stated the report was informational. 10. Presentation of 2nd Quarter 2012 Proxy Vote Reports Chairperson Reidenbach stated the reports were informational. She stated no exceptions

were noted. 11. Consideration of Correspondence From Pacific Alternative Asset Management

Company Regarding Downgrade of Goldman Sachs Security Chairperson Reidenbach stated this item was informational. 12. Consideration of Correspondence From Western Asset Management Regarding

Downgrade of Goldman Sachs Capital II Chairperson Reidenbach stated this item was informational. 13. Consideration of Organizational Changes at R.V. Kuhns & Associates Mr. Jim Voytko approached the table. Mr. Voytko stated he was in his 34th year in the financial services business. He stated a

certain amount of change is inevitable, particularly with people. He stated the challenge is to make sure an organization is prepared to deal with change.

Mr. Voytko stated he wanted to convey to the Board from himself, Kuhns’ Chief Executive

Officer Becky Gratsinger, their team and all the specialists who the Board has seen over time, this was an important account to Kuhns and they will devote the resources to make sure COPERS was supported and successful. He stated Ms. Gratsinger will meet with the Board in a few months to check on the transition to make sure it was seamless and successful. He stated Kuhns realizes the burden was on them to make sure the transition was successful.

Mr. Jeff DeWitt entered the room. Mr. Voytko stated he wanted to reintroduce parts of the team, which were not changing and

introduce some new members of the team. He stated Mr. Ryan Fitzgerald, who was not present today, was the Board’s performance analyst. Mr. Voytko stated Mr. Fitzgerald was a behind the scenes guy for the presentation books and conducts analytics which support the team. He stated Mr. Spencer Hunter works with the COPERS staff and has worked on many of the COPERS’ deliverables. He stated Mr. Nick Woodward, who was not present today, has previously presented information to the Board. He stated those three people have accumulated a large number of years of experience with the Plan’s investments, portfolio and special restrictions.

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Mr. Voytko stated Mr. Michael Ford was a veteran consultant and is one of the few consultants Kuhns hired from the outside as opposed to developing from within. He stated Mr. Ford’s former firm closed their office on the West coast. He stated Mr. Ford also works for the accounts of the City of Fort Worth. He stated Mr. Ford was his partner on Los Angeles Fire and Police account. He stated Mr. Ford was based in Southern California.

Mr. Voytko introduced Mr. Jeremy Miller, a practicing consultant and Kuhns’ Director of

Capital Markets Research. He stated many of the analytic reports brought before the Board over the past three or four years were either created or strongly influenced by Mr. Miller. He stated Mr. Miller was also based in Southern California. He stated Kuhns built the firm to be team oriented and to make sure they have enough resources to cope with change.

Mr. Voytko reintroduced Mr. Roman Nemtsov. He stated one of the hallmarks of Kuhns is

they bring experts so clients can work with them directly.

Mr. Piotrowski asked Mr. Voytko if there were any other personnel or structural changes. Mr. Voytko stated none of the remaining staff have said they will be leaving. He stated a number of clients have already told Kuhns they have no intention of leaving. He stated Kuhns built the firm’s support structure to support all sizes of funds. He stated Kuhns’ capabilities include manager research, asset liability study and custodial research. Chairperson Reidenbach asked if Mr. Ford would be COPERS’ primary contact and if Mr. Miller would attend meetings also. Mr. Ford stated he would be the lead consultant on relationship and Mr. Miller will be his co-consultant. He stated sometimes both will attend the meetings. He stated Kuhns thought the best way to structure the support was with a lead and a co-consultant. Chairperson Reidenbach stated she would like to see Mr. Miller’s biography. Mr. Voytko stated Mr. Miller was a graduate of the MBA School at Yale and had been a financial modeling specialist at KPMG.

Mr. Voytko left the table. 14. COPERS’ Investment Performance – Period Ended June 30, 2012 – Presentation by

R.V. Kuhns & Associates Mr. Michael Ford and Mr. Spencer Hunter approached the table.

Mr. Ford stated he was a Senior Consultant with Kuhns and will be the new lead consultant on the relationship. He stated he has been reading Kuhns’ COPERS master files. He stated he started with 2005 and was working his way forward to gain history and knowledge of the Plan. Mr. Hunter stated the Board may recognize his name because it used to be on the performance report. He stated he was looking forward to taking a new role as an Investment Associate.

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Mr. Ford stated there had been mixed results in the domestic economy during the quarter ended June 30, 2012. He stated the gross domestic product (GDP) growth came in at 1.9%, which was much lower than the 4th quarter of 2011. He stated the growth in the economy seems to be slowing. He stated manufacturing slowed and job growth was 75,000 jobs on average per month. He stated unemployment rose to 8.2%. He stated on the positive side, construction spending rose during the quarter. He stated consumer credit rose as well as light vehicle sales. Mr. Ford stated the Federal Reserve revised their inflation outlook downward as well as their GDP projection. He stated they continued a program known as Operation Twist started to help maintain the historically low long-term interest rates to boost the economy. He stated the United Kingdom slid back into a recession during the quarter. He stated European banks injected $100 billion Euro into the Spanish banking system. Mr. Ford stated emerging markets like Brazil and China lowered their interest rates to bolster their economies. He stated the Bank of Japan started a bond buying program to help fight against inflationary pressures. Mr. Ford stated for the month ended June 30, 2012, the S&P 500 Index returned 4.12%, which was not enough to bring it back from a difficult April 2012 and May 2012. He stated for the quarter ended June 30, 2012, the S&P 500 Index was down -2.75%. He stated for the quarter small cap stocks were down about -3.47%. He stated for the quarter international stocks were down -6.85%. He stated bonds had a good quarter. He stated the bond markets had strong returns with the Barclays Aggregate up 2.06% during the 2nd quarter. He stated real estate did well during the 2nd quarter, up 2.54%. He stated hedge funds were down -1.90% for the quarter. He stated since June 30, 2012, the S&P 500 Index is up 3.4% for a calendar year-to-date return of 13.2% through August 15, 2012. Mr. Ford stated Kuhns added a new chart to the presentation which shows monetary stimulus, the S&P 500 Index and inflation expectations. He stated there was a close correlation to monetary stimulus and the returns of the S&P 500 Index over the past several years. Mr. Ford stated only four sectors of the domestic equity markets had positive returns for the quarter ended June 30, 2012. He stated telecom services had a strong quarter, up 14.13%, utilities were up 6.55%, healthcare was up 1.75% and consumer staples were up 2.88%. Mr. Ford stated all regions of the international equity markets were negative for the quarter ended June 30, 2012. Mr. Ford stated the fixed income markets were positive with the Barclays Aggregate up 2.06% for the quarter ended June 30, 2012. He stated the strongest area was treasuries. Mr. Ford stated at the beginning of the quarter Plan assets were $1.724 billion. He stated the Plan had a 5.03% return for the calendar year-to-date through June 30, 2012. He stated COPERS’ three largest funds were Artio, PIMCO and Research Affiliates.

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Mr. Ford stated for the quarter ended June 30, 2012, the total Fund composite return was -2.12%, which was below the benchmark by 37 basis points. He stated most of the underperformance was attributable to the domestic equity composite which returned -5.81% versus the index return of -3.15%, underperforming by 266 basis points. He stated the international equity composite, although it was negative on an absolute basis, did outperform its benchmark. He stated the domestic fixed income composite returned 2.10%, which outperformed the benchmark. He stated the real estate composite had a great quarter with a 5.71% return beating its benchmark by over 3%. He stated the long/short equity composite return was negative but outperformed its benchmark. He stated the only weak area for the Fund was in domestic equities. He stated it was a difficult quarter because of the up and down nature of the markets. He stated it was another quarter where index funds tended to outperform active managers. Chairperson Reidenbach asked Mr. Ford if Kuhns had any specific comments on Cadence’s performance. Mr. Ford stated the Board had met with Cadence earlier this year and they did continue to struggle during the quarter. He stated Cadence was down about 4% below the benchmark. He stated security selection hurt Cadence in several sectors, information technology, energy, consumer discretionary and consumer staples.

Mr. Ford and Mr. Hunter left the table. 15. Review of Investment Manager Updates – Presented by R.V. Kuhns & Associates Chairperson Reidenbach stated there were no manager updates for the quarter. 16. Review of Quarterly Transaction Cost Analysis

Ms. Buelow stated the Board reviews this report every quarter.

17. Review of Quarterly Portfolio Rebalancing Ms. Buelow stated the rebalancing document had been distributed. She stated some

rebalancing will take place next week. She stated this was later than typical because the asset transition which the Board had previously directed was being completed this week. She stated there will be slight changes between the fixed income managers and the GMO account.

18. Real Estate Investment Performance Analysis – Presentation by R.V. Kuhns &

Associates Mr. Nemtsov approached the table.

Mr. Nemtsov stated Kuhns continues to see strong performance in the real estate portfolio from the existing core and non-core managers. Mr. Nemtsov stated as of March 31, 2012, the market value of the real estate investments, including called capital of $26 million during the quarter, was $232 million. He stated subsequent to the 2012 1st quarter the Board allocated $20 million to Wheelock. He stated the Board was steadily increasing positions in non-core managers.

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Mr. Nemtsov stated for the quarter ended March 31, 2012, the COPERS’ portfolio returned 4.41% gross of fees which compares favorably to NCREIF benchmark. He stated the portfolio outperformed by 161 basis points for the quarter. He stated for one year the portfolio was ahead of the benchmark by 278 basis points. He stated since inception the portfolio was ahead of the benchmark by 311 basis points. He stated this was mostly attributed to strong performance by the non-core managers. He stated the non-core managers have been returning capital a lot faster than anticipated. He stated the managers are selling properties ahead of their projected schedule because they are achieving the prices ahead of what they projected. Mr. Nemtsov stated the non-core portfolio for the quarter ended March 31, 2012, produced 7.96%. He stated the since inception internal rate of return (IRR) for the non-core portfolio was 27.42%. Mr. Nemtsov stated the benchmark was not perfect because it was a core benchmark but it was the best they currently have. He stated in some quarters COPERS will be well ahead of the benchmark because of the non-core funds and in some quarters they will be behind. He stated for a longer period of time they expect meaningful outperformance over the benchmark because non-core managers will be contributing significantly. Mr. Nemtsov stated the real estate portfolio was geographically in line with NCREIF with the exception of the eastern and western United States. He stated the portfolio was overweight to international holdings because NCREIF does not track international real estate investments. He stated the international portfolio continues to grow as RECAP III draws funds. He stated regarding property type, the portfolio was slightly under-allocated to office and retail. He stated the portfolio was significantly overallocated to hospitality because of JDM’s investments. Mr. Nemtsov stated the Board committed funding to RECAP III and had to pay catch-up fees for the period they were not invested. He stated this was an anomaly and would revert to normal in the next quarter. Mr. Nemtsov stated COPERS has a very conservatively levered portfolio. He stated he expects leverage to increase as the non-core funds get going. He stated Kuhns was not worried about leverage below 40%. He stated the outstanding debt and maturities were evenly staggered through the years. He stated Kuhns thinks the managers will be able to manage the debt maturities through ordinary refinancing of properties, if necessary. Chairperson Reidenbach asked Mr. Nemtsov if JP Morgan still had an entry queue. Mr. Nemtsov stated in the 2nd 2012 quarter JP Morgan accepted $926 million. He stated JP Morgan had significant outperformance through the downturn and is conservatively leveraged. He stated there was a lot of investor interest. He stated JP Morgan and Morgan Stanley’s performance has been similar. He stated JP Morgan was more steady through the downturn. He stated Morgan Stanley does not have a queue. He stated he likes the fact JP Morgan promoted two people to be co-portfolio managers because the fund was getting bigger.

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19. Real Estate Portfolio Significant Events – Presentation by R.V. Kuhns & Associates Mr. Nemtsov stated JP Morgan returned 2.48% for the quarter and 11.97% for the year

ended June 30, 2012. He stated JP Morgan was acquiring properties and upgrading the portfolio. He stated JP Morgan was acquiring properties in places like Washington, DC and selling in places like Nashville, Tennessee. He stated Kuhns likes the non-core managers to take advantage of the secondary markets. He stated core managers should hold properties for a long period of time. He stated JP Morgan recently promoted two people to help Ms. Anne Pfeiffer manage the portfolio.

Mr. Nemtsov stated Morgan Stanley had another great quarter ended June 30, 2102, with a

3% return comprised of 1.3% income and 1.7% appreciation. He stated Morgan Stanley has slightly higher leverage than JP Morgan, 30% versus 23.9%. He stated the incremental 7% increase in leverage causes the returns to be slightly higher. He stated Morgan Stanley does not have a queue. He stated they received $97 million in commitments and have uses for the money.

Mr. Nemtsov stated Kuhns expected Wrightwood to produce a positive return over the

course of the fund but currently it was about even. He stated they made a $6 million mezzanine investment during the 2012 2nd quarter. He stated the Board granted Wrightwood permission to extend the investment period until the end of 2012. He stated Wrightwood has not drawn all the committed capital. He stated the Board committed $9 million and $4 million has been invested.

Mr. Nemtsov stated for the 2012 2nd quarter TA Associates returned 3.24%. He stated

TA’s portfolio continues to be well occupied at 92% overall and leverage is low for a non-core fund at 31.9%. He stated TA Associates made some meaningful distributions averaging about $120,000 a quarter.

Mr. Nemtsov stated RECAP II entered into a contract to sell one of the largest investments,

the Laguna Beach Development. He stated the seller asked RECAP to finish the development. He stated RECAP will be paid $118 million for the resort which represents a 92% IRR and 2.4x original equity in the investment. He stated RECAP II’s sales activity in Windermere is on pace and they have sold 68% of the residential units. He stated the one asset RECAP II and RECAP III share are the two REITs they merged. He stated the price of the combined REIT increased 13.6% during the 2012 2nd quarter.

Mr. Nemtsov stated RECAP III had its final closing. He stated as of the 2012 2nd quarter

RECAP III had commitments of $373 million. He stated they closed the fund at $530 million in commitments. He stated COPERS has committed $30 million. He stated the fees which COPERS pays were lowered from 2% to 1.5% because Kuhns was able to aggregate their clients. He stated COPERS will be retroactively reimbursed. He stated the Board will see a credit to the Fund in the 2012 3rd quarter. He stated RECAP III has made only two investments, one is doing well and one is currently in a lease up stage.

Mr. Nemtsov stated JDM sold the La Costa Apartments. He stated JDM had a contract for

the apartment property but it fell out of contract. He stated JDM found another buyer who paid $16 million for the apartments. He stated after the debt repayment total proceeds were $7.7 million which equals an approximate 31% IRR.

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Chairperson Reidenbach asked when JDM acquired the La Costa Apartments. Mr. Nemtsov stated the property was acquired in October 2011.

Mr. Nemtsov stated the room renovations at the Wigwam are currently taking place. He

stated there are 92 rooms which should be completely refurbished by 3rd quarter 2012. Mr. Nemtsov stated Wheelock Street Capital (Wheelock) had their final closing in

June 2012, for a total of $525 million. He stated this fund was oversubscribed because of the perceived strength of the management team. He stated COPERS got in early so they received a full allocation. He stated during the 2012 2nd quarter Wheelock closed on two properties. He stated Wheelock bought a hotel in San Francisco and a land development in Texas in a suburb of Dallas for approximately $27 million. He stated Wheelock was looking at a portfolio of hotels and multifamily assets. He stated on their first investment in Houston Wheelock closed a loan with a fixed rate of 3.5% because of the strength of the market and the property. He stated Wheelock was also in the process of selling some lots at their first investment in Denver.

Chairperson Reidenbach asked what COPERS’ commitment was to Wheelock.

Mr. Nemtsov stated COPERS’ commitment to Wheelock was $20 million. He stated COPERS’ commitment was $30 million to RECAP III.

Mr. Nemtsov left the table. 20. Consideration of Investment Manager Search – Large Cap Value Equity Mr. Michael Ford and Mr. Jeremy Miller approached the table. Mr. Miller stated the Board was considering possible replacements for Dimensional Fund

Advisors (DFA). He stated Kuhns looks at this decision as a good, better, best choice in terms of options.

Mr. Miller stated Kuhns would consider Barrow Hanley to be a defensive, conservative

manager who was a little more traditional, looking at things like dividend yield and low valuations. He stated Loomis Sayles (Loomis) is also a bottom-up manager and their emphasis is going to be more on appreciation, potential profitability and margins. He stated MFS is going to focus more on the balance sheet and cash flows. He stated Robeco, while they are going to take the valuation approach, are going to consider momentum as well. He stated T. Rowe Price is probably the broadest of all of the managers, looking at different fundamental factors including relative value. He stated DFA used more quantitative, academic oriented and less of a specific stock focus. Mr. Miller stated the fees relative to other funds and relative to each other are competitive.

Ms. Gleason asked about DFA’s fees. Mr. Miller stated DFA’s fees were low. He stated in

terms of an active strategy it was more quantitative oriented and easier to manage. Mr. Miller stated the return ranking in the longer time frames, five, seven and ten-years,

tend to be above median or top quartile, obviously beating the median manager and the Russell 1000 benchmark. He stated the potential managers had solid performance and long, established track records.

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Mr. Miller stated the managers are all quite stable in up and down markets. He stated Kuhns feels these managers are more stable options in terms of how the returns have behaved. He stated in addition to returns, the risk profiles were important and tracking error mattered.

Mr. Miller stated all the managers have a ten year timeframe. He stated the risk return

tradeoff is important. He stated Robeco and Loomis have a material advantage over the other managers.

Mr. Miller stated Kuhns recommends Robeco and Loomis for interviews. Chairperson Reidenbach asked about fees on a separate account versus a commingled

account. Mr. Miller stated with Loomis the commingled fund was 48 basis points and a separate account would be an extra basis point.

Chairperson Reidenbach stated T. Rowe Price had a significant fee difference for the

separate account versus the commingled account. Mr. Miller stated some are going to be different because of trading fees. He stated in a separate account you can liquidate a little easier. He stated with a commingled fund you are probably going to have a once a month window.

Mr. Ford stated these were the published rates. He stated Kuhns may be able to negotiate

lower rates. Mr. Miller stated the managers should be asked if the fees are negotiable. Mr. DeWitt asked why MFS was not included in Kuhns’ recommendation. Mr. Miller stated

if the Board wanted to interview a third manager MFS would be the recommended manager. He stated MFS has some definite advantages and over the shorter timeframes some of their returns have looked better.

Chairperson Reidenbach stated she thought Barrow did not have enough assets in the

class. Mr. Ford stated Barrow also has a small to mid cap bias. Mr. Miller stated it was a good, better, best decision and the Board could not go wrong with

any of these managers. He stated T. Rowe Price had a broader focus, a lower tracking error but their returns have not been as strong.

Chairperson Reidenbach stated Robeco did not include any biographies for their Portfolio

Managers included in the material. Mr. Miller stated he will remind Robeco to provide this information.

Ms. Gleason moved to select Loomis Sayles, MFS and Robeco for interviews.

Mr. Naimark seconded the motion. The motion carried unanimously. Mr. Ford, Mr. Hunter, Mr. Miller, Mr. Nemtsov and Mr. Voytko left the room. 23. Presentation of City Auditor Report: COPERS Consultant Contract Review Ms. Barbara Coppage approached the table. Ms. Coppage stated the City Auditor’s office had recently completed the COPERS

consultant contract review. She stated a copy of the report was included in the materials.

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Ms. Coppage stated the purpose of the audit was to review the process for selection of COPERS’ investment consultant and determine if it complied with the policies. She stated the City Auditor’s office also verified if the consultant’s performance was in compliance with the contract, duties and responsibilities and if there are adequate procedures and internal controls in place to monitor their performance.

Ms. Coppage stated the first area they reviewed was to make sure Kuhns provided

investment advice and guidance to the Board. She stated the City Auditor’s Office staff attended Board meetings. She stated staff reviewed Kuhns’ contract and they were in compliance.

Ms. Coppage stated the second area was to ensure procurements are fair and defensible

and the intensions of the Board are carried out consistently. She stated procurement processes should be well-documented. She stated the current procurement process varied between consultant and investment managers and documentation of the process was limited. She stated some of the written policies are not as clear as they could be and have some inconsistencies. She stated the last sentence of the policy states the Retirement Board shall handle their own purchases and certain services through request for proposals (RFP) in compliance with City policies and procedures. She stated Kuhn was using an open search process for investment managers.

Ms. Gleason stated the Board was not required to use the City’s process. Ms. Coppage

stated the Board was not required to but the policy says they would. She stated the Board may also want to clarify the difference between an RFP and an open search process.

Ms. Gleason asked if the Board needed to change the policy. Ms. Buelow stated she

would recommend a review of the policy to consider how the Board would like to structure the policy to handle the various types of procurements.

Ms. Coppage stated the executive summary of the report says the City’s procurement

policy also establishes a maximum term of five years including contract extensions. She stated during their review of the Kuhns and State Street Bank contracts they were renewed and negotiated instead of doing a rebiding process. She stated a standard contract term limit was not established in the Policy. She stated for State Street the initial contract was signed in 1999 and since then there have been a couple of contract extensions. She stated Kuhns’ contract was signed in July 2008 with a contract extension which was signed in September 2011. She stated Kuhns’ contract expires in June 2014.

Ms. Gleason stated the Board had a lengthy conversation about the State Street contract a

few months ago. She stated in terms of the consultant, the Board may not want to change frequently. She stated she did not know if the Board would ever want to follow the City’s policy of five years on those two contracts.

Mr. DeWitt stated a policy should require a review and depending on what the relationship

is, how complex it is, what services are being received and the fees relative to the market and then make a decision whether to stay with the current provider.

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Chairperson Reidenbach asked if this was something the Charter Amendments/Policies & Procedures (CAPP) Committee could review. Ms. Smith stated the CAPP Committee could conduct the review.

Ms. Coppage stated with Board approval Kuhns was paid for a small amount of

reimbursable expenditures in addition to a flat fee outlined in the contract. She stated the contract allows for a flat fee with no additional payment or out of pocket expenses.

Ms. Gleason stated the Board could amend the contract. Ms. Coppage stated Kuhns was in compliance with the contract insurance requirements. Ms. Coppage left the table. The Board took a break from 4:03 p.m. to 4:09 p.m. 21. Discussion of Governmental Accounting Standards Board (GASB) Statements

Number 67 and 68 – Presentation by Cheiron, Inc. Mr. Bill Hallmark and Mr. Ken Kent joined the meeting via telephone. Mr. Kent stated Cheiron would present information regarding the background, key

changes, terminology and timing, balance sheet drives expense and deferred recognition periods. He stated he would also cover pension expense and how it was calculated, calculation of net pension liability, discount rate calculation, valuing the Pension Equalization Program (PEP) and 13th check and Moody’s proposed adjustments.

Mr. Hallmark stated GASB is the governing body which sets accounting and financial

disclosure requirements for public entities and public pension plans. He stated currently Statement 25 sets the financial reporting requirements for pension plans and Statement 27 sets the requirements for employers. He stated in 2009 GASB undertook a project to review those statements and update them. He stated GASB started with an invitation to comment, then issued some preliminary views and last year issued the exposure drafts. He stated this year GASB voted and adopted Statements 67 and 68 to replace Statements 25 and 27. He stated the full text of the statements were published earlier this month.

Mr. Hallmark stated GASB 67 is first effective for the COPERS pension plan for the

2013/2014 plan year and GASB 68 would be effective for the City one year later in the 2014/2015 fiscal year. He stated GASB encourages early implementation.

Mr. Hallmark stated there have been some key changes to the current standards.

He stated the current standards were built around funding and the annual required contribution (ARC). He stated in the past the focus was on funding and now it was focused on the balance sheet. He stated there was increased uniformity of methods. He stated in the end the most striking difference is going to be the annual expense under the new statements is extremely volatile.

Mr. Hallmark stated GASB established some basic terminology. He stated the key liability

measure is called the total pension liability, which is the actuarial liability under the entry age cost method using a discount rate, which could be a blended rate. He stated per GASB the fiduciary net position is the fair value of the assets of the plan. He stated the

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difference between the total pension liability and the fair value of assets of the plan is the net pension liability. He stated the ARC does not exist in the new GASB statements. He stated the new GASB term is the actuarially determined employer contribution, calculated in accordance with actuarial standards of practice.

Mr. DeWitt stated currently this was a discussion point amongst all the cities in the country.

He stated the change focuses on what the impact is on the balance sheet of the City. He stated the Charter contains the concept of an ARC. Mr. Kent stated GASB was initiating a conversation with regard to considering adopting a funding policy. He stated a funding policy allows the actuary to define this measurement.

Mr. Hallmark stated the Board will need to decide how they want to structure the reporting

dates. He stated there are three types of dates mentioned in the statements. He stated the reporting date is the actual end of the trust or fiscal year, which is June 30th. He stated the measurement date is the date assets are reported and liabilities have to be projected to this date. He stated the measurement date can be any date from the reporting date up to one year earlier. He stated the actuarial valuation date is the date of the valuation in which the total pension liability is calculated and rolled forward to the measurement date. He stated that valuation date cannot be more than 24 months before the end of the trust year.

Mr. Hallmark stated if the reporting date was June 30, 2014 the measurement date would

have to be somewhere between June 30, 2013 and June 30, 2014. He stated the valuation date could be as early as June 30, 2012 through June 30, 2014.

Mr. Kent stated the Board may decide it may be appropriate for the calculations to be as of

June 30, 2014, for the measurement date and reporting date. Mr. DeWitt stated the practical fact is the financial statements have to be completed by

COPERS and the City by each October. Mr. Hallmark stated there are two structures which are most likely to work and to consider. He stated one is Cheiron does the valuation on June 30, 2013 and projects to June 30, 2014. He stated then Cheiron can get the market value of assets on June 30, 2014 and complete the calculations before October. He stated the other alternative is to back up one year to as of June 30, 2013, which provides the results for reporting on June 30, 2014.

Mr. Naimark stated the Mayor and City Council are considering putting pension reform

before the voters. He stated any pension reform would be effective July 1, 2013. Mr. Hallmark stated if there is a significant change in the middle of a projection period

GASB requires a reassessment. Mr. Hallmark stated in the past Cheiron would determine the ARC and then compare it to

the employer contributions. He stated any differences would appear on the balance sheet as a net pension obligation. He stated now they will start out calculating the net pension liability, which was the unfunded liability. He stated there are certain changes to recognize deferred inflows and deferred outflows over a period of time. He stated the actual impact on the balance sheet is the net of the pension liability, the deferred inflows and deferred outflows. He stated pension expense will be the difference between the beginning year value and the end of year value. He stated the deferred inflows and outflows are gains and losses and other changes either in assumptions or plan benefits.

August 16, 2012 15

Mr. Hallmark stated the investment gain or loss will be recognized over a five-year period. He stated currently COPERS has an asset smoothing method based on a four-year period amortized over a rolling 20 year period. He stated any assumption or method changes will be recognized over the Plan’s expected remaining service period including inactives. He stated based on the June 30, 2011, valuation the expected remaining service period was 5.6 years. He stated inactives do not have any expected future working lifetime and by default Cheiron included them for a one year period. He stated if the Plan was amended to improve benefits the cost would be recognized in the year which the change was adopted.

Mr. Hallmark stated the annual pension expense is the change in the net pension liability

from the beginning of the year to the end of the year, adjusted for these deferred recognitions and excluding employer contributions.

Mr. Hallmark stated the net pension liability has to be calculated using the entry age

actuarial cost method. He stated the discount rate is based on the expected return on assets as far as assets are sufficient to make the projected benefit payments under GASB’s definition. He stated the 20-year tax-exempt general obligation bond rate is used to the extent assets are not sufficient. He stated a GASB methodology projects assets and benefit payments. He stated a rolling amortization method is required and results in a blended discount rate.

Mr. Kent stated basically the Plan has cost of living increases which are ad hoc to the

extent there are excess returns. He stated Cheiron calls it a variable cost of living adjustment. He stated in some years the adjustment is zero but in some years it can equal CPI plus the 13th check equal to half of CPI. He stated under the current investment expectations Cheiron’s analysis indicated the long-term average adjustment is 1.5% per year.

Ms. Gleason asked if it makes a difference the 13th check is not a permanent increase but

a one-time payment. Mr. Kent stated it does not make a difference because what is being defined is how much excess return is available. He stated this represents approximately $400 million of additional liability.

Mr. Kent stated amounts are added to the equalization fund based on the five-year average

return exceeding 8%. He stated the amount transferred is equal to the excess return multiplied by the present value of benefits in pay status. He stated Cheiron conducted stochastic projections of 50,000 30-year trials each projecting forward based on the investment consultants long-term expected return on the assets of 6.6% with an expected standard deviation, a reflection of the risk on those assets, of just under 11.5%. He stated using those statistics Cheiron can determine the likelihood returns will exceed 8% and more specifically exceed a rolling five-year average return. He stated Cheiron then presents a distribution of all of the trials.

Mr. Kent stated the first chart shows the distribution of annual returns based on the long-

term expected return and how is it expected to vary over a period of time. He stated the five-year average of those returns shows a normal distribution, which is a much narrower distribution.

August 16, 2012 16

Mr. Kent stated the Plan has gain sharing to contribute to the equalization fund. He stated there was no offsetting event when the returns do not exceed the threshold. Mr. Kent stated Cheiron presented the probable transfer percentages in a given year. He stated there was a high probability of no excess of about 58%. He stated the probability of an excess between zero and 5% is about 30%. Mr. Hallmark stated to calculate the discount rate Cheiron projects the benefit payments for current members including the estimated impact of the ad hoc COLA assuming a 1.5% increase each year. He stated this was compared to projected assets. He stated projected assets include current assets and future contributions except for the normal cost contributions for future members. He stated the chart shows the projection of future contributions using the 20-year rolling amortization. Mr. Hallmark stated the discount rate calculation, assuming the COLA is not part of the funding, results in a GASB discount rate of 4.42% and a depletion test date of 2038. He stated this analysis is with the Plan’s rolling amortization. He stated prefunding the COLA would increase the Plan’s GASB discount rate to 6.5%. Mr. Kent stated the concept in the measurement of the expense is the determination of the liability for the City based on current employees. He stated there is the ability to change the distribution for new employees but not the ability to change the obligations which have already been earned. Mr. Hallmark stated there is an effect of a rolling amortization. He stated a closed amortization period can be very long. Ms. Gleason asked if there are GASB rules regarding the length of amortization periods. Mr. Hallmark stated the restriction is what would be considered an actuarially determined contribution period. Mr. Kent stated Cheiron was going to be prepared to talk about actuarial assumptions and methods at the September 2012 Board meeting.

22. Discussion of Request for Comment From Moody’s Investors Service Regarding Adjustments to US State and Local Government Reporting Pension Data – Presentation by Cheiron, Inc.

Mr. Hallmark stated the chart regarding the proposed Moody’s adjustments started with the

actual June 30, 2011, calculations which did not include any measurement for the COLA. He stated Moody’s increased the liability assuming a duration of 13 years resulting in $3.7 billion of actuarial liability. He stated the assets were reported as an actuarial value and Moody’s switched to market value. He stated this year it does not make much difference. He stated Moody’s adds about $1 billion to the unfunded liability in their adjustments. He stated the 13 year duration is fairly close. He stated they are only proposing this for state plans at this time. He stated the contribution/fiscal burden was calculated at $110 million and under the proposed Moody’s adjustments it would change to $282 million.

Mr. Hallmark and Mr. Kent disconnected the call.

August 16, 2012 17

24. Consideration of Authorization for Computer System Changes to Implement Actuarially Equivalent Forms of Payment Previously Adopted by Board

Ms. Buelow stated staff was requesting authorization from the Board to implement the new

joint and survivor actuarially equivalent factors previously adopted by the Board. She stated COPERS’ pension system computer provider estimates a cost of about $7,300 to be paid out of Plan assets per Board policy.

Ms. Gleason moved to approve the computer systems costs to implement the joint and

survivor actuarially equivalent factors. Mr. Naimark seconded the motion. The motion carried unanimously.

25. Consideration of Meeting and Roundtable Dates for Calendar Year 2013 Chairperson Reidenbach stated the meetings were scheduled for the third Thursday of

each month. She stated dates for the Roundtable meetings were at three different times during the year.

It was a consensus of the Board to accept the meeting and Roundtable dates for calendar

year 2013. 26. Update Regarding Potential Pension Reform and Charter Changes Mr. Naimark stated the City Council gave direction in June 2012 and the modeling process

is underway for the options. He stated he anticipates presenting information to the City Council toward the end of September 2012. He stated the Council did not yet act on the Board’s recommendations regarding the additional investment and tax related items. He stated the referral to the ballot could occur at the end of October 2012. He stated the Board and the staff will receive a copy of the draft language. He stated any changes would be effective July 1, 2013.

Mr. Naimark stated a paragraph regarding the GASB changes would be put in the Council

report. Mr. Naimark stated in the past there have been questions about whether the City could

contribute more than the ARC. He stated one of the ideas being discussed is having the ARC be the minimum the City could contribute. Mr. DeWitt stated the City might consider redefining the language to an actuarial determined contribution.

27. Consideration of Possible Revision to Policy 193 Regarding Transfer to/from Arizona

State Retirement System (ASRS) Ms. Buelow stated the proposed policy revision provides clarification of the process. Mr. Naimark moved approval of the revised Policy 193. Ms. Gleason seconded the motion.

The motion carried unanimously.

August 16, 2012 18

28. Consideration of Requests for Service Credit (Buyback) Forfeited Due to Refund of Member Contributions

Ms. Gleason moved approval of the buyback requests. Ms. Smith seconded the motion. The motion carried unanimously.

a) Edward Adame b) Mark Yoshimura 29. Consideration of Requests for Transfer of Member Account from COPERS to Arizona

State Retirement System (ASRS) Ms. Bissa moved approval of the transfers. Ms. Smith seconded the motion. The motion

carried unanimously. a) Amalia Lopez b) Terrance Piekarz 30. Consideration of Transfer and Possible Purchase of Arizona State Retirement

System (ASRS) Service Ms. Gleason moved approval of the transfer and possible purchase. Mr. Piotrowski

seconded the motion. The motion carried unanimously. a) Philip Patton 31. Consideration of Requests for Purchase of Service Credits Pursuant to Board Policy 180 Mr. DeWitt moved approval of the service purchase requests. Ms. Smith seconded the

motion. The motion passed unanimously. a) In-State/Out-of-State/Military 1) Maria Orante 4) Robert Serocki 2) Robert Peoples 5) Mark Yoshimura 32. Bills to be Paid

Mr. DeWitt moved approval of the payment of the bills. Ms. Gleason seconded the motion. The motion carried unanimously. Plan Expenses a) Artio Global Investors 2nd Quarter 2012 Fees $122,826.15

b) Cadence Capital Management 2nd Quarter 2012 Fees $126,623.00 c) Cramer Rosenthal McGlynn 2nd Quarter 2012 Fees $131,819.98

August 16, 2012 19

d) Eagle Asset Management 2nd Quarter 2012 Fees $ 91,702.37 e) Elkins McSherry LLC 2nd Quarter 2012 Fees $ 2,500.00 f) J.P.Morgan 2nd Quarter 2012 Fees $158,483.94 g) Levi, Ray & Shoup, Inc. Computer Changes $ 12,870.00 h) PIMCO 2nd Quarter 2012 Fees $131,430.84 i) Research Affiliates 2nd Quarter 2012 Fees $ 71,019.84 j) R.V. Kuhns & Associates 2nd Quarter 2012 Fees $ 46,250.00 k) State Street March 2012 Fees $ 9,334.20 April 2012 Fees $ 10,510.07 May 2012 Fees $ 10,629.21 l) State Street Global Advisors 1st Quarter 2012 Fees $ 14,445.88 m) The Boston Company 2nd Quarter 2012 Fees $ 59,406.93 n) Western Asset Management Company 2nd Quarter 2012 Fees $ 68,489.09 o) Yoder & Langford, P.C. Professional Fees $ 882.00 Professional Fees $ 1,092.00 33. Refunds (June 30, 2012 and July 31, 2012)

Chairperson Reidenbach stated this item was informational.

34. Report of June 2012 and July 2012 Retirees and July 1, 2012 and August 1, 2012

Payroll

Chairperson Reidenbach stated this item was informational. 35. Treasurer’s Report as of June 30, 2012 and July 31, 2012 Chairperson Reidenbach stated this item was informational.

August 16, 2012 20

36. Pending Legal Opinions

Chairperson Reidenbach stated this item was informational. 37. Presentation of Results of 2012 Pension Verification Process Chairperson Reidenbach stated this item was informational. 38. Administrator’s Report a) Performance Management Reports Ms. Buelow stated this item was informational. b) Continuing Education Report Ms. Buelow stated this item was informational.

c) Public Records Request

Ms. Buelow stated this item was informational. She stated included in the materials was a public records request requesting information starting with 2000 to present. She stated staff was able to comply with the request but only from 2004 to the present. She stated staff will be prepared to respond to this request in the next few weeks.

d) Budget Report as of June 30, 2012

Ms. Buelow stated this item was informational. e) Member Attendance Report for 2nd Quarter 2012 Ms. Buelow stated this item was informational. f) Results of COPERS’ Database Comparisons Against Database of Deceased

Individuals Ms. Buelow stated this item was informational. 42. Future Agenda Items

No new future agenda items were requested.

43. Call to the Public

There was no response to the call to the public.

44. Next Board Meeting: Thursday, September 20, 2012 at 2:30 p.m.

Chairperson Reidenbach stated this item was informational.

August 16, 2012 21

40. Consideration and Possible Action Regarding Weisfelner v. Fund 1, et. Al. No action was taken. 41. Consideration and Possible Action Regarding Frank Piccioli, et al. v. City of Phoenix,

et al., CV 2012-010330 No action was taken. 39. Consideration of Input to the Human Resources Director to Assess the Progress and

Performance for Results Achieved in the Administrator’s Performance Indicators Related to Staff Support to the Board

Mr. Naimark moved to convene in executive session at 5:40 p.m. for discussion of

item 39. Ms. Gleason seconded the motion. The motion carried unanimously. [Executive Session took place]

The Board convened in open session at 5:56 p.m. No action was taken. 45. Close Session

The meeting adjourned at 5:56 p.m.

Donna M. Buelow Paula Whisel Retirement Program Administrator Recording Secretary APPROVED: Ms. Linda Reidenbach, Chairperson COPERS Retirement Board g:\minutes\rbmi0812.doc